Sunday, April 10, 2011 0 comments ++[ CLICK TO COMMENT ]++

Directors of leading American banks have little financial experience

Reuters Breakingviews hired Nestor Advisors to analyze the directorship at leading European and American banks and there are some differences. Jeffrey Goldfarb summarizes the results and here are a couple of things that stand out (do check out his article for further info).

It appears that there has been little change in directors at the leading American banks since the financial crisis. Given how many of these directors were largely incompetent and had no clue what they were doing pre-crisis or even, arguably, post-crisis, this is somewhat surprising to me. In contrast, European banks did dump a big chunk of their directors.

The other thing that stands out is how little financial sector experience is possessed by the leading American bank directors compared to similar European boards. The following chart is from the nestor advisors study provided by Reuters Breakingviews:

You don't necessarily need board members with industry experience but I would view it as good to have. This is especially true for complex and rapidly changing industries like banking and brokerage. It's amazing to see that only 15% of leading American banks have directors with financial industry experience. Again, you don't need it but 15% is way too low in my opinion. European banks, whose boards were largely reconstituted after the financial crisis, appear to be heading in the right direction with almost one in three having industry experience.

In terms of compensation, it has largely been flat over the last three years:
My impression is that directors of corporations are some of the highest paid jobs per effort expended in the world. You get paid, in this case with the largest US banks, around $177k for around 13 meetings each year. Most of the American and European bank directors were clearly in over their heads before and during the financial crisis.

Having said all that, if I'm not mistaken, in most jurisdictions, directors are the only corporate officers that can be personally held responsible for the actions of the corporation. However, in my short time following business, I haven't seen directors being convicted for anything a corporation has carried out.

I don't want to start another rant but in my opinion, the biggest problem plaguing investing (from a very-long-term perspective) is the ineffectiveness and incompetence of directors. They are supposed to act on behalf of shareholders but they seem to be in their own world most of the time. Many directors act in the interest of management rather than the shareholders/owners. This is not an easy problem to solve. Warren Buffett has suggested that boards should be made up of wealthy and successful individuals who get paid nothing (i.e. they work for prestige/success and would care about not destroying a company or their reputation) but I don't think that's going to work; it's hard to motivate too many people without throwing some money in front of them, and not many successful people would want to waste their time sitting on boards.

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