Board stupid

ROGER BERLIND IS a theatrical producer. During the septuagenarian’s glittering career on Broadway, his shows have garnered an amazing 62 Tony awards. He has put on definitive productions of such classics as Guys and Dolls, Kiss Me Kate, Hamlet and Amadeus.

Marsha Johnson Evans, known commonly as Marty, has lived an impeccable life in public service. She is a retired rear admiral in the US Navy, a former national executive director of the Girl Scouts of the USA, and is president of the American Red Cross.

It is no wonder that such successful people are much in demand in corporate America. Indeed Dick Fuld, the chairman and chief executive of Lehman Brothers, asked both to sit on the board of the investment bank he has run so successfully for close on 20 years. As independent, non-executive directors, they no doubt bring that experience and wise counsel to bear in board meetings.

But it might come as a surprise to many Lehman observers that both Berlind and Evans also serve on the firm’s finance and risk committee. Such committees always have non-executive board representation to offer an independent voice to their important work. As Lehman only has one independent board director with any direct experience of the banking industry, it has no choice but to appoint apparently poorly qualified individuals to a role in which, one can assume, they would have needed to consider such complex positions as Lehman’s exposure to sub-prime, CDOs, SIVs and the like.

Lehman is far from alone in this. But its case is symptomatic of a worrying situation that faces a global banking industry already under huge scrutiny, extreme pressure, and with a compelling need for people to advise on and take tough and often complex measures – many of the world’s leading financial institutions suffer from a chronic lack of bankers on their boards of directors.

At a time when it has been shown that even senior executive financiers struggled, and often failed, to understand the risks associated with many of the products that have led to the sub-prime crash, many shareholders will now be asking how their interests could have been best served by the collection of industrialists, business executives, academics and public policy officials that populate the boards of the world’s biggest banks.

Boards without bankers

Research carried out by Euromoney in January of this year looked at 17 of the world’s biggest banks and investment banks. These financial institutions, according to their websites, had a total of 248 board directors between them. We analysed the biographies and CVs of these board members posted on each website to see how many mentioned any direct, relevant experience of working in the banking industry. We did not include those that have indirect experience through positions in other areas of the financial service industry such as private equity, asset management or insurance.

The results, published on the following pages, make for some surprising analysis. Fewer than one in three directors of these 17 banks has any direct experience of the banking industry. Most worrying for shareholders, only one in 10 directors are former bankers in a non-executive role – which is principally to represent investors’ interests on the board.

And the situation is worst at many of the US banks that have suffered most in the credit crunch. In fact our earlier analysis probably does a disservice to Berlind and Evans. At the time of going to press, Lehman’s finance and risk committee, which is chaired by non-executive director and former Salomon Brothers managing director Henry Kaufman, had apparently done a much better job than many of its Wall Street counterparts. Berlind’s career, it should be noted, includes a stint as one of the founders of Carter, Berlind, Potoma & Weill in 1960, a company that would later through Sandy Weill become Shearson Loeb Rhoades, which was eventually sold to American Express in 1981 for approximately $930 million in stock.

But what of the board of Merrill Lynch, which has written off well over $20 billion, seen its market value halved and lost its chairman and chief executive over the past six months? The only banker on its board is new chairman and chief executive John Thain. If you want diversity and years in the service of business and government, then Merrill’s board has it covered. Its non-executive directors include Judith Mayhew Jonas, a member of the UK government’s commission for equality and human rights; and Ann Reese, the co-founder and co-executive director of the Center for Adoption Policy. But where are the board members who could have questioned whether 2006 was a good time to try to smash into the sub-prime mortgage business with the acquisition of First Franklin?

Citigroup is another global financial institution to have lost many billions as well as its head. Some 15 people sit on its board. Again, not a single one is a non-executive, independent director with direct experience of banking according to its website – although the chairman of its Mexican subsidiary, Banamex, Roberto Hernández, does also sit on Citi’s main board. Therefore it is no shock that the four-strong committee appointed to find successors to Chuck Prince contained only one banker – the chairman of the executive committee, Robert Rubin. And could it be that the many current and former CEOs that sit on Citi’s board took so long to unseat Prince because they were loth to get rid of one of their own?

The list goes on. JPMorgan Chase’s board of directors has only one banker on it – chairman Jamie Dimon, who is also the chief executive. Bank of America’s only non-executive with a career in banking behind him is Charles Gifford, its former chairman. Goldman Sachs has also persuaded one of its former chiefs, Stephen Friedman, to sit on its board – but he’s the only one, despite the huge and admired ranks of Goldman alumni.