Board to Death: How Busy Directors Could Cause the Next Financial Crisis

59 Boston College Law Review 877 (2018)

Ross School of Business Paper No. 1370

54 Pages Posted: 23 Jun 2017 Last revised: 1 Apr 2018

See all articles by Jeremy C. Kress

Jeremy C. Kress

University of Michigan, Stephen M. Ross School of Business

Date Written: March 26, 2018

Abstract

In the aftermath of the Great Recession, shareholders and regulators expect financial institution boards of directors to play an active role in risk management. To date, however, shareholders, policymakers, and academics have ignored a critical shortcoming: the directors of the United States’ largest financial institutions are too busy to fulfill their governance responsibilities. Many financial institution directors hold full-time executive positions, and most serve on the board of at least one other company. Although these outside commitments provide important learning and networking opportunities, they also contribute to cognitive overload and limit the time that directors spend assessing strategy and risk.

This Article argues that overcommitted directors impair the governance of large financial institutions. These firms, by virtue of their complexity and systemic importance, require enhanced risk monitoring that busy directors are ill-equipped to provide. Nonetheless, the boards of many large financial institutions remain alarmingly overcommitted. Through a series of case studies — including Wells Fargo’s fraudulent accounts scandal and JPMorgan’s London Whale trades — this Article explores how busy directors inhibit oversight of management, increase the risk of firm failure, and could cause the next financial crisis. This Article proposes a series of reforms to alleviate director overcommitment and thereby enhance the stability of the financial system.

Keywords: Busy Directors, Overcommitment, Corporate Governance, Board of Directors, Board Composition, Financial Institutions, London Whale, Wells Fargo

Suggested Citation

Kress, Jeremy C., Board to Death: How Busy Directors Could Cause the Next Financial Crisis (March 26, 2018). 59 Boston College Law Review 877 (2018); Ross School of Business Paper No. 1370. Available at SSRN: https://ssrn.com/abstract=2991142 or http://dx.doi.org/10.2139/ssrn.2991142

Jeremy C. Kress (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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