Yes, Bank Boards Are Lousy. And Who's To Blame For That?
In a Wall Street Journal op-ed about financial industry failures, former Fidelity Investments head Robert Pozen draws a conclusion about banks' boards of directors: they're not very good.
You think?
Pozen makes the well-established points that boards should be smaller and that directors should have relevant expertise. The diagnosis is fine, if nothing new. But his recommendations for some vague assistance from regulators and "activist investors" reminds me of the Aesop fable: Who will bell the cat?
When business types say the answer is government regulation and Carl Icahn, you know they can't be serious. What I want to hear from Pozen is how Fidelity and other big investors in bank stocks can make a difference, in ways the government and raiders can't or won't. For example:
- What could Pozen have done about bank boards when he was vice chairman of Fidelity Investments and president of Fidelity Management & Research Company?
- Why do institutional investors enable banks in maintaining the over-sized and under-qualified boards Pozen describes?
- Under his watch, how often did Fidelity vote against against the board candidates nominated by banks in which it invested? Or ask nominating committees to reduce the size of a board or look for directors with the necessary financial expertise?
- Why doesn't Pozen, now emeritus at Fidelity and a lecturer at Harvard Business School, call on Fidelity and other institutions to do better?
- How should Fidelity -- or Citigroup or JP Morgan Chase or any of the others -- handle conflicts of interest when they vote as shareholders in bank companies that are also clients or prospective clients?
It's indisputable: As long as management picks the directors, there is no such thing as independence and no incentive to populate boards with the kind of vitally engaged and able directors Pozen recommends.
Reformer or accomplice?
Pozen could make a significant and meaningful contribution to this debate by focusing on the failures of institutional investors like Fidelity to exercise their rights as investors and to push back on regulatory obstacles that make it harder for investors to hire good directors and boot the bad. The proxy access provision in the financial reform act was a good start, but the Chamber of Commerce and Business Roundtable, who have no interest in any kind of market test, have tied up its implementation indefinitely with litigation.
Fidelity and its peers should support proxy access in court and before Congress. Until it is implemented, they should vote against directors who refuse to make obvious and important changes: tie pay to performance; insist on clear, prompt, and informative financial reports; ensure compliance and risk management. They should vote no on the upcoming advisory "say on pay" proposals for any compensation plan that fails to include clearly stated performance goals and meaningful clawbacks -- and for compensation committee members that approved them. They should write to board nominating committees to ask them to do better -- they could even enclose Pozen's piece.
And they should make sure they never again act as "accomplices" in the game of overcompensation by automatic votes in favor of compensation that's clearly contrary to shareholder interests. Most important, before they tell us how to fix some other entity's failings, they should take some big steps to fix their own.
Nell Minow, dubbed "queen of good corporate governance" by BusinessWeek, is a member of the board of GovernanceMetrics International (formerly The Corporate Library, which she co-founded).
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