How can boards go wrong?

Corporate boards can go wrong in several ways, often rooted in governance issues, conflicts of interest, and ineffective decision-making processes:

1. Conflict with Management: Glenn Kelman notes that startup founders often clash with their boards due to stress and a siege mentality. This adversarial relationship can prevent boards from being helpful and supportive 1.

2. Superficial Governance: Aswath Damodaran highlights the failure of governance reforms, such as Sarbanes-Oxley, which addressed only surface problems (like board composition) without ensuring meaningful change in corporate governance actions 2. Governance scoring systems often lead to gaming rather than improving actual board effectiveness 2.

3. Limited Power and Influence: Scott Galloway discusses the limited practical power of boards, especially in dual-class shareholder companies, where they often act more like advisory bodies and lack real authority to influence corporate decisions 3. He also emphasizes the need for term limits to avoid stagnation and bring in fresh perspectives 3.

   
   1
   Overcoming Board Frustrations
   00:07:57
   
   2
   Governance and Valuation
   01:34:56
   
   3
   Corporate Governance Insights
   00:02:38
   
   4
   Corporate Boards and Conflicts
   00:26:17
   
   5
   Board Effectiveness Insights
   01:32:53
   
   6
   Boardroom Dynamics
   00:11:30

4. Conflicts of Interest: Luigi Zingales points out that economists and other professionals sitting on corporate boards can develop conflicts of interest, which can shape their decisions and perspectives, making them biased toward specific viewpoints 4.

5. Lack of Effective Oversight: Damodaran calls for transparency in board voting and more meaningful metrics to evaluate board effectiveness, such as recording “no” votes to ensure directors are not mere rubber stamps 5.

6. Groupthink and Lack of Diversity: Galloway notes that effective boards require diverse opinions and healthy conflict. Boards that lack these elements, as seen in the cases of Theranos and Enron, can fail spectacularly due to groupthink and complacency 6.

In conclusion, boards can falter due to adversarial relationships with management, ineffective governance reforms, limited influence, conflicts of interest, lack of transparency, and insufficient diversity and conflict 1 2 3 4 5 6. Addressing these issues with more robust governance practices, transparency, and a focus on ethical oversight can potentially mitigate these failures.