Independent director bank board

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Independent director bank board

  1. 1. INDEPENDENT DIRECTORS ON BANK BOARDS What Is Their Added Value? Name: Renoe Doorga Studentnumber: U1254935 ANR: 504880 Supervisor: Jing Li Professor: E.P.M. Vermeulen
  2. 2. Table of Contents 1. INTRODUCTION 4 2. CORPORATE GOVERNANCE, BANK BOARDS AND THE FINANCIAL CRISIS 6 2.1.WHAT MAKES CORPORATE GOVERNANCE OF BANKS SO SPECIAL? 6 2.2 CORPORATE GOVERNANCE OF BANKS AND THE FINANCIAL CRISIS 7 2.3 BANK BOARDS AND THE FINANCIAL CRISIS 9 2.4. CONCLUSION 11 3. INDEPENDENT DIRECTORS 13 3.1. THE CONCEPT OF INDEPENDENT DIRECTORS 13 3.1.1 ORIGIN AND PURPOSE 13 3.1.2. THE ‘CHECK-THE-BOX’ PARADOX 14 3.2. INDEPENDENT DIRECTORS ON BANK BOARDS 15 3.2.1. INDUSTRY EXPERIENCE 16 3.2.2. INDEPENDENT DIRECTOR BUSYNESS 17 3.2.3. TENURE AND TRUE INDEPENDENCE 18 3.2.4. PROPORTION OF INDEPENDENT DIRECTORS ON BANK BOARDS 19 3.3 CONCLUSION 20 4. CURRENT INDEPENDENT DIRECTORS ON BANK BOARDS 21 4.1. PARAMETERS 21 4.2. US BANKS 22 4.2.1 CURRENT AND RELEVANT EXPERIENCE 22 4.2.2 DIRECTOR BUSYNESS 25 4.2.3. TENURE 28 4.2.4. PROPORTION 29 4.3. EUROPEAN BANKS 30 4.3.1. EXPERIENCE 30 4.3.2. DIRECTOR BUSYNESS 33 4.3.3. TENURE 35 4.3.4. PROPORTION 36 4.4. ARE THERE ANY ‘QUALIFIED’ INDEPENDENT DIRECTORS? 37 4.5. CONCLUSION 38 5. FUTURE OF INDEPENDENT DIRECTORS ON BANK BOARDS: REGULATION VERSUS HUMAN REALITY 40 5.1. REGULATION 40 5.1.1. THE UNITED STATES 40 5.2.2. EUROPE 41 5.1.3. IMPACT OF REGULATION 42 5.2. HUMAN REALITY 44 5.4. CONCLUSION 47 CONCLUSION 48 BIBLIOGRAPHY 50
  3. 3. EXHIBIT A: JP MORGAN & CHASE 56 EXHIBIT B: BANK OF AMERICA 62 EXHIBIT C: CITIGROUP 69 EXHIBIT D: WELLS FARGO 76 EXHIBIT E: GOLDMAN SACHS 83 EXHIBIT F: HSBC HOLDINGS PLC 89 EXHIBIT G: CREDIT AGRICOLE GROUP 95 EXHIBIT H: BNP PARIBAS 99 EXHIBIT I: BARCLAYS PLC 105 EXHIBIT J: ROYAL BANK OF SCOTLAND 109
  4. 4. 4 1. Introduction The recent financial crisis has led to a lot of scrutiny surrounding the banking sector. Blame is put on the bank boards and more specifically on the independent directors sitting on these bank boards. This scrutiny is not unfounded, since independent directors are specifically put in place to ensure good corporate governance practices. Their independence is seen as an asset because they, in theory at least, are able to provide an unbiased opinion in the best interest of the company whenever matters are to be decided. In other words, a director’s independence means that he/she can be trusted to critically examine the decisions made by officers, as opposed to simply rubberstamping those decisions.1 However, the financal crisis and the scrutiny surrounding bank boards, led to doubt regarding this notion of independent directors and their true value. Therefore, the big question arising here is whether these independent directors can acutally play a valuable role on bank boards or if they are just some nice piece of theory. Therefore, I want to research what the added value is of independent directors who currently serve on bank boards. If these directors do not have the ability to add value , it may be time to lose this idea that independent directors are a valuable asset and play a crucial role to ensure good corporate governance practice and find some other corporate governance mechanism that may be more valueable. For independent directors to be valueable they should not only be focused on monitoring management, but they should also have the ability to actively engage in banking business. It is recognized that in the past independent directors were selected in a way that left their qualifications or suitability only of secondary importance.2 Because of this, I choose to look at the value of independent directors from another point of view. To determine whether independent directors add value on the bank board, I deem it important to look at several controversies (quilifcations) surrounding the notion of independent directors to determine if they are suitable to be part of the bank board in question. In my thesis I will look at whether the independent directors in question have (1) current and relevant industry experience, (2) time and (3) acceptable tenure. 1 See § 3.1.1. 2 See § 3.1.2
  5. 5. 5 Without current specific expertise it is almost impossible to add value and make valuable contributions, simply because such a directors just does not know the intracacies surrounding the banking bussines. Furthermore, expertise alone is not enough. Someone can have all the expertise in the world but if he/she does not have the time to actually apply this expertise, it will not be of any value. Therefore, it is important to look at the number of commitments each independent directors has. Also, tenure can play a role. When a director has been on the board for a long time, his independence can come into question. Lastly, I will look at whether a high proportion of independent directors on each board adds value. This ultimately depends on the outcome of the previously discussed controversies. Before I discuss the above mentioned controveries in my thesis, I will first discuss the ‘special’ role banks play in our society in chapter 2. Also, in this chapter, the more specific role of corporate governance and the financial crisis will be discussed as well as the more specific part played by bank boards and the independent directors. This will clarify the need for a well function corporate governance system. In Chapter 3 I will discuss the orgin and purpose of independent directors. The current (inadequate) way independent directors are selected will also be discussed. More importantly, the theory surrounding the controveries of independent directors will be set out. In Chapter 4 I will look at the reality of independent directors who currently serve on five bank boards in the US and the EU. In this chapter I will discuss my findings related to the above mentioned controversies. In Chapter 5 I will disucss the regulation measures taken with regard to the independent directors and whether they will actually have the impact they are designed for. Also, the concept of human reality will be disucced because I believe this is an aspect that should not be overlooked. And, finally, I will answer my research question in the conclusion.
  6. 6. 6 2. Corporate Governance, Bank Boards and the Financial Crisis In this chapter I will discuss the general role that corporate governance plays within banks and the financial crisis. To clarify the importance of a well functioning corporate governance system within these financial entities, I will first (shortly) discuss why banks are so ‘special’ within our economy (§ 2.1.). Second, to shed some light on the academic debate whether corporate governance did or did not play a role in the financial crisis, the more general role of corporate governance in the financial crisis will be discussed. (§ 2.2.). Finally, I will discuss the role of the board of directors more extensively with an emphasis on the specific role of the independent directors (§ 2.3.) In § 2.4. I will conclude. 2.1.What makes Corporate Governance of Banks so special? Since the financial crisis, the insight that banks have special corporate governance problems has gained momentum rather quickly.3 The relevance of banks in the economic system and the nature of the banking business make the problems involved in their corporate governance highly specific, as are the mechanisms available to deal with these problems.4 It is this vary nature of the banking business that weakens the traditonal corporate governance institutions of board and shareholder oversight.5 Banks are a key element in the payment system and play a major role in the functioning of the economic system. They are also highly leveraged firms, due mainly to deposits taken from customers. For all these reasons, banks are subject to more intense regulation than other firms, as they are responsible for safeguarding depositors’ rights, guaranteeing the stability of the payment system, and reducing systemic risk.6 Their stakeholders vary more widely than those of other private companies, including not only shareholders but also, and perhaps more significantly, depositors and the general public. This is also recognized by the Basel Princples that state: ‘from a banking perspective, corporate governance involves the allocation of authority and responsibilities (..) including how they (..) protect the interests of depositors, meet shareholder obligations and take into account the interests of other recognized stakeholders’.7 Banks deliberately take and intermediate financial risk to generate revenue and serve their clients, leading to an assymetry of information, less transparency, and a greater ability to obscure existing and developing problems. Because banks have the ability to take on risk very quikcly, in a way that is not immediately visible to directors or outside investors, weak 3 K.J. Hopt, Better Governance of Financial Institutions, Law Working Paper No. 207/2013, ECGI, April 2013, p.c 4 P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008 5 M. Becht, P. Boltin and A. Roell, Why Bank Governance Is Different, Oxford Review of Economic Policy, Volume 27, Number 5, 2011, p. 438 6 P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008 7 M. Becht, P. Boltin and A. Roell, Why Bank Governance Is Different, Oxford Review of Economic Policy, Volume 27, Number 5, 2011, p. 458
  7. 7. 7 internal controls can rapidly cause instability. 8 As a result sound (internal) governance for banks is essential,9 since this is the necessary condition to safeguard both the health of financial intermediaries and the business and economic development of a country.10 2.2 Corporate Governance of Banks and the Financial Crisis Good corporate governance has been a major component of international financial standards and is seen as essential to the stability and integrity of financial systems.11 After the beginning of the financial turbulences in summer 2007, the issue of banks’ corporate governance, with the notable exception of remuneration, went out of focus for some time. In 2008 numerous reports, documents and statements dealing with the causes of the financial crisis did not even mention the corporate governance of banks. But, during the second year of the financial crisis, the issue of banks’ corporate governance has begun to resurface with a vengeance.12 The financial crisis has focused a great deal of scrunity on failures in corporate governance, in particular lax board oversight or risk management and executive compensation packages that encouraged excessive risk taking.13 The global financial crisis has intensified the reflection on the corporate governance of banks both in the context of academic discussions and in policymaking. While there are a multitude of factors that contributed to the financial crisis, some studies suggest that weaknesses of corporate governance may be largely responsible for the excessive risk taking by bankers, the systemic fragility of banks, and the financial instability stemming from it.14 In his report on corporate governance and the latest financial crisis, Kirkpatrick confirmed that the crisis was attributed to failures and weaknesses in corporate governance arrangements15. In this report it is stated that: “(..) the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements. When they (corporate governance arrangements) were put to a test, corporate governance routines did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies.”16 This view is also shared by several scholars. Tarraf points out that, like Kirkpatrick, sponsors of the Shareholder Bill of Rights Act of 2009 argued that a widespread failure of corporate 8 M. Becht, P. Boltin and A. Roell, Why Bank Governance Is Different, Oxford Review of Economic Policy, Volume 27, Number 5, 2011, p. 438 and The World Bank Group, Bank Governance: Lessons from the financial crisis, March 2010, p. 2 9 The World Bank Group, Bank Governance: Lessons from the financial crisis, March 2010, p. 2 10 P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008 11 The World Bank Group, Bank Governance: Lessons from the financial crisis, March 2010, p. 2 12 P.O. Mulbert, Corporate Governance of Banks after the financial crisis – Theory, Evidence, Reforms, Working paper No. 151/2010, ECGI, 2010, p. 7 13 H. Tarrif, , Running head: Corporate Governance and the Recent Financial Crisis, Lawrence Technological University, 2010, p. 6 14 E.M. Dorenbos and A.M. Pacces, Coporate Governance of Banks: Is More Board Independence the Solution, Dovenschmid Quaterly, 2013, p. 2 15 H. Tarrif, Running head: Corporate Governance and the Recent Financial Crisis, Lawrence Technological University, 2010, p. 6-10 and G. Kirkpatrick, The Corporate Governance Lessons from the Financial Crisis, OECD Publication, 2009, p. 2 16 G. Kirkpatrick, The Corporate Governance Lessons from the Financial Crisis, OECD Publication, 2009, p. 2
