James Cayne | The Finlay Centre for Corporate & Public Governance

Still Searching for Signs of Life on the Bear Stearns Board

Corporate governance at the failed Wall Street giant had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. Finally, Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.

Former Bear Stearns CEO James Cayne will be making a rare public appearance this week when he testifies before the Financial Crisis Inquiry Commission. Other top executives from the once thriving firm that was a fixture on Wall Street for nearly a century will be giving evidence as well. It will be an ideal opportunity for the Commission to explore the role that questionable corporate governance practices played in Bear Stearns’s failure. We set out our views on that subject in a two-part posting called “Did Bear Stearns Really Have a Board?” in early 2008. They can be viewed here and here. They remain among our most widely-read columns even today. Our comments were quoted in The New York Times reviewed book “Money for Nothing” by John Gillespie and David Zweig.

Corporate governance at Bear Stearns had all the hallmarks of a disengaged boardroom stacked with cronies and dominated by insiders. The most strenuous task of the all-male board seemed to be lifting the rubber stamp embossed with “yes” for gigantic bonuses and anything else management wanted. Only at the very end did the directors even faintly awaken to their duties, after the sudden shock of seeing that no one was at the controls of the engine that was speeding toward catastrophe and realizing that it was too late to retreat to the heavily curtained sleeping car where they long resided.

As we said back in March 2008:

Dig deeper though and you will find a dysfunctional board, overstretched independent directors and an executive chairman whose approach to his duties is novel, to say the least. The first thing that hits you about this Wall Street icon is that it is governed by men. Only men. It was like that at its inception in 1923; it remains a men’s club in 2008. Three of its 12-member board are insiders, as is the executive chairman, James Cayne. (There were actually four insiders until Warren J. Spector, the firm’s president and co-chief operating officer, resigned last fall over the collapse of Bear’s hedge funds.) Best corporate governance practices generally prefer management limited to one or two seats at most. The insider problem in Bear’s boardroom is even more pronounced where all the heavy lifting is done: the company’s executive committee. Composed entirely of the top insiders of the investment bank, company filings confirm that in 2006 (the most recent figures available) the executive committee met on 115 occasions. By contrast, the full board met only six times.

We concluded by suggesting exactly the type of inquiry that is occurring under the Congressional appointed commission headed by Phil Angelides

When such an important financial institution begins to crumble so quickly, leaving the capital markets in turmoil and requiring the intervention of the highest echelons of the federal government, Congress needs to ask some pointed questions. It should start with the Bear Stearns board.

Finally, a window of Congress can shed some light on where the board was at Bear Stearns — or if it existed at all.

Cayne and Greenberg: Two Peas in a Very Dysfunctional Bear Stearns Boardroom Pod

Much as we have long faulted James Cayne for his role in Bear’s implosion, responsibility for its ultimate failure is born by many actors, including the long-time head of its executive committee, Alan Greenberg. It proves once again that boards must actually direct. In Bear’s case, there is scant evidence that its independent directors were even in the room, much less grasped the pivitol role the firm played in the health of the entire financial system.

So now the titans of Bear Stearns itself are weighing in on who is to blame for the blunders that led to the firm’s collapse. The New York Times reports on Wednesday that Alan C. Greenberg, chairman of Bear’s executive committee, had some harsh words about former CEO and board chairman James E. Cayne. And the issue of corporate governance has been raised for the first time by the newspaper as a contributing factor in Bear’s downfall. It might be the first for The Times, but as loyal readers will know -and they actually include a number of Bear’s own employees- Finlay ON Governance was the first to bring to public attention the role of that firm’s dysfunctional and over- extended board of directors.

The Times notes:

The demise of the firm they loved was not so much the fault of either man. Instead, it was a collective failure of the governing five-man executive committee that over the years became so fixated on increasing the firm’s book value – and expecting the stock price to follow – that it lost sight of the concentrated, underhedged exposure to the home mortgage market that left Bear vulnerable.

