You can't know it all: why directors have such difficulty understanding their companies.

• Author: Lorsch, Jay W.
• Position: ENDNOTE

EARLY IN 2009, members of the Harvard Business School faculty's Corporate Governance Initiative met to discuss the impact of the economic crisis on corporate governance in general and on corporate boards in particular. We recognized the legitimacy of many issues raised by the media, the public, and politicians about boards' ineffective oversight of financial services firms and other complex companies whose failing contributed to the current recession.

As we reflected on how and why some boards had fallen short, we came to a tentative conclusion. The problems that surfaced in 2008 and 2009 largely differed, we believed, from those that had prevailed in 2002, when boards failed to identify and stop management malfeasance and fraud. By contrast, the more recent boardroom failures could be primarily attributable to the growing complexity of the companies that boards are charged with governing.

By complex companies, we mean those that operate multiple businesses (in terms of both products and geographies). In our view, these companies create unprecedented challenges for the executives who lead them and for the boards that oversee them. We questioned whether the boards of complex companies receive adequate information to understand the performance issues and risks their companies face. The challenge for the boards of such companies is how to oversee such complexity within the limited time that directors can devote to the task.

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We agreed that the best way to test these conclusions and explore the causes of board failures was to go directly to the source: directors serving on the boards of financial institutions and other complex companies. We decided to seek answers to two broad questions: How well did these boards function before the recession, and, more important, what aspects of board functioning troubled board members as they looked to the post-recession future?

We selected as interviewees (1) members of boards of complex public companies whom we both (2) knew personally and (3) believed to be both dedicated and respected by fellow board members. We interviewed 45 directors. Clearly, this was not a random sample. It was intended to be biased toward experienced directors with whom we had prior relationships and therefore had reason to believe would be candid with us.

A strong consensus

Interviewees opinions varied about the difficulties that complexity poses for boards, but there was strong consensus that the key to...