Monday, October 20, 2008

Leadership missing in Action at Financial Companies- Part I

Every public company has different Board committees to provide oversight and expertise over a critical area of business. Board Committees should ideally consist of members who are subject matter experts. Ideally, they should also be members from outside the company so that there is that element of independent advice.

In order to define their scope of work and responsibility, every committee should have a charter, which is like a mission statement of the committee- the ‘laundry list’ of things to do.

Look at the table (above) carefully. It depicts a few major financial institutions and the status of key non financial factors that could be considered critical to the long term success of the company.

In this part, I have taken the first factor and analyzed these companies for the presence of the Asset Quality Committee.

For a financial company, in the current scenario, Assets would include those assets backed by sub prime mortgages. This should give you an idea of the critical nature of this committee and we also know now, that oversight over such assets is a key factor to the on going viability of a financial company.

The thing that strikes me the most peculiar is that only 1 out these 5 companies even has an Asset Quality Committee.

As per Bank of America’s Asset Quality Committee charter, the purpose of such an Asset Quality Committee has been, among other duties, to provide oversight of credit risks to the Company’s assets and related earnings.

Even having such a committee is not enough…it needs to be ‘manned’ by members with relevant experience. Look at the details of the committee members at Bank of America:

There are 4 members of this committee. Out of these 4 members:

1. One is a Publisher and Chief Executive Officer, La Opinion, Los Angeles, California, the largest Spanish-language newspaper in the United States. From the bio of this member, she appears to have more media related experience.

2. The second member is a former chairman and CEO emeritus of Lowes (home improvement retailer.)

3. Third member is retired chairman/CEO Computer Generation Inc. This is the chairman of the committee. He gets $20,000 p.a. in addition to other Director remuneration for serving as the chairman of the Asset Quality committee.

The charter for the Asset Quality Committee needs members, among other things, to “approve credit risk policies and management disciplines as required by the Basel II accord”.

From the members listed above, how many of these members do you think would have any experience related to Basel II? Basel II is an extremely financial industry specific requirement for companies. 3 out of 4 members of this committee do not belong to a financial company or appear to have a financial background. .. Worth thinking over? You bet. Even when a company hires salaried employees, they would look for candidates with ‘relevant work experience’.

Here is the charter.


If you see the kind of oversight that it requires from its members, you will see a clear disparity in the requirements of this charter and the qualifications of the members on this committee. It kind of makes you wonder what was the Corporate Governance Board committee of Bank of America thinking when it nominated these members?

And don’t forget the other observation from this table….the Asset Quality Committee does not even exist for 4 out of these 5 companies.

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