  8. 8. 8 governance was among the central causes of the financial and economic crises.17 Similarly, Fetisov cited drastic detoriation in corporate governance quality as a main cause of the global financial crisis. He stated that “During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market particpants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due dillegence”.18 Furthermore, Yeoh presented evidence of flawed corporate governance practices adopted at some financial institutions that failed in relation to the crisis. The analysis reveals that, in case of Bears Stearns and Lehman Brothers, bad corporate governance practices were evident in the company.19 But, on the other hand, there are scholars who argue that corporate governance did not play a central role in the recent financial crisis. Moslein, for example, argues that the most important reports, documents and declarations barely mention corporate governance and that the crisis is rooted in the instability of markets. But noted that reform proposals on remuneration and risk management were more specifically related to corporate governance. Also, Moslein further explained that when the OECD mentioned corporate governance as a cause, it did not propose any substantive revision of the current corporate governance principles, although it called for a better implementation and enforcement mechanisms.20 Anwar was also critical of the argument that the financial crisis is a corporate governance problem, labeling it a ‘layman perspective to acknowledge the crisis only as a corporate governance problem’.21 Mulbert argues that even egregious cases of unsound corporate governance practices do not support the claim that major corporate governance failures were one imporant or even the most important cause for the crisis, and, more generally, neither will any number of anecdotal evidence serve as proof. Mulbert goes on by stating that proof of widespread corporate governance failures at banks can only come from emperical studies and that systemic emperical studies, so far, do not provide strong support for the corporate governance failure hypothesis.22 However, this is not to say that internal bank governance failures were irrelevant. In conformity with the Basel Committee on Banking Supervision, the relevant failures were in risk management and internal control, in the profile and practice of directors and senior 17 H. Tarrif, Running head: Corporate Governance and the Recent Financial Crisis, Lawrence Technological University, 2010, p. 6 18 G. Fetisov, Measures to overcome the global financial crisis and establish a stable financial and economic system, Problems of Economic Transition , Volume 52, Issue 5, September 2009, p. 25 and H. Tarrif, Running head: Corporate Governance and the Recent Financial Crisis, Lawrence Technological University, 2010, p. 6 19 P. Yeoh, Causes of the Global Financial Crisis: Learning From the competing insights, International Journal of Disclosure and Governance, 2009, p. 42-69 20 F. Moslein, Contract Governance Within Corporate Governance: A lesson from the global financial crisis, 2009, p. 7-8 21 G.M.J. Anwar, The U.S. Financial Crisis from 2007: Are there Regulatory and Gocvernance Failure?, Journal of Business and Policy Research, Volume 4, Number 1, 2009, p. 27 22 P.O. Mulbert, Corporate Governance of Banks after the financial crisis – Theory, Evidence, Reforms, Working paper No. 151/2010, ECGI, 2010, p. 27
  9. 9. 9 management, in complex and opaque corporate and bank structures, in perverse incentives by the remuneration strcutures then in place and in insufficient disclosure and transparency. The European Banking Authority concedes that these bank governance failures were not a direct trigger for the financial crisis, but considers these practices to be ‘a key contributory factor’.23 Similarly, the European Commission states that ‘although corporate governance did not directly cause the crisis, the lack of effective control mechanisms contributed significantly to exessive risk taking on the part of financial institutions’.24 Winter, on the other hand, takes a more middle ground view on this subject and does not deny nor sees corporate governance as a major factor in the financial crisis. He states that failing corporate governance was probably not one of the decisive factors explaining the financial crisis, but good corporate governance would have helped to mitigate some of its effects and where it was in place it may actually have insulated some financial institutions against the worst consequences of the crisis. Good governance can help to avoid that a company becomes a blind animal in a herd running to destruction, by ensuring there is enough reflective space when it matters to consider the company’s direction, its succes and its vulnerability.25 2.3 Bank Boards and the Financial Crisis When the 2008 financial crisis broke out, corporate boards at rescued institutions took (partly) the blame of the collapse.26 The role of boards as a mechanism for corporate governance of banks takes on a special relevance in a framework of limited competition, intense regulation and higher information assymetries due to the complexity of the banking business.27 In a later statement, the EBA holds ‘weak governance arrangements, in particular inadequate oversight by and challenge from the supervisory function of the management body’ to be among the ‘underlying causes of the financial crisis’.28 There are different views with regard to the question what this role of the bank boards exactly is. In general, these views come down to the idea that a valueable board of directors is a key mechanism to monitor managers’ behavior and act as advisors and function to complement managers by anticipating blind spots and offering advice. It is furthermore recognized that effective governance practices call for a board that is actively engaged (meaning that they provide (effective) oversight, insight, advice and support). And, boards must rise above the technicalities of risk management and ask the big questions going 23 European Banking Authority, EBA Guidelines on Internal Governance (GL 44), 27 September 2011, p. 51 and K.J. Hopt, Better Governance of Financial Institutions, Law Working Paper No. 207/2013, ECGI, 2013, p. 50 24 European Commission, Green Paper: Corporate Governance in Financial Institutions and Remuneration Policies, COM(2010) 285 Final, Brussels, 2010, p. 2 25 J. Winter, The Financial Crisis: Does Good Corporate Governance Matter and How to Achieve it?, DSF Policy Paper, No. 14, August 2011, p. 2 and 8 26 R.C. Pozen, The case for professional boards, Harvard Business Review 15, 2010 27 P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008 28 European Banking Authority, Guidelines on the assessment of the suitability of members of the management body and key function holders, 22 November 2012
  10. 10. 10 forward.29 A valueable board is not only valuebale for its shareholders and stakeholders, but also for the development of an economic system.30 So, it is not ‘just’ an oversight role that these boards, and with that the directors on the board, need to fullfill. They need to be able to actually contribute their knowledge in the banks’ strategy. Eventhough the role of the boards is quite clear, the question remaning is: where was this ‘valueable’ board in/during the financial crisis? The big(gest) issue with bank boards (and with that the directors on the board) is that they are seen as being ‘a sleep at the switch’ during the recent financial crisis.31 This, in turn, raised questions about the effectiveness of board oversight at some large banks, including whether or not boards were compromised of a sufficient number of directors with relevant financial industry experience who could ask the right questions and appropriately challenge management in key areas such as risk management and strategy.32 Board of directors were expected to take a leading role in overseeing risk management structures and policies and implement current corporate governance procedures and guidelines. It is important for directors to take steps to be well informed of their companies’ risk profile, to discuss and evaluate risk scenarios and to satisfy themselves on an ongoing basis as to the adequacy of managements efforts to address material risks.33 The board of directors seem to have failed in this role during the financial crisis.34 A number of academic papers seek to confirm the account that boards not only failed, but failed in a away that contributed to or exacerbated the financial crisis and the resulting losses at banks and in the real economy.35 Similarly, other scholars have noted that boards made poor decisions with respect to compensation, operations and investment at financial institutions.36 Adams, on the other hand, argues that boards of financial firms clearly share some responsibility for the crisis because it was their duty to oversee managers who led their banks to the brink of failure. However, he suggest that it is important to keep several facts in mind when considering potential policy changes. First, while the boards of financial firms 29 See for these different views the following reports/articles: P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008, Nestor Advisors, Bank Boards and The Financial Crisis, Nestor Advisors Publication, 2009, p. 6, and J.F. Castello. S.S. Lightle and B. Baker, The Role of Boards of Directors in the Financial Crisis, The CPA Journal, September 2011, p. 54 30 P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008 31 N.A. O’Hara, Asleep At the Switch? Corporate Boards’ Culpability in the 2008 Financial Crisis, The Journal of the New York Society of Security Analysts, 2009 32 Moody’s Investors Service, Special Comment: Bank Boards in the Aftermath of the Financial Crisis, March 2010, p. 1 33 H. Tariff, The role of corporate governance in the events leading up to the global financial crisis: analysis of agressive risk taking, Global Journal of Business Research, Vol. 5, No.4, 2011, p. 102-103 34 Nestor Advisors, Bank Boards and The Financial Crisis, Nestor Advisors Publication, 2009, p. 6 35 W.G. Ringe, Independent Directors: After the Crisis, Legal Research Paper Series, No. 72/2013, University of Oxford, July 2013, p. 3 and L.L. Dallas, Short-termisms, the Financial Crisis and Corporate Governance, Legal Studies Research Paper, No. 12-078, University of San Diego, School of Law, February 2012, p. 351 36 W.G. Ringe, Independent Directors: After the Crisis, Legal Research Paper Series, No. 72/2013, University of Oxford, July 2013, p. 3-4
  11. 11. 11 should have better information than outsiders, directors are generally not experts in the economy. For this reason it is argued that it seems unreasonable to expect that they should have been better able to predict the problems financial firms would face than academic, regulators and financial analysts. Second, it it still not clear whether regulators substitute or complement board-level governance. It is not hard to imagine that a bank director does not understand all risk implications of particular transactions but agrees to them because he assumes that regulators would identify potential problems.37 While I do understand what the author is trying to say when making this point, I do not agree. It is too easy to shift blame to others, like the regulator, when it was the board that failed to do the job they were hired for. It should be their job to know what is going on within their own company, and therfore it is their own responsibility to see what others can’t. Why else is their a board if they are just going to rely on or hope that somebody else is going to tell them that something is going wrong? The criticism on the board of directors has lead an even deeper criticism on independent directors. Serious concerns have been raised regarding the very relevance of the institution of independent directors or the value of them on the bank boards. While there was compliance with SOX (the Sarbanes-Oxley Act), the institution of independent directors still seems to have failed in the financial crisis. While some focus on the role of independent directors in improving corporate performance some go further to explain their irrelevance from a corporate governance point of view while other are even seriously concerned about the very commitment of independent directors.38 Independent directors play a prominent role in this discussion, since there were already independent directors on the board of banks when the financial crisis hit. These directors are typically associated with less risk taking, and are put on the board because their ‘independence’ might actually be of value. But, despite these independent directors the financial crisis still hit us worldwide and led to huge implications. The need and value of such directors therefore comes into question. This subject will be extensively discussed in chapters 3 and 4. 2.4. Conclusion Banks play a huge role within our economy, as is shown by the recent financial crisis. These financial instutions do not only have to worry about their shareholders, but about all the stakeholders, especially the public. Therefore, the importance for a well functioning corporate governance system and a board becomes that much more important. Many may argue about the big, small or non-existent part corporate governance played in the financial crisis. Despite all these different views about the role of corporate governance 37 R. Adams, Governance and the Financial Crisis, Finance Working Paper No. 248/2009, ECGI, April 2009, p. 14-15 38 S.K.T. Narayanan, Is the Institution of Independent Directors Irrelevat?: A Critical Inquiry Into Why The Institution Has Failed To Lead To Better Corporate Governance, DC School of Management and Technology, 2012, p. 1
  12. 12. 12 in the financial crisis, I believe that, based on the above mentioned academic debate, corporate governance was a contributing factor in the financial crisis. It may not have been the only cause of the crisis, but that does not mean that better corporate governance could not have mitigated some of the huge implications this crisis brought on most people worldwide. A more prominent role in all of this was played by the board of directors. When it comes to the board of directors, they are seen as being responsible for the recent financial crisis or at least played a big role in letting it get so out of hand. It was their job to know what was going on in their own company, and now they seem to have failed in their job. But, an even bigger part of this blame is put on the independent directors. Their independence should have been a valueable asset on the board, because they are supposed to operate independently from other in the bank. A lot of hope is therefore put on these directors to get to the bottom of a banks’ issues. However, failing this special role truly begs the question about their added value on bank boards. The more specific function and controversies surrounding independent directors will be discussed in the next chapter.
