U.S. bank boards escape post-crisis clear-out

April 7, 2011

By Jeffrey Goldfarb
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Apparently, U.S. banks don’t think their boardrooms were the problem. That’s the obvious interpretation when so little has shifted among them since before the crisis. Many directors clearly lacked the educational or work backgrounds needed to understand the derivatives and other complex products whose risks eventually overtook their institutions. Worse, they forgot or never learned the many lessons of past bubbles and manias. Yet industry knowledge on bank boards is no more extensive today than it was four years ago.

At a group of nine big U.S. banks that includes Goldman Sachs and Wells Fargo, only about one of every seven non-executive directors has any financial expertise — roughly the same percentage as in 2007, according to research conducted by Nestor Advisors at the request of Reuters Breakingviews. That compares to nearly one in three at a comparable sampling of large European banks, where the level of industry knowledge has increased since the crisis struck.

Of course, financial experience doesn’t guarantee independent judgment or, crucially, the willingness to keep asking tough questions. But not much else has changed on bank boards, either. They are no smaller and their directors no less entrenched now than before the crisis. That’s partly because of the 131 directors at the nine firms surveyed — all of which took bailout funds from American taxpayers — two-thirds are the exact same individuals. Only Bank of America and Citigroup conducted significant overhauls.

Of course, there’s no one-size-fits-all approach to structuring a board. But 13 members, the median among the banks in the sample, both pre and post-crisis, is probably too many to foster individual accountability or decisive action. With a median tenure of nine years at the start of 2011 — the same as in 2007 — there are surely instances of capture, the kind evidenced by the inexplicable bonus hikes just awarded by Goldman directors to the firm’s top brass. And while a diversity of backgrounds and views is to be encouraged, it shouldn’t come at the expense of a core of experience in the firm’s primary business.

Reasonable minds will disagree about whether the significant reforms in practices and regulation forced on banks will prevent another shock. But it’s hard to argue that corporate governance at big U.S. banks has yet changed enough to make any difference at all.

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