Another View: Let’s License Corporate Directors

The New York Times, September 20, 2011

BY JONATHAN F. FOSTER

Many occupations require licenses to prove competency, including accountants, investment professionals, physicians, private investigators and security guards. While licensees are not necessarily excellent at what they do, a license does guarantee that a licensee has fulfilled the requirements for a given role determined by a reputable authority.

So, why not require licenses for directors of publicly traded corporations to confirm their competency in corporate governance?

Governance can be defined as the “exercise of authority or control.” A member of a board of directors is “one of a group of persons chosen to control or govern the affairs of a company.” In other words, the oversight of management on behalf of a company’s shareholders is vested in the board of directors. While the shareholders elect the board, and there is an accelerating trend with publicly traded companies to vote on each director every year, there are no specific requirements and no required license for a director of a public company.

An important step to help encourage good governance and help increase the public’s confidence in the oversight of our country’s companies could be to require licenses for directors of publicly traded companies in the United States.

To obtain a license for a given position, the requirements typically include the completion of an approved course of study, passing of a written and/or practical examination and experience at acceptable levels.

For example, to become a licensed certified public accountant, state requirements generally include education, examination and experience requirements. Typically, the education requirement is a bachelor’s degree, which includes a minimum number of qualifying credit hours in accounting and business administration. The candidate must sit for and pass the 14-hour, four-section uniform certified public accountant examination. Experience requirements vary but are usually one or two years of accounting experience. C.P.A.’s are also required to take continuing education courses in order to renew their licenses.

Similarly, the “Series 7” is the basic test and license for securities professionals. The examination has sections on customer issues, securities markets, economic and financial issues and portfolio analysis. All registered individuals also have to complete periodic computer-based training focused on compliance, regulatory, ethical and sales practice standards.

These examples offer a possible road map for licensing directors of public companies. A license for directors could be granted by each state with full reciprocity between states. Because effective directors can come from so many backgrounds, an appropriate education requirement is difficult to define. However, capable directors must be thoughtful and mature. Thus, an age and experience requirement is necessary: at least 30 years of age and 10 years of full-time work experience.

A “national examination for directors of public corporations” might cover six areas: corporate governance; ethics; leadership and organizational structure; corporate finance, accounting and control; technology and systems; and sales and marketing. Continuing education is critical to keep up with new issues; 20 hours a year of continuing education should be required.

Corporate governance is evolving, and largely improving, as a result of catalysts ranging from federal legislation to activist shareholders and institutional investors. It is noteworthy, however, that licenses are required for accountants, investment professionals and doctors — as well as cosmetologists and massage therapists — but not for corporate directors. Maybe they should be.

Jonathan F. Foster is the founder and managing director of Current Capital.