Actually, The Times is not quite on top of the story. There were problems with the executive committee and the fact that it did so much of the heavy lifting in the firm -to the exclusion of any independent director. But the ultimate responsibility for permitting that situation rests with the full board of directors, which Mr. Cayne chaired and on which Mr. Greenberg served for decades. As we have observed before, there is little to suggest that any of the directors in the all male, management-dominated Bear boardroom were bothered by its governance structure or the bizarre antics of its chairman.

As The Times reveals:

One member of the executive committee said that Mr. Greenberg, as a longtime director, had ample opportunity to voice concerns about Bear’s vast exposure to subprime mortgages and its hedging strategies, which he did not do.
“He never said a word,” said this person, who declined to be identified because of the legal sensitivities in the matter.

The company’s independent directors were not exactly breaking sound barriers in voicing their concerns, either. In fact, one has to wonder if they were even in the room.

The company had independent directors on paper, to be sure, but they displayed a curious sense of their roles and what passed in their eyes for acceptable corporate governance in a firm that apparently was so consequential to the capital markets that its collapse could have precipitated an upheaval of the entire global financial system, as we have been told. Many Bear directors served on multiple boards involving other publicly traded companies. They did not establish a risk committee of the board until March of 2007 and it met only twice that year. There is the issue of the over-extension of its audit committee members (which we first revealed here). And like every major player that ran into serious trouble over the subprime meltdown, from Countrywide and Merrill Lynch to Citigroup and UBS, at Bear Stearns the post of board chair was not filled by an independent director but rather a member of top management. For at least two decades, we, and other corporate governance experts, have been urging that the top board position be held by an independent director. By almost every measure, Bear’s directors failed in their most important duty: to ensure the viability and sound reputation of the enterprise entrusted to them. They took many steps along the road in failing that trust.

As much as we have long faulted Mr. Cayne for his role in Bear’s implosion, responsibility for its ultimate failure as a stand alone institution is born by many actors. Mr. Greenberg’s pointing the finger at his former colleague is a little like Conrad Black blaming his Hollinger successors for that company’s dismal plight. As history teaches with predictable repetition, what boards do, or do not do, in supervising the affairs of a company, and whether directors actually direct, makes a difference in the ultimate outcome.

As the story unfolds, we suspect there will be more indications that poor corporate governance was at the heart of this once mighty Wall Street icon’s demise. Offered in further evidence of that proposition is the fact that even though he is at the center of such criticism and cashed out all his Bear Stearns stock, Mr. Cayne remains chairman of the board of directors.

Would The Times or anyone else like to explain that?

Outrage of the Week: Jimmy Cayne Jumps into the Fed-Sponsored Lifeboat

He was, more than anyone, responsible for bringing Bear Stearns to its demise. Already fabulously compensated over many years, he has now been made even wealthier by the American taxpayer.

On a cold April night in 1912, as the ill-fated Titanic was preparing for its unscheduled journey to the bottom of the Atlantic, White Star managing director J. Bruce Ismay pushed himself ahead of the throngs of horrified women and children and stepped into a crowded lifeboat. Though he escaped death on that calamitous occasion, he never overcame the clutches of odium history held him in and became a reviled figure whose spirit lives in infamy. For us, the name Ismay has become synonymous with the class of leader who puts himself first in times of crisis and leaves others to fend for themselves in the cruel seas of betrayal and folly. We have seen many CEOs, like those at Enron, Nortel and Hollinger, do that in recent years.

Our thoughts turned to the Ismay metaphor when we read that James Cayne had liquidated his remaining holdings in Bear Stearns. He netted some $61 million on the sale of 5.7 million shares. Much of the stock was obtained over the years through generous options that allowed him to purchase shares well below their earlier highs. The move sends a clear signal to the market, and to Bear Stearns employees, that Mr. Cayne will not be leading any effort to get a better deal for the company or to save it as a stand-alone entity. An unceremonious end to the 85-year-old institution now seems unavoidable. It was the final act of a leader who was more distinguished in recent months by absence and folly than crisis management and vision. We chronicled his antics earlier on these pages.

For all of the time since 1993 and up until just the past few months, Mr. Cayne was CEO of Bear Stearns. He has been its chairman continuously since 2001. In the past five years alone, he received more than $155 million in salary, bonuses and other compensation. He was, more than anyone, responsible for the colossal misjudgments of the company and for taking the steps that brought it to its demise. And when the alarms were sounding this past summer and earlier this month, he was nowhere to be found. The New York Times reports that he played little role in talks with JPMorgan Chase about how the companies will integrate their operations.

