Wednesday, October 15, 2008

Where Were The Boards?

Writing about the global financial crisis, former Medtronic CEO and Harvard Business School Professor Bill George asked this question in yesterday's Wall Street Journal. "The first job of the board," he wrote, "is to ensure the viability--indeed the survivability-- of the firm. By this criterion these boards failed miserably." True enough, and well said.

While no one expects board members to delve into the pricing details of complex derivatives, they rarely even ask the most fundamental economic questions that should draw out useful information. "What happens if all the assumptions in our models are turned upside down? What's the total risk? How much comes back to us?"

It's difficult to ask this kind of question and get a pat response. If the response is waffling, the board member should know there is a problem. Probe further. However, this kind of basic questioning is very often considered "not collegial."

Warren Buffet and Charlie Munger asked these kinds of questions of their own investment valuations in the early days of Berkshire Hathaway. It's the best way to learn: ask questions. It's what savvy investors do. Boards should be no different.

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