Bank governance datapoint of the day

May 20, 2009

David Reilly reckons we should have bankers overseeing banks:

Only about 15 percent of directors have banking experience at the 10 largest U.S. commercial banks by assets, according to my own analysis. Include directors with investing, accounting, insurance or real estate backgrounds and the rate creeps up to only 33 percent…

Bank directors also include academics, politicians, retired military officers and heads of nonprofit groups such as the Pennsylvania Horticultural Society. There are more of these folks than non-executive directors with banking experience at the banks I examined.

This is startling, and I’d be inclined to agree with him — if he did a bit more empirical work. Looking at the percentage of directors with banking experience is just step one; the second step is to see if there’s any correlation between the number of directors with banking experience, on the one hand, and the performance of the bank, on the other. Reilly writes:

To understand what might sink a bank, directors needed a grasp of instruments like collateralized debt obligations and off- balance-sheet entities like conduits or structured investment vehicles…

Boards with more investing, finance and accounting experience may be better positioned to deal with today’s quickly evolving financial industry.

Or, they may not: bankers have proven themselves, over the past couple of years, to be just as oblivious as everybody else when it comes to complex products and systemic risks.

So let’s do a bit of homework here, and see whether banks with boards with lots of financial experience are less likely to lose money, or less likely to blow up, than banks with few such board members. Then we can start pushing them to make changes, starting with the chairman of BofA.


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