Legal Commentary

The problem with nuance is that it is boring.  It's far more exciting to hop on the availability heuristic (prediction of the frequency or prevalence of an event or characteristic based on how easily examples can be brought to mind, not the actual data) bandwagon, particularly when the targets are well-paid, like corporate executives (full disclosure:  I was one, so take this appeal to wishy-washiness FWIW).  Indeed, I think I could make an argument that the availability heuristic is the primary driver of social and political discourse today:  see, well, every cable news outlet.  My own heuristic for wisdom tends to be some acknowledgment of nuance or counter-intuitive position:  such as when a conservative acknowledges some merit in a liberal position or vice-versa (in academia, it's where the author says, "to be sure...")

So l liked the "hey, it's not so bad, but it could be better" view of corporate governance today in the Wall Street Journal, coming from John J. Brennan, the chairman emeritus of Vanguard, as he describes it, "one of the largest index fund providers in the world" and therefore "at a minimum, a 2% owner of just about every public company in the United States."  Moreover, Vanguard views itself as a long-term holder, not a day- or even quarterly- trader, which I think is important.  I've made the point before that making universal pronouncements (or rules for that matter) based on the pathologies of the worst examples of corporate leadership, even if there are 100 examples, is operating on the availability heuristic, given that there are 9,000 publicly-traded companies (I'm pretty sure that's about right) in the U.S. alone.  Brennan observes from his broad perspective that there's been a steady progress in board performance over the last twenty-five years, but nevertheless offers a list of conceptual suggestions for additional improvement:  focus on the directors' roles as stewards of shareholders who really don't want to be involved in the management of the company; collaborative rather than confrontational relationships between management and shareholders; and self-reflection and self-evaluation that goes beyond current stock price and earnings to matters such as succession planning, strategy, and big picture goals.

Brennan offers a number of concrete suggestions as well, one of which I like a lot.  He suggests that every director of a public company should hold a minimum amount of equity in the company equivalent to a five times multiple of board pay.  The problem, which he recognizes, is that making directors buy their way onto boards would mean that only very wealthy people would serve because the purchase of the shares would not be a significant percentage of the director's net worth.  Indeed, I'd question the business savvy of somebody who bought her way onto a board by violating basic concepts of diversifying one's own holdings!  Brennan proposes, and I concur:  pay directors solely in equity (I would amend this to equity and enough cash to pay the taxes on the equity) until they've reached the threshold.  I don't see it writ in stone anywhere that directors, who ought to be compensated, should get cash for their work.

Brennan's observations are consistent with my own trafficking in the availability heuristic (and, hence, as subject to revision by the data as the opposite view):  what I've seen personally is that "cultural change [from insider to shareholder focus] has been driven by board members themselves."  I also think he's correct in believing that that leading directors and leading boards changing the culture of corporate governance is likely to be more effective and more permanent than regulation or legislation.