By Jordan, Emma Coleman
American Banker , Vol. 174, No. F307
Byline: Emma Coleman Jordan
As President Obama recognized in his recent remarks at Federal Hall, the necessity of federal bailouts one year ago is damning evidence of how utterly broken our financial system has become. Yet while passive internal oversight by the boards of directors across the financial sector was one of the chief factors in the crisis, a shocking 92% of the directors of the top 17 firms receiving taxpayer support from the Troubled Asset Relief Program have remained in office.
An ambitious agenda of government regulation will do little to avoid another crisis if directors are asleep at the wheel. Boards of directors are given the responsibility for overseeing management decisions and protecting the value of the firm for shareholders. This role was designed to provide a private system of checks and balances. Today, that system is badly damaged.
That is why, in conjunction with the Center for American Progress, I have authored a paper proposing the special appointments of public directors to the boards of companies that receive large infusions of taxpayer support to survive.
Public directors will first and foremost provide a voice representing the interests of the taxpayer. But, if implemented judiciously, a system of outside, skeptical, public directors can also serve to curb some of the problems with corporate governance.
Excessive executive compensation has been one of the most prominent pieces of evidence of the breakdown in board oversight over financial firms. When New York Attorney General Andrew Cuomo evaluated the bonuses of nine banks that received taxpayer rescues during the crisis, he found that taxpayers were taken for a ride. Banks - with the approval of their boards - paid out $32.6 billion in bonuses in 2008, even while receiving $175 billion in taxpayer support.
The Bank of America-Merrill Lynch merger stands out as another example of the failures of board oversight.
The Securities and Exchange Commission reached a $33 million settlement with BofA over its allegations that the company misled investors about bonuses and losses at Merrill Lynch before the merger. A federal judge rejected the settlement, saying it"does not comport with the most elementary notions of justice and morality."
It was predictable that there would be a inquiry into who knew what and whenamong B of A's directors, who approved the merger. Cuomo has now subpoenaed five of the directors, seeking information about their knowledge of the disclosure of the fourth-quarter losses at Merrill Lynch. …