The Role of Boards of Directors in the Financial Crisis

By Castellano, Joseph F.; Lightle, Susan S. et al. | The CPA Journal, September 2011 | Go to article overview

The Role of Boards of Directors in the Financial Crisis


Castellano, Joseph F., Lightle, Susan S., Baker, Bud, The CPA Journal


In the wake of the 2008 financial crisis, Wall Street bankers, government regulators, academics, and the general public all asked one simple question: 'Why?" The answer to this question is important to the task of figuring out how to prevent such an event from happening again.

Some have argued that the financial crisis resulted - at least in part - from poor risk management by U.S. financial institutions. This observation has led to a call for more active engagement of boards of directors in the risk management process, as well as for the selection of board members who have the relevant industryspecific experience necessary to effectively meet that responsibility.

While the assumption that relevant industry-specific experience would enhance a board's ability to effectively oversee the risk management process is intuitively pleasing, it is not empirically supported. This article describes a study of the boards of 21 financial institutions - 11 that survived the recent financial crisis and 10 that did not survive. The authors examined the management biographies of the directors and found that the majority of both surviving bank directors and failing bank directors demonstrated little or no background or experience in the financial service or banking industries. The authors expected to find that the boards of the surviving banks had more industry-specific experience than those of the failed banks; they found in the study, however, that the opposite was true.

The Role of Boards

In his speech, "Lessons of the Financial Crisis for Banking Supervision," Federal Reserve OEairman Ben S. Bernanke discussed ways to strengthen the banking system and mitigate future crises (Federal Reserve Bank of Chicago Conference on Bank Structure and Competition, May 7, 2009). One of the key elements of "safe and sound banking" that he identified was effective risk management. He stated that the federal government puts "a high priority on ensuring that management and board of directors are well informed about the various risks that confront the organization and that they are actively engaged in management of those risks."

Enterprise risk management (ERM) is a critical part of effective internal controls. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defined it as "a process, affected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives." (COSO Enterprise Risk Management - Integrated Framework Executive Summary, September 2004, p. 2) While day-to-day responsibility for managing risk lies with management, effective governance practices call for active engagement of the board in that process.

In a 2009 publication, "Effective Enterprise Risk Oversight: The Role of the Board of Directors," COSO highlighted the following four components of that role:

* Establishing a mutual understanding with management regarding the entity's risk philosophy and overall risk appetite;

* Assuring that management has established an effective ERM process;

* Reviewing the entity's portfolio of risks and comparing it to its risk appetite; and

* Monitoring significant risks and determining if management is responding appropriately to them.

Active engagement by the boards means that, in addition to providing oversight of management's ERM efforts, they also lend insight, advice, and support to the ERM process. To meet this responsibility, board members must have a deep understanding of the operating, compliance, and financial reporting issues the entity faces. While some risks may be relevant to all entities, no matter what the industry, other risks are specific to the industry in which the entity operates. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Role of Boards of Directors in the Financial Crisis
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.