The evidence keeps accumulating.
Last month the Wall Street Journal reported on additional research confirming the disadvantages of boards with too many independent directors.
This is not surprising. Although directors oversee and don’t manage, a board can do its job more effectively if it has a better grasp of what could work well for the company. Independent directors may have a more limited understanding of the company’s workings. This can lead to weaker strategic choices. So, although valuable fresh perspective can result from having some of them on a board, too many independent directors can easily have a dark side.
The research reported on last month was discussed in the June 14, 2017 Wall Street Journal article “Insiders Are Useful to Boards” by Joann Lublin. The study, which was co-authored by Christine Shropshire, associate professor of management at Arizona State University, “tracked 1638 companies in the S&P 1500 between 2003 and 2014”. The research concluded that “Businesses should ‘reconsider whether the push toward lone-insider boards is actually in the shareholders’ best interests’” And, since I have been advocating the value of fewer independent directors since that policy first came about in the early 2000s, I heartily agree with the study’s recommendation.
I have been researching business success and failure for more than 25 years. So, as someone whose research showcases the importance of building on strengths, to me having too many directors who may have had very limited exposure to the company’s inner workings can be detrimental. My research, however, focuses on the strategic choices that companies make and is not necessarily about boards. But, I have attended the University of Chicago Directors College, a training seminar for current and aspiring board members, and I regularly read board related publications and use board resources online. And, I see many situations where my research does apply to boards.
My research, which is often confirmed by other prominent experts, finds that knowledge and strengths play a crucial role in the success of business. As I see it, a major dark side can unfold if the advantages of building on strengths and knowledge are restricted to company levels below the board. That’s why I have been pointing out the downside of too many independent directors since I wrote a letter to the editor about it that was published in Businessweek in October of 2002. The more recent push toward directors with industry experience is not necessarily a solution. So, I am pleased to see another study confirming the unfavorable consequences of too many independent directors, and I see value in the study’s call for reconsidering the push toward lone-insider boards.