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How Much Responsibility Do Boards of Directors Bear?

Name: Bob Betts
City & State: Bellevue, Wash.

Question: It seems the press is ignoring the elephant in the banking bath tub: Members of each board of directors had responsibility to their shareholders, yet I never hear that being discussed. And I've only had a whiff of who sits on which board, especially in 2007 and 2008.

Can you spotlight that in your work? We'd all like to be reassured that these people are brought to account. It's a rule that the chief officers of every bank set policy; they don't just spontaneously get the idea of dropping into the CDS rabbit hole on their own. And while I'm on this topic, every board I've sat on has insurance to protect its members, except in cases of overt negligence. Which insurance company insured which board? And, if a bank is nationalized, then will the board members get stripped as well?

Paul Solman: I was in the Harvard Business School MBA program in the mid-'70s. I taught in the school's Advanced Management Program in the mid-'80s. And I've been covering business that whole time - 32 years now. Know what? The critique of boards of directors has been pretty much the same throughout.

As you must know better than I, since you've sat on boards and I haven't, most board members, especially of large companies, don't have the time to steep themselves in the details of the firm. How could they? They sit on multiple boards, and often have other full-time jobs. Yet THEY are supposed to oversee the firm on behalf of the "owners": the shareholders. For the most part, it's a charade.

Moreover, they generally don't have a major investment in the firm, so there's little at risk if they don't do a thorough job. Furthermore, they're often hand-picked by the CEO, so how independent or hard-nosed are they likely to be? And finally, as you point out, they're insured, at the company's expense, so they're not personally liable for negligence.

This system has been decried, as I say, for at least my entire reportorial lifetime. So when I hear the word "nationalization" -- or, as I prefer to call it, "Scandanavianization" -- I don't quake like some folks do. Not because I romanticize government control, I assure you. Public-sector bureaucracies have driven me as crazy as they have the rest of us. But I've got few illusions about the competence or probity of large corporations.

(As to which companies write so-called D&O, or Directors & Officers, liability insurance. Lots do. And almost all firms carry it. But I don't see how that's especially relevant to the breakdown of the system.)

-- Posted March 16, 2009 | Comments ( ) | Permalink