The buck stops here: The Board of Directors

Corporate governance has long been a concern when massive corporate frauds come to light. Today, Boards of Directors are being criticized for their role in the subprime crisis. Ultimately, the Board is the highest level of control that can prevent or detect corporate malfeasance--whether it be fraud or other illegal business practices. An article in The New Yorker discusses the current state of corporate governance and suggests that Boards need to be much more than moonlighting opportunities for the CEO's friends. The article concludes by saying:

Right now, boards are made up of moonlighters. And, if the last few years have shown anything, it’s that protecting shareholder interests is a full-time job.

Directors and Corporate Governance

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.