On Boards of Directors of Diversified Financial Firms

Yesterday's Wall Street Journal featured an excellent editorial by Peter Hahn, entitled "Blame the Bank Boards." The article's byline describes Mr. Hahn as "a fellow at the Sir John Cass Business School in London and was Citigroup's senior corporate finance officer for the U.K."

Echoing my own sentiments regarding the boards of diversified financial giants such as Merrill Lynch and Citigroup, appearing here, here, and here, Hahn characterizes the board members of such firms thusly,

"Most bank boards consist principally of leading clients, ex-politicos and community leaders. Notably absent among them is any sophisticated understanding of banking and risk, let alone stuff like derivatives. But the contemporary banking business is about risk management, risk trading and systems integration -- and has been for years. German banks speculate in the U.S. mortgage market; a regional British savings and loan (Northern Rock) becomes the ninth largest bank in U.K. buying mortgages from brokers and selling interests in them to U.S. investors; the largest bank in the U.S. with assets in 100 countries (Citi) finds itself with $50 billion in securities that it can't value. And we haven't even talked about what could happen with all the private equity positions these guys own. As far as boards are concerned, in other words, we're not just talking about sophisticated risk management -- we're talking about basic oversight.

One common denominator with many of the bank boards I've looked at is that very few bank directors actually have full-time jobs. To be blunt, many of the biggest bank boards resemble retirement clubs. Without current corporate, banking or risk expertise, it's hard to see what these directors are adding, save a few more deal contacts."

My own thoughts included these, in one of the linked posts above,

"Citigroup's board, which is listed here, would seem to be ultimately culpable for allowing this long, slow slide into mediocrity of the country's largest commercial bank. Despite the Journal's reporting that either Bob Rubin or Dick Parsons might be considered to move from board member to interim chairman, it's hard for me to see how members of this already tainted group could be candidates to correct the situation.

Isn't this the type of regulatory corner-cutting Prince was supposed to have avoided? Didn't his board wonder, as these SIVs were created, precisely where the risk went? Especially Rubin, a onetime co-head of Goldman, Sachs, and Secretary of the US Treasury?

The truth is, ever since Sandy Weill fused his insurance-asset management conglomerate with Citicorp some years ago, the firm has had trouble consistently outperforming the market for its shareholders. The diversified financial giant has proven too unwieldy and complex for anyone to run profitably to shareholders' lasting benefit, as measured against the less risky step of simply buying the S&P500 Index.

With the board having collaborated with Prince in allowing these omissions to fester and grow for four more years, after Weill, I'd suggest that the biggest favor the Citi board can grant its shareholders is, at least, to break up the company into separate, manageable units, spun back as separate equities to current Citigroup owners. Perhaps, in a few cases, buyers can be found for the units. It's unlikely that the old commercial bank unit could merge with another bank. But various asset management, investment banking and other non-core commercial banking units could be sold or split off.

Look at it another way. The company has suffered under two successive CEOs, and the board that allowed the pain to continue. Should anyone connected so far with this travesty have a hand in improving it within the same framework, going forward?

I don't think so. That way probably lies more failure and loss for shareholders."

Another post quoted various outside observers laying much of the blame for Citigroup's current situation at the feet of Rubin and his fellow board members.

Hahn has this to say about Citi's board,

"Citigroup's board reportedly fought for two years to get Sandy Weill to name a successor. But looking at Citi's business structure, it's clear they didn't have much overall success overseeing the company's banking integration efforts -- let alone risk management. And they still haven't figured out succession planning.

The average tenure of the Citi board member is over 10 years. Much has been made of the fact that many of Citi's outside directors were not associated with stellar business performances elsewhere. But with the scale of Citi's bad positions, investors must be wondering -- if not succession planning, or business oversight, or risk oversight -- what were they doing for the last decade at Citi?"

Hahn makes great points regarding the inappropriate makeup of most financial services company boards. They still cling to old notions of involving a broad array of community and political leaders, along with luminaries from other fields. But, as Hahn notes, banking today is much more involved with sophisticated understanding of abstruse risk management. Chemists and community activists hardly qualify as capable of overseeing such financial activities.

While we skewer various CEOs- Spector of Bear Stearns, Prince of the Citi, O'Neal of Merrill Lynch, and, just today, Morgan Stanley Co-President Zoe Cruz- let's not forget the sleeping morons on the boards which let these executives take such appalling losses for their firms.