AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Bros. et al. are the result of a fundamental flaw in governance of corporate America: Failure to provide independent oversight of management in the governance of these organizations. Management failed to assess, and boards failed to understand, the enterprise risks to these organizations in the debt and investment decisions made by management.

The likely reaction of the President and Congress after this November’s election will be to provide oversight through government regulation. To avert such regulation, corporate America needs to act quickly in correcting its governance.

The best defense against corporate mismanagement remains (1) independent oversight of management by independent directors (2) with counsel of independent advisers and (3) holding management accountable for the information provided:

(1) Independent directors know more about, and are closer to, the businesses of their organizations, and can take corrective action more quickly and knowledgeably, than any government official or agency.

(2) However, these directors need counsel of independent advisers who have not participated with or advised management. Part of the governance failure of AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Bros. et al. is that their boards did not have an understandable assessment by independent advisers of the debt and investment risks being incurred by management and their advisers. The company counsel and other advisers to AIG, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Bros. et al. could not, because of their participation, provide independent counsel needed by the boards.

(3) A board is only entitled to rely upon management for matters that the board reasonably believes management is reliable and competent. Determining reliability and competence requires a board to ask questions. Not just once, but repeatedly and of different constituencies of management, sometime separately with each in executive session. Management must be held accountable for their answers because without reliable and complete information, governance will fail.

A likely reaction to the failure in governance will be a federal codification to increase the duty of each director from that of an ordinarily prudent person which is the standard under most states’ corporation laws to that of a prudent expert with knowledge of the enterprise which is the standard under ERISA. Doing so will likely have adverse impact on governance because it will discourage knowledgeable independent people from assuming the resulting increased risk of being independent directors.

The solution is for boards to act before the government can react. In so acting, boards should begin with educating their members to be better directors, to become more familiar with the risks to the enterprise of their organizations, to be more aware of the strengths and weaknesses of the members of management, and to learn how to hold management accountable for the information being provided. Boards should do so with counsel of independent advisers who have not participated in advising management. And boards should hold management accountable for the reliability and completeness of the information being provided.

Only then will investors regain faith in corporate America. Only then can corporate America avert oversight by government regulation.