  13. 13. 13 3. Independent directors To understand the role and importance of independent directors it is important to go back to the roots of this concept. For this reason I will discuss when and, more importantly, why the concept of independent directors was created and what the purpose is of this concept (§3.1.1) Also, the way independent directors are currently selected will be discussed and the need for a different approach to determine the value of current independent directors on bank boards (§ 3.1.2). To determine the value, the most common controversies surrounding independent directors on bank boards will be dicussed as well as related (available) emperical evidence (§3.2.) This information will be used to determine when independent directors can be preceived as being a valueable asset on the bank boards in the conclusion (§3.3). 3.1. The concept of independent directors 3.1.1 Origin and Purpose The concept of board independence orginated in the United States. Although the idea has always been there, its resurgence into becoming a dominant requirement of good corporate governance is a direct consequence of corporate malfeasance involving directors who are thought not to be independent enough to care about the wellbeing of the firm, like in the case of Enron, Worldcom and so on.39 These collapses led to an enormous amount of commentary concerning the causes, what went wrong and how to fix it. Although many companies that collapse(d) have effective corporate governance structures in place, the close relationship between their board and their advisers is often perceived as a problem that needs to be addressed. ‘Independence’ of directors is considered to be a priority.40 In a similar way, the recent financial crisis re-opened the debate around corporate governance and risk management. Again, independent directors were partly blamed for the major failures of ‘checks and balances’.41 Traditionally, the principle of director independence has been justified by the proper role of boards: to provide effective and unbiased monitoring. As one of the key roles of the board is to monitor the executive management, this task can be carried out best if those who monitor are independent of those who are supervised. At the root, therefore, is a conflict of interest dimension: independence is seen as a coarse pre-condition for ensuring ex-ante that board 39 R.C. Iwu-Egwuonwu, Some Emperical Literature Evidence On The Effects Of Independent Directors On Firm Performance, Journal of Economics and International Finance, Vol. 2(9), September 2010, p. 196 40 S.K.T. Narayanan, Is the Institution of Independent Directors Irrelevat?: A Critical Inquiry Into Why The Institution Has Failed To Lead To Better Corporat Governance, DC School of Management and Technology, 2012, p. 1 and J.M. Convill and M. Bagaric, Why all Directors Should be Shareholders in the Company: The Case Against Independence, Bond Law Review, Vol. 16 (2004), Iss. 2, Art, 2, 2004, p. 40-41 41 W.G. Ringe, Independent Directors: After the Crisis, Legal Research Paper Series, No. 72/2013, University of Oxford, July 2013, p. 2-3
  14. 14. 14 decisions are not tainted by arbitrary considerations.42 The appointment of independent directors is based on the hypothesis that directors, who are totally unconnected with the company of the day-to-day management or its promotors, will be in a better position to improve transparency and accountability and provide an unbiased opinion in the best interest of the company whenever matters are to be decided. In other words, a director’s independence means that he/she can be trusted to critically examine the decisions made by officers, as opposed to simply rubberstamping those decisions.43 Independence has become a crucial issue in determing the composition of any board because a person appointed as the independent director should be able to excercise his/her judgement without being inhibited or prejudiced by the demands of any dominant group in the company or in the management.44 This notion of indepence should furthermore contribute to ‘good corporate governance’, because, ideally these individuals can ask the right questions and be better equipped to challenge management.45 As a result, independent directors have emerged as the cornerstones of the worldwide corporate governance movement. Their increased presence in the boardroom has been hailed as an effective deterrent to fraud and mismanagement, inefficient use of resources, inequality and unaccountability of decisions; and as a harbinger for striking the right balance between individual, economic and social interests.46 3.1.2. The ‘Check-the-Box’ Paradox There is not one clear answer when it comes to the question what the meaning of ‘independence’ is. The definition of independence in most corporate governance codes is exhaustive. To be considered independent a director must have no relationship with any firm in the up-stream or down-stream added-value chains, must not have previously been an employee of the company, nor be a nominee for a shareholder or any other supplier of finance to the company. Indeed, the definition of independence is so strict that an independent director who has served on the board for a long period is often assumed to have become close to the company and is no longer considered independent47 (this will be discussed in §3.2.3). Existing board studies as well as current governance codes classify directors as dependent if they are affiliated, i.e. have past or present business or family relatonships to the firm 48 Herein lays the paradox. The more independent directors are, the less they are likely to know about the company, its business and its industry. Conversely, the more directors know 42 R. Nolan, ‘The Legal Control of Directors’ Conflict of Interest in the United Kingdom: Non-Executive Directors Following the Higgs Report in J. Armour and J. McCahery After Enron: Improving Corporate Law and Modernising Securities Regulation in Europe and the US, Oxford, Hart Publishing, 2006, p. 367 43 L.M. Fairfax, The Uneasy Case of Inside Directors, Iowa Law Review, Volume 96, 2010, p. 139 44 Dr. B.S. Ronald, Independent Directors in the backdrop of Corporate Failurs, Simbiosis Law School, Pune, May 2013, p. 8-9 45 Moody’s Investors Service, Special Comment: Bank Boards in the Aftermath of the Financial Crisis, March 2010, p. 5 46 P. Mittal, The Role of Independent Directors in Corporate Governance, April-June 2011, p. 1 47 B. Tricker, Corporate Governance: Principles, Policies and Practices, Second Edition, Oxford University Press, p. 24 48 O. Bohren and R.O. Strom, Governance and Politics; Regulating Independence and Diversity in the Board Room, Journal of Business Finance and Accounting, 37(9) & 10, November/December 2010, p. 1284
  15. 15. 15 about the company’s business, organization, strategies, markets, competitors, and technologies, the less independent they become. Yet such people are exactly what top management needs to contribute to its strategy, policy making and enterprise risk assessment.49 Independence is often decided based on a ‘check-the-box’ system, however a system of corporate ‘box-ticking’ is not the answer. This was also recognized by Kirkpatrick in his report where he states: ‘(..) the question if independent direcors might have been pushed too far in favour of negative lists and this might have led to qualifications or suitability being only of secondary importance. (..) The issue is not just independence and objectivity but also capabilities.’. Therefore, determining the value of independent directors should not take place in this current ‘box-ticking’ manner. To determine the true value of independent directors, it is important to look at the fact if they are actually suitable for the job. Meaning that their value does not come from the fact if they check all the above mentioned boxes (negative lists), but if they have the needed qualifications/capabilties to add value on a bank board. These qualifications will be discussed now, in § 3.2. 3.2. Independent directors on bank boards As shortly mentioned in the previous chapter, independent directors took a special place in the financial crisis. Their existence on bank boards have led many to question whether they are of any value. A lot of emphasis nowadays is put solely on the montoring duties of independent directors, but this not the only task an independent director should have .The key language spoken in board rooms in one of gross marging, operational expenses, EBITDA, underlying growth, leverage ratio, enhanced control environment, KPI’s, impariment, etc. This focus and language obscure another primary task for independent directors, and that is to provide strategic direction to the company. If independent directors are to play a valueable role in setting, calibrating and changing the strategic direction of the company, including addressing key strategic weaknesses and risks, this requires that independent directors are more engaged in the content of the business of the bank. The monitoring role typically does not take independent directors to the heart of the business itself and does not allow them to contribute to the core issues that makes a business succesful or not.50 To come to a conclusion about their value, it is important to discuss several controversies related to this notion of independent directors. Controversies regarding independent directors on bank boards during the financial crisis is mostly focused on qualifications 49 B. Tricker, Corporate Governance: Principles, Policies and Practices, Second Edition, Oxford University Press, p. 467 50 J. Winter, The Financial Crisis: Does Good Corporate Governance Matter and How to Achieve it?, DSF Policy Paper, No. 14, August 2011, p. 12
  16. 16. 16 related to their industry experience, available time, tenure (in relation to ‘true’ independence) and their proportion on the board. I will discuss these controversies seperately in this section as well as the (available) emperical studies regarding each point of criticism. 3.2.1. Industry Experience One of the major criticisms levied at many bank boards is that they lacked a significant contigent of independent directors with extensive and first-hand financial industry experience or that this experience was dominated by insiders or former insiders (i.e. former senior executives of banks).51 Independent directors who lack a deep understanding of a firm’s operations may be another disadvantage in meeting their fiduciary duties. Such directors may become overly dependent upon the representations of management for the important information necessary to evaluate important strategic initiatives, risks and decisions. It can be difficult for the indenpendent director with no or little industry experience to raise important issues, questions or concerns. Lacking the necessary knowledge they might find it awkward or embarrasing to explore issues that are complex or not easily understood. In these cases, a theoretically independent director can quickly become very dependent, thus compromising the board’s oversight function rather than enhancing it.52 On the other hand, independent directors with prior experience in the firm’s industry may be socially connected with or sympathetic to the firm’s management, thus impairing their monitoring incentives.53 Naturally, board members cannot be expected to know as much about the business as a member of management. However, if board members are to carry out their responsibility to challenge management, they must have the expertise necessary to grasp the complexity of the business and thus the associated risks. The question is however what constitutes as approporate expertise. Some argue that the non-financial experts are the individuals that may ask the important high-level strategic questions, while the more technical members are focused on the details.54 In this respect it is argued that every board needs a generalist to provide a broad perpective on the company’s strategy, but the other members should be experts in the company’s main line of business.55 But, when it comes to expertise, it is important to keep in mind if their expertise is current. Someone who worked for a bank 30 years ago might not know all the intricacies of complex financial instruments.56 51 Moody’s Investors Service, Special Comment: Bank Boards in the Aftermath of the Financial Crisis, March 2010, p. 5 52 J.F. Castello. S.S. Lightle and B. Baker, The Role of Boards of Directors in the Financial Crisis, The CPA Journal, September 2011, p. 55 53 C. Wang, F. Xie and M. Zhu, Industry Expertise of Independent Directors and Board Monitoring, 6 March, 2013 54 H. Mehran, A. Morrison and J. Shapira, Corporate Governance and Banks: What Have We Learned from the Financial Crisis, Staff Report No. 502, Federal Reserve Bank of New York, June 2011, p. 11 55 R.C. Pozen, The case for professional boards, Harvard Business Review 15, 2010 and R.W. Masulis, C. Ruzzier, S. Xiao and S. Zhao, Do Independent Directors Matter?, March 2012, p. 56 J. Prager, The Financial Crisis of 2007/8: Misaligned incentives, bank mismanagement, and troubling policy implications, Department of Economics, New York University, 2012, p. 36-37
