The Idea in Brief
The model for corporate governance is broken. Despite having boards crammed with eminent independent directors following detailed procedures, many of the world’s largest financial institutions had to be rescued from insolvency in 2008.
Insufficient board oversight is a problem that was supposedly solved in 2002, with the passage of the famous Sarbanes-Oxley Act. Yet all the firms that failed in 2008 were SOX compliant.
The reforms did little to improve the quality of people serving on boards or change their behavioral dynamics.
To improve governance, companies need to move to a model of professional directorship: Board service would be the primary occupation of independent directors, and not an ancillary avocation. The new model would address chronic deficiencies of corporate governance by taking the following measures:
- Reduce board size to seven members to improve decision-making effectiveness;
- Require that most directors have industry expertise to allow them to better guide today’s complex businesses;
- Require directors to devote sufficient time to properly understand and monitor the company’s operations.
When the world’s largest financial institutions had to be rescued from insolvency in 2008 by massive injections of governmental assistance, many blamed corporate boards for a lack of oversight. This was a problem we had supposedly solved nearly a decade ago, when blatant failures of corporate governance (remember Enron?) prompted Congress to pass the Sarbanes-Oxley Act. The new rules had seemed promising. The majority of a board’s directors had to be independent, which would, in theory, better protect shareholders. Senior executives were required to conduct annual assessments of their internal controls for review by external auditors, whose work would be further reviewed by a quasi-governmental oversight board.