February/March 2010 / Governance
Lessons from the Crisis About Governing Financial Institutions
The author, a Harvard Business school professor who has consulted with several large financial services companies, says that failure of financial institutions to cope with forces that led to the economic crisis of 2008 was to a great extent a failure of their boards.
The emphasis on selecting board members who are independent generally means seating directors who have no experience with the company or its competitors. These directors start with a handicap. It is not clear whether management understood the problems their companies faced and withheld this knowledge from the board, or whether management did not understand the situation. Either way the directors, even those few who had in-depth knowledge of financial issues, were unaware of the risks their companies were taking and were unable to raise doubts about management’s “exciting” new ideas.
The author would require boards of financial companies to have more independent directors who have experience with financial markets and institutions. That would mean less emphasis on appointing CEOs or other high-status individuals. He suggests that boards have their own staff and not be chaired by the company’s CEO.
Read the full article at QFinance.com
