There is little question that as a consequence of first the accounting scandals and later the financial crisis, the expectation of what boards can do has never been higher. “Where was the board?” is one of the most frequently asked questions in the aftermath of any corporate scandal, followed quickly by assessments of what individual board members bring to the company, the length of their tenure, their relationship to management outside of the boardroom and their capability to exercise their role as the shareholder’s representative.
Bethany McLean is the coauthor of The Smartest Guys in the Room, which documented the rise and fall of Enron, and All the Devils Are Here: The Hidden History of the Financial Collapse. In 2001, while a senior editor at Fortune, she wrote “Is Enron Overpriced?” That article was among the first to raise questions about the energy giant’s business model. She continues to write about business—and when called in June to ask her opinion on how boards have changed, or been changed, in the past 10 years, she was reflective.
The line between the accounting scandals and the subprime lending debacles that triggered the financial crisis are deep ethical lapses, she suggested. One striking difference is that in the more recent crisis the will to prosecute didn’t exist as fervently as what drove the investigations of the SEC, Department of Justice and other enforcement agencies back in the Enron era. But with or without crackdowns, crises that are later blamed in part on corporate governance failures continue to happen. Why?
According to McLean, who echoed a view shared by others interviewed for this story, directors are simply not capable of knowing what they don’t know, or what they aren’t being told. Directors, she says, “can be very smart and have worked in complex businesses, but if a disaster like the trading losses can happen under the nose of [JPMorgan Chase & Co. Chairman and CEO] Jamie Dimon, who’s considered the smartest banker in America, if not the world, for example, then what kind of chance does a director have in preventing what then happened?”
The Penn State Crisis
Governance failures were again blamed when earlier this year the report of a special investigator hired by the Penn State University board of trustees to review the actions of university officials related to the child sexual abuse committed by former assistant football coach Gerald A. Sandusky was released. During a press conference in Philadelphia, Louis Freeh said, “The board failed in its oversight. They did not create an atmosphere where the personnel and the senior officials were accountable to the board.”
Board Chair Karen Peetz, speaking at a separate press conference in Scranton, Pa., said, “The board of trustees…accepts full responsibly for the failures that occurred.”
Even before Freeh released his report, the Penn State board had started to make needed changes, redesigning its committee structure in March to add audit, risk, legal and compliance. And the report, which included numerous suggestions on how the trustees could improve transparency, operations and communications, sounded all too familiar. The recommendations were focused on the structure, composition, eligibility requirements and term limits of the board. They also pointed to a need to have more independent trustees with no ties to the university.
One veteran director who has served on both private and public company boards, and who asked not to be quoted by name, suggests that all directors read the Freeh Report and simply ask themselves, “Could this be us?”