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LEADERSHIP IS A PROCESS OF SOCIAL INFLUENCE, WHICH MAXIMISES THE EFFORTS OF OTHERS TOWARDS THE ACHIEVEMENT OF A SHARED GOAL.
Saturday, October 09, 2010
There has been a lot of talk about governance in the wake of the financial crisis. People have been wondering: where were the directors when numerous financial institutions bet the proverbial mortgage on, well, mortgages and their related products? Those directors are supposed to be there to defend the shareholders against self-interested executives trying to maximise their personal compensation by taking excessive risks.
We thought that we had board oversight in hand after the last crisis. We tightened up governance dramatically, for example with Sarbanes-Oxley in the USA: more scrutiny, more independent directors, financial experts on the audit committee, etc. With SOX behind them, boards should absolutely be able to do the job. Shareholders should have good protection.
But there's a flawed assumption buried under the logic of SOX, which is that it assumes a relatively random distribution of smart, experienced people smeared across boards like peanut butter. In other words, every board should, on the whole, have at least one or two smart, experienced independent directors.
It is worth examining that assumption, because it is the soft underbelly of board governance.