Financial Crises and Failed Corporate Governance

Abstract

The banking sector is special given the importance of credit to support economic growth, and enormous public costs periodically sustained to bailout extensive institutional failures. US banks fail in waves approximately every generation and are unable to cope with severe economic downturns and incur excessive risk in a predictable and preventable manner. Is good corporate governance focusing on efforts to refresh boards by age or term limits the cause of episodic failure? As institutions refresh boards, banks lose directors with experience related to prior periods of crisis. Consistent with the availability heuristic, recall and memory are important to judgment. If relatively few directors have personal experience of a prior financial disaster, they are unable to recommend more conservative strategies. While some deservedly will believe the proposal a reversal in good governance, banks should consider suspending term and/or mandatory age limits for a few directors. Each board will need to overcome common "blind spots" that young equals good. Ageism is well-known and documented.