Delaware General Corporation Law Section 141 tells us that the "business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors." Given the complexity of managing or overseeing the business and affairs of modern corporations, an outsider may be forgiven for being surprised at finding out that (as I've noted before) directorships are often part-time positions filled by individuals who generally have other very pressing full-time demands. Now we can add another curiosity to this area: the celebrity director. Bloomberg reports that:
Rules being considered by the Securities and Exchange Commission would force Bank of America Corp. to explain how leading the 2003 invasion of Iraq prepared former U.S. General Tommy Franks to sit on its audit committee. Franks and ex-Admiral Joseph Prueher, who both resigned as directors of the bank this month, are among military leaders and athletes paid as directors by U.S. companies. They include seven-time Tour de France champion Lance Armstrong, who quit Morgans Hotel Group Co. after missing 11 board meetings in 2007.
Now there may be some good arguments for the notion that having some star power on the board is good for business, or that certain skills like leadership are important and transferable. But in an age where financial expertise and specialized business knowledge seem essential to effective oversight, there must be better positions than director for leveraging those skills. Then again, those other positions would probably require one to show up more than once a quarter (if that).
Of course, this whole issue may be unduly magnified by the very star power it questions. Prof. Quinn notes: "I wonder how big a problem this really is. The SEC has been gradually tigtening the screws on director nominations and qualifications. SOX has placed added burdens on directors. If you're a celebrity, why would you want the hassle?" He goes on to argue that the SEC's time might be better spent "thinking about limiting the number of board assignments that full-time CEOs take on." I tend to agree.
But there may be another incentive for appointing celebrities to directorships. The general rule is that a director cannot be held liable for failing to spot a "red flag" due to a lack of expertise. However, if the particular director has the relevant expertise he or she will be held accountable for that knowledge. Thus, when it comes to dealing with the seemingly inevitable lawsuits challenging directorial oversight, the "I'm just a world-class cyclist" defense may actually carry some weight. For now, I'll just add this to the list of reasons why we should strive to close the gap between the rule of director primacy and the reality of part-time directors. Perhaps "an independent, nonprofit clearinghouse to recruit and screen independent directors" may be part of the solution.
