The future of corporate governance: Network governance - a lesson from the financial crisis

Abstract

Abstract 10.2 trillion dollars have been lost in the US alone in the first two years after Lehman Brothers collapse. In its wake 45% of world’s wealth has been destroyed and three of the largest bankruptcies in the US have occurred. Just as the majority of observers thought lessons from Enron had been learned, crisis had struck again. Massive government intervention, the collapse of the banking system, and public outrage at the missteps of executives have highlighted once more the weaknesses of mainstream corporate governance systems. Contrary to popular opinion the principal cause of the crisis was not sub-prime mortgage defaults but a failure of corporate governance, states the Association of Chartered Certified Accountants. While the OECD is brainstorming new corporate governance codes, public policy makers are calling for more comprehensive and tougher regulation. How likely will those changes help to prevent a future crisis? Not very likely, we argue, unless we fundamentally rethink the underlying failures inherent to the Anglo- Saxon structure of corporate governance and regulation. In the following article, we thus examine the systemic shortcomings of Anglo-Saxon corporate governance that arise from too much power being vested in a single board. We also lay out alternative governance models based on the natural science of communication and control. We then identify why a single board cannot adequately and reliably control the complex firms that wield influence over our lives. Examples of alternative models provide evidence that managers can design governance architectures that significantly reduce the risk of systematic blind spots, and the ensuing massive wealth destruction.