59 Pages Posted: 26 Aug 2018 Last revised: 24 Sep 2019
Date Written: August 1, 2018
Corporate boards of directors mediate the agency costs between the corporation’s managers and shareholders. For boards to do this well, they must include the right people. At present, most believe that the best kind of director is an independent director. Indeed, it is important that boards have independent directors to deal with clear conflicts between managers’ self-interest and corporate interests – a prime example is having independent directors set the CEO’s salary. Independence, though, is not the only quality of a good director and boards often face significant problems independence alone does not solve. The heavy focus on board independence has obscured another important director attribute: Expertise. This Article approaches the questions of when and why corporations might appoint expert directors. It argues expert directors can improve business performance, and perhaps avoid legal or regulatory liability, for problems consisting of at least two criteria: First, the corporation faces risks that are difficult to quantify or measure, but may also result in catastrophic losses. Second, the board’s general business skills and experience are insufficient to discern whether the managers’ course of action is reasonable in light of that risk. It illustrates these criteria to the past case of Sarbanes-Oxley’s “audit committee financial expert,” a rare circumstance where the law has affirmatively approved the appointment of expert directors. It then analyzes the possibility that corporations might soon add cybersecurity experts to their boards.
Keywords: Board of Directors, Corporate Governance, Independent Directors, Cybersecurity, Accounting, Auditing, Audit Committee, Audit Committee Financial Expert
JEL Classification: K22
Suggested Citation: Suggested Citation