I wonder how many frauds could have been prevented if board members had been more active in protecting the interests of shareholders. While most, if not all, recognize the need for a strong, independent board, I don't know that our current system encourages board members to actively pursue shareholder interests.
My personal (anecdotal) experience with directors is that most boards seems to be comprised in a manner similar to the following example:
- Chairman of the Board (usually either the current or former CEO of A Corp.)
- Several other C-level executives and a few VPs from A Corp.
- "Independent" directors who are executives at B, C, and D Corps., where the CEO of A Corp. is also an "independent" director
- Enough additional independent directors to meet independence and expertise requirements
Most of these individuals seem to be inclined toward favoring management over the shareholders. In such a situation, I doubt that the remaining independent directors have enough influence over the board to adequately represent the shareholders. We can continue to stress the importance of corporate governance, but until we see more independence among board members, said governance will be flawed and will continue to be a weak deterrent to fraud.
Further crippling to any assurance that fraud is prevented or even considered (in the sense that auditors at least design some procedures to detect fraud) is the fact that these same individuals you mentioned above (specifically, board members who are former C-level members of management or close buddies who are from corporations on which current C-level management sit on the BOD) are the ones who hire/fire the auditors. When push comes to shove and the "independent" auditors want to dig a little deeper but they feel significant push-back from management, they will be less inclined to put up a fight and thereby scale their procedures back so as to avoid a angering management to the point that they recommend that their buddies on the audit committee put the audit up for bid.
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