  17. 17. 17 Emperical evidence shows that independent directors with industry experience boost firm performance by improving major corporate decisions. Such independent directors have both the incentives and industry-specific knowledge to more effectively minitor and advise.57 But there are some studies that show the level of financial expertise among independent directors is positively related to risk taking before and during the financial crisis58, and that the boards of failing banks had more independent directors with industry experience on the board compared to the boards of surviving banks.59 Expertise, however, is not enough to ensure that the board will engage with and challenge management. Arguably board members must invest sufficient time and energy to understand the firm60, as will be discussed now in § 3.2.2. 3.2.2. Independent Director Busyness It is not unusual for independent directors to hold positions at more than one board. However, multiple directorships can, logically, severly limit the time independent directors spend doing their job on the bank board. And this time is very important, seen as what can happen when certain risks are being overlooked or not enough time is spend to examine what is truly going on within a bank. Too little time can, once again, contribute to a future crisis because independent directors are too busy to actually monitor management and actively engage. Chancellor William Alleen of the Delaware Court of Chancery explains this predicement very well by saying “effective monitoring requires a commitment of time and resources (..) The demands of the position, if properly understood, are inconsistent in my opinion, with service on an impressively long list of boards”.61 However, there are studies showing that multiple directorships can actually have a positive effect on the ability of an independent director to perform their job. It has been argued that sitting on multiple boards provides an incentive for diligent monitoring since the independent directors would have the knowledge, expertise and stronger incentive to actively engage and monitor the actions of management.62 In that respect, holding multiple directorships can help directors make the best desicions based on knowledge of the best board practices gained from other firms.63 Banks also hold that their firms benefit from the input of individuals that understand global business trends and can speak to some of the 57 R.W. Masulis, C. Ruzzier, S. Xiao and S. Zhao, Do Independent Directors Matter?, March 2012, p. 27 58 B. Minton, J.P.A. Taillard and R. Williamson, Do Independence and Financial Expertise of the Board matter for Risk Taking and Peformance?, Charles. A. Dice Center for Research in Financial Economics, Fisher Collefe of Business, June 2011, p. 35 59 J.F. Castellano, S.S. Lightle and B. Baker, The Role of Board of Directors in the Financial Crisis, the CPA Journal, September 2011, p. 54 60 H. Mehran, A. Morrison and J. Shapira, Corporate Governance and Banks: What Have We Learned from the Financial Crisis, Staff Report No. 502, Federal Reserve Bank of New York, June 2011, p. 11-12 61 S.P. Ferris, M. Jagannathan and A.C. Pritchard, Too Busy To Mind the Business? Monitoring by Directors With Multiple Board Appointments, John. M. Olin Center for Law & Economics, University of Michigan, January 2002, p. 1 and W. Allen, Redefining the role of outside directors in an age of global competition, Sppech to the Ray Garret, Jr, Corporate and Securities Law Institute, Northwestern University, April 30, 1992. 62 H.A. Hashim and M.S.A. Rahman, Multiple Board Appointments: Are Directors Effective?, International Journal of Business and Social Science, Vol. 2, No. 16, p.137 63 R.M. Haniffa and T.E. Cooke, Culture, Corporate Governance and disclosure in Malaysian corporations, ABACUS, 38(3), p. 317-349
  18. 18. 18 geopolitcal issues these multinational firms face. The most desirable individuals are therefore by definition overcommited, but crucial nevertheless.64 But, on the other hand, there is evidence that boards dominated by busy outside directors, i.e. directors holding three or more than three directorships, contribute to weaker corporate governance.65 Directors holding a larger number of outside board seats may be overcommitted. These directors may be stretched to the point where they are unable to effectively do their job.66 Similarly, the National Association of Corporate Directors guidelines (NACD) recommend corporate executives and CEOs should not hold more than three outside directorships.67 3.2.3. Tenure and true independence It is difficult to measure whether a independent director is truly independent. A director’s tenure on a firm’s board is a factor that can influence a director’s independence.68 During the financial crisis it has been recognized that boards were less independent than they appeared. While many of the independent directors met the technical requirements for being considered independent, most had been in place for a long time.69 Research in the US indicated that the weighted average director tenure at the end of 2007 for financial instititutions that dissapeared was 11.2 years but 9.2 years for those that survived the first phase of the crisis.70 Research provides two alternative views on how tenure may affect director’s ability to perform their job. It can be argued that longer tenure increases an individual’s commitment towards the firm and acummulates greater experience and knowledge about the firm and its business evironment. From this point of view independent directors may be able to perform their monitoring responsibilities better. Some highly experienced board members believe their long-term ties with a company make them tougher monitors of management – partly because they understand its prior missteps better than newer directors do.71 But, an alternative view is that independent directors are less likely to discipline management when they develop friendship or social ties with management. In that respect longer tenure develops a close social nexus and a strong affiliation between management and independent directors which can affect the monitoring function of an independent 64 H. Mehran, A. Morrison and J. Shapira, Corporate Governance and Banks: What Have We Learned from the Financial Crisis, Staff Report No. 502, Federal Reserve Bank of New York, June 2011, p. 12 65 E.M. Fich and A. Shivdasani, Are Busy Boards Effective Monitors?, Finance Working Paper No. 55/2004, ECGI, October 2004, p. 2-3 and H. Mehran, A. Morrison and J. Shapira, Corporate Governance and Banks: What Have We Learned from the Financial Crisis, Staff Report No. 502, Federal Reserve Bank of New York, June 2011, p. 9-10 66 E.M. Fich and A. Shivdasani, Are Busy Boards Effective Monitors?, The Journal of Finance, Vol. LXI, No.2, April 2006, p.721 67 P. Jiraporn, M. Singh an C.I. Lee, Analyzing Ineffective Corporate Governance: Director Busyness and Board Commitee Memberships, April 28, 2008, p. 2 68 A. Tourani-Rad and C. Ingly, Handbook on Emerging Issues In Corpoate Governance, World Scientific Publishing CO. Pte. Ltd, 2011, p. 124 69 The World Bank Group, Bank Governance: Lessons from the financial crisis, March 2010, p. 2 and Thomson Reuters, Rebuilding Bank Governernance After The Financial Crisis: Best Practices, October 2012, p. 6 70 OECD, Corporate Governance and the Financial Crisis: Key Findings and Main Messages, OECD Publishing, June 2009, p. 46 71 A. Tourani-Rad and C. Ingly, Handbook on Emerging Issues In Corpoate Governance, World Scientific Publishing CO. Pte. Ltd, 2011, p. 124 and J.S. Lublin, The 40-year Club: America’s Longest Serving Directors, Wall Street Journal, July 16, 2013
  19. 19. 19 director because he/she is no longer objective.72 This particular view is recognized by several countries and institutions, however determining an ‘appropriate’ tenure limit is, is very debatble. The NACD for example suggest a maximum 10 to 15 of years of board service in order to obtain fresh ideas and critical oversight which only new directors can bring to the board.73 India introduced the Companies Bill 2012 that deals with this ‘problem’ by proposing a tenure limit on independence to two terms of five years each.74 Furthermore, in the UK, the code sets a limit of 9 years if the director is considered to be independent while in the Netherlands and France a 12 year limit is set.75 However, it is very controversial to set a tenure limit, since anyone who has an independent mind will not compromise even as years pile on.76 3.2.4. Proportion of independent directors on bank boards There is a ‘conventional wisdom’ surrounding the proportion of independent directors on bank boards stating that a mandatory increase in board independence would lead to better corporate governance, which in turn would lead to better corporate governance decisions and firm performance.77 It is now a preponderant view of regulatory authorities of business firms across corporate sovereignties that the ‘virtue’ of majority independent directors should guide appointments or selection of boards members. Consequently, there is a growing trend towards appointing majority or supermajority independent boards.78 A high standard of director independence is merited by the view that disspassionate, objective debate at the board level is integral to strong oversight of management.79 To avoid or lessen the conflict of interest among stakeholders and fulfill the functions of monitoring and advising in an efficient manner, these directors should be a majority on the board.80 Those who consider the board of directors an important element of corporate governance argue that boards dominated by independent directors are in a better position to monitor and control managers.81 Furthermore, it is argued that corporate decision making will be improved if a majority of the board can be structured so that a particular motivation—that of pleasing management—is absent.82 72 A. Tourani-Rad and C. Ingly, Handbook on Emerging Issues In Corpoate Governance, World Scientific Publishing CO. Pte. Ltd, 2011, p. 124 73 A. Tourani-Rad and C. Ingly, Handbook on Emerging Issues In Corpoate Governance, World Scientific Publishing CO. Pte. Ltd, 2011, p. 124 74 An independent director shall hold office for a term up to five consecutive years on the Board of a company, but shall be eligible for reappointment on passing of a special resolution by the company. No independent director shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director, provided that an independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.” See Stakeholder Empowerment Services, Frontiers in Corporate Governance: Companies Bill 2012, 2012, p. 9 and see also clause 149 (9) and (10) Companies Bill 2012: 75 OECD, Corporate Governance and the Financial Crisis: Key Findings and Main Messages, OECD Publishing, June 2009, p. 46-47 76 B. Shrivastava, Are long-serving independent directors truly independent?, Live Mint & The Wall Street Journal, September 23, 2012 77 R.W. Masulis, C. Ruzzier, S. Xiao and S. Zhao, Do Independent Directors Matter?, March 2012, p. 2 78 R.C. Iwu-Egwuonwu, Some Emperical Literature Evidence On The Effects Of Independent Directors On Firm Performance, Journal of Economics and International Finance, Vol. 2(9), September 2010, p. 191-192 79 Moody’s Investors Service, Special Comment: Bank Boards in the Aftermath of the Financial Crisis, March 2010, p. 6 80 P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008 81 J.R. Booth, M.M. Cornett and H. Tehranian, Board of directors, ownership and regulation, Journal of Banking and Finance 26, 2002, p. 1975 82 D.C. Clarke, Three Concepts of the Independent Director, George Washington Delaware Journal of Corpoate Law, Vol. 32, 2007, p. 88
