Corporate Governance, Risk Management, and the Financial Crisis - An Information Processing View

Abstract:     
Using an information processing perspective we identify two reasons why boards failed to manage risk well 1) board members did not get relevant information about risks incurred by management because they lacked control over information supply; 2) board members were not able to process such risk-related information and lacked incentives or power to influence managerial decision making. Based on insights from cybernetics and decision making theory, we suggest increasing the information processing and decision making capabilities on the board level, by including multiple stakeholders on multiple boards based on a division of labor and a division of power; this alternative structure we label network governance.

This paper is one of the few papers making actual recommendations based on systemic insight. Practitioners that agree with the analysis will be able to draw conclusions for their proper governance structure, especially when their businesses operate in increasingly complex environments. Regulators could equally learn from those recommendations and include basic insights generated in their regulatory frameworks.

Number of Pages in PDF File: 33

Keywords: Corporate Governance, Complexity, Network Governance, Information Processing, Risk Management

JEL Classification: L20, M00, N00, K20

working papers series