STEVE INSKEEP, host:
And next we're going to hear about a group that doesn't get much respect in popular culture - the board of directors.
(Soundbite of TV show, "Arrested Development")
Unidentified Man #1 (Actor): (as character) What's this? A staff office meeting? Well, maybe it's time for a little office magic.
Unidentified Man #2 (Actor): (as character) What's office magic?
Unidentified Man #1: (as character) Sometimes it's as simple as turning 10:45 in the morning into lunchtime.
INSKEEP: The company board in the TV show "Arrested Development" may turn meetings into dining opportunities, but in the real world boards are supposed to safeguard shareholder interests, to advise and sometimes question decisions. Their oversight did not save the financial industry from disaster. So as part of our series called the Future of Capitalism, NPR's Yuki Noguchi reports on how boards of directors should function.
YUKI NOGUCHI: Imagine if AIG's corporate board said credit default swaps were just too risky. It might have angered shareholders who wanted to see heftier returns, but it also might have saved the company from disaster.
Serving on a board has always been something of a balancing act. Directors are both creatures of the company as well as advocates for those outside of it. They are paid by the company and sometimes even nominated by management. On the other hand, they're elected by shareholders and are supposed to act as independent-minded advisers.
Jack Kessler sat on the board of JPMorgan Chase for many years until he hit the bank's age limit two years ago and stepped down. Kessler says he knows people think boards rubber-stamped decisions, but in reality it was a demanding job.
Eight or more times a year they reviewed reams of bank documents and debated how to chart the best course.
Mr. JACK KESSLER (Former JPMorgan Chase Board Member): I think if you sat through any of the meetings, you'd say, wow, this is pretty good stuff.
NOGUCHI: Substantive stuff, even, according to Kessler, contentious stuff.
Mr. KESSLER: We had very strong input from the directors and they were very intelligent, well-informed people who had opinions of their own. So it was a good check and balance.
NOGUCHI: But critics say there are many places where bank boards fell down on their jobs, primarily in understanding the risks banks were taking.
Mr. KESSLER: Well, the banks, it's pretty complicated. I mean I think that's a fair question, because again, my experience - and it's not gotten any simpler, it's gotten more complex.
NOGUCHI: So you were in real estate though, and that was your expertise. Did you see the meltdown coming?
Mr. KESSLER: Not like it happened, no. If I did, or if we did, we'd be worth a lot more money.
NOGUCHI: JPMorgan did fare better than some of its rivals. But corporate reformers argue it needs to be easier to oust board members for making mistakes or approving too much executive pay.
After WorldCom and Enron imploded in accounting scandals, Congress passed a law creating risk monitors within companies.
Charles Elson directs the Weinberg Center for Corporate Governance at the University of Delaware. He says in a perverse way the new monitoring system helped created a false sense of comfort.
Mr. CHARLES ELSON (Weinberg Center for Corporate Governance): Would a good board have avoided this mess or not? I kind of think that they would have in a sense, 'cause I think they would have put more pressure on management to be a bit more careful as they evaluated risk and as they disclosed risk to the investors.
NOGUCHI: Bank boards also relied on credit rating agencies, which said these companies were stable. But Richard Mahoney, a former director on the MetLife board, doesn't think that's any excuse.
Mr. RICHARD MAHONEY (Former MetLife Board Director): One could have asked, if you were astute, did we pay for those ratings from the rating agencies? So are they really objective? You could have asked, what is this backing from AIG Insurance, what's behind that? Do they have adequate financial reserves?
NOGUCHI: Mahoney is also former chief executive of Monsanto. He now teaches business at the Washington University in St. Louis. He says Enron changed the culture of most boardrooms, and that ghost still haunts directors.
Mr. MAHONEY: Enron is still in every board room, and the fact that Enron somehow missed the bank boards is astounding to me, but there it is.
NOGUCHI: It's hard to say how much change the financial crisis will inspire. Some proposals on Capitol Hill would force more transparency into how executives are paid.
And now that the government owns large stakes in companies like General Motors and Citigroup, many say both Washington and private investors will be keeping a closer eye on how corporate boards work.
Yuki Noguchi, NPR News.
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