A Student Plan Goes to Washington
Not all financial reform proposals under consideration in Washington sprang from federal agencies and congressional committees. One emerged from HBS. Last spring, students in Professor Rakesh Khurana’s elective corporate governance class took aim at solving two problems that plague directors: lack of time and lack of knowledge. Their solution? Elevate board service to a profession by creating a nonprofit, public-private Corporate Governance College (CGC) to employ, train, and coordinate the placement of full-time professional directors.
The students’ 59-page proposal calls for Congress to charter the CGC, while funding would come predominantly from public investors. To launch the college, the proposal seeks a congressional mandate to require companies receiving federal TARP bailout money to allocate three board seats to directors employed by the CGC. These firms would serve as models to encourage non-TARP companies to allocate voluntarily slots for three CGC directors. The proposal anticipates demand for roughly 500 professional directors within five years.
“I wouldn’t say that the current corporate governance system is broken,” explains Lars Nielsen (MBA ’09), lead author of the student proposal, “but in many ways corporations have evolved faster than corporate governance has been able to adapt. The system needs an update; this kind of reform is practical, low-cost, truly implementable, and more palatable compared with added regulation.”
One update that many agree on is the need for industry experts to serve on boards. Under current regulations, directors must be independent as a means to avoid conflicts of interest. Today, ten out of twelve directors of Fortune 500 companies are independent. As a result, they bring little or no in-depth, industry-specific knowledge to their board positions, a situation widely regarded as a major impediment to good governance. Since the CGC’s professional directors would hold no other jobs, they would come to positions without industry conflicts and could serve companies in their area of expertise. In fact, their knowledge would no longer be a liability.
The college also solves a second problem. Many directors work full-time as CEOs or academics, and many serve on multiple boards, leaving little time for them to master the complexities of the businesses they oversee. For the CGC’s professional directors, time would not be an impediment to quality service. They would sit on no more than four boards and devote themselves to honing skills in oversight and governance.
Since the CGC proposal was completed in April, it has circulated among academics and Washington policymakers alike. In June, two governance legal experts gave it a favorable mention in an opinion piece in the New York Times. It remains to be seen whether the proposal will gain traction in Congress or fade from view. For now, it is being taken seriously, an achievement in itself.
To read the entire proposal in PDF format.
