Why There Are No Qualifications to Serve on a Corporate Board of Directors

Investors don’t really care about boards of directors, except when a firm that’s been successful starts to fail.

Photo by Justin Sullivan/Getty Images

A couple of readers wanted me to say more about why I say there are no real qualifications to serve as a nonexecutive director of a major corporation. The main issue is that nobody has any idea what a board is supposed to be doing.

Now you can imagine a kind of just-so story about corporate boards. A firm would start as a closely held startup. The vast majority of the shares are in the hands of a couple of founders and a handful of early stage investments. All day-to-day decisions are made by the CEO, and all big-picture decisions are made by a full vote of the shareholders. In practice that means the founders plus that handful of investors. Some shares, to be sure, are in the hands of other early employees or people who bought shares on a private secondary market. But basically it’s simple. And now it’s time for people to get rich by holding an initial public offering. But after the IPO, the company will be far too widely held to be governed by shareholders’ meetings. So the investment bank advising the company says, “Potential investors are going to be scared that you guys will squander all the firm’s money, so before you stage the IPO, you need to assemble a highly credible board of directors.” This board needs some heavy-hitters. You need folks with relevant technical expertise. You also need folks with finance backgrounds. You need managers. You need a group that says to potential investors, “These guys can really watchdog the heck out of those crazy founders.”

In that kind of world, there would be some sense of who is and isn’t a strong candidate for a board gig.

But that’s not the world we live in. In the real world, Mark Zuckerberg personally controls a majority of shares in Facebook even after the IPO, and that never stopped people from buying shares in the company. Few public companies are that closely held, but plenty of post-IPO tech companies are de facto controlled by their founders. People bought nonvoting shares in the New York Times Company when it went public. Boards aren’t there to reassure investors—investors don’t demand reassurance. That’s because “exit” from a shareholding relationship is so easy that people don’t spend a lot of time worrying about voice. Boards are there because a firm is legally required to have a board. And every few years after some scandal shows up how ineffective boards are at supervising corporate managers, there’s some tweak to the rules to make them be more independent or whatever. But nothing really changes because investors really don’t care.

Now the exception to all of this is when a firm that’s been successful starts to fail. When that happens (like to JC Penney over the past few years), the share price drops low enough that “activist” fund managers can step in and buy up large stakes in the company and try to force changes in corporate policy or strategy. When that happens, board seats often become tokens in the struggle. In that case there very much is a clear job for the board members—either to support the activist’s proposed changes or to oppose them. But in that case it’s an issue of loyalties, not credentials—the activist wants to put his people (or, typically, himself) on the board.