Examine Boards' Role in Financial Crisis
chairman Mary Schapiro may ask boards to disclose
more about the backgrounds of its directors.
(By Jose Luis Magana --
Zachary A. Goldfarb
Post Staff Writer
Friday, February 20, 2009; Page D01
Securities and Exchange Commission Chairman Mary Schapiro plans to look
into whether the boards of banks and other financial firms conducted
effective oversight leading up to the financial crisis, according to SEC
officials, part of efforts to intensify scrutiny of the top levels of
management and give new powers to shareholders to shape boards.
As she examines what went wrong, Schapiro is also considering asking
boards to disclose more about directors' backgrounds and skills,
specifically how much they know about managing risk, said the officials, who
spoke on condition of anonymity because no policy initiative has been
Having led the agency for just three weeks, Schapiro hasn't had the
chance to move forward on these initiatives, though that will probably be
one of her first tasks. Schapiro has said that Wall Street must repair
itself after the financial crisis and that one way to do so is by "giving
shareholders a greater say on who serves on corporate boards, and how
company executives are paid."
With few exceptions, boards have received little media attention as the
country has sought explanations for financial firms' taking on such perilous
risks. These boards -- which typically consist of a dozen or more well-known
executives, politicians and other influential people -- were ultimately
responsible for the decisions of the Wall Street companies, housing firms
and banks at the heart of the crisis.
The boards signed off on the risks the companies took and the
compensation packages awarded to top executives. But many corporate
watchdogs say the boards of top financial firms had characteristics that
promoted risky business practices and harmed shareholders.
"Corporate governance is about managing risk. It's about incentive
compensation. It's about corporate strategy and sustainability. And all of
those things are what the boards failed to do," said Nell Minow, a
co-founder of the Corporate Library and an advocate of reforming corporate
The Obama administration and Congress have already taken steps to limit
the type of board behavior that may have contributed to the crisis. The
stimulus legislation includes limits on compensation at companies receiving
tax dollars as well as provisions that give shareholders an advisory vote on
executive compensation, known as "say on pay."
Most boards have committees to oversee risk and compensation, and
corporate watchdogs say their biggest failure was allowing executives to be
paid in exchange for the quantity of business rather than the quality. This
often promoted short-term risk-taking at the expense of long-term gains.
"Management and traders are compensated on booking profits. It didn't
take a long time to figure out if you undertake very risky activities, you
get higher bonuses," said Ivo Welch, professor of finance and economics at
Brown University. "There's nobody to say this is not in the interest of
shareholders or the United States overall."
Watchdogs point to flawed boards at many firms -- including Countrywide,
American International Group and
Wachovia -- involved in the crisis. Minow points out that at Bear
Stearns, the compensation committee had nine criteria to decide on the chief
executive's compensation, such as total return to shareholders and earnings
per share. But in the end, it could choose to award the maximum compensation
to the chief executive based on only one of the criteria.
Over five years at Bear Stearns, chief executive James E. Cayne took home
$155 million, according to Forbes. A few months after Cayne stepped down as
chief, a collapsing Bear Stearns was snapped up by J.P. Morgan in a
federally engineered fire sale in which shareholders lost most of their
The Bear Stearns board had other characteristics that corporate
governance advocates found problematic. For example, several directors
served on the boards of four public companies, raising questions about
whether they had the time to oversee a complex financial firm.
During part of the tenure of former
Merrill Lynch chief executive E. Stanley O'Neal, who took home $161.5
million as he left the firm, the Wall Street investment bank loaded up on
investments derived from subprime mortgages and other risky loans. O'Neal
was also chairman of the Merrill board -- meaning he was both the overseen
and the overseer.
Watchdogs say the
Citigroup board also exhibited poor practices. Three of the firm's
directors also were serving as chief executives at other companies.
Other Citigroup directors had multiple roles at the firm. Robert
Hernández Ramírez was both a board director and chairman of the bank's
Mexican subsidiary. Former Treasury secretary Robert E. Rubin was both a
board director and a top adviser to the firm, a role that earned him more
than $100 million. Rubin recently retired, and Hernández announced he was
stepping down this week, though Citigroup said he would retain access to
aircraft on the company's dime.
Some business insiders say that boards shouldn't be held culpable for a
financial crisis that just about everyone missed.
"The universe of people who misread the risks in what some of these firms
were doing is very broad. You could extend it to the rating agencies, to
managements, to regulators," said David Hirschmann, president of the Center
for Capital Markets Competitiveness at the U.S. Chamber of Commerce.
The inquiry into what went wrong at the board level comes as the SEC's
Schapiro plans a broader review of policies governing how much shareholders
can influence boards. She previously has expressed support for proxy access,
which would make it easier for shareholders to propose new directors. Many
public companies oppose proxy access, in part because it enables activist
shareholders, such as from labor or environmental groups, to try to seek
influence on boards.
Schapiro recently hired Kayla J. Gillan, a longtime shareholder advocate,
as a senior adviser. Another one of Schapiro's close associates, SEC
Commissioner Elisse B. Walter, has also spoken favorably about enhancing
shareholders' influence. "To me, the fundamental question is: 'Should
shareholders have a real say in determining who will oversee management of
the companies that they own?' I believe strongly that the answer is yes,"
Walter said this week.
Earlier this month, the SEC rejected a request by Birmingham, Ala.-based
Regions Financial to ban a shareholder proposal to set strict pay limits
at the firm, according to RiskMetrics Group. Just months earlier, the SEC
approved a request by
SunTrust Banks to ban a similar shareholder proposal.
Some investors aren't convinced the shift is real. Money manager John
Harrington tried to propose new board committees at
Bank of America, Citigroup and
Goldman Sachs that would ensure that the companies take steps to support
U.S. economic interests.
Bank of America and Citigroup wrote letters to the SEC asking for
permission to disallow the proposal. The SEC told Citigroup it had the
authority to do so, Harrington said. "It's shameful that the SEC is still
supporting corporate management right down the line," he said.