Given what we have seen in the past, we are not surprised that he was the first to bail out big time. Many, particularly those on Wall Street, will point to how much he has lost on the $10 bid for Bear Stearns stock. Mr. Cayne’s rich compensation over the past several years, when he was overseeing the mistakes that created this catastrophe, will no doubt console him somewhat. Many others at the company, who did not play a decisive role in the bad decisions, will not be so fortunate.

The American people helped make Mr. Cayne, who was fabulously compensated, even wealthier. The Fed-orchestrated bailout ensured that his shares would be bought at $10 –instead of nothing. He was happy to step into the lifeboat taxpayers provided him as the company sinks to the bottom and the casualties are still being tallied. Mr. Cayne’s closing performance at Bear Stearns, as with his previous inexplicable lapses, bring discredit to the term leader. They are our choice for the Outrage of the Week.

Did Bear Stearns Really Have a Board? | Part 1

How this 85-year-old icon of Wall Street was governed was also a clue as to how it might fail.

When rumors were circling the company and threatening its survival, it responded by issuing a strong statement denying liquidity problems. The board agreed. But astonishingly, the company disintegrated less than 48 hours later and was quickly valued at only $2 per share in a fire sale to JPMorgan. The board agreed with that number. Then, in yet another stunning twist, just a few days later the company was suddenly valued five times higher by the same suitor and a new price of $10 per share was set. The board agreed with that number, too. In the dust and rubble that cover the collapse of Bear Stearns, much is still unknown and unexplained. But one thing is clear: the fifth largest investment bank in America has been governed by one of the most incurious and acquiescent boards in history. On the other hand, perhaps it has had no real board at all.

On paper it appears that Bear’s board complies with NYSE rules and Sarbanes-Oxley legislation. Dig deeper though and you will find a dysfunctional board, overstretched independent directors and an executive chairman whose approach to his duties is novel, to say the least.The first thing that hits you about this Wall Street icon is that it is governed by men. Only men. It was like that at its inception in 1923; it remains a men’s club in 2008. Three of its 12-member board are insiders, as is the executive chairman, James Cayne. (There were actually four insiders until Warren J. Spector, the firm’s president and co-chief operating officer, resigned last fall over the collapse of Bear’s hedge funds.) Best corporate governance practices generally prefer management limited to one or two seats at most. The insider problem in Bear’s boardroom is even more pronounced where all the heavy lifting is done: the company’s executive committee. Composed entirely of the top insiders of the investment bank, company filings confirm that in 2006 (the most recent figures available) the executive committee met on 115 occasions. By contrast, the full board met only six times.

When the board of a sizeable and complex institution such as Bear Stearns believes it has so little need to meet, it is generally a sign that the company’s corporate governance culture has not evolved to the level that shareholders and the global capital markets require in the 21st century. Another red flag is the existence of a committee of insiders that performs much of the board’s work to the exclusion of any independent director involvement.One of the hallmarks of boards today is the role of independent directors and the extent to which they are actually informed and empowered. When they are left out of the equation, accountability and sound decision-making can be severely compromised. There was an executive committee composed solely of insiders at Hollinger International, for instance. It was headed by Conrad M. Black, who also held a jaded view of modern corporate governance practices. Lord Black of Crossharbour, as he prefers to be called, is now presiding over a small cubicle cell at the Coleman U.S. prison complex in Florida.

It’s not that Bear’s independent directors are underworked, however. They are busy –serving on the boards of other publicly traded corporations. On the all-important seven-member audit committee, three directors hold among them 18 board seats on listed companies. Vincent Tese, the audit committee chairman, serves on the boards of five listed companies in addition to Bear Stearns. Two members of the audit committee, Michael Goldstein and Frederick Salerno, serve on the audit committees of 11 public companies between them. In the Sarbanes-Oxley era which tightened up the role and duties of audit committees, it is rare, and more than a little troubling, to see boards tolerating that level of concurrent responsibility on the part of audit committee members.

