Sunday, June 5, 2011
Rethinking Board Function in the Wake of the 2008 Financial Crisis, by Nicola F. Sharpe, University of Illinois College of Law, was recently posted on SSRN. Here is the abstract:
Following the 2008 financial crisis the federal government made capital investments in more than 650 companies. The government’s involvement was not limited to mere financial investment. In many cases, the government became involved with the corporations’ board of directors. The Essay examines the pressing corporate governance questions raised by this involvement. The Essay uses an agency theory lens to examine the government’s response to the financial crisis of 2008, and explores the government’s role as board member. The Essay then takes a step back and discusses how the financial crisis and accompanying federal bailout represent a larger failure in how boards of directors are conceptualized. The Essay provides some preliminary thoughts on the gap between principal-agent analysis, the federal bailout, and the reality of the board of directors as an effective monitoring mechanism. Specifically, the Essay argues that we must reevaluate board composition with an emphasis on the board members’ expertise and redefine the function of the board to include involvement in the firm’s strategic decision-making process. The Essay concludes that to better understand corporate failure and to truly improve the efficacy of a board’s monitoring function, we must first develop a theory that takes better account of the current corporate failures and craft potential solutions that balance the role of the board as monitor with that of executives as managers.