The changes that have been occurring in the board rooms of American corporations provide a good example of how well the market can work on its own. For over a decade now, many corporate activists have been urging the federal government to adopt a variety of rules that spell out how companies should govern themselves. The basic idea has been to make business enterprises more accountable to their owners and to the public. The most popular proposal was to require corporations to name outsiders, and not company officers, to the majority of positions on a company's board of directors. Some of the suggestions (which the advocates urged be codified into law) got as specific as requiring that designated ``constituencies'' -- environmentalists, union members, civil rights groups, etc. -- be represented on the corporate board. Neither the Securities and Exchange Commission, which has important rulemaking authority in this area, nor Congress has seen fit to respond to the corporate activists.
Yet in important ways, many private companies have voluntarily acted on this issue. Corporations are choosing directors with a broader array of backgrounds than in the past. Furthermore, corporate boards of directors constituted primarily of ``insiders'' (members of the company's management) have become rarities.
In 1938, at least one-half of all corporate boards in the United States consisted primarily of inside directors. By 1979, only 17 percent of corporations reported that inside directors constituted a majority of their boards.
In fact, the average corporate board had nine outside directors last year, compared with four insiders. And the ``outsiders'' are becoming more ``outside.'' For example, fewer of the non-management directors are members of the company's law firm -- down from 40 percent of the companies surveyed in 1974 to 28 percent in 1984. Similarly, the proportion of boards with commercial bank directors declined from 51 percent to 31 percent during the same period. The basic premise is that outside directors can act
more independently of the management and do a better job of representing the shareholders if they do not have business relationships with the company.
The activities of the typical corporate board in the US has also changed in recent years. Since 1970, about 100 major companies have established public policy committees of their boards. These committees give board-level attention to company policies and performance on subjects of special public concern. The topics they deal with include affirmative action, employee health and safety, the company's effect on the environment, corporate political activities, consumer affairs, and ethics.
Also, the proportion of boards with women directors rose from 11 percent in 1974 to 45 percent in 1984. During the same period the proportion of boards with black members rose from 11 percent to 26 percent. Another indicator of broadening board membership is that the proportion of companies with members who are academics increased to 52 percent in 1984, from 36 percent in 1974. Also, boards with with former government officials increased from 12 percent to 31 percent.
But relatively few companies have elected union officials to their boards. Most of those who have done so took the action as part of a package of union ``givebacks'' in order to tide the company over a period of financial difficulty. Often, the union members received shares of the company's stock in lieu of the expected wage increases. Membership on the board was sought to protect the workers' new financial interest in the company.
In a sense, all these changes measure ``inputs'' rather than ``outputs.'' Electing directors with broader backgrounds and perspectives provides an enhanced opportunity for better representation of shareholder, public, or other interests than management-dominated boards. But there is no assurance that they will do a better job in this regard. In practice, the outsiders may defer to the chief executive officer, especially when he also serves as chairman of the board.
It is also possible that outside board members may represent their own parochial interests ahead of shareholder interests. Those who are leaders of the local community may exert pressure on the company to donate to their pet projects, which may have little value to the shareholders of a nationwide corporation. Similarly, a company may find it difficult to turn down a request for a large contribution from a college whose president just happens to be a member of the board of directors.
Nonetheless, it is usually easier for outside directors to initiate a change in the top management of a company than inside directors. Also, a board with a majority of non-management directors is less likely to rubber-stamp the outgoing chief executive's recommendation for his or her successor. Indeed, the subject of management succession is generally considered to be the most important responsibility of the board.
These various voluntary changes that have occurred in the practice of corporate governance have not prevented many corporate activists from continuing to urge the federal government to adopt hard-and-fast rules concerning the governing boards of American business. But the near-universality of the voluntary changes helps to explain the federal government's reluctance to intrude.
A former chairman of the Council of Economic Advisers, Murray Weidenbaum is director of the Center for the Study of American Business at Washington University in St. Louis.