Catch and release, board of directors edition

April 20, 2012

In 1996, Richard Parsons joined the board of directors of Citicorp. Two years later, in 1998, Citicorp’s board approved its merger with Travelers – a merger that was illegal at the time, since it violated the Glass-Steagall Act. But no matter, in 1999, the Glass-Steagall Act was repealed, allowing the creation of Citigroup to go through unimpeded. There was no indication at the time that Parsons objected at all to the way that the law was changed to allow the creation of a financial services behemoth.

Parsons remained on the Citigroup board until three days ago, when he stepped down as chairman. And now he is publicly casting doubt on the wisdom of repealing Glass-Steagall:

“To some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall,” Parsons, 64, said during a question-and-answer session. “Have we gotten our arms around it yet? I don’t think so because the financial-services sector moves so fast.”

Parsons’s role as a passive director – even as his institution oversaw the evaporation of hundreds of billions of dollar in value during the financial crisis – is hardly unique: Citi is far from the only financial firm with a captured board and weak oversight. Earlier this week the re-election of Goldman Sachs Director James Johnson was opposed by Ruane, Cunniff & Goldfarb, the managers of the Sequoia Fund.

Parsons’s 2012 pay of $75,000 in cash and $150,000 in stock isn’t close to Johnson’s outrageous $523,000. Still, it’s hard not to wonder how much earlier Parsons might have come to his regulatory epiphany had Citi paid him $50,000 to $80,000 a year or had he not already been wealthy on arrival, as Felix suggested:

If board members get rich, it should be from the appreciation of the shares they buy, rather than from money they’re paid to turn up to board meetings. Management has a strong incentive to put already very rich people on its board: they’re inured to large sums of money, and are therefore much less likely to blink at compensation packages which can reach well into the eight-figure range. So let’s hire directors for whom an extra $50,000 will actually make a noticeable difference to their annual income.

As galling as Parsons’s about-face is, it’s weirdly heartening to know that even after almost two decades of being captured, once released, Parsons changed his tune. Maybe, if we change directors’ incentives, they might start speaking their mind when doing so can make a difference.

Note: this is an excerpt of the full Counterparties email, which is available here.

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