Corporate Directors Forum 2012 – Part 3: Has the Financial Crisis Changed the "Governance-Industrial Complex"?

These are some relatively quick notes that I’m sharing from the Corporate Directors Forum 2012, held on the beautiful campus of the University of San Diego, January 22-24, 2012. This post may be a cryptic… not complete sentences bt hopefully mor intelligible thN txt msgN.

The program was subject to the Chatham House Rule, so there is little in the way of attribution below but I hope to provide some sense of the discussion. There may have been changes in panel members not reflected here. I throw in a lot of opinions. Many are mine. Some are those of panelists. Some were from the audience. Some are just what I’ve heard that I hope is related. Confusing? Attend next year and you’ll get a more complete picture.

Did We Learn Anything From the Financial Crisis: How Have the Reforms Changed Doing Business? 

  • Moderator Gary H. Stern, former president & CEO, Federal Reserve Bank of Minneapolis; director FINRA and The Dolan Company
  • Laban P. Jackson, Jr., director, JP Morgan Chase; chairman & CEO, Clear Creek Properties, Inc.
  • Dane Holmes, head of investor relations, Goldman Sachs
  • Donna F. Anderson, VP & global corporate governance analyst, T. Rowe Price Associates, Inc.

We learned that we made a lot of mistakes. The mistake now is that there is not enough apologies and help in cleaning up the mess instead of fighting it all the way. All we talk about is how expensive it is.

Living wills. Bankers have to quit fighting. Its a mighty thin pancake; it doesn’t even have two sides. Incorporate better measures of risk. Sometimes perception overwhelms reality.

Transparency is not a cure-all. Information will not always be used for good. Covering your core constituents is not enough… the public is an important stakeholder that was never targeted by some. Goldman Sachs, for example, once took pride in moving alumni to pubic services. That was a good thing; its one element in why many members of the public see Goldman as a pariah.

Profiting from the failure of others. You’re only as strong as your weakest link. General practice might have been to not call up the regulator to bash a competitor.  Will this change in the next wave?

Pay is rising faster than performance. There’s been lots of activity but little progress. More dialogue. More personal. We’ve been voting against comp committees for years but now are more likely to give them a pass and vote against the compensation package itself.  Many of the recent changes may not be well grounded; we just change what is in the spotlight.

Many companies midcap and below won’t meet with funds. No matter how many withholds, they stay on board. There is still no real mechanism to institute change. Golden parachutes are out of control in change of control situations.  So much activity but so little real change… so little actual content. There’s a lack of trust between market participants. The benefits of liquidity should be challenged. Incentives and uninsured creditors created moral hazard problem. We learned that uninsured creditors will be protected. As a result, uninsured creditors don’t use significant resources to protect themselves. As long as risk is priced too low we will continue to get into systemic difficulty — that problem hasn’t gone away.

Importance of preparation in a world of improvisation. Lack of preparation by financial regulators. Living wills (Resolution Recovery – how they would wind down business over weekend if they become insolvent. Plans are due this summer). They have the possibility of reducing future crises.

“Collegiality” is too expensive for shareholders. Most get up in the morning and try to do the right thing. However, Dodd Frank was figuratively written in the middle of the night, when they are mad.

What needs to change at rating agencies? Nobody’s come up with a solution that is palatable to the market. The market wants a rating but they are not willing to pay for it. It an opinion; that’s all.

Most of the financial services industry felt the debate was how far to swing pendulum. People want the right outcome… still extend credit. Risk management; how different? Stress testing = good risk management. Liquidity coverage and ratio management.

Euro, we’ve been clear what the risk is. $15.8 billion net. Hedging. $8.5 billion of that is to corporations (now less risky than countries). That is the risk as we know it. “Tail” risk is the risk that when credit freezes, then what is that risk? We have a very fat tail… a lot bigger than $30 billion gross. Liquidity (lack of it) is what kills you. We don’t understand the fat tails.

Too much time is spent by investors on process. Now we may be overly risk averse. Should we go back to Glass Steagall? We compete in a global world. The decision of the broader world is to combine. The answer isn’t clear. Not easy to break up banks. The virtue of living wills is identification of structures. Maybe maybe that will lead to banks simplifying their structure… spinning off less profitable units. Banks try to service their clients. They’ve gotten bigger because people trust them to provide services.

An example was raise of a project by CalPERS (or was it CalSTRS?) to flag directors. They write to corporations re directors who were on boards of companies that were problematic. Response: Having gone through a crisis, these directors are really good. They’ve learned lessons that others haven’t. What does it take to get these guys off boards — indictment or conviction? No, the answer too often is “not being collegial.” Keep doing what you’re doing but make it more public. Everything is 20/20 in hindsight. We weren’t flawless.  No financial institution can survive extended run on their confidence. Panic is an element.

During the conversation, Donna Anderson coined (at least as far as I knew) the term, the “governance-industrial complex.” I now see Matt Kelly used the term back in February 2010 but Anderson’s use was repeated several times at the Forum and may be picked up by more insiders. Maybe it should be “corporate governance industrial complex” to tie the concept down further? I don’t see that term in use yet. Another concept bandied about at the Forum (in a negative way) was “collegiality,” as in collegiality is why directors don’t vote each other off the island, even when they should.

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