Every time we listen to Charles Mungers’ famous speech titled – The Psychology of Human Misjudgement, we learn something new. One example is Munger’s example of the problem with having a ‘Board of Directors’ in American companies, saying:
Finally the institution of the board of directors of a major human American company.
Well, the top guy is sitting there, he’s an authority figure. He’s doing asinine things, you look around the board, nobody else is objecting, social proof, it’s okay? Reciprocation tendency, he’s raising the directors fees every year, he’s flying you around in the corporate airplane to look at interesting plants, or whatever the hell they do, and you go and you really get extreme dysfunction as a corrective decision-making body in the typical American board of directors.
They only act, again the power of incentives, they only act when it gets so bad it starts making them look foolish, or threatening legal liability to them. That’s Munger’s rule.
Occasional, things that don’t follow Munger’s rule, but by and large the board of directors is a very ineffective corrector if the top guy is a little nuts, which of course frequently happens.
You can listen to the entire speech here:
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