Governance Gambits and Business Judgment in In/Out-Sourcing Tactics

Abstract

This article investigates the burgeoning trend of proceduralization within corporate law, with a spotlight on the board of directors. It delves into the tension between nurturing skill diversity within the board and outsourcing specific functions, and the related paradoxical challenge: while external consultants and specialized directors enhance expertise and decision-making, they may also inadvertently expose directors to greater legal risks.

Drawing on a comprehensive review of existing literature and relevant case law, the paper examines the intricate dilemmas corporations face when choosing between specialized directors and external consultants, particularly in light of the business judgment rule. It points out the paradox where operations without consultancy costs, ostensibly perceived as financially advantageous, might expose directors to liability, while those with consultancy expenses often avoid scrutiny. Also, it considers risk management and accountability in today’s environment, where reliance on external experts is increasing.

Furthermore, the piece identifies two pivotal cross-sectoral shifts: the rising influence of diverse stakeholder cohorts and the evolving role of consultancy firms as board service providers à la Bainbridge.

This paper posits that over-reliance on external expertise may turn boards into “theatre boards,” where the performative aspects of governance overshadow substantive decision-making, especially when conflicts of interest may arise.

It addresses the question of which core board competencies of the board are non-delegable, examining the balance between delegation and ensuring reliable information from external advisors. While consultants can improve decision-making, the board must retain strategic oversight and accountability.

To address these challenges, the paper calls for a robust framework that balances external expertise with safeguarding governance functions. This includes enhancing the board’s internal capabilities, establishing guidelines on consultant reliance, ensuring that directors are equipped to critically assess external input, establishing guidelines on consultant reliance, and fostering a culture of critical engagement and board accountability.

Keywords: proceduralization, theatre boards, board diversity, outsourcing, business judgment rule. shareholder interest, risk management, corporate accountability, consultancy firms, board service providers, fiduciary duties

JEL Classification: G3, G32, G34, K2, K22, M14