Bear Stearns was among the most aggressive risk takers of the top investment banks. Its demise today reflects how poorly that risk was managed. Yet the firm never took a formal approach to its risk oversight responsibilities until a year ago when, on March 22, 2007, the board approved the charter for a finance and risk committee. Prudent directors would have known, given the nature of Bear’s business lines and how intricate its products had become, that a risk committee was called for much earlier. The choice of how Bearn Stearns was governed and how its board was structured to discharge its duties were clearly a decision of its directors and, especially, of James Cayne, who became CEO of the firm in 1993 and has been chairman of the board since 2001.

In my 30 years or so of following, working with and commenting on boards, I have come to learn that the chair of the board sets the tone for how it performs. In searching for clues as to where the board was when the seeds of Bear’s destruction were being sewn, one need look no further than Mr. Cayne. It has often been asserted, in the aftermath of boardroom debacles, that directors were asleep at the wheel. In Mr. Cayne’s case, there is compelling evidence that he was not even on the ship.

When Bear’s mortgage-based hedge funds were collapsing last summer –and there were strong adumbrations of a gathering storm of subprime credit before this– Mr. Cayne was off enjoying a golf and bridge vacation. As we noted previously:

Of course, it is harder to excuse a CEO who is making stupid mistakes or issuing comments that are so at odds with reality that it becomes impossible to have confidence in his sense of vision and judgment. This was the case with Mr. O’Neal’s previous pronouncements that things were looking OK with the subprime situation at Merrill Lynch. And we expect it will also be the case with Bear Stearns’s Jimmy Cayne, who rode out that company’s summer hedge fund storm in the calm of a golfing and bridge tournament vacation and who may yet learn that, in the department of CEO appearance, a corporate crisis always trumps a card game. Others will surely fall before the latest turmoil is quelled and the surprise-o-meter is likely to get quite a workout when all is said and done.

The first losses in Bear’s history soon followed Mr. Cayne’s summer shenanigans. A few months later he gave up the CEO slot while remaining executive chairman of the board. They were not the only hits the above noted surprise-o-meter took, as predicted.

But in an astonishing encore of his now infamous disappearing act, Mr. Cayne was at a bridge tournament in Detroit while the investment bank was facing its deepest crisis ever. This he chose to do even while rumors about the company’s liquidity problems were so rampant that it had to put out a press release denying them. So bizarre were Mr. Cayne’s actions that the only equivalent that comes to mind is Nero’s reported fiddling while Rome burned. It is no doubt an approach to a director’s duty of care that has not escaped notice by the shareholders’ bar. There is no record of any independent director having been troubled by Mr. Cayne’s frolics during the past six-month fall of the company. There is no evidence available that the corporate governance committee, whose charter includes “the evaluation of the Board and management,” or the lead director, took any action to replace Mr. Cayne when it was first apparent that he had other priorities besides leading the board during this decisive period.

With a board that seldom meets and has a habit of giving over so much of its authority to an insider-dominated executive committee, and an absentee leader at the helm like James Cayne, one wonders precisely how much due diligence directors did before they signed off on the sale. They sizably undersold the company’s assets, as the recent $10 per share price –five times what the board accepted last week- confirms. Such a dramatic shift over a period of just a few days in what the directors think the company is worth suggests a board that is either being poorly advised or is not entirely focused on its duties. It was an approach to corporate governance in Bear’s boardroom that was consistent with the pattern of shortcomings that brought the firm to the point of crisis and collapse in the first place.

Much of what happened and how it could have been permitted remains a mystery. There were, after all, many lessons from the past that showed the painful consequences of disengaged boards which the chairman and directors of Bear should have committed to memory. But this much is certain: When such an important financial institution begins to crumble so quickly, leaving the capital markets in turmoil and requiring the intervention of the highest echelons of the federal government, Congress needs to ask some pointed questions.

It should start with the Bear Stearns board.

_______________________________

If Bear Stearns had no chairman and no board at all, would the results have been any worse?

Read part 2 of this series.

Outrage of the Week: Leadership Fiddles While Bear Stearns Burns

With absentee leaders like Jimmy Cayne at the top and a corporate governance culture straight out of the 1920s, the surprise is not that Bear Stearns fell into a confidence chasm. The surprise is that calamity did not strike earlier.

