How Should Board Members Be Selected?

Serving on a corporate Board of Directors is a sweet gig. You get to fly somewhere for free and stay at a nice hotel and eat some nice meals a couple of times a year. And rather than just casting around for some people who’d like a couple free trips a year, they actually pay you money for your trouble. Oftentimes a lot of money. Goldman Sachs, for example, paid James Johnson over $500,000 last year. This is a really sweet job. If someone offered me a job like that I would be very excited, and most likely quit my day job and just do a little amateur blogging while counting my blessings and doing absolutely everything in my power to stay on friendly terms with management.

That dynamic, obviously, is toxic to the executive oversight function a board is supposed to perform. So Felix Salmon proposes that board members should just get paid less like “somewhere in the $50,000 to $80,000 range.”

I think this sort of mistakes the problem, which is less about the level of compensation than the method of selection. If the board is there to keep tabs on the management, then the management should have no role in selecting the board. The best approach might be to pick a board based on a lottery, with your odds of selection proportional to the number of shares you own. If selected you’d serve a fixed term of several years, and the terms would be staggered so each year a few new people would join the board. Board members could get a modest honorarium (much less than what Salmon is proposing) to compensate them for their trouble but the basic idea would be that your compensation for serving on the board is the chance to safeguard your investment.