Can Network Governance Reduce Risks for Financial Firms Too Big to Fail?

Abstract

This paper compares the competitiveness and resilience of firms governed by a single board that were considered “too big to fail” in 2008 with firms governed by a network of boards. Network governance introduces a division of power, checks and balances with stakeholder engagement. Hierarchical firms and/or regulators governed by a unitary board can deny the reliable identification, communication, analysis and mitigation of operating problems and risks. These problems increase with the size of the organization and are exacerbated by information overload on senior managers, directors and/or regulators. The 2008 financial problems were anticipated by some employees and external commentators. However, stakeholders exposed to risks possessed insufficient influence in either governing and/or regulating firms to take corrective action. Empirical evidence reveals that the resilience of network governed organizations arises from distributed intelligence, decision-making and controls that facilitate the mitigation of risks while providing competitive and/or operating advantages. The paper concludes that it is imprudent for regulators to allow financial firms that are excessively large and/or with excessively complex operations to exist without network governance or for any such non-financial firms to be publicly traded.