Monday, December 28, 2009

Re-blogging: An excerpt from HBS Working Knowledge: Good Banks, Bad Banks, and Government's Role as Fixer.

Q&A between Roger Thompson (Q) and Robert Pozen (A)

Q: Corporate boards have been criticized for being asleep at the wheel leading up to last year's financial meltdown. Are boards at fault?

A: After Enron and WorldCom, Congress hastily passed Sarbanes-Oxley, basically a very elaborate set of procedures for boards to follow. But it's very clear that the boards of megabanks?the nineteen banks with over $100 billion in assets?complied with Sarbanes-Oxley and somehow didn't realize what huge risks they were taking.

Q: If boards don't need more procedures, what do they need?

A: Some of the most effective boards are those at companies that are owned by private equity. They are composed of the CEO and six directors, all of whom have relevant industry expertise. The directors make the time commitment, spending several days each month at the company. And they all have significant stock incentives.

The question is, what can we learn from the private equity model? When it comes to megabanks, I'm in favor of a smaller board with deep financial expertise, substantial time commitments, and a different pay structure. We can try to be clever and add more procedures. But unless we rethink the board model in a very fundamental way, I believe we're kidding ourselves. Is it likely that somebody who isn't a financial expert can show up six times a year and really understand Citigroup?

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