Francesco Guerrera and Peter Thal Larsen have a long and intelligent article on banks’ boards today. They point out that board members, the people with ultimate oversight over the multi-billion-dollar losses which have devastated the industry, have emerged all but unscathed from the turmoil of the past year. But they smartly stop short of pointing fingers: the issue turns out to be very complex.
It’s true that bank boards are often light on financial experience in general and risk-management experience in particular. But interestingly, if you had to pick two banks before the crisis whose boards had a lot of finance-industry experience and expertise, there’s a good choice you’d point to Bear Stearns and Northern Rock. The fact is that bankers didn’t see this crisis coming, wherever they were on the org chart: it didn’t matter if they were the head of fixed-income, the chief risk officer, the CFO, the CEO, or whether they were on the board. It’s far from obvious that having more bankers on boards would have made any difference at all – and there’s even a good chance it could have made matters worse rather than better, since bankers tend to have a rather larger risk appetite than most of the rest of us.
In any case, finding people with extensive financial experience to serve on boards is not nearly as easy at it sounds, given that those people will almost automatically be conflicted out of trying to make money elsewhere in the financial sector as a result. According to the article, board members could be next in the firing line:
Shareholders could decide to attack underperforming boards by voting against individual directors at companies’ annual meetings. Some dissatisfaction has already surfaced in this year’s shareholder meetings but, with many of the chief executives seen as responsible for the problems gone, directors could find themselves even more in the firing line in 2009.
In the next few months, board members will have to show investors and capital markets that their ability to oversee companies that are striving to come out of the credit squeeze is better than the stewardship displayed before the crisis hit. Failure to do that may well lead them to face the kind of brutal justice that Wall Street and the City have already meted out to thousands of other employees.
Before they kick out the existing directors, however, shareholders should be very clear who they’re likely to be replaced with. My feeling is that just about any board where the CEO is also the chairman is likely to be pretty ineffective when it comes to noticing potential difficulties in the business. Maybe, before sweeping changes take place in the industry, it might be worth finding just one board which seems to have done something right, and trying to copy that.