Bank Boards: How to influence people and win business

Banks’ power rankings Rank Bank Rank Country Market Cap ($bn) 1 Citigroup 534 US 143 2 Morgan Stanley 432 US 59 3 Chase 320 US 68 4 HSBC 310 UK 56 5 Lloyds 283 UK 79 6 JP Morgan 280 US 22 7 Credit Suisse 271 Swiss 49 8 UBS 244 Swiss 66 9 Dresdner 213 Germany 20 10 Paribas 182 France 17 11 BNP 172 France 18 12 Wachovia Corp 168 US 17 13 US Bancorp 139 US 23 14 Standard Chartered 126 UK 15 15 Deutsche 107 Germany 28 16 Bank of America 105 US 122 17 Bank One Corp 104 US 65 18 Wells Fargo 95 US 60 19 NatWest 91 UK 38 20 HypoVereinsbank 81 Germany 23 21 Bank of Scotland 79 UK 17 22 ABN Amro 74 Holland 29 23 PNCBank 72 US 17 24 Merrill Lynch 71 US 32 25 Fifth Third Bancorp 66 US 19 26 ING 63 Holland 45 27 Société Générale 62 France 18 28 CBA 44 Australia 16 29 Suntrust 43 US 20 30 NAB 42 Australia 26 31 Bank of New York 40 US 27 32 Royal Bank of Scotland 39 UK 19 33 Hang Seng 33 Hong Kong 18

34 First Union 32 US 52 35= BSCH 30 Spain 23 35= Barclays 30 UK 42 37 AIB 28 Ireland 15 38 National City 23 US 22 39 Firstar 18 US 20 40 Mellon Bank 16 US 18 41 Unicredito Italiano 19 Italy 25 42 San Paolo IMI 15 Italy 22 43 Sumitomo 9 Japan 43 44= DKB – Japan 0 44= IBJ – Japan 0 44= Sanwa – Japan 0 44= Bank of Tokyo-Mitsubishi – Japan 0 44= Fuji – Japan 0 44= BBV – Spain 0 44= KBC (formerly Kredietbank) – Belgium 0 Sources: Morgan Stanley, Bloomberg Political weightings: minor civil servants 5bn, major civil servants, cabinet ministers 15bn, former G7 presidents and prime ministers 30bn It is often remarked that a happy man is one with a good doctor, a better lawyer and an even more splendid accountant. Banks apply this theory to themselves in the form of their advisory board and external directors. The figures from business and politics generate business opportunities, open doors and give advice that would be hard to get from inside.

Take Citigroup, whose board of directors reads like a directory of corporate, multinational America at the very highest level: the chairman and chief executive of AT&T, Michael Armstrong, his equivalent at Colgate-Palmolive, Reuben Mark – to name but two, plus a former president of the US, Gerald Ford. The 18 people who sit on Citigroup’s board, of whom only two are bank executives, ooze influence.

But which banks have the best external directors and what good does it do them? To answer at least the first part of this question Euromoney decided to create a transparent measuring system which placed almost 90% of its evidence on pure numbers, and only a relatively small amount on our own subjective judgements.

First we took the top 50 banks as measured by market capitalization at the close on March 26. Our initial list of banks – provided by Morgan Stanley – excluded ING because of its preponderant earnings from insurance. We added ING. Then we expanded our universe from banks to financial institutions and added the biggest investment banks.

Weighing up the firepower

We then create a “power” score by combining two measures – one of the power of corporate directors, the other of the political clout of ex-politicians. Corporate directors are measured by reference to the market capitalization of their companies. In a world of mergers and consolidation, a company’s most important currency is its stock. The “political” score is added on top and is subjective.

The number members of the boards varies from around 12 to the small army that comprises the board of Bank of Tokyo-Mitsubishi. The number of bank executives also varies considerably and in the case of Japanese banks does so to the exclusion of any non-executives from the corporate world. The exception was Sumitomo which included two non-execs – though only from other parts of the Sumitomo keiretsu. Here we faced a cultural divide. Whenever the spokespeople for Japanese banks were asked about outside participation on their boards it almost always provoked a bemused response. IBJ’s spokesperson, for example, described the situation as “complicated” because one of its board members had left the bank for a short while to join Chase. Did that make him an “outside” director?

In our scheme this meant, perhaps unfairly, that Japanese banks got a zero score. This may be considered somewhat artificial but nearly all the Japanese banks admitted the issue of corporate directors was being debated internally. So expect Japanese institutions to climb our poll within the next 20 years. For continental Europe we used supervisory boards and advisory boards where applicable.

Since the goal of most banks is to generate as much high-quality business as possible, we took the view that the bigger the board – and the more corporates on it – the better for serving this purpose. In our scheme, the bigger the better. Even if a board member adds very little in constructive comments, the fact he is a member of the board makes it easier for the bank to call him up and enlist his influence to win business.

