When Citigroup and Bank of America held their annual meetings last month, shareholders were in an understandably surly mood. Even as the companies’ C.E.O.s apologized for past failures and vowed to do better, shareholders blasted the executives for their incompetence, and talked about the need for dramatic change. Yet, after all the venting and repenting was done, something weird happened: every member of each bank’s board of directors was reëlected to office.

Christoph Niemann

This may seem odd, but it was all too predictable. In the apportioning of blame for the financial crisis, corporate boards of directors have remained remarkably unscathed, even though they effectively approved the strategies that immolated so many companies. At Citigroup, for instance, there have been plenty of calls for Vikram Pandit, who took over as C.E.O. long after most of the damage to the bank was done, to leave. Yet Citi’s board still includes ten of the individuals who presided over the company during its lengthy foray into toxic-asset land. (And the record at Citi, where four board members did step down a couple of months ago, is actually better than at most big banks, where there has been next to no turnover.) There are hopes that this situation may change, since the Obama Administration, as part of its stress test, required banks to “review their existing management.” But so far, even as everyone rails against the banks’ disastrous behavior, boards have not been punished for failing to stop it.

It wasn’t supposed to be this way. Over the past couple of decades, a tremendous amount of attention has been devoted to improving corporate boards. New regulations, along with pressure from big investors, have forced companies to appoint more independent directors—people who have no direct connection to the company—and have tightened the definition of independence. And companies themselves have tried to draw from a wider pool of candidates. The result of these changes is that boards certainly look different: in 1950, half of all directors were insiders. Today, fewer than twenty per cent are. Boards are also more demographically and professionally diverse. And they’re paid more sensibly: increasingly, directors are compensated with company stock, making it more likely that they’ll look after shareholder interests.

All these changes, though, have had a much smaller impact than expected. The academics Sanjai Bhagat and Bernard Black, for instance, have found no evidence that simply appointing more independent directors improves corporate performance. And, while increasing diversity was, in theory, going to break up the old boys’ club and make boards less deferential, the benefits have proved more elusive in reality. James Westphal, a business professor at the University of Michigan, has found that professionally diverse boards are actually less likely to challenge the C.E.O. One reason is that even “independent” directors are typically nominated not by shareholders but by the C.E.O. or by other board members, who, not surprisingly, tend to prefer directors who will be cheerleaders for the firm and won’t rock the boat. It also doesn’t help that independent directors are sometimes inexperienced, which makes it harder for them to take on management, or that they’re often chosen for name recognition. Why, for instance, is Tommy Franks on Bank of America’s board?

This doesn’t mean that we should go back to the bad old days of boards made up of cronies and old white guys. But changing the way boards look matters less than changing the way they act. Directors are still part-time employees—the typical board meets just eight times a year—so it’s hard for them to devote enough time to make a meaningful difference. And they’re paid both too much and, paradoxically, not enough: too much in the sense that a directorship is often a cushy gig, which no one wants to endanger by challenging the boss; not enough in that their compensation isn’t sufficient for them to be hurt if the company flounders. Directors still rely heavily on the C.E.O. for information, and do little independent digging—one recent survey found that half of them wished they had more information about company strategy. And board meetings still tend to work the way Warren Buffett described them: collegiality trumps independence. True, boards are more active than they were, and more willing to show underperforming C.E.O.s the door (as happened at both Merrill Lynch and Citigroup). But they often react too late, after the real damage has been done. And the fact that boards see their chief job as hiring and firing the C.E.O. is a problem: shareholders need boards to prevent messes, not just clean up afterward.

Easier said than done, perhaps. But there are ways to make boards proactive and more than nominally independent. Investors need to be able to play a much bigger role in determining who ends up on boards, nominating candidates themselves, instead of choosing among the C.E.O.’s picks. (The S.E.C. is currently considering a proposal to make it easier for big shareholders to do this, which would be a good start.) On top of that, it’s time to revive an idea that was first floated by the corporate-law scholars Ronald Gilson and Reinier Kraakman, who proposed that big institutional investors create a cadre of full-time directors, people whose only job would be to sit on corporate boards and look after shareholder value. Most board members, accomplished as they may be in their real jobs, are amateurs when it comes to being directors. So it shouldn’t surprise us when they get buffaloed or pushed around by C.E.O.s, who are professionals. Right now, boards are made up of moonlighters. And, if the last few years have shown anything, it’s that protecting shareholder interests is a full-time job. ♦