How boards head off problems in their organizations

Following the recent scandals that erupted at the end of the economic bubble, the Sarbanes‐Oxley Act was passed as a regulatory “cure.” However, regulation is only part of the cure. The reason fraud happens in the first place often stems from performance deterioration. Corporate governance is still the best cure to fix the system. The board’s role is to use business judgment to identify issues that could cause problems and to insist on timely action to solve those problems. The board must understand upstream indicators such as people performance, operating performance, and financial performance. It must create a culture of open discussion and understand the drivers of performance.