Corporate boards have a daunting array of tasks, including hiring and firing the chief executive officer, setting the CEO’s compensation, monitoring the CEO’s decisions, ensuring compliance with laws, and above all, representing the interests of shareholders. Critics have long complained that boards are not up to the task.

There are many reasons boards fail to police managers adequately or make good decisions. Directors are part-timers with weak incentives and limited information. They also are generalists, meaning the average board is unlikely to have all the experts it needs at any given time. CEOs pick directors based on an unknown set of factors, and shareholders have no information about how decisions are made or how individual directors perform.

Corporate governance experts have proposed many reforms, some of which ended up in the Sarbanes-Oxley Act and the Dodd-Frank Act. All the reforms share several unattractive features. They are one-size-fits-all, notwithstanding the huge differences across companies and industries. While say-on-pay or more independent directors might make sense for some companies, it may actually destroy value for others. In addition, the reforms rely on academics or other “experts” knowing more about what is good for particular companies than the managers and owners of those organizations.

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