Board Effectiveness

Just a cautionary note: Independence and industry experience are important and necessary attributes for directors, but they are not a foolproof protection against poor board performance. Witness the case of bank boards during the financial crisis, as reported in the Financial Times (Lex column, 3.25.10).

The given wisdom is that the higher the percentage of independent directors and directors with industry knowledge on a board the better the corporate governance and theoretically the better the performance.  Yet, the irony is that the outside directors of BNP Paribas, Deutsche Bank, JP Morgan and Wells Fargo, which were reportedly among the best performing banks in the crisis, were identified by Moody’s Investors Services as having the least financial experience among 20 big U.S. and European banks.  Standout JP Morgan, in fact, had no outside directors with a financial background.  Further Spain’s Santander, which made some good decisions in the crisis, had less than half its board as independent directors.

Director independence and industry experience are indeed important.  Boards can’t function well without them.  However, judging from the banking situation, the keys to board effectiveness may have more to do with insight, judgment and character.

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