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?
A UBS commercial asks if the company could be “the most powerful two-person financial firm in the world.” With a total of $38 billion in subprime related write-downs, and a Q1 loss of $11 billion reported today, it seems to be headed in that direction. It also plans to cut some 5,500 jobs.
The sheer magnitude of the bad decisions that would have put so much money at risk almost defies comprehension, especially for an institution like UBS that prides itself as a money manager for the very wealthy.
We are told, as we have been in every year since the Enron scandals, that director compensation has risen across the board. It is up by 12 percent over last year. The reason, so they say, is the increased work load in the wake of Sarbanes-Oxley. There have been regular stories since the passage of the first U.S. securities laws in 1933 and 1934 that boards are working harder than ever. One scholarly commentator remarked in the 1930s that “the weight of the New Deal” appears to have fallen on the board of directors. There has never been a time when boards have admitted that they could be doing more for investors. But they always claim they are working so much harder than they did before. And they demand more money. Yet for all that extra work, the world is facing its worst credit crisis since the Great Depression and a scale of losses unimagined even in that bleak period. The financial sector has posted more than $300 billion in mortgage-related losses and write-downs since the beginning of the subprime crisis.
Firms in the financial sector, like UBS, claim to have superior listening powers and ways of understanding the market that give added value to investors and customers. With the costly underperformance of so many of these institutions, much of which we have attributed to a failure of corporate governance, a more credible demonstration that boards truly value their investors would be to start giving back some of their fees, not adding insult to injury by demanding more money for the privilege of presiding over more losses.
Care about risk was not permitted to intrude upon the holiday from reality many boards chose to take in the years leading up to their subprime cataclysm, which is why the credit crisis of 2008 can be traced to a complete failure of corporate governance.
There is a common theme emerging from the subprime debacle as it relates to the banking industry: risk was not respected. A recent internal UBS report found that the bank’s approach to risk was “insufficiently robust” and that the oversight of investment banking “lacked effectiveness.” UBS has written off over $37 billion in connection with subprime shortcomings, more than any other bank. We noted earlier that the board of Bear Stearns, whose mishandling of risk nearly brought down the whole financial system, according to U.S. government officials, did not establish a risk committee until early 2007. It met only twice in all of that year. John Thain, who succeeded Stanley O’Neal as CEO after Merrill Lynch posted the largest losses in its history, said the risk committee there did not function. A failure to treat risk with the care it deserves was also central to Société Générale, where the bank lost more than $7 billion as a result of unauthorized trades by a mid-level employee.
After Enron and other scandals, legislators in the United States concluded that boards needed to take the “surprise factor” out of financial reporting and assume greater responsibility for the prudent supervision of their companies. Section 404 of the Sarbanes-Oxley Act of 2002 sets out the expectations of cautious boards and top management in their handling of risk and the safeguarding of financial controls. It was not long ago that officials in the Bush Administration and in the business community were seeking to ease Section 404 requirements. SOX went too far, they suggested, and it was hobbling the ability of American business to compete. The irony is that at the very same time these players were claiming SOX was too onerous, they were failing to monitor risk to such an extent that it would lead to the worst credit meltdown and largest write-downs and losses in modern corporate history. Millions of ordinary Americans, as well as stakeholders elsewhere, would be dramatically impacted by the recession-causing missteps that were taken by some of the most revered names in banking.
What is becoming more apparent is that directors and top management, all very well paid, were living in a fantasy land where they acted as though the era of soaring fees and uninterrupted success would continue indefinitely. They chose to see only what they wanted and never contemplated the prospect that reality might hold a more dismal scenario. It was a time of deafening party making where the voices of reason and prudence, if they were invited to the occasion at all, were completely drowned out in the giddy bonus-popping euphoria of the modern Gilded Age’s newest members. Care about risk was not permitted to intrude upon the holiday from reality many boards chose to take on Wall Street and elsewhere in the years leading up to the subprime cataclysm. Like the Enron-type upheavals and accounting frauds that produced the most comprehensive reforms in securities law since the 1930s, the subprime debacle reveals serious shortcomings in boardroom culture and in the way directors are supposed to work.
Simply put, the credit crisis of 2008 can be traced to a complete failure of corporate governance. Others contributed speaking (or non-speaking, as the case may be) parts to the calamity, including sleeping regulators and conflicted rating agencies. But it was the boardroom that played the leading role in this unsettling drama, where the consequences when directors fail to direct were reprised in high definition, even while the scandals of the past were fresh in their minds.
It was a time of excess at every level of the corporate enterprise -except in sound thinking and common sense in the oversight of risk, in vision for looming hazards, and in CEO compensation tied to reason instead of the unsustainable illusion of growing subprime fees. Once again, the safeguards and governance tools that could have protected these companies -and, ultimately, the health of the financial system- from what is fast becoming the worst economic crisis since the Great Depression were the Rodney Dangerfield of the modern banking boardroom.
They just didn’t get any respect.
From the April 1st news ticker: UBS…global wealth managers…announces $19 billion write-down…bringing total write-downs to $33 billion since October 2007…changing business to global wealth destroyers…more impressive track record plus lots of core experience. After all, any business can lose a few million now and then. It takes a special talent to lose $33 billion in less than six months.
