Regulators and the investing public need to demand that boards of directors be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.
The SEC’s settlement with Bank of America, still to be approved by the court, raises another question beyond the shell game contrived to give the impression – entirely misleading in our view – of a fair financial settlement for shareholders. Our thoughts on the $150 million “penalty” were set out here.
The boards of both Bank of America and Merrill Lynch appeared to escape the scrutiny of regulators, as well. While some 25 management personnel and in-house lawyers were deposed by the SEC, no independent director of either company underwent such questioning. Though a great deal of attention was focused on emails to and from legal counsel and management, there is no evidence of any effort to look into what the board was thinking when it came to its role in the merger or in related compensation and disclosure issues.
The settlement makes reference to some rather cosmetic changes in respect of the compensation committee. One bars members from accepting “consulting, advisory or other compensatory fees from the Bank…other than routine compensation for serving as a Board member.” But the Commission has offered no evidence that any compensation committee director at Bank of America was receiving anything beyond normal compensation. In any event, the idea that such ancillary compensation might have played a role in compromising the independent judgment of compensation committee members has no antecedent in any of the SEC’s supporting documentation. It has, instead, the appearance of being included as a part of the settlement to make it look like something meaningful was done.
Finally, the settlement requires the Bank’s CEO and CFO to certify proxy statements along the lines set out under the Sarbanes-Oxley Act for quarterly and annual financial statements. But there is no requirement that any independent director, like the chairman of the board or the chairman of the audit committee, has to certify anything along SOX standards. This has always been a flaw in the existing SOX legislation from our perspective. It is one that could have been addressed in the settlement, as the certification process is intended to concentrate the mind of key shareholder guardians in a way that ensures that they have done their due diligence.
It is astounding that in the recent succession of corporate disasters of Depression-era proportions – which many feared would lead to a return of Depression-era misery – the SEC has not been moved to conduct a sweeping review of the generic failings of the board of directors. The often expressed discovery that it was the last to know of the problems, and that it had no idea what was really happening around it, is a common refrain on such occasions, as we remarked some years ago to the U.S. Senate Banking Committee when it was considering legislation in response to the Enron et al. debacle, and as we repeated in an appearance before Canada’s Senate equivalent later. It does not assist in investor confidence or society’s faith in its giant institutions of capitalism that boards either view themselves, or are viewed by regulators, as the junior partners in corporate performance and outcomes, as if they were some 1950s suburban housewife who by custom and design tended to be sheltered from having any knowledge of or responsibility for the business affairs of the household.
Time and again, in one corporate calamity after another, the question has been posed: Where was the board? If the world’s top securities regulator is not prepared to dig deeper to find out the answer, if it is unwilling to hold directors’ feet to the fire during major enforcement investigations like the one involving Bank of America, that question will persist like a great mystery. But as the world has been painfully reminded on too many occasions, boards have a role beyond being viewed as a riddle or the perennial focus of ridicule.
They are the governing authority elected by company owners to operate in their interests and according to the customs and standards of society. They are generally paid handsomely to perform their tasks, and when they fail, the consequences, in personal and financial terms, have been devastating. The only option, therefore, is for regulators and the investing public to demand that boards be placed on the front line of accountability and not be allowed to slip away from scrutiny like some escape artist in a circus act.