Board to Death: How Busy Directors Could Cause the Next Financial Crisis

By Kress, Jeremy C. | Boston College Law Review, January 1, 2018 | Go to article overview

Board to Death: How Busy Directors Could Cause the Next Financial Crisis


Kress, Jeremy C., Boston College Law Review


INTRODUCTION

The winter of 2012 was a busy time for James Crown. As the lead independent director of Sara Lee Corporation,1 Crown began the year by con- ducting a search to replace Sara Lee's CEO and overseeing a spin-off of half of Sara Lee's business lines.2 Meanwhile, defense contractor General Dynamics Corporation-where Crown also served as lead independent director-was scrambling to cope with $1 trillion in congressionally mandated defense budget cuts.3 At the same time, Crown-the grandson of a wealthy industrialist-managed stakes in the Chicago Bulls, New York Yankees, Rockefeller Center, and the Aspen ski resort as president of his family's multi-billion dollar investment company.4

As if those responsibilities were not enough, Crown also served on the board of the largest financial institution in the United States, JPMorgan Chase & Co. ("JPMorgan").5 Crown, in fact, occupied a crucial role on JPMorgan's board-he chaired the Risk Policy Committee ("RPC"), which was in charge of overseeing significant risks facing the firm.6

JPMorgan's winter proved to be eventful. A trader in the firm's London office began amassing risky credit derivatives.7 The trader's position soon dominated the market-rival firms started referring to him as the "London Whale."8 Neither the RPC nor JPMorgan's risk management systems, however, detected the escalating risk within the company.9 While Crown attended to crises at Sara Lee and General Dynamics, the market turned against JPMorgan's now-massive derivatives position. Just weeks before Crown finalized Sara Lee's spin-off,10 JPMorgan publicly disclosed billions of dollars of losses on the London Whale trades.11

America's boardrooms are filled with directors who, like Crown, serve as board members or executives of other firms.12 Shareholders believe that leaders of other companies will be strong contributors in the boardroom.13 Directors with many affiliations-the conventional wisdom goes-are more effective because they acquire valuable knowledge and practice by serving in governance capacities at other firms.14 As a result, director candidates who sit on many corporate boards or serve as full-time executives are in high demand among the United States' largest companies.15

This Article challenges the conventional wisdom that more is better when it comes to directors' professional commitments. To the contrary, this Article argues that other board seats and outside employment limit a director's availability, contribute to cognitive overload, and thereby diminish the director's effectiveness. Drawing on psychological principles and empirical evidence, this Article demonstrates that overcommitted directors withdraw from corporate decision making, tend not to challenge management, and experience attention shocks that distract them from company business.16

This Article's key insight is that the drawbacks of director busyness are especially severe for large, complex financial institutions because of the special governance demands imposed on their boards. In contrast to nonfinancial firms, financial institutions' unique combination of high leverage and short-term funding can trigger sudden liquidity crises that spread rapid- ly to other firms through interconnectedness and contagion.17 Shareholders and regulators, therefore, expect financial institution directors to implement and oversee monitoring systems to detect misconduct and excessive risktaking.18 Enhanced risk monitoring, however, is precisely the type of oversight that busy directors are ill-equipped to provide.

This Article assesses the drawbacks of director busyness through case studies of Wells Fargo's fraudulent accounts scandal and JPMorgan's London Whale trades. In both cases, key directors who were overextended with outside commitments inhibited oversight and prevented the firms from responding more effectively to nascent risks. A third case study of PNC Financial Group ("PNC"), by contrast, demonstrates how directors who were unusually focused on their governance responsibilities helped PNC emerge as one of the biggest winners of the financial crisis. …

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

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
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

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

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Board to Death: How Busy Directors Could Cause the Next 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?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
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.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, 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." (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.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.