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

12 Pages Posted: 14 Oct 2011

See all articles by Michael Pirson

Michael Pirson

Fordham University - Gabelli School of Business; Humanistic Management Network; Harvard University

Shann Turnbull

International Institute for Self-Governance; Sustainable Money Working Group; New Garden City Alliance

Date Written: September 2011

Abstract

Manuscript Type: Perspective.

Research Question/Issue: What were the reasons for poor risk management on the board level before and during the financial crisis? Were there systemic information processing problems that an alternative board design could alleviate?.

Research Findings/Insights: Using an information processing perspective, we identify two reasons for boards failing to manage risk well during the financial crisis: (1) board members did not have access to relevant information on the risks management incurred because they had no control over information supply; and (2) board members were unable to process the available 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 board level information processing and decision making capabilities by including multiple boards for different stakeholders to create a division of power and labor. We label this alternative structure network governance and posit that it allows superior risk management.

Theoretical/Academic Implications: The paper illustrates that the unitary board structure's systemic shortcomings increase the likelihood of poor risk management at the board level. The solutions proposed are an important theoretical advancement of the discussion on ongoing board failure in increasingly complex business environments.

Practitioner/Policy Implications: This paper is one of few providing actual recommendations based on a systemic insight. Enlightened shareholders and/or managers could introduce network governance by amending corporate constitutions. Regulators should require firms considered too big to fail to adopt network governance or pay the cost for regulators establishing a risk‐monitoring unit in each firm.

Keywords: Corporate Governance, Board of Director Mechanisms, Governance Environments, Corporate Governance Theories

Suggested Citation

Pirson, Michael and Turnbull, Shann, Corporate Governance, Risk Management, and the Financial Crisis: An Information Processing View (September 2011). Corporate Governance: An International Review, Vol. 19, Issue 5, pp. 459-470, 2011, Available at SSRN: https://ssrn.com/abstract=1943970 or http://dx.doi.org/10.1111/j.1467-8683.2011.00860.x

Michael Pirson

Fordham University - Gabelli School of Business ( email )

140 West 62nd Street
New York, NY 10018
United States

Humanistic Management Network ( email )

St. Gallen
Switzerland

Harvard University

1875 Cambridge Street
Cambridge, MA 02138
United States

Shann Turnbull

International Institute for Self-Governance ( email )

PO Box 266 Woollahra
Cell: +61418222378
Sydney, New South Wales 1350
Australia
+61293278487 (Phone)
+61280655905 (Fax)

HOME PAGE: http://independent.academia.edu/ShannTurnbull/CurriculumVitae
SKYPE: shann.turnbull

Sustainable Money Working Group ( email )

Holyoake House
Hanover Street
Manchester, M60 0AS
United Kingdom

New Garden City Alliance ( email )

113 Guinness Court
Snowsfields
London, UK, hello@gardencities.org.uk SE1 3TA
United Kingdom
+44 207 378 1902 (Phone)

HOME PAGE: http://www.gardencities.org.uk

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