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Boards Fail -- Again

Directors are ultimately responsible for the decline of their companies. At teetering financial institutions, they have a lot to answer for

Op-Ed, BusinessWeek

September 26, 2008

Author: Ben Heineman, Senior Fellow, Belfer Center for Science and International Affairs

The battlefield of the credit crisis -- indeed, the crisis of capitalism -- is strewn with the dead and wounded.

One casualty is the role of directors at a broad range of dead and maimed financial institutions. These board failures represent, in turn, a signal failure of the broad governance movement that gained momentum at the beginning of this decade.

This issue is of profound importance because the board of directors stands between government regulation and corporate freedom. The board's duty is to provide a balance among wealth creation, financial discipline, and risk management; to make the fusion of high performance with high integrity the firm's foundation; and to choose and reward a CEO who has the vision, motivation, and skills to affect that essential balance and critical fusion. When boards don't succeed but fail, as so many have, the terms of debate shift from how companies can best govern themselves to how regulators should govern them.

A Board's Responsibility
Since the Enron scandal, regulators, academics, commentators, and the media have all focused on the importance of an independent board in providing meaningful checks and balances on chief executives and top management. Centers have been established by nonprofits and professional schools; conferences are held every week somewhere around the nation; enough earnest papers have been written to fill a library.

Yet, despite the enormous time, energy, and focus generally devoted to governance in the past decade, the boards of directors at Bear Stearns, Merrill, Citi, Countrywide, Fannie Mae, Freddie Mac, Lehman Brothers, and Washington Mutual are ultimately responsible for the sharp decline or disappearance of their companies. Although the sad sagas of institutions will vary due to their cultures, the personalities involved, and their particular mistakes, I believe it is safe to say that the boards at all adversely affected financial service companies have failed in their most basic tasks. more>

For more information about this publication please contact the Belfer Center Communications Office at 617-495-9858.

Full text of this publication is available at:
http://www.businessweek.com/managing/content/sep2008/ca20080925_789001.htm

For Academic Citation:
Heineman, Ben. "Boards Fail -- Again." Directors are ultimately responsible for the decline of their companies. At teetering financial institutions, they have a lot to answer for. BusinessWeek (2008 Sep 26).