Government in the Board Room

Recent news items: the SEC bars Elon Musk from board chairmanship for three years and fines each of Musk and Tesla $20M; California passes a law requiring public companies headquartered there to have at least one woman director, and in the future multiple women for larger boards.

It has been a long time since internal board governance became “news” but there is much imprecise thinking (to my mind) swirling around these news items.

First, as to Musk, the day his comments hit the news it was clear to SEC lawyers there was an issue.  He was hung out to dry based on established law, nothing new.  Commentary suggests that the fact that the board was static (mostly the same folks serving since the 2010 IPO) constitutes an argument for board renewal.  But any board, even long-serving in a company owned 22% by its founder, needs to institute control of the flow of news; board management 101.  This is the same problem the current Federal administration enjoys.  But in a public company, the SEC is there to enforce the need for accuracy and evidence.

As to California, the idea that you need one woman is in conflict with my understanding of the evidence, which is that one woman does not make much of a difference, you need multiple women to create an atmosphere where woman are active (and then the statistics show that performance improves).  Then also, it may well be that California is constitutionally not able to regulate management of an entity formed in another state (think Delaware for most public companies).  Corporate governance issues are driven by state of formation of an entity, not where it builds its shiny home office building.

The question of women on boards has triggered a broader discussion, however: the intrusion of government into the board room.  Today’s Boston Business Journal argues against Massachusetts following the California lead, even though only 19.2% of board members of the largest Massachusetts companies (public and private) are women.

It is interesting that there is resistance to government sticking their noses into board rooms, since nose-sticking is fundamental to the way in which US corporations operate.  Major examples: the SEC requires public companies to have independent key committees and in most cases an independent board majority; State statutes and courts impose substantial fiduciary duties on boards, sometimes by complex and arcane analysis of whether boards have properly authorized certain action involving risk of majority abuse of minority interests.  So governmental interference with the board room is pervasive, substantial, and well-established.  (I do not suggest disagreement with these “intrusions” but only note they are robust and firmly established.)

Since academic analysis demonstrates the superiority of gender-mixed board management, why the resistance to legislation in the gender/board discussion?  There is something different, as we have recently learned in the Federal setting, about issues perceived as gender-driven.  I do not dare take a dive into the basis for this difference or the appropriate way to address it as to matters of policy, except to say that the issue in the governance area should not be avoided by legislative bodies on the grounds that it constitutes inappropriate governmental impact on board governance; the train of governments messing with boards left the station, and at high speed, a very long time ago.


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