Overworked directors can harm banks
Nine years after a banking industry crisis became the Great Recession comes a warning that directors at the nation’s largest financial institutions may be too busy to prevent it from happening again.
“[ Systemic ally important financial institutions ]— the same institutions that, if mismanaged, could inflict material distress on the broader economy—are being governed by extraordinarily busy directors ,” writes Jeremy Kress, senior research fellow at the Michigan Law School’ s Centeron Finance, Law and Policy.
His paper, “Board to Death: How Busy Directors Could Cause the Next Financial Crisis,” examines how overcommitted directors at Wells Fargo and JPMorgan contributed to crises at the two banks.
WellsFargo lost $25 billion in market value because of an unauthorized accounts scandal million customers, while JPMorgan lost more than $6 billion because of rogue credit derivatives tradesmade by an employee knownas the London Whale.
The diligence of directors at both bankswas strained by other responsibilities they juggled, Mr. Kress concludes. He said the crises wouldnot necessarily have been avertedif the directors had been lessbusy, but the banks would have been more likely to detect and address the problems earlier if directors had been less preoccupied.
Nine of Wells Fargo’s 13 independent directors served on three or more public company boards in 2014, long after the San Francisco bank’s board was aware of the problem, he notes. At JPMorgan, director James Crown, who headed the bank’s risk policy committee, simultaneously served as lead independent director of Sara Lee and General Dynamics and as president of his family’s multimillion-dollar investment company.
“In both cases, key directors who were over extended with outside commitments inhibited oversight and prevented the firms from responding more effectively to nascent risks,” Mr. Kress writes.
Wells Fargo and JPMorgan are not outliers. Mr. Kress found 44 percent or more of independent directors at four other banks considered too big to fail — Citigroup, Bank of America, Morgan Stanley and Goldman Sachs — serve on three or more public company boards, according to the banks’ 2017 proxy statements.
“This level of overcommitment … is cause for alarm,” he writes.
Directors who believe their indispensable skills and experience make them capable of managing multiple complex tasks simultaneously have been a problem for years. The fact that company executives continue to have a big say in director nominations and that it’s difficult to oust incumbent directors also contribute to over boarding, Mr. Kress believes.
“It’s a virtual rubber stamp because it’s so hard, especially at big banks, for shareholders to get together and propose other director candidates,” he said in an interview.
Results of proxy voting at Wells Fargo this year demonstrate that.
“If you’re not going to vote out the risk committee chair of Wells Fargo, who is going to get voted out?” Mr. Kress asks.
In contrast, 12 of PNC Financial Services’17 independent directors atthe time of the financial crisis served only on the Pittsburgh bank’s board or as a director of just one other public company. The bank’ s post-crisis success“is attributable, at least in part, to its uncharacteristically focused and committed board of directors ,” Mr. Kress writes.
Mr. Kress pointed out that Donald J. Shepard, PNC’s current lead independent director, serve son two other public company boards, while Richard B. Kelson, chair of PNC’s audit committee, serves as lead directorof another public company, non executive chairman of another andis chairman and CEO of a privatecompany.
“I worry a little bit that [PNC] is shifting back in the other direction,” Mr. Kress said.
He believes that when it comes to the 10 institutions considered too big to fail, the lead director and chairs of the audit and risk committees should not sit on any other public company boards.