Specialist Directors

Abstract

What determines the effectiveness of corporate boards? Corporate legal scholars usually approach this question by focusing on directors’ incentives, such as counting how many directors are independent or whether the roles of the CEO and Chair are separated. Yet on the ground, the focus has been shifting to directors’ skill sets and experience. Investors, regulators, and courts are now pressuring companies to appoint directors with specific types of expertise. In response, more and more companies are adding what we term “specialist directors”: a DEI director, a climate director, a cyber director, and so on. These changes in board composition could reshape corporate governance and impact broader societal issues such as data privacy and environmental degradation. This Article examines the ongoing shift in board expertise and makes the following three contributions.

First, the Article presents evidence on the scope and magnitude of the changes in board expertise. We hand-collect and hand-code data from the proxy statements of S&P 500 (large cap) and S&P 600 (small cap) companies over the 2016–2022 period. We find that over the past few years companies have not only significantly increased their emphasis on expertise disclosure, but also added hundreds of directors with narrower, ESG-related expertise.

Second, the Article analyzes how these shifts in board expertise could affect corporate behavior, and whether they are likely to prove overall desirable from a societal perspective. It is intuitive to think of board expertise as an unalloyed good. But we merge insights from interviews with nomination committee members with insights from the literature on group decision-making, to highlight five realistic concerns arising from the current trend. The injection of new, narrow types of expertise could distort board dynamics, create “authority bias,” overly increase the size of boards, hinder efforts to promote board diversity, and result in “board washing” whereby human capital disclosure camouflages the company’s actual behavior.

Finally, the Article generates concrete policy implications. For regulators, the main lessons concern rethinking the desirability of legal intervention and ensuring more credible and comparable expertise disclosure. For courts, the main lessons revolve around how to assess board behavior in oversight-duty litigation and what to consider when approving derivative settlements.

Keywords: Corporate Governance, Corporate Law, Directors, ESG, Compliance, Oversight Duties, Caremark, Board Effectiveness, Board Diversity, Director Independence, Director Expertise, Cybersecurity, Corporate Social Responsibility, Securities Regulation,

JEL Classification: K22, G34, G38, L21, M14