The federal government seems to think that many of the directors on the Bank of America (BAC) board are not qualified to serve. To solve that problem, the bank is being encouraged to find new directors who have more experience in bank operations.
Once the Treasury can successfully push for financial firm changes at the board level, the company making the changes is hardly independent.
According to The Wall Street Journal, “Within the bank, some see the request by federal regulators concerning the bank’s board as part of the normal give-and-take between banks and regulators.” That is hardly the case. The board is responsible for, among other things, deciding the fate of the CEO, setting management compensation, and overseeing risk management.
The part of the governance burden involving risk management may be the key to pressure the Treasury and the Fed are bringing to bear at Bank of America and Citigroup (C). It has become clear that the boards at both firms were negligent in aggressively questioning the composition of the banks’ balance sheets and probing how critical decisions on buying and selling asset were made.
While the most obvious reason for forcing new board members into the large banks may be to encourage replacing their CEOs, that may not be the main reason. If the government does not have the time and personnel to constantly examine balance sheet risk or wants the perception that it is not meddling in the affairs of public companies, finding directors with extensive financial firm management may accomplish the goal of having de facto examiners in each institution.
Douglas A. McIntyre