November 19, 2011
The question that won't go away: Are boards simply not up to the task?
It often strikes me as somewhat of an emperor-has-no-clothes moment when I explain to my students that, in this era of too-big-to-fail, we continue to entrust oversight of institutions that have the potential to cripple the entire global economic system to folks who are doing so on very much of a part-time basis, and with some minor distractions to boot (like running their own TBTF enterprise as CEO). I was reminded of this when I read Steven Davidoff's post, A Board Complicit in MF Global’s Bets, and Its Demise. After pointing out that the failure of oversight in this case was not due to lack of expertise or knowledge, Davidoff suggests that perhaps "boards are inherently unable to do the job we want of them: to oversee the company and counteract the influence of its chief executive." As a possible solution, Davidoff suggests that "[i]f the board members were to be penalized for their failures through forfeiture of their own compensation, perhaps directors would [be more] focused on creating a stronger risk management culture." I have my doubts that we could ever implement any such system that wouldn't be left as anything other than a shell after Delaware got done with it. Perhaps the answer lies in part in doing more of what some have suggested we do in the area of Securities Regulation--that is, stop pretending we have more oversight than we actually do and let the capital market discounting begin.
The president of a community college where I worked got into all sorts of trouble for playing fast and loose with the finances. The investigation concluded in part that the board of governors had not been sufficiently diligent in their duties. The new president was told he must keep the Board in the loop better so he held meetings that lasted until 2:00 AM for several months, after which the board lapsed back into the old ways and he did whatever he wanted and the board went back to the golf course. Of course these were not paid directors and they owned no stock, but I think it's the same thing everywhere.
Posted by: NEFryy | Nov 20, 2011 4:32:33 AM
I must concur with the concluding paragraph that we "...stop pretending we have more oversight than we actually do and let the capital market discounting begin." Sarbanes-Oxley was nothing but another consideration to seeking an IPO. Dodd-Frank has only further choked off access to capital. Government and the law is too unwieldy to deal with markets and businesses. Much like expecting a law enforcement officer to be present to "prevent" the crime or wrongful act, it can only come in after the event to try to investigate, unravel and attempt to impose some remedy. Law enforcement preventing the act is the rarest of acts and government preventing "bad acts or decisions" is an exercise in futility.
Posted by: Tom Norris | Nov 20, 2011 9:10:33 AM