Corporate Directors are Generalists, Not Specialists
A furtive topic debated in some corporate governance circles: special interest directors, those with credentials in specific fields. For example, the US Securities and Exchange Commission has pending regulations on cybersecurity and climate science that would require companies to disclose whether they have such director expertise or not.
In contrast, state corporation law contemplates no such director expertise, permitting the longstanding practice of having directors who are generalists, not specialists. While most still see directors as individuals creating value as a body, some want special-interest directors on every board. As alluring as such a change might seem to elevate favored topics, downsides caution against it.
Directors are elected to provide general oversight and strategic direction. Boards are best when they exercise collective business judgment on each agenda item put forward, from appointing officers to declaring dividends. Value arises from each member having an equal voice and no person having power over another. Even board chairs are merely first among equals, presiding more for coordination than authority.
By law, every director has the same fiduciary duties of care and loyalty, including good faith oversight. On all topics, it’s all hands on deck: if cyber or climate are enduring vital challenges, then every director must develop an ‘understanding’ and an ‘ability to assess’ the issues—to quote the regulatory expertise required of audit committee members.
The concept of a special interest director would undermine these strengths. Such a director may be great at spotting and resolving the thorniest challenge in a field—patching a hack or capping a leak. But if one director is a board’s resident cyber or climate expert, others will unduly defer to that person, may skip doing homework or posing questions, and create false complacency. That hurts companies.
Directors are generalists, charged with overseeing managers, who are specialists. A company needs chiefs of finance, investment, technology, human resources, and cyber risk. A parallel board, each member with corresponding oversight, would be micromanagement at its worst and leave gaps in oversight.
Boards must oversee broad enduring topics of business—strategy, financial reporting, succession, capital allocation—not the hot topics of today, which may or may not be important tomorrow. For examples of yesterday’s hot topics that are now inert, ask experts in Y2K, CDOs, or Covid.
Inverting the question, if special interest directors are warranted for cyber or climate, why not myriad others? How about: employee relations, customer service, or shareholder stewardship? A board of a dozen one-issue directors will be weak in each issue overseen by a lone expert and on every subject, from budgeting to crisis response.
In practice, each board develops thematic directors. These are people who recurrently offer a distinct perspective, such as questioning the dividend policy, insisting on high hurdle rates, or advocating less red tape. While their expertise may shape their viewpoints, it is their experience, conviction, and business acumen—not their status—that adds value.
The same is true for other director categories, such as those deemed independent or diverse. While such directors may assert status when offering a viewpoint, the winning argument invariably appeals to substance—that ‘the price is wrong’ not ‘this is what women think.’
It has become common for companies to display matrices reporting directors’ skills such as market research, engineering, or government affairs. The concept of special directors would fit right in, enabling checking more boxes. But such matrices are tools of limited use, not reflections of boardroom reality: great directors are not those with certain checked boxes, but those possessing breadth of knowledge, wisdom, and perspective.
A director possessing specific expertise can contribute related value to a board, so long as they also bring to bear these more general aptitudes. But professionals commanding domain expertise without such breadth would benefit both themselves and companies by serving as consultants instead. Indeed, many experts may find consulting more rewarding and lucrative than a directorship, especially on a board pressured to designate one member as such an expert.
It would be nice to have empirical research on the relationship between director expertise and corporate outcomes, whether overall corporate performance or the incidence of events of interest. For instance, a robust body of research demonstrates scant reason to believe that director independence contributes to superior corporate performance and another robust body of research provides abundant evidence that financial expertise improves accounting quality.
But there is limited research probing the relationship of other sorts of director expertise and performance or outcomes, such as between cyber expertise and data breaches or between climate expertise and lower emissions. Indeed, research relating board attributes to cyber incidents is not only limited but contradictory on basic issues such as board size, director age, director seasoning and even status as an independent or insider.
The latter is of particular interest, as researchers surmise that inside directors will be more effective in thwarting cyber threats than outsiders because of their expertise—not so much in cyber, but in the company. That, of course, revives an old debate about the tradeoff between insider knowledge and independent perspective but offers no insight into the question of topical expertise or special interest directors.
Boards pressed to favor special interest directors consider this: sponsor a series of board training sessions on the topic, describe the sessions in disclosure documents, and indicate attendance—ideally that every director attended every session. That training would help all directors stay informed, ask good questions, and exercise effective oversight.
Rather than rely on a special interest director, all directors could do more than check their own box: they could add real value.
Lawrence A. Cunningham is a Public Company Director, Special Counsel with Mayer Brown LLP, and Professor Emeritus of Corporate Governance at George Washington University.
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