  20. 20. 20 However, it is also argued that a relatively higher proportion of independent directors does not affect firm performance in either way. An optimum combination of executive and non- executive directors is seen as more adequate than excessively independent boards.83 3.3 Conclusion Deciding whether an independent director is qualified based on a check-the-box system that states their (non)affilition with the firm is, in my opinion, inadequate. Such a system does not take their true value into account. To determine whether independent directors are actually valueable on bank boards it is important to look at controversies that targets their qualifactions, i.e. whether they have the experience, time and ‘appropriate’ tenure (in relation to true independence). Also the proportion of independent directors is very relevant in this discussion. Relevant and current industry experience is an important aspect for an independent director. Not only to avoid being fooled by management but also to give valueable input. But, not every independent director needs to have this experience , but a balance is needed between independent directors with and without specific industry expertise. However, relevant and current experience is not enough. Independent directors need time to put that knowledge to some use. Studies showing that serving on more boards can be valueable for the knowledge and expertise of an independent director do make a fair point, however the number of boards a director serves on should not be unlimited. Independent directors are still ‘just’ human, and it is impossible to be fully committed to a bank board if someone has too many other commitments that need their attention. It is quite logical that tenure is related to true independence of the independent director. And while tenure might play a role in determining how valuable an independent director is a tenure limit will not necessarily mean that someone that served for, for example, less than nine years is truly independent. In that respect one should be carefull not to see every independent director who served for a long time as being not independent anymore. When it comes to the proportion of independent directors on bank boards, a high proportion of independent directors does not automatically equal better corporate governance. This truly depends on whether the independent directors fulfill the other qualifications. For example: a (super)majority of independent directors would be more valueable if they possess the other discussed qualifications as well. If they, do not have any industry experience, a (super)majorty of independent directors will be not of much value. All these qualifcations contribute to determine whether an independent director can be seen as valueable (or not). 83 P.O. Mulbert, Corporate Governance of Banks after the financial crisis – Theory, Evidence, Reforms, Working paper No. 151/2010, ECGI, 2010, p. 29 and P. de Andres and E. Vallelado, Corporate Governance in Banking: The Role of the Board of Directors, Journal of Banking & Finance, 2008
  21. 21. 21 4. Current Independent Directors on Bank Boards As discussed in chapter 3, there are several controversies surrounding independent directors: industry experience, director busyness, tenure, and proportion of independent directors on the board (for a more extensive explanation of these criteria, I refer to § 3.2). Now that we have discussed the theory regarding independent directors in chapter 3, it is important to look at the reality of independent directors on bank boards, since these controversies contribute in determining whether independent directors are valuable on bank boards. Therefore, in this chapter I will look at these controversies on five bank boards in the United States and in Europe. In § 4.2. I will look at the bank boards of the top 5 banks in the US: JP Morgan & Chase (JPM), Bank of America (BA), CitiGroup (Citi), Wells Fargo (WF) and Goldman Sachs (GS). In § 4.3. I will look at 5 of the top 6 Banks in Europe: HSBC Holding Plc (HSBC), Credit Agricole Group (CAG), BNP Paribas (BNP), Barclays and Royal Bank of Scotland (RBS). All the collected data from these bank boards are of current time (i.e. 2012/2013). Before I present my findings it is important to clarify when independent directors are considered to be valueable. Therefore, I will first (briefly) explain the parameters of the criteria I am going to look at in § 4.1. 4.1. Parameters In § 3.2. I extensively discussed the theory regarding several controversies surrounding independent directors. Based on this theory I will determine an independent director valueable if he/she has the following qualifications: (Current) Relevant Industry Experience: Since banks play a special role in our society (see § 2.1), the focus will lie on first hand banking or relevant financial industry experience/expertise of the independent director(s) who are currently serving on bank boards. This expertise should also be of a current nature meaning that independent directors who’s latest expertise within this industry was gained more than ten years ago from the moment they joined the board, will not be considered to have current industry experience. Futhermore, I will look if at least a majority of the independent directors have actual experience in the banking or financial services sector that can make a valuable contribution to the bank board (see § 3.2.1 and § 3.3. for more information).
  22. 22. 22 0 2 4 6 8 10 JPM BA Citi WF GS 4 2 4 6 5 6 9 5 7 4 Banking Expertise NO Banking Expertise Numberof IndependentDirectors US Banks Banking Expertise on US Bank Boards 2013 Director Busyness: For director busyness I will follow the emperical studies as discussed in section § 3.3.2. Having more than three other commitments, next to the commitment to serve on the bank board, will be seen as being overcommitted and therefore unable to make a valuable contribution to the bank board. Tenure: There seems to be a fine line between tenure and true independence. Serving too long on a board can mean that someone is not as independent as they should be. Despite the controversy regarding a tenure limit, I will take the view of the UK Code and assume that serving for more than nine years on a board will compromise a directors’ independence and their value (see §. 3.2.3 and § 3.3. for more information). Proportion: Whether a high (or low) proportion of independent directors is good, will depend on the fact if the above mentioned qualifications are met (see §3.2.4 and 3.3. for a more extensive explanation). 4.2. US Banks 4.2.1 Current and Relevant Experience84 Banking experience of independent directors on the US banks can be illustrated as follows: As is clear from this chart, not all US bank boards consist of a majority of the independent directors with banking or relevant financial services industry experience. Citi, WF en GS 84 To determine the relevant experience, information is gathered from the company’s website, available company reports. When these reports did not give enough information, further informationw as gathered www.forbes.com, market.ft.com, investing.businessweek.com and www.wsj.com
  23. 23. 23 show the best results in that category. But only GS shows a majority of independent directors with relevant expertise. We should not be too worried about earlier concerns regarding too many experts from the same background (see §.3.2.1), because these directors don’t have the exact same background (see next under ‘Goldman Sachs’ and Exhibit E). And, it is furthermore just a slight majority, meaning that there are still four independent directors with a different background that can voice their opinion. To clarify these results, I will discuss the findings of each bank separately. JP Morgan & Chase85 JP Morgan shows less than half of the independent directors with current banking or financial serives experience. The four independent directors that do have such expertise are: (1) Laban. P Jackson, Jr, who worked as a director of the Federal Reserve Bank of Cleveland, (2) James. S. Crown who is experienced in investment banking and capital markets, (3) Ellen V. Futter, who was a director of the Federal Reserve Bank of New York and served as its chairman, and (4) Timothy P. Flynn, who did not work for a specific bank but has extensive knowledge of the financial services industry due to this 32 year career at KPMG. Other members of this board are extremely knowledgeable in other sectors like energy (Lee. R. Raymond), pharmaceuticals (William. E. Weldon), technology and/or manufacturing (D.M. Cote and Crandall C. Bowles.), Aerospace (James. A. Bell) and entertainment (Stephan B. Burke). But their knowledge does not come from, a relevant banking or financial services environment. However, Ellen F. Futter and David M. Cote are no longer independent directors on the board of JPM, leaving these three other directors the only ones with relevant banking experience opposed to five independent directors who lack such experience. Bank of America86 Bank of America shows the lowest amount of independent directors with current banking or financial services experience. The only independent directors with banking experience are: (1) Susan. S. Bies, who was a member of the Board of Governors of the Federal Reserve System and worked at a regional bank holding company for many years (from 1979 till 2001) and (2) Frank. P. Bramble, Sr, who worked at several financial institutions., including one that was later acquired by Bank of America . Sharon. L. Allen who, similar to Timothy. P. Flynn of JPM, has an extensive carreer at Deloitte for over 40 years, does not fit the description of current financial services experience. Her previous workexperience does not mention extensive knowledge with financial services. 85 See exhibit A for a more detailed overview 86 See exhibit B for a more detailed overview
