One of the most critical roles the board of directors plays is the fiduciary role of ensuring that the actions taken by the organization (through its management and the board itself) are in the best interest of the organization and its stakeholders in the long run. This also means that the degree of risk each organization is allowed to assume is ultimately overseen at the board level.

Taking a real-world perspective on this question spotlights several dramatic, public examples of situations where it is appropriate to ask the questions:

  • Where was the board?
  • What was their role and responsibility in overseeing the degree of risk the organizations were assuming?
  • When was the board responsible for curbing or reining in management’s appetite for risk and pursuit of “rewards” and “new approaches” and riskier portfolios of markets, products, and investments?
  • When is the board accountable for stopping the “everyone else is doing it” justifications and requiring sound business reasons and fundamentals, even when it may mean denying short term gains and “sure thing” returns?

Bubbles Burst, and What Goes Up Comes Down: Resounding Crashes

Enron was praised for its “innovation” in accounting and financial acumen … and then we learned how much of this was smoke and mirrors, a shell game at the highest levels. As a result, we asked “who was watching?” and we legislated “oversight” so this could never happen again. Fast forward to the new millennium, and Wall Street, and banks and mortgages, and mortgage-backed securities … and a shell game has happened again! The fundamentals of corporate oversight and sound financial principles didn’t keep it from happening. There were responsible parties and audits required; there were qualified and financially savvy boards and a host of people who should have been watching, knowledgeable, and aware. But like watching two trains on a single track heading for a collision, those who were warning of the inevitable were shrugged aside. They weren’t the “insiders,” the people with “clout;” they were Joe and Jane Average, watching the unfortunate inevitable take place.

Joe Average as Chicken Little

What happens when the average Joe steps forward to say that major institutions are acting in reckless ways? All too often: nothing. In the aftermath of the recent banking/Wall Street crisis, some of the media have admitted that they had been warned of the impending mess, but not by anyone “credible”: no big names, just the “average Joe” in a bar or restaurant, someone working in the regular jobs in the banks, the mortgage companies, the rank and file. These people were the ones most familiar with the practices of the companies originating the underlying loans, but why should anyone listen to the average Joe? What would someone like Joe know about the “big picture” versus a theoretical economist or a Wall Street type with a stake in keeping the game going? The average Joe is naïve, an alarmist, and simply being “Chicken Little” warning the sky is falling … Maybe, maybe not.

The “All-Knowing Gurus” versus Joe Average

The gurus said they were wrong, and couldn’t have forseen the consequences of the mortgage lending industry practices. Yet there were signs and there were voices in academia, politics, and industry pointing out the issues [is it safe to say “for months prior to the crisis”]. Many voices in the banking industry—and throughout the business world—spoke of risky returns and the increasing precariousness of the underlying investment instruments, value of assets, and the eventual consequences of when the market for real estate would stop. There had to be a point in time that the rapid and continued appreciation of property values would stop. But no one was listening, because the “rewards” were too great and the consequences for the decisionmakers too few. Fiduciary roles and accountability seem to be only for the upside, not for the down-side risk; too few actually believed there was a down side.

All Fall Down

The responsibility of the board to assure that stakeholder interests are protected seems to have failed to take into consideration the down-side risk. The boards also cannot plead ignorance or lack of skill; when you examine the qualifications and experience of the board members of the failed and failing banks and other financial enterprises, they read as the Who’s Who of financial, audit, and experienced executive boards. Many of these board members are active on multiple boards, multiple audit committees, and are in fact part of world-wide financial companies, the leaders in financial “expertise.” Why didn’t they know? Where were they in insuring that the underlying transactions, assets, and risks were understood?

Where is Your Board?

The boards of the Wall Street and financial companies seem to have been absent in awareness—if not in action and deed—leading up to the recent and ongoing financial crisis. The contribution to strategic oversight planning and the direction of the organization is a critical role of the board of directors. When your board is working, it is able to find the balance between the risk and the reward. The board is a mix of skill sets, experience, expertise that is deployed on behalf of the organization and its stakeholders. It is working not on behalf of the other board members or their own resumes, but with the fulfillment of the fiduciary role they are charged to uphold.

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