Our methodology is occasionally skewed towards a star system. HSBC’s score is greatly helped by Lord Marshall, who is chairman of British Airways (market cap: $7.5 billion), Inchcape ($1.2 billion), and BTR Siebe ($17.6 billion) as well as deputy chairman of BT ($111.6 billion). His personal contribution to HSBC’s score of $310 billion was $138 billion. Likewise, the surprisingly high score for Wachovia Bank is almost entirely due to the presence of the chief executive of Glaxo Wellcome ($127 billion).

As can be seen from the Lord Marshall example, we also added together the individual’s various directorships. This again had a skewing effect. We believe annual reports should contain information on positions held by directors in other firms. Those banks which did give mini-bios of their directors gained points simply for the information disclosed. If Citi had disclosed Michael Armstrong’s various directorships it would have gained credits for them. As it stands it only gained 189 points for his role as chief executive of AT&T.

In some cases we couldn’t get any information and banks have been penalized for their lack of transparency. BBV of Spain lists its directors almost as an afterthought and gives no details whatsoever about them. KBC of Belgium promises such information in its annual report which is due to appear soon, but in this year’s poll has been duly penalized.

Our weightings were designed to reflect influence, by which we mean the ease with which that director could gain the bank a piece of business. We considered chairmen, deputy chairmen, presidents, chief executives, executive vice-presidents, and chief financial officers to merit the highest status. They score the full market cap of the company concerned. If the individual holds a directorship in other companies, is a retired chief executive, a retired chairman or chairman emeritus then the market cap is weighted – in this case by a third. If the individual is on the regional board of a global company – such as Shell Australia – then one fifth of the company’s overall market cap is allocated. If he is on the board of another bank then a similar 20% weighting is used. If the company is acquired by a bigger group then a 25% weighting is given. If the same individual is no longer with the new concern that 25% is divided by three.

The market caps were given by Bloomberg in the first week of April. By definition, private companies were not included since no market cap was obtainable. This, of course, has led to exclusions. But in 90% of the cases the board directors represented large, floated companies.

Packing a political punch

The corporate side contributes the vast chunk of the bank’s score and is purely numerical. We have added some scores for political figures, and these are indicated in the table. Board members from universities, charitable foundations, accountancy firms and the like have scored zero. In our scheme they are useless. Lawyers – with at least one on every bank board – have also been written off. The single exception is Franzo Grande Stevens who sits on the board of Unicredito Italiano as well as many other firms. He was the feature of a one-page Economist profile in March, and was too important to dismiss.

Political scores Citigroup Gerald Ford, former US president JP Morgan Martin Feldstein, president, National Bureau of Economic Research Credit Suisse Helmut Kohl, former German Chancellor Paribas Alexander Lamfalussy, former European Monetary Institute president NatWest Lord Hurd, former UK foreign secretary, Sir Charles Powell, former private secretary to UK prime minister Margaret Thatcher Bank of Scotland Sir Russell Hillhouse, former undersecretary of state at Scottish office Royal Bank of Scotland Eileen Mackay, ex-Scottish office Barclays Sir Andrew Large, ex Securities & Investment Board Unicredito Italiano Franzo Grande Stevens It made little difference anyhow. The two Italians banks included did very badly in our list coming barely above Japanese banks. This is partly due to their recent mergers and the need to have a large banker representation from the different merged factions. Doing only marginally better than the Italians was Barclays of the UK, although this is much more difficult to explain in terms of recent mergers.

The table above divides the scores obtained by the banks own market cap. This gives a board-efficiency ratio. A score below one means that the bank’s own market cap is bigger than the combined market cap of the corporates sitting on their boards. Barclays scores 0.71. Another surprising laggard is Bank of America with 0.86.

The best by our efficiency ratio is JP Morgan with an incredible 12.93 – although this large ratio may be down to the poor performance of its own stock. But in keeping with Morgan’s traditional close links with white-shoe America, it is one of the few institutions – along with HSBC and Credit Suisse – to make it into both the absolute top 10 and the top 10 for efficiency. Citigroup doesn’t because its own market cap is so huge.

The point of this study was to emphasize the nexus of power between the channelers of capital and its users – meaning respectively global financial supermarkets and global firms.

As we move into a world where nation states hold less clout than global firms this relationship will become ever more important.

Not every one will agree with our approach. However, it is hoped that this study will at least cast some light on a much ignored area – banks and their boards of directors. Those with lazy boards full of port-swilling old-timers, ought to be edged out by highly professional boards full of top corporate chief executives. Certainly the days when a bank directorship was just a sinecure for good behaviour are over. The Citigroup board is the way a board should look.

Most efficient 1 JP Morgan 12.9 2 Dresdner 10.7 3 Paribas 10.5 4 Wachovia Corp 10.0 5 BNP 9.5 6 Standard Chartered 8.3 7 Morgan Stanley 7.4 8 US Bancorp 5.9 9 Credit Suisse First Boston 5.6 10 HSBC 5.5 Least efficient 1 Almost every Japanese bank 0 2 Sumitomo Bank 0.2 3 First Union 0.6 4 San Paolo IMI 0.7 5 Unicredito Italiano 0.7 6 Barclays 0.7 7 Mellon Bank 0.8 8 Firstar 0.9 9 Bank of America 0.9 10 National City 1.0