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?