Home > Board Performance, Estructura del Consejo, Roles of the Board > Who should sit on Corporate Boards (I): Industry Experts

Who should sit on Corporate Boards (I): Industry Experts

Industry expertise provides a better understanding of risks, opportunities, regulatory environment, and competitive landscape. It is a general belief that directors should provide the boards with industry experience, perhaps only second to financial knowledge.

But, does it really improve board effectiveness? What else is necessary, or when is that assertion correct?

Faleye, Hoitash and Hoitash find evidence that industry expertise enhances firm value, while taking companies to better innovation results, by facilitating and bettering organic investments results, (on the other hand, there is not a correlation of industry expertise and firm value generated from acquisitions).

Industry expertise also provides a higher connectedness, through the directors`s connections and relationships in the industry and the regulatory bodies, which can be of a certain firm value relevance in certain industries, where regulation is demanding and local activities are predominant.

Dr Richard Leblanc, in his “Banking directors need to be at the top of their game” post, highlights the fact that directors in Lehman Brothers were well past their retirement age, so probably outdated on the complexities of the new financial products. So, when assessing the capacities of directors, “current experience” is also needed, not just “experience”. Just taking the example of the Online Display Advertising”, as a fast-changing industry, we will recognize the absolute need for this updated directors`expertise. Please look at the enclosed video by the industry association IAB, and be aware of the changes that took place in just ten years. Past experience would have become irrelevant in that time. (http://www.iabuk.net/video/the-evolution-of-online-display-advertising).

Dr. Richard Leblanc in his Corporate Governance blog points out that lack of industry expertise is one of the reasons why boards lack the courage needed to “do what is needed”, however disruptive it is to the company history or management. Just think of Kodak, and so many other firms, that failed to see what seemed to be evident for many others, except for management, and perhaps to a complacent board lacking industry expertise to be opposed to that of managers, who obviously somehow captured the board.

“People/director of one listed company should not be independent director of another listed company, and it should be clearly defined in the corporate governance guidelines,” Dr M Baki Khalili, the research director of Centre for Corporate Governance and Finance Studies (CCGFS) of Dhaka University, told bdnews24.com: “Experts alone should be independent directors, otherwise the whole purpose of having independent directors will be defeated,”.

Gregory Pratt, a President of the Capital Area Chapter of the National Association of Corporate Directors, says”The role of industry expertise in determining proper governance is a central piece of the puzzle going forward”.

But, what`s the real life of boards regarding this particular point? There are several studies on this subject, and for instance, one made by GovernanceMetrics International outlined that in each of the US largest companies, at least two directors had outstanding industry experience. Regulation should probably not go further than that, for several reasons: first, diversity could be hit by a general industry expertise requirement; second, a board could turn to be “parochial”, or forced into the kind of “groupthink” that so much harm causes to companies; third, not introducing members from nearby industries, or from industries with similar features, (regulatory pressure, growth path, etc), condemns the firm to lose that part of the picture; fourth, a board is charged with decisions not always connected to the industry strategy or facts, but also to accounting, law and regulation, crisis management, and a board only made of industry experts would eventually fail to satisfactorily comply with its duties.

As Richard Levick points out in Forbes: Whom would you need on the board in an accounting scandal, in a product recall, in a FCPA (Foreign Corrupt Practices Act) probe? How much actual knowledge of your specific markets will your directors need in such eventualities? Alternatively, how much of a broader world view would be needed?

To end up with, let me cite a McKinsey & Co. 2006 report saying: “…in our work with boards we find that too many simply lack directors who have industry expertise to participate effectively in shaping strategy… We believe that on a board of, say, a dozen directors, a litmus test of strategic energy is the presence of at least three or four members who have deep industry expertise in the core business and market conditions the company faces……… Once that expertise is in place, other board members can be screened for deep functional or geographic expertise” (Carey and Patsalos-Fox, 2006).

Bibliography:

Faleye, Hoitash and Hoitash: Industry Expertise on Corporate Boards.

Richard Leblanc: Why Corporate boards lack courage?, in his blog: http://rleblanc.apps01.yorku.ca/

Richard Levick, on http://www.forbes.com/sites/richardlevick/2011/11/10/icahn-oshkosh-and-a-persistent-question-should-board-members-be-industry-experts/?goback=.gna_3834048

Shaping strategy from the boardroom, by Carey and Patsalos-Fox, 2006, McKinsey Review.

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