The Overstated Promise of Corporate Governance

Corporate Governance: Promises Kept, Promises Broken. Jonathan Macey. Princeton, 2008. Pp vii, 334.

Corporate governance is in trouble. The implosion of Bear Stearns and Lehman Brothers, the near collapse of Citigroup and other large commercial banks, the bankruptcy of the US auto industry, and the massive overexposure of AIG to subprime risk have wreaked unprecedented turmoil in the capital markets and a widespread crisis of confidence in the quality of operational decisionmaking at US corporations.

Poor corporate governance may be a contributing factor. Critics have described the corporate governance culture at Bear Stearns, for example, as “straight out of the 1920s.” Bear’s board of directors met just six times a year, leaving primary oversight of the company to Bear’s all-insider executive committee. Bear did not create a finance and risk committee until January 2007, just a year before its failure. Two members of Bear’s audit committee served on the audit committees of five and six other companies, respectively, yet the board determined that, based upon their “wealth of financial experience,” this service did not “impair their ability to effectively serve on the Company’s Audit Committee.” In short, the board was “another one of these all male clubs that acts like a throwback to black and white movies.”