Get only the financial experts on board
JPMorgan's CEO Jamie Dimon has accepted responsibility for the 'hedging' losses at the bank and presided over the mandatory human sacrifices of foot soldiers. But what is the role and responsibility of senior managers and directors in complex and large financial institutions?
Non-executive directors of financial institutions frequently have scant domain knowledge. On joining investment bank Salomon Brothers' board, the firm's chief economist Henry Kaufman noted that the non-executive directors had little understanding of the complex business, risks, leverage and dynamics of banking.
When Kaufman later joined the board of Lehman Brothers, only two members had experience in banking. Kaufman sat on the Lehman risk committee with a Broadway producer and the former chairman of IBM.
Lehman's board was not atypical. The board of AIG, which later required a US$182billion bailout from the US taxpayer, included several heavyweight diplomats and admirals, although, as Richard Breeden, former head of the US Securities and Exchange Commission, said: 'AIG, as far as I know, didn't own any aircraft carriers and didn't have a seat in the United Nations.'
At JPMorgan, the directors responsible for overseeing risk include a head of a museum and former member of AIG's governance committee. It also includes the grandson of a billionaire and the chief executive of a company that makes boots.
Increased specialisation means that few senior executives, let alone directors, understand transactions outside their specific expertise. Where they have specialised knowledge, it is frequently dated.
Directors depend on heavily censored information from management, and non-executive directors rely heavily on the veracity and competency of senior managers, who in turn are beholden to staff who are motivated to take risks for profit compensation.
Directors also frequently rely excessively on external consultants, whose interests in generating fees rarely align with those of shareholders.
There is little accountability. Directorial failures rarely result in regulatory sanction because of the protection afforded by the business judgment rule. Courts are reluctant to review the decisions of directors who purported to act in the company's interests.
Directorial competence and responsibility in large financial institutions throughout the world - including Asia - need to be addressed. Requiring directors to have up-to-date expertise in relevant areas and forcing them to assume greater personal liability for failure may be one path.
Satyajit Das is a former banker and author of Extreme Money: Masters of the Universe and the Cult of Risk