When the subprime meltdown was already giving a chilling preview of coming attractions last summer and his company’s mortgage-based hedge funds were collapsing around him, the CEO of this Wall Street icon was off on a bridge and golf vacation. Last week, during a liquidity crisis that saw the near death of the company and the resulting intervention of the Fed that carried with it echoes of the Great Depression, he was at a bridge tournament in Detroit, according to the Wall Street Journal. It is not certain where this long-time investment banking figure is right now, but odds are soon Jimmy Cayne may not have an office or a company to return to.

Last January, when the company posted the first loss in its 84-year history, Mr. Cayne turned over CEO duties to Alan Schwartz. When he’s not away escaping a corporate crisis as executive chairman -a post he has held for seven years- Mr. Cayne presides over the Bear Stearns board. And what a board it is -another one of these all male clubs that acts like a throwback to black and white movies.

The board meets only six times a year, according to company documents. The real work seems to be done by Bear’s executive committee, which in 2006 met a whopping 115 times. All of the directors on the executive committee are management insiders, including Mr. Cayne, making management effectively accountable to itself. Maybe this helps to explain why, despite the lessons of Enron and the risky nature of much of the company’s business, Bear Stearns’s board did not get around to creating a finance and risk committee until January of 2007 and why there has been so much patience with Mr. Cayne’s card-playing antics.

Just a year ago, the firm was boasting that it was well insulated from the subprime fallout. Then the stock was trading around $160. On Friday the stock closed at $30. It lost nearly half its value in just one day. When Rome burned, it is said that Nero fiddled. When Bear Stearns melted down, its one-time emperor played bridge. We will leave it to others to determine whether any smoke was present at the occasion this time.

It is widely asserted, especially on these pages, that what boards do matters. Yet it seems clear that if Bear Stearns had had no board whatever, the results could not have been any worse. One can understand how utterly lacking in effectiveness Bear’s board is when it is being led by an absentee chairman.

Mr. Cayne, who is 74, would have known the crisis his company faced given the extraordinary nature of the press release it issued on March 10th which denied any liquidity problems. Still, even when Wall Street’s fifth largest investment bank was sitting on a precipice later in the week, a bridge game trumped the fight for corporate survival for the firm’s well paid chairman.

As we have said on more than a few occasions, the stratospheric compensation that many boards award CEOs increasingly shows that both directors and top management are living on another planet. Excessive CEO pay has been a leading indicator of disaster in companies that run the gamut from Enron and Computer Associates to Countrywide and Hollinger. Bear Stearns can now be added to this list. Just last year, many commentators were celebrating the genius of Jimmy Cayne and how he deserved every penny of the $34 million he received for 2006 and the $23 million for 2005. You might think that would entitle shareholders to a little more than the calamity that has been unfolding for the past several months. You might also think it would entitle shareholders to a CEO or a board chairman who clocks in during the hours when disaster has decided to pay a visit.

Bear Stearns also makes the case that if investment banks are now able to enjoy the benefit of the Fed’s intervention -and these firms have already shown that their misjudgments are capable of causing enormous turmoil in the capital markets and ultimately in the wider economy, members of the public have a huge stake in what companies do and how well they govern themselves. They also have a major investment in whether board compensation programs reflect a rational level of thinking or whether they reflect a mentality that says the CEO is king and temps them to pursue high paying subprime-like schemes that cannot be sustained.

With absentee leaders like Jimmy Cayne at the top and a corporate governance culture straight out of the 1920s, the surprise is not that Bear Stearns fell on Friday into a confidence chasm from which it may not recover. The surprise is that calamity did not strike earlier. Which makes the failures of the Bear Stearns board and its chairman our choice for the Outrage of the Week.

Better Late than Never: Cayne to Leave Bear Stearns Top Spot

We’ve had a few things to say about Bear Stearns’s CEO James Cayne over the past few months. He also made it into the Finlay ON Governance Year End Awards. He was not a winner. Just earlier today, we suggested that standards were slipping so badly in America’s boardrooms that: (more…)

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