Jr. | The Finlay Centre for Corporate & Public Governance

Question for Lehman Brothers Board: Why Are You Still There?

This was a board that took a leisurely approach to overseeing the risk decisions and standards that led to billions in losses and write-downs, was content with a governance structure that concentrated power effectively in the hands of the CEO and sees no need for change at the top. And shareholders actually paid the directors for this performance.

Underperforming assets come in more than just numbers at Lehman Brothers. They are a substantial part of its boardroom, as well. Company chairman and CEO Richard S. Fuld, Jr. and President and Chief Operating Officer Joseph M. Gregory made more than $60 million in compensation between them in 2007 according to the most recently reported figures. And despite announcing in April, at the annual meeting, that “the worst of the impact of the financial markets is behind us,” Mr. Fuld presided over a stunning and unexpected loss of $2.8 billion for the second quarter. So far, Lehman’s write-downs exceed $11 billion.

So what exactly has Lehman been doing? For one thing, it decided -rather inexplicably, given the attendant circumstances involving the Bear Stearns collapse- to buy $2 billion in residential mortgages made to less than top credit borrowers. Lehman CFO Erin Callan called the deal a “great opportunity” on March 18th. (The Wall Street Journal reported on March 17th that JPMorgan Chase had agreed to buy Bear Stearns with Fed backing.) But the move executives prided themselves on in March turned out to be rather sour by June. The company took an additional $2 billion in write-downs involving residential mortgages, mostly in the Alt-A “space,” as Ms. Callan prefers to call it. This is the same Ms. Callan who announced in March that the investment bank was raising $3 billion in fresh capital but that it was “not really needed” to deal with write-downs or losses. It was a spin produced by an aggressive new CFO in the hope of bolstering confidence. Now it looks more like a silly stunt that reveals a company that didn’t know what was happening around it.

You might ask how, during a time of market turmoil in March that required an unprecedented level of intervention by the Fed (which it testified before Congress was necessary to avoid a total meltdown of the financial system) is it possible that Lehman would have taken on more risk in the form of these Alt-A loans? Would not a strong dose of conservative, risk averse medicine have been more appropriate?

For these answers we turn to Lehman’s boardroom, where we find the troubling fingerprints of dubious corporate governance, as we have so often in the worst Wall Street crisis since the Great Depression. It is a board that was pretty much hand-picked by Mr. Fuld, who has been Lehman’s chair since 1994. Only three directors have been appointed in the 21st century.

It is also a board that appears content to leave all the top jobs to -what a surprise- Mr. Fuld, who serves as company CEO, board chair, and chairman of the powerful two-man executive committee. The other member is independent director John D. Macomber, who is 80 years old. The executive committee met 16 times in 2007, more often than the board itself or any other committee. Executive committees, which both defunct Bear Stearns and deceased Hollinger also operated, are considered relics of the past and are not well embraced by most modern corporate governance experts. Best corporate governance practices also call for separation of the positions of CEO and board chair, with an independent director filling the latter post.

You would probably think that in a company where the effective management of risk is such an important determinant of success -or the lack of it- the board’s risk and finance committee would be quite active. That expectation is all the more heightened given that 2007 was a time of increasing worry about the quality of assets and risks in the financial industry. So it is with a sense of bewilderment that we discover Lehman’s finance and risk committee, headed by 80-year-old Henry Kaufman, met on only two occasions during that year. It’s a little reminiscent of Bear Stearns’s board committee of a similar name and mandate, which also met just twice in 2007. We know how that turned out.

Directors at Lehman Brothers were paid well for their services in fees that range from a low of $325,000 to a high of $397,000. Directors also sit on the boards of other publicly traded companies and numerous public institutions on top of their duties to Lehman shareholders. Marsha Johnson Evans serves as a director of Weight Watchers International, Huntsman Corporation and Office Depot, as well as chairman of Lehman’s nominating and governance committee and a member of both the compensation committee and the finance and risk committee. Roland A. Hernandez serves as a director of MGM Mirage, The Ryland Group, Vail Resorts and Wal-Mart Stores, in addition to Lehman. He is also sits on advisory boards for Harvard University’s David Rockefeller Center for Latin American Studies and Harvard Law School, as well as the board of Yale University’s President’s Council on International Activities. He, too, is a member of Lehman’s less than overworked finance and risk committee. Mr. Fuld also has other pressing duties. As we reported before, he is a director of the Federal Reserve of New York, which played a leading role in the great Bear Stearns bailout, a move, as we noted above, that is claimed (by its architects and supporters) to have saved the world’s entire financial system from collapse.

Lehman is a company that took on added risk when everyone else was fleeing from it, raised capital which it claimed it did not need, and lost more money than it, or others, ever expected. On such occasions it is traditional to ask why the CEO, and perhaps other top managers who were responsible for these decisions, are still at their desks. Many at other companies have been booted out. CEOs at Merrill Lynch, Citigroup and UBS come to mind. Accountability at Lehman seems to have no real consequence or manifestation.

