Abstract
Banks failed in 2008 because individuals with knowledge of risks were not connected to individuals who had the incentive and power to take corrective action. Evidence of this problem is provided by reports from the Lehman liquidator and The Financial Crisis Inquiry Commission. Improved communications and control within and between banks, their regulators and stakeholders can be achieved with network governance. Lawmakers and/or regulators can introduce network governance by requiring bank shareholders to amend corporate constitutions to introduce a division of power with checks and balances with stakeholders, who can take on the role of supplementary and/or co-regulators. Such decentralized regulatory architecture is how simple living creatures sustain their existence in complex, dynamic and unpredictable environments without suffering communication errors and/or overload. The natural science of control and communication identified in 1948 by Wiener explains why centralized control and communication systems are not found in nature. This science of regulatory systems explains why regulators and large firms fail to reliably manage, regulate or govern complexity. Examples of large network-governed firms provide evidence that they obtain sustainable operating advantages over business cycles. This indicates how natural systems provide design criteria to enhance the efficacy of business operations, governance and regulation.
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1Principal, International Institute for Self-governance, PO Box 266 Woollahra, Sydney, Australia.
2Assistant Professor of Business, College of Business, Fordham University, New York.
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Turnbull, S., Pirson, M. Could the 2008 US financial crisis have been avoided with network governance?. Int J Discl Gov 9, 238–263 (2012). https://doi.org/10.1057/jdg.2011.26
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DOI: https://doi.org/10.1057/jdg.2011.26