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?