Board Service Providers Taking Off

SEP 25, 2014

Published 9/23/2014 by Stephen Bainbridge in his Journal of Law, Politics, and Culture:

Back in the May 2014 Stanford Law Review Todd Henderson and I published an article entitled Boards R Us: Reconceptualizing Corporate Boards, which argued that:

State corporate law requires that “natural persons” provide director services. This Article puts this obligation to scrutiny, and concludes that there are significant gains that could be realized by permitting firms (be they partnerships, corporations, or other business entities) to provide board services. We call these firms “board service providers” (BSPs). We argue that hiring a BSP to provide board services instead of a loose group of sole proprietorships will increase board accountability, both from markets and from courts. The potential economies of scale and scope in the board services industry (including vertical integration of consultants and other board member support functions), as well as the benefits of risk pooling and talent allocation, mean that large professional director services firms may arise, and thereby create a market for corporate governance distinct from the market for corporate control. More transparency about board performance, including better pricing of governance by the market, as well as increased reputational assets at stake in board decisions, means improved corporate governance, all else being equal. But our goal in this Article is not necessarily to increase shareholder control over firms; we show how a firm providing board services could be used to increase managerial power as well. This shows the neutrality of our proposed reform, which can therefore be thought of as a reconceptualization of what a board is rather than a claim about the optimal locus of corporate power.

Maybe we should have patented this as a business process, because it looks like people are taking it seriously. There's an outfit called Integral Board Group, for example, which is now offering BSP-like services:

"Think of a board made up only of independent directors (acting somewhat as consultants / advisors) all working under a single contract, from a single service provider (vendor) and bound to performance. Sounds like a simple concept to grasp, however, it is truly a new approach - one that should not to be confused with companies that provide executive staffing, individual board advisors, executive coaching or stand-alone independent directors. The holistic approach of a cohesive and collectively-accountable team, directly tied to a client company's performance and bottom line, is not present in these models. It is present, however, in the BSP model along with much needed transparency as well as performance-based metrics. When describing our service to clients we like to say we are an "all or nothing" model - you either get the core board team in its entirety or you get no one. This is due to the belief that it is the collective board's experience, constructive interaction and diverse industry backgrounds that elevates the mission.  Additionally, a 'bench' of expert advisors supplements the board team expanding its effectiveness well beyond just the core board members in this type of outsourced model. As I (Mark A. Pfister) discussed in a previous article, add the element of an elevated 'behavioral predisposition' to the existing 'intellectual capital' of the board team and you have an even more incredible company leadership asset. In essence, the board becomes greater than the sum of its parts.

But didn't the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010 take care of most board-related issues? Hardly. An article in The Economist summarizes "In the May edition of the Stanford Law Review Stephen Bainbridge of the University of California, Los Angeles, and Todd Henderson of the University of Chicago offer a proposal for fixing boards that goes beyond tinkering: replace individual directors with professional-services firms. Companies, they point out, would never buy legal services or management advice from people only willing to spare a few hours a month. Why do they put up with the same arrangement from board members? They argue for the creation of a new category of professional firms: BSPs or Board Service Providers. Companies would hire a company to provide it with 'board services' in the same way that it hires law firms or management consultants. The BSP would not only supply the company with a full complement of board members. It would also furnish it with its collective expertise, from the ability to process huge quantities of information to specialist advice on things such as mergers."

As I understand it, they're currently focused on privately held companies. Even so, it's an interesting development.

Stephen Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA School of Law, where he currently teaches Business Associations, Mergers and Acquisitions, and a seminar on corporate governance.

Original Source Article: Stephen Bainbridge's Journal of Law, Politics, and Culture