Consider two recent events. On December 2nd directors of Intel sacked its hapless chief executive, Pat Gelsinger. He had torched $150bn in shareholder value over his three-and-a-half-year tenure at the chipmaker, even as the fortunes of virtually all other chip firms were boosted by white-hot demand for computing power amid the artificial-intelligence (AI) revolution. Good riddance, then. But what took the board so long?
The same day, a judge in Delaware reaffirmed her ruling from January to annul the eye-watering $56bn compensation package awarded in 2018 to Elon Musk by the board of Tesla, his electric-car company. The decision is controversial. Tesla’s shareholders have minted it lately thanks to the soaring price of the company’s stock. In June 75% of them voted to bless the mega-paycheque (and move the company’s incorporation from Delaware to management-friendlier Texas). Tesla called the latest ruling “wrong” and will be filing an appeal. Still, the imbroglio is a reminder that Tesla’s notionally independent directors who signed off on Mr Musk’s windfall were, in a judge’s opinion, anything but.
Intel and Tesla represent two ways in which boards fail in their duty to represent investors and hold management to account. The case of Tesla shows how directors at the mercy of a domineering figure—be it a controlling shareholder, an imperial CEO or, like Mr Musk, both—have a powerful incentive to humour that person’s whims even if it might mean ignoring their fiduciary obligations. Equally, as possibly happened at Intel, thoroughly independent directors may lack enough of an incentive to care. Either way, the result looks like feckless passivity.
Certain features of American capitalism are making both problems worse. For a start, more companies are going public with ownership structures in which some shares are more equal than others. Jay Ritter of the University of Florida keeps a tally of businesses that opt for such dual-class shares. When Google famously did so 20 years ago, they were a rarity. In the 2000s they accounted for fewer than one in ten initial public offerings on American exchanges. In the past five years they made up more than a quarter—and nearly half of tech IPOs, from Airbnb to Zoom.
Dual-class arrangements appeal to founders, who are happy to take money from public markets but not to give up control. Investors used to be suspicious. After Snap, a social-media firm, sold stock with no voting rights in 2017, some of them persuaded S&P Dow Jones, a compiler of indices, to bar new arrivals with multiple share classes from the blue-chip S&P 500 and its sisters.
Many have since had a change of heart, no doubt impressed by the trillion-dollar market values of dual-class darlings like Alphabet, Berkshire Hathaway and Meta. So has S&P Dow Jones, which in 2023 rowed back its ban. In January Mr Musk mused about adopting the structure at Tesla, apparently out of fear that his mere 13% stake makes him vulnerable to be “voted out by some random shareholder-advisory firm”.
Investors may be right to conclude that a heroic entrepreneur alone can lead a company to greatness. But they should have no illusions about the resulting emasculation of their representatives in the boardroom. This is easier to swallow when returns are healthy than when they are not. Just ask the shareholders of Snap, which is worth a third less today than at its IPO.
The rise of emasculated directors is coinciding with that of absentee ones. Most are physically present at board meetings but, like at Intel, too many appear disengaged. In the latest annual survey by PwC, a consultancy, only 30% of executives rated their board’s performance as good or excellent. A fifth thought it poor. Most telling of all, 84% of executives did not think that directors overstepped the boundaries between themselves and management. Often this is precisely what a vigilant board ought to do.
One reason for directors’ disengagement may be overcommitment. This was brutally exposed by covid-19, when boards often convened weekly rather than every seven weeks or so. A subsequent backlash against “overboarding” forced many directors to split their time between fewer companies. The typical busy S&P 500 director now sits on two boards, manageable in non-pandemic times. But this has been offset by the rising number of hours they spend on board duties as the world gets more complicated.
Directors’ rut
Companies are also finding it harder to recruit heavy-hitters who won’t nod off. A headhunter recalls that chief executives, a mostly white and male bunch, were out of favour amid the push for greater diversity a few years ago. “Now that is the only thing companies want.” With the share of active or former chief executives on S&P 500 boards in decline over the past few years, many won’t get it.
There is no recipe for a perfect board. But some ingredients may make them better. Lucian Bebchuk of Harvard Law School proposes “enhanced-independence” directors, whose dismissal by an imperious boss can be vetoed by minority shareholders. A version of this exists in Britain and Israel. And whereas a board’s size or average age seems not to affect investor returns, S&P 500 firms with a wider age range tend to do better. Expedia’s eldest director, Barry Diller, a media baron, is 55 years older than the youngest, Alex Wang, an AI billionaire. Perhaps intergenerational tiffs keep everyone else on boards alert.
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