This was a board where most of the directors have been around since the firm’s initial public offering in 1994, which took a leisurely approach to overseeing the risk decisions and standards that led to its recent blunder, and was content with a governance structure that concentrated power effectively in the hands of the CEO. It apparently sees no need for a change in its own governance, or that of top management either. It took a bet that its approach would work and it lost big time in the form of billions in losses and write-downs, diluted share value (because of added capital offerings) and a plunge in the price of its stock.

So the real question is: Why are these underperforming assets, also known as Lehman’s directors, still in the boardroom?

Remembering Dr. Martin Luther King, Jr.

The Dream Still Lives

Forty years ago today, the world lost a transformative -and for generations then and to come- inspiring figure. Although Dr. Martin Luther King, Jr., was killed on that April evening in Memphis long ago, his dream could not be. It is the birthright of every man and woman, regardless of the color of their skin or the religion they follow, to be treated with fairness, dignity and respect. And it is the obligation of each generation to ensure that principle is never forgotten. This was the teaching of a man who believed in change, but also in peace. Coincidentally, his teachings came at a time of another distant war that divided America, Vietnam, and during a period of economic unease and growing income disparity which Dr. King eloquently opposed.

A milestone of a very different kind was also observed recently: the 75th anniversary of the Reichstag’s passage on March 23, 1933 of the infamous Enabling Act, which set the stage for Hitler’s absolute grip on power. What is often overlooked is that he came to his autocratic perch through democratic means in free elections held months before.

For Germany, Hitler was a turning point toward a dark and evil future that would consume much of the world. For America, and for lands beyond not even born when he was alive, Dr. King served as a turning point toward a brighter path where men and women would be measured by the “content of their character.” One leader was driven by hatred and intolerance. The other was called by a devotion to peace and the cause of bringing people together so that we may all fulfill our God given potential.

What a difference leaders can make in the destinies of people and nations. The best of them summon hopes in us that we could never dream by ourselves. The best teach us that we can be greater than we ever thought and give us the courage to venture into the winds of injustice or strive to make a better home. And when they leave us, after the tears and memories have finally faded, they leave us still with the dream. And we go into the light of day to change the world, one generation after another, one dreamer at a time.

William F. Buckley, Jr. | 1925 – 2008

He was in many ways like the gifted founders of the American republic itself. A man of prodigious intellect and Jeffersonian wide talents, he saw in the state always something of a looming threat.

It may be a sign of growing wisdom or just advancing age, but I get a little sad to see the passing of icons -even the ones with whom I have often disagreed. Bill Buckley died today at his home in Connecticut. He was 82.

He was in many ways like the gifted founders of the American republic itself. A man of prodigious intellect and Jeffersonian wide talents, he saw in the state always something of a looming threat. He had little patience for the Great Society vision of more contemporary government. One thinks he would have been happiest if Alexander Hamilton had become president and the size of government remained pretty much constant from that point forward. There are days, when I can see some merit in that myself.

We were of different thoughts on many things, but at least on the issue of individual privacy and the need to keep a solid check on the intrusive powers of government, which are too often prone to be exercised at the whim of petty bureaucrats and small-minded officials, we shared similar views. He was a great believer in the free market, but not so much that he did not find current levels of CEO pay to be rather revolting and injurious to the continued health of modern capitalism. That made Bill Buckley a pretty wise fellow in my book, as did his determination to resist fleeing to that false island of intellectual illustriousness: the practice of law. His debating skills were remarkable, not just for the positions he took and his ability to advance them with unassailable logic, but for the flash of his eyes and a personality that gave them infectious energy. You have to be a pretty good act to cause teenagers and their parents to stop and watch your television show on Sunday afternoons. Millions did. It was always mandatory at our home.

And who can forget that now grainy and distant scene when Bill Buckley and Gore Vidal almost came to blows on ABC during coverage of the 1968 Democratic National Convention? I think my father found the spectacle of what he called two geniuses acting like morons to be one of the funniest things he had ever seen on television.

As one gets older, one finds uniqueness in the human spirit among the more memorable discoveries in life. Bill Buckley was a gifted author, sailor and musician. His sartorial abilities were somewhat less advanced, however. He often looked like he was auditioning for some kind of new reality show called “How Many Plaids and Checks Can You Wear?” He also had an ability to write novels, which he did on some 12 occasions. He relaxed by playing the harpsichord. How many people who have lived into the 21st century do you think you will ever hear that about?

William F. Buckley, Jr. was an original. There are too few of them at the best of times, which leaves the world more diminished when they are gone. Blackford Oakes will be going under cover for a while. I wonder if we will see his likes, or those of his alter ego, ever again.