Blink and corporate directors

I have been reading Malcolm Gladwell’s Blink. As most people know by now, the book is about the benefits and potential costs of snap judgments. Naturally, I've been thinking about the implications for corporate governance.

For example, as I’ve pointed out, the Van Gorkom case effectively requires corporate boards to laboriously jump through procedural hoops to avoid costly litigation – including paying somebody several hundred thousand dollars for a fairness opinion that states that “$55 is greater than $35.”

I criticized this in my Business Associations casebook (at p. 412):

Cases like Van Gorkom make clear that the courts are much more willing to second-guess the process by which director decisions were reached than the substance of the decisions themselves. Yet the selection of the appropriate decision-making process is clearly a type of business decision in itself. Whether managers should have gotten more information depends on the tricky question of whether the cost of doing so is exceeded by the expected benefits. Where the transaction is recommended by a chief executive officer who has been reliable in the past, or where because of their experience, the board members have a strong sense of the merits of the transaction, the expected benefits of further inquiries often may be less than the costs. Thus, whether managers should inquire further involves a sensitive decision not only as to what will be lost by seeking more information, but what can be gained by doing so. Courts might think that they have greater expertise regarding decision making procedures. But judicial second-guessing of board procedures can involve a clash of contrasting decision-making styles. Business people do not necessarily arrive at decisions in a deliberative manner as courts do. Moreover, directors, unlike courts, are engaged in an ongoing decision process involving interrelated rather than isolated decisions.

As Gladwell says (p. 52):

Our world requires that decisions be sourced and footnoted, and if we saw how we feel, we must also be prepared to elaborate on why we feel that way. . . I think that approach is a mistake, and if we are to learn to improve the quality of the decisions we make, we need to accept the mysterious nature of our snap judgments.

To be sure, Gladwell doesn’t give us a usable theory of when snap judgments are good, and when they tend to go awry (e.g., racial stereotyping). But at least we finally have a popular-press book that teaches us to be agnostic on the subject.  This might prepare courts to trust a board that looks like it knows what it's doing, and that reaches what looks like a good result.

For example, in Van Gorkom, Justice McNeilly pointed out in dissent:

At the time of the September 20 meeting the 10 members of Trans Union’s Board of Directors were highly qualified and well informed about the affairs and prospects of Trans Union. These directors were acutely aware of the historical problems facing Trans Union which were caused by the tax laws. They had discussed these problems ad nauseam. . .

Given the board's background and expertise, they should have been trusted, in the absence of obvious self-interest, even if they didn't apply a precise lawyer-like review at the meeting at which they reviewed the transaction at issue.

A problem with this approach is that if we leave boards too much to their own devices, they might make more shoddy judgments. But as I’ve said, including in my post linked above, the answer to this is not more judicial interference, but higher powered market incentives.