An Effective Board Makes the Necessary Trade-Offs

Historically, the legal basis of corporate governance has been rather limited, leaving the companies free to organise their governance, direction and control as they saw fit. But corporate failures in the 1990s (such as Maxwell or BCCI in the UK) and in the beginning of the 21st century (such as Enron and Worldcom in the United States, or Parmalat and Ahold on the European continent) led to a real up-rise of governance codes (in Europe) as well as legislation (SOx in the US and European Directives) that drastically increased the requirements companies had to comply with. Although governance codes can never mimic the numerous challenges companies are confronted with, they have come a long way in describing in greater detail the conditions to reach good governance practices in general and board effectiveness more specifically. However, the recent financial crisis was an abrupt wake-up call that those recipes were not that effective after all. In answering the societal revolt, politicians (at both sides of the Atlantic) took over the reins and overwhelmed the companies with an avalanche of legal rules and obligations. This incremental building up of corporate governance laws and regulations, combined with strengthened self-regulatory recommendations, led to a construction that is not only very complex, but at the same time contains quite a number of paradoxes, that need further in-depth reflection and trade-offs.