  24. 24. 24 Despite this lack of industry experts on the board, Bank of America is trying to step it up by adding two former banking industry executives to it’s board.87 As for the other members of the board, just like JPM, they have a lot of experience but have not worked within a relevant banking or financial services environment. CitiGroup88 CitiGroup shows slightly better results compared to JPM and BA, with just one independent director making the difference in having (or in this case: not having) a majority of independent directors with relevant industry expertise. The board members that do have current expertise are: (1) Michael. E. O’Neill and (2) Diana. L. Taylor, who both worked for (several) banks within 10 years before they were appointed to the board. Also, (3) Joan. E. Sparo is seen as an asset on this board because of their (former) job as a financial services executive and Mrs. Sparo job as (former) board member of ING. And (4) Anthony. M Santomero who served as the President of the Federal Reserve Bank in Philadelphia has extensive knowledge of the banking industry. William A. Thompson and Ernesto Zedillo both have experience in the banking industry. Mr. Thompson worked for Solomon Brothers and Mr. Zedillo worked at the Bank of Mexico. Unfortunately, their experience exceeds the limit of being qualified as current. Therefore they are not counted as independent directors with current expertise. Other directors simply don’t have a background in the banking industry or they gained experience by sitting on serveral committees within Citigroup (Judith Roding and Robert. L. Ryan) but don’t have further exprience within the banking industry. Wells Fargo89 Eventhough Wells Fargo’s board shows quite good results by, just like Citi, having almost half of its independent directors consist of people with bank industry expertise. In that respect they also show better results when compared to JPM or Bank of America. Independent directors that are considered to have such experience are: (1) Elaine L. Chao, who was a board member of Protective Life Corporation. She also has worked for BankAmerica Capital Markets Group and Citigroup, however here experience there is not considered to be ‘current’. (2) Enrique Hernandez, Jr both offers a great contribution to the board of Wells Fargo, due to his experience at large financial institutions. The same can be said for (3) Donald. M. James who has substantial knowledge and experience in the banking and financial services industry. Also, (4) Cynthia H. Milligan, who worked as a bank regulator, and (5)Judith M. Runstad, who was a director and chairwoman of the Federal Reserve Bank of San Fransisco, can be seen as great assets on this board. The last indepedent 87 S. Raice, Bank of Ameria Adds To Board, The Wall Street Journal, 24 July 2013 88 See exhibit C for a more detailed overview 89 See exhibit D for a more detailed overview
  25. 25. 25 1 3 1 5 3 8 10 8 6 7 0 5 10 15 GS WF Citi BA JPM <3 or 3 commitments > 3 commitments Number of Independent Directors USBANKS Director Busyness US Banks 2013 director on this board with current expertise is (6) Frederico. F. Pena, who gained his experience from leading his own investment firm and working for a private quity firm. Howard V. Richardson, who worked for PriceWaterhouseCoopers LLP, is not seen as an independent director who was current financial industry experience. His expertise in the financial industries was gained by a variety of positions at PWC LLP. But he filled this positions from 1996-200290. Since he was appointed to the board in 2013, his experience can not be seen as ‘current’. The rest of the directors on this board don’t seem to have the relative bank or financial industry industry experience. Goldman Sachs91 Goldman Sachs shows the best results, by having a majority of independent directors with current expertise. James A. Johnson. Adebayo O. Ogunlesi, Claes Dahlback, James J. Schiro and Mark. E. Tucker all bring their (extensive) knowledge of the financial services industry and/or background in investment banking and investment management to the board. The remainder of the board does not have an extensive background in the banking industry and therefore does not provide the necessary expertise to the board. 4.2.2 Director Busyness Independent directors are quite busy on the US bank boards, as can be seen in the chart below. This chart shows that more than half of the independent directors on each bank board has more than three other commitments, next to their job as independent director on the bank 90 According to his biography on the company website he held positions as U.S. Financial Servies and Banking Leader (1996-2000) and Global Banking/Capital Markets leader from 1998-2002. 91 See exhibit E for a more detailed overview
  26. 26. 26 board. More specifically, the number of people linked to the number of directorships is illustrated in the following table: Number of Other Commitments 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 # Directors JPM 92 3 2 2 1 2 BA 93 1 1 3 2 2 1 1 Citi 94 1 2 1 1 1 1 1 1 WF 95 1 2 4 1 1 3 1 GS 96 1 1 2 2 2 1 Here you can clearly see that some directors believe they can do anything. For example CitiGroup’s independent director, Diana L. Taylor, has 14(!) other commitments. Similarly, other independent directors of CitiGroup also have a lot on their plate with 11 (Ernesto Zedillo) and 12 (Joan. E. Sparo) other commitments. Another eyecatching amount of commitments is by Bank of America’s independent director Arnold W. Donald, who has 13 other commitments. There are just a few independent directors on these bank boards who hold 3 or less other commitments. Bank of America, despite the 13 other commitments of Mr. Arnold W. Donald, seems to have the best balance between busy and not so busy directors. Goldman Sachs and Citigroup, on the other hand, show very poor results with only 1 director holding 3 or less other commitments (for CitiGroup this is Robert L. Ryan and for Goldman Sachs this is Mark. E. Tucker). Overall, it is obvious that we can talk about (very) busy boards in the US. And, unfortunately some independent directors with industry expertise are also the ones that are too busy. Some more than others, but still they hold too much other commitments and it is therefore questionable whether their expertise is actually helpful as an asset.97 The chart below shows the number of independent directors with industry experience and their (over)- commitments. 92 3 commitments: Laban P. Jackson, Jr., Timothy P. Flynn and James. A. Bell. 4 commitments: David M. Cote and Stephan B. Burke. 6 commitments: Lee. R. Raymond and Crandal C. Bowles. 7 commitments: Ellen V. Futter. 9 commitments: William C. Weldon and James S. Crown 93 1 commitment: Frank P. Bramble, Sr. 2 commitments: Sharon L. Allen. 3 commitents: Susan S. Bies, Jack. O. Bovender, Jr and Lionel L. Nowell. 4 commitments: Linda P. Hudson and R. David Yost. 5 commitments: Monica C. Lozano and Thomas J. May. 9 commitments: Charles O. Holiday, Jr. 13 commitments: Arnold W. Donald 94 3 commitments: Robert L. Ryan. 4 commitments: Michael E. O’Neill and Anthony M. Santomero. 6 commitments: William S. Thompson Jr. 7 Commitments: Franz B. Humer. 9 commitments: Judith Rodon. 11 commitments: Ernesto Zedillo. 12 commitments: Joan E Spero. 14 commitments: Diana L. Tayor 95 2 commitments: Howard V. Richardson. 3 commitments: Susan E. Engel and Stpehan W. Sanger. 4 commitments: John S. Chen, Frederico F. Pena, Judith M. Runstad and Susan G. Swenson. 6 commitments: Lloyd H. Dean. 7 commitments: John D. Baker. 8 commitments: Elaine. L. Chao, Enrique Hernandez, Jr. and Donald M. James. 9 commitments: Susan E. Engel 96 2 commitments: Mark. E. Tucker. 4 commitments: Debora L. Spar. 5 commitments: William W. George and M. Michelle Burns. 7 commitments: Lakshmi N. Mittal and Claes Dahlback. 8 commitments: James J. Schiro and Adebayo O. Ogunlesi. 9 commitments: James. A. Johnson 97 See exhibit C for more information.
  27. 27. 27 0 1 2 3 4 5 6 JPM BA Citi WF GS 2 2 1 2 4 6 4 Not Overcommited Overcommited Numberof IndependentDirectors (Over)commitments of Independent Directors With Relevant Industry Experience US Banks It is clear that only the independent directors with industry expertise on the board of BA are not overcommited. But, then again, they only have two independent directors with current and relevant industry experience on their board. JPM shows that half of the experienced independent directors is overcommited. As for the rest of the US bank boards, their independent directors with industry experience really have too much other commitments. Citi and WF even show extreme results, since all directors with industry experience are seen as overcommitted. The advantage that Wells Fargo, CitiGroup and, especially, Goldman Sachs had in relation to the amount of independent directors with industry experience is quickly being undone due to the overcommitments of these experienced independent directors. Based on these results it is not really convincing that these independent directors, with the exception of those who do not have too much other commitments, have a valueable contribution to make on this board. Not only in relation to monitoring management but also discussing strategy and actually contributing to the future of the bank. In almost all cases more than half of the board is, based on my definition of busyness, too busy to make a valueable contribution. Important to point out in this respect is that not all directorships are listed in the relevant corporate governance report(s) or on the company’s website. This can be quite misleading, since the possibility exists that there are more commitments we don’t know about, i.e. more independent directors that are overcommitted. Take for example Arnold. W. Donald who
  28. 28. 28 0 2 4 6 8 10 12 14 JPM BA Citi WF GS 6 11 13 7 6 4 0 0 6 3 Less than 9 or 9 years More than 9 years US BANKS Tenure on US Banks 2013 Numberof Independentdirectors has six(!) other commitments that are not mentioned on the company website nor it’s Proxy Statement. And Mr. Donald is, unfortunately, not the only one.98 4.2.3. Tenure When it comes to tenure a nine year limit, in accordance with the UK Code, should be enough to ensure the ‘true independence’ of the current independent directors on the bank board (see § 3.2.3 for more information). The chart below shows the number of directors who are currently serving a tenure of less than nine (or nine) years or more than nine years on the US bank boards. In all these cases a majority of the independent directors, and in the case of BA and Citi all independent directors, serve a tenure of less than nine or nine years on the board. However, there are some directors who serve more than nine years. JPM has four99 of these directors, WF has six100 and GS has three101. If we accept the nine year limit, this will mean that the independence of these directors is (or can be) compromised. Despite the current controversy surrounding the need for a tenure limit (since someone with an independent mind can not be compromised, see §3.2.3.), big questions can be raised regarding the current tenures of some of these independent directors. . Take JP Morgan for example, where Lee. R. Raymond serves for 26 years, Laban. P. Jackson serves for 20 years, and Jr, James S. Crown for 22 years. Also, in case of WF there are some directors with long tenures: Susan E. Engel and Judith M. Runstad both serve 15 years, Cynthia. H. Milligan serves for 21 years, and Susan G. Swenson serves for 19 years now. 98 Commitments of independent directors that are not listed on the company website or relevant corporate governance reprots (like Proxy Statements) are indicated with a ‘*’ in all the exhibits regarding these banks (Exhibit, A, B, C, D, E, F, J, I, K, H). 99 The four directors with a tenure of more than nine years are: 1. Lee. R. Raymond (26 years), 2. Laban. P. Jackson, Jr. (20 years), 3. James S. Crown (22 years) and 4. Ellen V. Futter (12 years). 100 The six directors with a tenure of more than nine years are: 1. Susan E. Engel (15 years), 2. Emrique Hernandez, Jr. (10 years), 3. Cynthia H. Milligan (21 years), 4. Judith. M. Runstad (15 years), 5. Stephan W. Sanger (10 years) and 6. Susan G Swenson (19 years) 101 The three directors with a tenure of more than nine years are: 1. William W. George (11 years), 2. Claes Dahlback (10 years) and 3. James A. Johnson (14 years).
