From Main Street to Wall Street: The Hidden Impact of Management Discretion
Typewriter with word Crisis written on paper
Did you know that unchecked management discretion played a major role in the 2008 Global Financial Crisis? Poor governance and lack of oversight led to nearly $20 trillion in household wealth vanishing during the crisis. Stop for a moment and think about that—$20 trillion gone. Imagine if stronger oversight and ethical decision-making had prevented that devastation—not just for Wall Street, but for Main Street—for families, communities, and everyday investors like you. For board members, leaders, and the public alike, understanding how discretion shapes governance is critical. While discretion is vital for organizational growth, without proper checks, it can lead to misalignment, poor decisions, or even unethical behavior.
When I worked in fundraising, I often dealt with projections based on physical pledge cards and verbal pledges. The paper trail from physical cards was helpful, but verbal pledges were tricky—they lacked documentation, making them harder to substantiate. However, verbal pledges allowed us to update projections more quickly in a fast-paced environment.
I began questioning whether there was any meaningful difference between a signed pledge card and an email that could be traced. My conclusion? There wasn’t. So, I developed a process to shift verbal pledges to email documentation. My goal was to get as many of these verbal commitments documented as possible because I knew they would face heavy scrutiny from the CEO and the board. Any discrepancy between a verbal pledge and the actual gift could leave me struggling to justify including it in the system. Projections, by their nature, are subject to management discretion, and without solid documentation, it could have been perceived as me trying to inflate the numbers. Thankfully, I had the foresight to ensure my projections were always based on solid, verifiable information.
In banking, this need for accountability becomes even more critical when reviewing pro formas. Questions like How did you come up with this? or What evidence supports this projection? are essential. Contracts or detailed documentation ensure these numbers aren’t just “pixie dust.”
The Role of Regulation and Oversight
Accrual accounts (used to track revenues or expenses not yet paid or received) are another area where discretion often plays a significant role. Years ago, my wife, an auditor, advised me to pay attention to both revenue and expense accruals, as they often reveal where management’s judgment significantly impacts reporting. While I’m no auditor, I’ve learned to ask the right questions and look for patterns that might indicate potential risks.
Sound regulation also plays a crucial role in ensuring that management discretion is exercised responsibly. It’s not about overreach; it’s about ensuring management is thoughtful and deliberate, particularly when making projections.
What Is Management Discretion and Why Does It Matter?
Management discretion refers to the areas where leaders make judgment calls, sometimes without explicit guidelines or oversight. These decisions can significantly impact an organization’s financial performance, reputation, and stakeholder trust.
Discretion is a double-edged sword:
The upside: It allows leaders to respond quickly and effectively to challenges.
The downside: It opens the door to excessive risk-taking, misaligned incentives, or unethical practices.
In banking, Allowance for Credit Loss is a prime example. This refers to decisions about how much to set aside for potential loan losses, directly impacting earnings, shareholder dividends, and perceived financial health.
Provisioning for “bad debt” involves both quantitative factors (historical data and models) and qualitative factors (management’s judgment about forward-looking risks like economic changes).
Lessons from the 2008 Crisis
Sometimes it feels like we have short memories, but if you stop and think about it, we all remember the 2008 Global Financial Crisis. It exposed glaring weaknesses in how banks managed and reported credit risk, leaving Main Street families to bear massive losses while the most powerful institutions were bailed out. In response, stricter regulations like CECL (Current Expected Credit Loss) in the U.S. and IFRS 9 internationally were introduced. These frameworks prioritize forward-looking provisions to protect the public by fostering greater transparency and accountability.
Do you remember that? While no model is perfect, the combination of these frameworks, strong board and management oversight, and sound judgment are essential for effective governance. Provisioning for bad debt, for example, remains both an art and a science: the science uses data and models to estimate losses, while the art requires human judgment to address uncertainties that numbers alone cannot capture.
Why the Public Should Care
Good governance isn’t just a corporate issue—it impacts everyone. When companies operate transparently and align management’s incentives with shareholder outcomes, they create sustainable growth that benefits employees, customers, and communities alike.
What many people don’t realize is that a significant portion of Main Street’s 401(k) savings—and if you’re reading this, you’re Main Street—is invested in funds that, in turn, invest in Wall Street companies. When you contribute to your 401(k), that money is often placed in mutual funds or index funds, which pool investments and buy shares of public companies. Simply put, the performance of Wall Street isn’t just about big corporations—it directly impacts the retirement savings and financial future of everyday workers like you and me.
This connection is why governance matters to everyone, not just those in leadership. A well-governed company doesn’t just create wealth for investors; it supports stable jobs and contributes to stronger communities.
The Path Forward for Leaders
For those of us in leadership—whether at the board or management level—it’s our responsibility to remain discerning. We must ensure decisions are made ethically and with a focus on long-term value creation, not just short-term gains. Strong governance depends on aligning incentives, fostering accountability, and maintaining transparency.
Conclusion
Management discretion is where risk and opportunity often collide. For leaders, the challenge lies in fostering alignment, promoting transparency, and ensuring ethical decision-making that drives sustainable value creation. For the public, it’s a reminder to stay engaged—because you have a stake in what happens on Wall Street. Ask questions, challenge decisions that could leave you at a disadvantage, and stay informed about how organizations are governed.
Take a moment to reflect:
Are there areas of discretion in your organization that deserve closer scrutiny?
How can you foster greater alignment between management and stakeholders?
Good governance starts with asking the right questions and having the courage to act with integrity, even when the answers are hard to face.
#CorporateGovernance #EthicalLeadership #FinancialTransparency #MainStreetToWallStreet
About Me:
Hi, I’m Orvin Kimbrough—volunteer, board director, and chairman & CEO of Midwest BankCentre. I help professionals scale confidence, leadership, and influence by driving mindset shifts, expanding networks, sharing knowledge, and encouraging bold action.
I share insights on leadership, resilience, and personal growth—rooted in my journey from foster care to CEO. 📖 Twice Over a Man, my recently released book, has been described as inspiring, honest, and transformative. Readers call it a leadership manual wrapped in a powerful, relatable memoir of perseverance and faith.
For more Reflections (and broader lessons learned), visit orvinkimbrough.com