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

Author:Lorsch, Jay W.
Position:BOARD LEADERSHIP
 
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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.

We selected as interviewees (1) members of boards of complex public companies whom we (2) knew personally and (3) believed to be both dedicated and respected by fellow board members. We interviewed 45 directors.

As...

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