The Sarbanes-Oxley governance reforms did little to prevent failures of major U.S. financial institutions because they didn't scale down oversized boards stuffed with "social loafers," former U.S. mutual fund executive Robert Pozen says.
Mr. Pozen told a Toronto audience Tuesday that the sweeping changes legislated in 2002 were inadequate to prevent scandals or failures at companies such as Bear Stearns, Merrill Lynch, Lehman Brothers, Wachovia, Citigroup and Bank of America . The changes required independent directors on boards and independent audit committees to oversee financial statements.
"These requirements were supposed to bring about good corporate governance, but the evidence was in the cooking – it didn't seem to work," he said in remarks at the annual meeting of the Canadian Coalition for Good Governance, a coalition of large institutional investors.
Mr. Pozen, who sat on the board of Canadian telecom giant BCE Inc. until 2009, is former chairman of Boston-based mutual fund giant MFS Investment Management and previously was vice-chairman of Fidelity Investments. He is now a senior lecturer at Harvard Business School and a fellow at left-leaning think-tank the Brookings Institution.
He laid out his prescription for board reform Tuesday, arguing boards need to be far smaller – ideally six independent directors plus the company's CEO – and need to have far more people with financial industry expertise.
He said Citibank, despite its compliance with Sarbanes-Oxley rules, has been a "poster boy for a terrible board" with 18 directors and only one person with financial services experience. The average financial services board globally has 14 directors and only three members with financial expertise, he added.
Large boards lead to "social loafing," he said, because members assume issues that arise will be dealt with by someone else and they don't have to take personal responsibility for them.
"You figure someone else will take care of it and you don't feel responsible – it really is a very bad dynamic."
He also called on directors to do more work and sit on fewer boards – and to be paid more as a result. He said boards typically meet six times a year, which is not often enough to understand the business well. Mr. Pozen proposed directors should work two or three days a month, and should schedule unaccompanied visits to corporate sites to learn more about the business.
Boards should also abolish mandatory retirement ages for directors, he added, because senior executives who join boards after retiring can hit the retirement ages too quickly, just as they're starting to reach peak director skills.
Mr. Pozen said the best reform of the past decade wasn't part of Sarbanes-Oxley but was a New York Stock Exchange requirement for listed companies to hold meetings of independent directors without management present. Directors who had said nothing for years suddenly became talkative out of the earshot of management, he noted.