Corporate boards are among the most important institutions in capitalism. Their job is to police the relationship between shareholders who own companies and managers who run them. This means keeping an eye out for managerial incompetence and fraud. It also means standing back and offering strategic advice on hiring new managers or buying competitors.
Thus begins The Economist’s article, Replacing the board, which cites how the board of directors of contemporary organisations has succeeded in some cases and failed miserably in some (Enron and WorldCom). The success of boards across industries and countries cannot yet be attributed to a specific common underlying theme, but, in most cases, the theme for failure has similar foundations. The board’s duties are confined to limited oversight. Cites Schumpeter:
Board members are part-timers with neither the knowledge nor the incentives to monitor companies effectively. And they are beholden to the people they are supposed to monitor. Boards are thus showcases for capitalism’s most serious problems: they are run by insiders at a time when capitalism needs to be more inclusive and are dominated by part-timers at a time when it needs to be more vigilant about avoiding future crises.
There seems to be a need now to manage the board of directors of a company. With less incentive to actively formulate and mould the future of a company, board of directors have been accused of unintentional negligence in the operations of their companies.
The problem can be managed, however, if the proposal put forth by Stephen Bainbridge and Todd Henderson of the University of California, Los Angeles and University of Chicago respectively is accepted, Schumpeter says. Their proposal is to “replace individual directors with professional-services firms“. Their recommendation, which entails hiring Board Service Providers (BSPs), involves a company hiring BSPs to provide them “board services”.
This is when I reflected on the very establishment of the outsourcing industry. When the internet proliferated our lives, the way we lived, worked and operated completely changed. Globalisation became an inescapable truth and organisations began to realise the potential of using the talent pool from cheap-labour countries such as India, China, Indonesia, Cambodia, among others. The significant cost arbitrage that resulted from the use of outsourcing models to delegate work to these countries drove up net profits for organisations willing to become truly global in their operations.
Such incentives that immediately benefited the short-term goals of organisations and improved the bottom-line became more popular. Global delivery models became the norm as organisations connected the entire world to achieve a shared objective. The outsourcing industry had firmly set its foot down.
But it wasn’t as sophisticated earlier as it probably is now. These countries with a lot of human potential, high population, cheap labour and dire need of job opportunities were showered with low-end work in the value chain of the organisation, with the West retaining the most significant high-end work. Menial tasks such as data entry and processing, which took up a lot of valuable time of the highly skilled and educated labour force of the West, began to be outsourced to the East.
The East gobbled up such opportunities that fell in its lap, ensuring its evolution along the way. As time passed, more such work came to be outsourced and more people began to work in these fields. Add to this the benefits derived from the opening up of labour markets through the dissolution of the Berlin Wall and the end of the Cold War, and the rapid acceptance and use of technology, and what we have is a unique mix of an interconnected world that seemed to be embracing the path of a global organisation.
Over time, skills and competencies of the workers developed and organisations began to offer more high-value work than simply trivial tasks. Business process outsourcing, IT application development and maintenance became the norm. IT companies such as Infosys, Wipro, Tata Consultancy Services emerged out of India and within no time, established their mark in the West as providers of skilled services.
But the West wasn’t exactly relaxing either, when the East seemed eager to shed its shell of underdevelopment. Check out the next post on how the outsourcing model seems to have climbed up the ladder to the board level. What might we expect out of such a change? What does the future hold in store? Read on…