Martin Edwards


The board of directors occupies the space between the managers, who control the corporation, and the shareholders, who own the residual claims on it. The board's job is to mitigate agency costs arising from this structure and its primary functions are to monitor managers and manage conflicts of interest between managers and the corporation. For this reason, research into director characteristics and board composition tends to focus heavily on the extent to which individual directors are independent from management and on how many independent directors sit on a given board. Boards, however, do more than just monitor and manage conflicts, and, regardless of what they are doing, they have to gather, process, and act on relevant information. Information gathering and analysis, though, involves costs-costs that individual directors must bear.

This Article argues that expert directors can mitigate or reduce overall board information costs because their expertise substitutes for more costly information gathering and analysis. Expert directors provide the greatest benefit when information costs are at their highest. Information costs are highest when two criteria exist: First, when the corporation faces risks that are difficult to quantify or measure, but that may result in catastrophic losses. Second, when the typical generalist director's skillset is insufficient to discern whether management is acting reasonably with respect to the risk and to contribute intelligently to managing the risk.

To illustrate that primary argument, this Article analyzes the information costs, the risks, and the need for expertise that are reflected in Sarbanes-Oxley's "audit committee financial expert" requirement-a rare circumstance where the law has affirmatively encouraged the appointment of expert directors. It then proposes that corporations might soon add cybersecurity experts to their boards because of the high information costs, risks, and need for expertise associated with cybersecurity. The Article concludes with the presentation of a mechanism for encouraging appointment of expert directors that is grounded in enhanced disclosure of director expertise.