Specialist Directors

What determines the effectiveness of corporate boards? Corporate legal scholars usually approach this question by focusing on directors’ incentives, such as counting how many directors are independent or whether the roles of the CEO and Chair are separated. Yet, the focus on the ground is shifting to directors’ skill sets and experience. Investors, regulators, and courts are now pressuring companies to appoint directors with specific types of expertise. In response, more and more companies are adding what we term as “specialist directors”: a DEI director, a climate director, a cyber director, and so on.

In a new Article (forthcoming in Yale Journal on Regulation) we examine this ongoing shift in board composition and evaluate how it is likely to reshape corporate governance. In doing so, we make the following three contributions.

First, we present evidence on the scope and magnitude of the changes in board expertise. We hand-collect and hand-code data from the proxy statements of S&P 500 (large cap) and S&P 600 (small cap) companies over the 2016–2022 period. We find that over the past few years companies have significantly increased their emphasis on expertise disclosure, as illustrated by the adoption of image-based “skills matrices.” In 2016, only 14% of the companies reported skills matrices. By 2022, that number jumped to 66%. Companies have also started regularly tracking ESG-related expertise, as evidenced by the addition of new rows to skills matrices. To illustrate, over the 2016–2022 period, 215 of the S&P 500 companies started tracking “technology” expertise, and 143 started tracking the more specific “cybersecurity” Expertise. Beyond changes in how companies report expertise, our dataset reveals changes in how companies add expertise. To recast the cyber example, from 2019 to 2022, S&P 500 companies added 199 new directors who were “cyber” experts.

Second, we analyze how this recent shift in board expertise is likely to affect corporate behavior. Does adding directors with expertise in climate change mean less environmental degradation? Does adding directors with expertise in cyber mean more user privacy? Here, we draw on interviews we conducted with nomination committee members and search consultants, and borrow insights from the multidisciplinary literature on group decision-making, to explore the pros and cons of adding specialist directors. It is intuitive to think of board expertise as an unalloyed good (what harm could come of adding more expertise?). Indeed, the push toward new expertise has potential advantages. For one, it can raise awareness of important societal problems that the old boys club of generalist directors may have a hard time grasping.

But adding specific expertise also comes with distinct and potentially overlooked disadvantages. Consider the following five. The first and most obvious drawback stems from the limited supply of quality directors who are also experts in specific fields such as climate change and cybersecurity. When all large companies are pressured to add specialist directors from a very limited pool of candidates, companies may end up adding directors with lower-than-average bandwidth, motivation, and understanding of the business. As a result, adding a director with a narrow range of expertise may reduce the quality of board discussions on other, more prevalent topics on the agenda. The second drawback comes from authority bias. Counterintuitively, adding a director with expertise in a specific subject matter may hinder the quality of board discussions on that specific subject, due to a tendency of directors to overly rely on opinions and information coming from perceived experts.

A third drawback has to do with suboptimal board size. To the extent that companies inject expertise into their boards by adding new members (instead of replacing old ones), the push toward more expertise may cause boards to become bloated, thereby slowing down communication and hindering coordination. A fourth drawback concerns board diversity. The push toward diversity in directors’ skill sets could clash with efforts to promote diversity in their demographics and viewpoints (gender and minority-group diversity). This is because the pool of available expert directors in any given area may be limited and skewed. To illustrate, less than 12% of the directors with cyber expertise in S&P 600 companies are females or minorities. Finally, by touting the addition of expert directors, companies may be engaging in board washing, i.e., trying to alleviate societal pressures without improving their underlying behavior.

Whether the benefits of adding ESG-expert directors outweigh the costs is a context-specific question. Still, we can highlight one general reason to worry about the tradeoff: today’s evolution of corporate boardrooms is not happening gradually and organically. In many ways, it is a reaction to outside pressures from regulation, litigation, and shareholder activism. A classic example of pressure from regulation is the SEC’s proposal in 2022, to require companies to disclose whether their board has a director with cybersecurity expertise (the SEC has recently abandoned this proposal). A classic example of pressure from litigation is the Boeing oversight duty case, where the company was required as part of the settlement to appoint a new director with expertise in airplane safety, and to ensure that, going forward, at least three of its directors would have aviation, engineering, or product safety oversight experience. Classic examples of shareholder involvement range from the largest asset managers’ voting policies and guidelines, to socially minded activist shareholders’ targeted proxy campaigns to add directors with expertise in climate change or human rights. As a result of these pressures, companies may fast-track expert directors into their boardrooms while compromising the director selection process and without careful onboarding and succession plans.

Our third and final contribution comes from generating concrete policy implications. For regulators, our analysis highlights the need to rethink the desirability of legal intervention. Addressing first-order problems such as climate change, racial discrimination, and data privacy by focusing on a specific observable director trait may not be the recipe for success. Having a certain skill set adds value only under specific circumstances, which vary across firms and over time. A one-size-fits-all nudge could backfire by limiting companies’ flexibility to reconfigure their boards. To the extent that regulators intervene in board expertise, they should focus not on adding specific traits, but rather on ensuring more credible and comparable expertise disclosure. Indeed, our dataset reveals just how haphazard and unstandardized expertise disclosure currently is. We find many examples of two companies reporting different expertise for the same individual director who sits on both boards, and of companies checking more and more boxes in skills matrices even though no concurrent change in actual expertise occurred (cheap talk).

For judges, our analysis spotlights the need to rethink how to assess board behavior (whether individually or collectively) and whether to assess the liability of domain-specific expert directors differently. For academics, our analysis situates the changes in board expertise within broader timely debates on “welfarism” in corporate governance, the promise and perils of mandatory disclosure, and the proper scope of director oversight duties.

Herein lies a broader point. Compliance and ESG have been the two biggest developments in corporate governance over the past decade. These two developments are now starting to influence the composition of corporate boards, causing a shift in board expertise. Investors and regulators now critically evaluate directors’ skill sets and experiences and require companies to add specific types of expertise. Companies respond to these pressures by disclosing more prominently their directors’ skill sets, and by adding more directors with ESG-related expertise, such as a cyber director or a climate change director. But we believe that it would be a mistake to lump all these directors together as “ESG directors.” Instead, we break down the ESG category into its various components and highlight how each newly emphasized expertise comes with different challenges for disclosure, nomination, and onboarding. For example, “safety” and “cyber” are closer in kind to traditional, industry-related types of expertise than “DEI” and “climate” are.

We also aim to offer rules of thumb for assessing the tradeoff of adding specific expertise. For example, when Boeing adds a director with expertise in airplane engineering and flight safety, the likelihood that this specific expertise will be tapped is high. Aviation safety is, after all, “mission critical” not just in the sense of regulatory compliance but also in the sense of the viability of Boeing’s business model. By contrast, adding a director with climate change expertise to a software company with a very limited environmental footprint may be less germane to the ability of that board to monitor and advise management. Another important criterion is whether the addition of expertise was done in response to one-size-fits-all pressures or to company-specific pressures. Pressuring a specific airline-manufacturing company to add directors with Aviation expertise is unlike pressuring all public companies to add directors with climate expertise or cyber expertise. All else being equal, the former is more likely to prove desirable than the latter.

To return to our initial point, board expertise is now being invoked daily in activist campaigns, consultants’ memos, and company disclosures. Yet it is too often treated as an unalloyed good with little reference to on-the-ground evidence. Our Article hopefully represents a first step toward injecting much-needed theory and evidence into the discussion.

The full article is available for download here.