from Douglass Ott’s “Yes and Not Yes” (see recommended sites)

A Failure of Corporate Governance
on September 17, 2008
in Corporate Governance and Law. 1 Comment
Writing about the failed financial institutions, Carl Icahn feels “it is difficult to see how one could reach any conclusion other than that the boards of directors of a number of these imploded financial firms utterly failed to successfully implement some of their primary tasks – to oversee management and monitor and evaluate risk controls.”

I concur with Carl. The problem with these failed institutions was excessive risk-taking and excessive leverage. Each one of these failed institutions had boards of directors to watch over management, so what went wrong with these directors?

First there is the problem that these board members are most likely paid far too much for doing far too little. The board seat might even constitute a substantial portion of the board member’s total salary. With high compensation, it is little wonder that a director would not want to challenge management lest he or she be terminated and lose that easy money.

One idea I have to foster an environment in which a board of directors takes a more active role in monitoring a company is to codify Warren Buffett’s requirements for his BoD. Buffett’s rules are very simple and are designed to align the director’s interests with the shareholders: (1) the director must be a longtime shareholder, (2) a substantial shareholder, and (3) the must only receive minimal compensation.

Buffett’s easy rules for directors would be an excellent start and I think much preferable to more minute, detailed regulations that would continue to ratchet up costs of compliance with the SEC.