Editor's note: Our new "On the Brink" series will provide daily insight into the financial firms facing capital shortfalls and the growing pressure from short sellers in the market.
As the credit crisis drags on into its second year, many experts are saying financial companies need to beef up the level of relevant experience on their boards to help steer clear of such pitfalls down the road.
Over the past year, numerous banks have taken writedowns on underwater securities and provisions for soured mortgages and other assets, while capital-raising initiatives have become the norm.
Investors in these firms -- once seen as attractive because of their once substantial earnings growth and attractive dividends -- are now left with stocks that haven't seen comparable lows in more than two decades.
"Many investors are asking what added level of monitoring do they have to do on these boards to ensure that these problems don't occur in the future," says Pat McGurn, special counsel at RiskMetrics Group. "There were plenty of radar maps to see this problem emerging on the horizon, and yet most boards failed to recognize the depth of problems."
Critics like McGurn charge that risk controls at firms like
seemed to be an afterthought, even as the housing market began its descent. The result at these companies was writedowns and management shake-ups from pushing too far into risky securities backed by subprime and other residential mortgages.
McGurn says he believes more bank board vacancies will be filled with "individuals who at least understand the
banking industry" and are "much more financially savvy" in the coming months and years.
Citi is already looking to replace several board members up for retirement with directors who have "a particular emphasis in finance and investments," the company says on its Web site.
Citi's board currently holds seats for several big name executives such as Richard Parsons, the chairman of
Chairman Alain Belda; Andrew Liveris, chairman and CEO of
; and Anne Mulcahy, chairman and CEO of
, among others.
Under the helm of CEO Vikram Pandit, who took the bank's reins in December, Citi in July elected turnaround specialist and financial sector expert Lawrence Ricciardi to its board. Riccardi has held senior positions in big-name companies like
. He replaced retiring director George David, the chairman and former CEO of
The firm says that in 2009 at least two more directors will meet the mandatory retirement age of 72: Kenneth Derr, retired chairman of
, and Franklin Thomas, a consultant at TFF Study Group. (Thomas actually met it for the 2008 annual meeting, but was asked to stay on for another year, the company says.) Citi has also been rotating its board committee chairs and memberships.
UBS recently appointed David Sidwell, the retired CFO of
, to join its board of directors this past spring. Sidwell, who is also a former
executive, now heads up UBS' risk committee.
As part of Sarbanes-Oxley corporate governance rules, the
Securities and Exchange Commission
requires that at least one member of a public company's audit committee meet its definition of an "audit committee financial expert." The SEC defines such experts as individuals with understanding of financial statements using generally accepted accounting principles (GAAP) and can apply these rules to complex accounting measures used by companies in their financial statements, as well as an understanding of internal controls and procedures for financial reporting.
Observers say that most CEOs and CFOs of any public company meet this requirement in its broadest sense. McGurn says banks must "transcend" that standard by finding board members who have "some level of sophistication in financial analysis."
"Not just a former CEO of another corporation," he says.
Carter Burgess, head of board recruiting at RSR Partners in Greenwich, Conn., says banks should add more executives to their boards with not just financial expertise but specific expertise in running a commercial bank.
Placing bank executives as directors at other financial institutions could easily trigger conflicts of interest -- not to mention be impeded by non-compete agreements. But the goal is to have some relevant experience sitting on boards that can act as a sounding board for executive management, Burgess says.
"It's not the board's responsibility to run the company and tell them where they should operate and what they should be doing,
but it is the board's responsibility to challenge and ask questions," Burgess says. "We're not talking four people on the board -- one or two just to help the rest of the board chime in."
But industry experts agree that for the most part it will be difficult to find financial experts. Many such individuals don't want to take on the potential liability that becoming part of the audit committee entails. Some companies are "widening the pool in order to find these people" to include former senior investment bankers," says Jack O'Kelley, principal with consulting firm Katzenbach Partners.
"Increasingly the members of the audit committee are retired executives because the time commitment is so massive," says Clarke Murphy, head of CEO/Board Services at executive search firm Russell Reynolds.
Murphy says those who fit the bill include experts with risk-consulting backgrounds, retired regulators and retired executives "who have not been in a financial institution in the past two years because you need someone who has a clean bill of health."
Simply having a financial expert on a bank's board, however, does not ensure that a company will avoid problems.
for example, has been decimated by the credit crisis and housing downturn, forcing the nation's largest thrift to raise $7.2 billion in capital from a group of institutional investors led by TPG. WaMu posted its third quarterly loss in July and said cumulative losses could reach as high as $19 billion from credit deterioration in its large residential mortgage portfolio.
CEO Kerry Killinger has been stripped of his chairman title, while one other director, Mary Pugh, the head of fixed-income money manager Pugh Capital Management and former chair of its finance committee, resigned under shareholder pressure.
WaMu's problems "seemed to be a systematic breakdown with management, and the boardroom recognized problems but ignored the risk," according to McGurn.
The Seattle-based thrift has since brought TPG's David Bonderman back to its board. He had previously been on the bank's board after its acquisition of American Savings Bank.
Rob Sloan, head of the financial services practice at executive search firm Egon Zehnder, said complex financial companies need directors with a "holistic view of the business," which may have been lost to companies with experts in some esoteric area like structured finance serving on its board.
"Everything does circle back around to risk," he says. "A bank is a risk business."