  29. 29. 29 0 2 4 6 8 10 12 14 JPM BA Citi WF GS 1 2 4 1 4 10 11 9 13 9 Non-Independent Independent Numberof Independentdirectors US Banks Proportion of Independent Directors on US Banks 2013 These are all extreme long tenures, in some cases even twice the tenure limit, to hold as an independent director and can certainly raise questions about their true independence and ‘cozyness’ with management. Even the experienced independent directors on the boards of JPM, WF and GS are among the ones who hold these long tenures.102 Whether they use their knowledge objectively can certainly be an issue. 4.2.4. Proportion Despite small differences in proportion, it is very clear that independent directors are dominant on these US bank boards. To determine whether this high proportion of independent directors is valuable, we have to take the previously discussed qualifactions into account. Based on the results of the previously discussed qualifications, this (super)majority of independent directors on bank boards in the US does not seem to have the ability to make a valuable contribution in effectively monitoring management or contributing to the banks business. First, not all bank boards have a majority of independent directors with relevant industry experience. Second, the independent directors that do have such experience are in most cases too overcommitted. So their knowledge may not even be used to the fullest. Third, if we accept that a nine year tenure is long enough and longer than this will compromise the independence of independent directors, serious questions can be raised by the tenures limits on some of these bank boards, their independence and their ability to objectively participate in company business . Therefore, a high proportion of independent directors in case of US bank board does not immediatly add value to the bank board nor the bank as a whole. 102 For JPM: 1. Laban. P. Jackson, Jr. (20 years), 2. James S. Crown (22 years) and 3. Ellen V. Futter (12 years). For WF: 1. Susan E. Engel (15 years), 2. Emrique Hernandez, Jr. (10 years), 3. Cynthia H. Milligan (21 years), and 4. Judith. M. Runstad (15 years) For GS: 1. Claes Dahlback (10 years) and 2. James A. Johnson (14 years)
  30. 30. 30 0 1 2 3 4 5 6 7 8 HSBC CAG BNP Barclays RBS 7 1 4 8 7 6 5 7 3 1 Relevant Expertise Non-Relevant Expertise Numberof IndependentDirectors EU Banks Banking Expertise on EU Bank Boards 2013 4.3. European Banks 4.3.1. Experience103 Banking experience of independent directors on EU banks can be illustrated as follows To clarify these results, I will discuss each bank separately. HSBC Holdings104 HSBC shows more than half of its independent directors has industry experience. (1) James Comey, (2) Joachim Faber (3) Renato Fassbind and (4) Sir Simon Robertson all have worked for financial services institutions, (for example: Bridgewater Associates LP, Allianz Global Investors, Credit Suisse Group) Their experience and background are therefore an asset on this bank board. Also, (5) Laura Cha brings her extensive regulatory and policymaking experience to the board (she formerly served as Vice Chairman of the China Securities Regulatory Commission and Deputy Chairman of the Securities and Future Commission in Hong Kong). (6) John Lipsky and (7) Rachel Lomax have both worked for bank institutions,their specific knowledge of the banking industry is therefore a great asset to this board (Rachel Lomax has worked at the Bank of England and John Lipsky has, among other things, served at the International Monetary Fund). The remainder of the independent directors on this board have expertise in other areas such as management software (Safra Catz), international business and financial accounting (Marvin Cheung and James Hugh Hallet), pharmaceutical industry (John Coombe) and 103 To determine the relevant experience, information is gathered from the company’s website, available company reports. When these reports did not give enough information, further information was gathered www.forbes.com, market.ft.com, investing.businessweek.com and www.wsj.com 104 See exhibit F for a more detailed overview
  31. 31. 31 energy (Sam Laidlaw), but don’t contribute relevant bank or financial services industry knowledge. Credit Agricole Group105 CAG has biggest board but the lowest amount of independent directors on its board (see section 4.3.4.). Of these independent directors, there is only one(!) with relevant industry experience: Francoise Ververka. He has served on serveral banks (and was an executive managing director of Standard & Poor’s). The rest of the independent directors on this board show knowledge is many other fields, however their knowledge does not fit my description of current relevant bank or financial services industry experience. This leaves this board with a dissapointing number of just one independent director with bank industry experience. BNP Paribas106 BNP, just like CAG, also shows a lacking number of independent directors with current and relevant industry experience on its board. The four independent director with relevant experience are: (1) Jean-Francois Lepetit, who served on several banks and was Chairman of the French stock market and financial markets authorities; (2) Helene Ploix, who was in charge of Finance and Banking at the Caisse Autonome Refinancement and was an Executive Director of the International Monetary Fund and The World bank; (3) Michael Tilmant, who worked for ING; and (4) Fields Wicker-Miurin, who is an international business executive with more than 20 years experience in the global financial industry. Like in the previous board, the remainder of this boards shows a lot of experience, unfortunately this is not the relevant industry experience I am looking for. Barclays107 Barclays’ board, just like HSBC and RBS (see next), consist for more than half of independent directors with relevant industry expertise. (1) Sir David Walker, who has worked for Morgan Stanley. (2) David Booth who also worked for Morgan Stanley and now manages his own venture capital investments. (3) Dambisa Moyo and (4) Reuben Jeffrey III have both worked for Goldman Sachs. (5) Tim Breedon, who worked for Legal & General Group, and (6) Simon Fraser, who worked for Fidelity International, both gained their experience from a carreer at these financial services firms. (7) Sir Michael Rake also brings valueable experience to the board, due to his 30 year carreer at KPMG where he gained financial and commerical experience. And, finally, (8) Sir Andrew Likierman, who gained experience on the HM Treasury and was a member of the Cadbury Committee on UK Corporate Governance. 105 See exhibit G for a more detailed overview 106 See exhibit H for a more detailed overview 107 See exhibit I for a more detailed overview
  32. 32. 32 The remaining three members ghave expertise in the energy industry (Fulvio Conti), international power and automation technology industry (Diane de Saint Victor) and the beverage industry (Sir John Sunderland). Royal Bank of Scotland108 RBS also shows good results when it comes to a industry experienced board. The seven independent direcors with industry experience are: (1) Sir Sandy Cromble and (2) Phillip Scott, who both worked for financial services companies; (3) Alison Davis, who worked as chief financial officer at Barclays Global Investors (now BlackRock); (4) Tony di Iorio, who worked at Goldman Sachs, Bank of America and Deutsche Bank; (5) Arthur Ryan, who had several position wutg Chase Manhattan Bank; and (6) Brendan Nelson and (7) Baroness Noakes, who both gained financial services expertise during their time at KPMG. Baroness Noakes, furthermore, served an executive role at the Bank of England. The only independent director who does not seem to have relevant bank and industry experience is Penny Hughes, who spend the majority of her executive career at Coca-Cola. Interestingly, the EU bank boards show (more) independent directors who have previously served at large international banks such as Goldman Sachs, Bank of America, JP Morgan & Chase and Deutsche Bank. This particular fact does not show up in the discussed US Bank boards. However, this might also be a concern. Having too much directors of the same background might impair their judgement (see § 3.2.1.). This might be the case for Barclays, where four of the eigth independent directors have previously worked for large banks (Sir David Walker and David Booth worked for Morgn Stanley. Dambisa Moyo and Reuben Jeffrey worked for Goldman Sachs). But, on a more positive note, the EU shows better results compared to the US when it comes to independent directors’ current and relevant industry experience on the board: there are three bank boards (HSBC, Barclays and RBS) that show a majority of independent directors with industry experience on their board opposed to the just one bank board in the United States (Goldman Sachs). But, whether this majority of independent directors adds more value to the bank board also depends on their other qualifications, like available time. This will be discussed now, in § 4.3.2. 108 See exhibit J for a more detailed overview
  33. 33. 33 5 7 3 1 5 3 4 8 5 8 0 5 10 15 RBS Barclays BNP CAG HSBC <3 or 3 commitments > 3 commitments Number of Directors EUBANKS Director Busyness EU Banks 2013 4.3.2. Director Busyness Director busyness on EU bank boards can be illustrated as follows: This chart shows that only two banks, CAG and Barclays, don’t have a majority of overcommitted independent directors. The number of directorships held by the individual directors is illustrated in the table below: Number of Other Commitments 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 # Directors HSBC 109 2 2 1 1 1 3 2 1 CAG 110 1 4 1 BNP 111 1 2 4 1 1 1 1 Barclays 112 3 2 2 1 1 1 1 RBS 113 1 1 1 2 3 The most striking number of other commitments held by independent directors here is 11. The independent directors responsible for that much other commitments are: (1) Laura Cha (HSBC); (2) Francois Veverka (CAG); and (3) Helene Ploix (BNP). For more information regarding the independent directors and their other commitments, I refer to exhibits F, G, H, I and J. 109 1 commitment: Safra Catz and James Comey. 2 commitments: Rona Fairhead and Sam Laidlaw. 3 commitments: John Coombe. 4 commitments: Renato Fassbind. 5 commitments: John Lipsky. 6 commitments: Marvin Cheung, James Hughes-Hallet and Rachel Lomax. 8 commitments: Joachim Faber and Sir Simon Robertson. 11 commitments: Laura Cha. 110 3 commitments: Caroline Catoire. 5 commitments: Laurence Dors, Francoise Gri, Monica Mondarini and Christian Streiff. 11 commitments: Francois Veverka. 111 0 commitments: Emiel van Broekhoven. 3 commitments: Laurence Parisot and Fields Wicker-Miurin. 4 commitments: Pierre-Andre de Chalender, Christophe de Margerie, Marion Guillou and Jean-Francois Lepetit. 5 commitments: Daniela Weber-Ray. 7 commitments: Denis Kessler. 9 commitments: Michael Tilmant. 11 commitments: Helene Ploix. 112 1 commitment: David Booth, Tim Breedon and Diane de Saint Victor. 2 commitments: Sir David Walker and Dambisa Moyo. 3 commitments: Reuben Jeffrey III and Sir Andrew Likierman. 4 commitments: Sir Michael Rake. 5 commitments: Simon Fraser. 6 commitments: Sir John Sunderland. 7 commitments: Fulvio Conti. 113 0 commitments: Tony di Iorio. 1 commitment: Phillip Scott. 2 commitments: Penny Hughes. 3 commitments: Sir Sandy Cromble and Baroness Noakes. 4 commitments: Alison Davis, Brendan Nelson and Arthur Ryan.
