Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

By Thomas H. Stanton | Go to book overview

4
Company Governance and the Financial Crisis

The typical bank board resembles a retirement home for the great and the
good: there are retired titans of industry, ousted politicians and the
occasional member of the voluntary sector.

—PAUL MYNERS, 2008

Governance is the guidance system that dictates an organization’s decision making. More formally, governance is the means by which an organization exercises authority and uses institutional resources to address problems and carry out its affairs. Governance reflects power relationships of stakeholders to an organization and among units within the organization. In the financial crisis, effective governance allowed top managers to prepare for adversity, avoid mistakes, and, when the crisis developed, to respond appropriately.The Basel Committee on Banking Supervision suggests that corporate governance involves the way that boards of directors and senior management govern an institution, including, to paraphrase slightly, how they:
1. Set the firm’s strategy and objectives;
2. Determine the firm’s risk tolerance (so-called risk appetite of a firm);
3. Operate the firm’s business on a day-to-day basis;
4. Protect the interests of investors, meet shareholder obligations, and take into account the interests of other recognized stakeholders; and
5. Align corporate activities and behavior with the expectation that the firm will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations.1

Achievement of these objectives requires coordinated or at least complementary action by the CEO and top management, the board of directors, and regulators. The problem, of course, is that power and information are not distributed proportionately among these three groups. Too often, overbearing CEOs held weak boards in thrall while boards failed to uphold the duty of

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