  34. 34. 34 0 1 2 3 4 5 6 7 8 1 1 6 4 6 1 3 2 3 Not Overcommited Overcommited Numberof IndependentDirectors Numberof IndependentDirectors EU Banks Numberof IndependentDirectors (Over)commitments of Independent Directors With Relevant Industry Experience In comparison with the independent directors on US bank boards, there is a big difference when it comes down to the busyness of independent directors, especially less busy independent directors. Percentage wise the EU has, of its total of independent directors, 43% that is not seen as being overcommited . The US on the other hand only has 27% of its total independent directors that are not seen as being overcommitted.114 The EU clearly shows better results in that area, with a difference of 16%. Unfortunately, similar to the US bank boards, the independent directors with experience are (in most cases) also the ones who are seen as being overcommitted, making it very questionable whether their experience can acutally be seen as an usefull asset on these boards. The number of experienced independent directors and their (over)commitments can be illustrated as follows: Interestingly to see here is that the only independent director with industry expertise on the board of CAG, is also the busiest director on this board holding 11(!) other commitments. Furthermore, on HSBC’s and BNP’s bank board there is only one(!) independent director that is not seen as being overcommited. For HSBC this is James Comey and for BNP it is Fields Wicker-Miurin. Barclays and RBS show the opposite result, by having the majority of independent directors not being overcommitted. 114 US: The US has a total of 52 independent directors. 14 of those independent directors are not seen as overcommitted based on my stadards. (14:52)x100% = 26,92% EU: The EU has a total of 49 independent directors. 21 of those independent directors are not seen as being overcommited based on my standards. (21:49)x100%= 42,86%
  35. 35. 35 0 2 4 6 8 10 12 14 HSBC CAG BNP Barclays RBS 13 6 9 11 8 0 0 2 0 0 < 9 or 9 Years > 9 Years EU BANKS Tenure on EU Banks 2013 Numberof Independentdirectors Overall, EU bank boards seem to do better , based on these results, when it comes to overcommitted experienced independent directors than the US bank boards. While the EU also has three bank boards where there are overcommitted experienced independent directors, at least they have two bank boards with a majority of independent directors with experience that are not overcommited opposed to one US bank board (Bank of America). Also, in the EU there is only one bank board where all the experienced independent directors are seen as being overcommitted: CAG. This opposed to two US bank boards: Citi and WF. And this is only because there is one experienced independent director on the EU bank board, opposed four experienced independent directors on Citi and six on WF. Furthermore, when it comes to the commitments of independent directors with industry experience, ‘only’ 56% of experienced independent directors are overcommitted on the EU bank boards, opposed to 76(!)% on US bank boards.115 4.3.3. Tenure There is a big difference when it comes to tenure on EU bank boards compared to the US bank boards, as is illustrated in the following chart: While in the US there are three bank boards having independent directors serving more than nine years, the EU only has one bank board: BNP. The only two directors serving more than nine years are: (1) Denis Kessler who is currently serving 13 years, and (2) Helene Ploix who is currently serving 10 years. In accordance with the tenure limit set by the UK Code, their independence might be compromised. 115 US: The US has a total of 21 independent directors with relevant and current industry experience. 16 of these independent directors are seen as overcommitted: (16:21)x100%= 76,19% EU: The EU has a total of 27 independent directors with relevant and current industry experience. 15 of these independent directors are seen as overcommitted: (15:27)x100%= 55,56%
  36. 36. 36 0 5 10 15 3 15 5 2 4 13 6 11 11 8 Non-Independent Independent Numberof Independentdirectors EU Banks Proportion of Independent Directors on EU Banks 2013 Despite the fact that they serve more than nine years, it is ‘nothing’ compared to the over 20 years that are spend by ‘independent’ directors at some of the US bank boards (see section 4.2.3.).But just like in the US, there can be an issue with objectivity since Helene Ploix is considered to be experienced independent directors on the board op BNP. However, compared to the US, this is a far smaller problem. The EU only has one board where only one experienced directors’ independence might be compromised opposed to three different bank board where a total of nine independent directors’ independence is in question. Based on the tenure limit set out in section 4.1., it would seem that the independence of independent director on EU bank boards are better safeguarded by the fact that not so much independent directors are serving a (too) long tenure. 4.3.4. Proportion The proportion of independent directors on EU bank boards show an immediate difference compared to the proportion of independent directors on US bank boards. The biggest difference between the EU and US bank boards is that not all EU bank boards have a majority of independent directors. Only CAG has a board of 15 dependent and ‘just’ six independent directors. This can immediatly raise questions about the power independent directors have on this board. EU bank boards do have three bank boards that consist of a majority of independent directors with relevant industry experience. However, these independent directors, in most cases, are also overcommitted. Even the experienced ones, leaving it very doubtfull that their knowledge will actually make a valueable contribution to the bank in question. When it
  37. 37. 37 comes to tenure, the EU shows quite good results with only two independent directors having a tenure of more than nine years. So, while we were off to a pretty good start with three banks at least having a majority of its independent directors with industry experience, if you factor in the available time, these results quickly drop. EU bank boards do score better compared to the US when it comes to a majority of independent directors who have relevant expertise on the bank boards, director busyness and tenure. However, that’s all it is. Their qualifactions are still below what you may expect from a bank board. So, in this case a majority (except for CAG) of independent directors on the bank board does not immediatly mean better governance of more value. 4.4. Are There Any ‘Qualified’ Independent Directors? The discussed results regarding qualifactions of independent directors, don’t seem very hopefull. Either independent directors on these bank boards : a. do not have the current and relevant industry experience b. are overcommitted c. have a tenure that is too long; or d. all of the above Therefore, the question remaining is whether there is an independent director who fullfills all these qualifactions or are we just searching for a needle in a hay stack? When we select the independent directors who are experienced, not overcommitted and have an acceptable tenure (i.e. less than nine or nine years), the following conclusion can be drawn. The United States Citigroup and Wells Fargo immediately fall off because all their experienced independent directors are overcommitted. Therefore it is not necessary to look to tenure, because this will not make a difference. This only leaves JPM, Bank of America and Goldman Sachs. The only independent directors with relevant industry experience who are not overcommitted on the board of JPM are: 1. Laban P. Jackson and 2. Timothy P. Flynn. Of these two directors only Timothy P. Flynn has an acceptable tenure of one year (Laban P. Jackson currently serves 20 years). Making him the only one who fullfills the criteria. Bank of America has two experienced independent directors who are not overcommitted: 1. Susan S. Bies and 2. Frank B. Bramble. Both also serve an acceptable tenure of 4 years and respectively 7 years. Goldman Sachs has just one experienced independent director, who is not seen as being overcommitted, and serves for only one year on the board: Mark. E. Tucker.
  38. 38. 38 The US shows a total of 4 independent directors who are experienced, not too busy and have an acceptable tenure, making their ‘true independence’ not immediatly questionable. Europe CAG, just like CitiGroup and Wells Fargo, immediately falls off since its only experienced independent director is also the most busiest one. Both HSBC and BNP have one experienced independent director who is not overcommitted and has an acceptable tenure. For HSBC this is James Comey and for BNP this is Fields Wicker-Miurin. Barclays shows the quite a high number of six experienced independent directors who are not overcommitted and have not served for too long on the board: 1. Sir David Walker, 2. David Booth, 3. Tim Breedon, 4. Dambisa Moyo, 5. Reuben Jeffrey III and Sir Andrew Likierman. And finally, RBS has four independent directors who can fullfill the above mentioned criteria: 1. Sir Sandy Cromble, 2. Tony di Iorio, 3. Baroness Noakes and 4. Phillip Scott. This brings the total of ‘qualified’ independent directors in Europe to 12, three times as much as in the US. However, these ‘qualified’ independent directors in the US respresent just 8%116 of the total independent directors on the US bank boards. In case of the EU, these 12 qualified directors represent 25%117 of the total independent directors on EU bank boards. This means that 92(!)% of independent directors on US bank boards is not seen as valueable against 75% on EU bank boards. These results show that it is not exactly like seeking a needle in a hay stack, but they also don’t show very comforting results, especially the US. 4.5. Conclusion As previsously discussed it is important to have a understanding of the business you are working for. The researched bank boards showed quite dissapointing results when it comes to the relevant expertise of independent directors, four of the ten banks showed a majority of independent directors with industry experience (one bank in the US (Goldman Sachs) and three in Europe (HSBC, Barclays and Royal Bank of Scotland)). This dissapointing start did get worse when it came to the busyness of directors. Independent directors do need to invest their time to actually be valueable. Having too much 116 The US has a total of 52 independent directors on the five discussed bank boards. Only 4 of those seem to fullfill the qualifications. (4:52)x100%=7,69% 117 The EU has a total of 49 independent directors on the five discussed bank boards. Only 12 of those seem to fullfill the qualifications. (12:49)x100%=24,49%
  39. 39. 39 other commitments can seriously interfere with this ability and does not serve the bank and all involved stakeholders in their best interest. Unfortunately, there were a lot of independent directors who are overcommitted. In the US there were 38 out of 52 independent directors and in the EU 28 out of 49 independent directors. More than half of the total independent directors in the US as well as in Europe are overcommitted, this also includes the experienced ones. This truly begs the question whether they are able to provide valueable input and monitor management. And when it comes to the experienced independent directors: whether their knowledge is of any use when they are too busy to apply that knowledge to the bank board. Furthermore, if we accept a tenure limit of nine years to determine independence, serious questions can be raised about the ‘true independence’ of several board members of the US bank board who currently serve a tenure of twenty years or more on US bank. In EU bank boards this problem does not occur as much, since only two independent directors serve a tenure limit of more than nine years against thirtheen independent directors on US bank boards. Based on these results, a high proportion of independent director does not immediately mean that they are able to make a valueable contribution like is expected. But, not all hope is lost. There are actually some independent directors who do fullfill these qualifactions. But these numbers are so low, especially in the US, that they are not very comforting in the ability to make a valuable contribution to the bank board.

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