Friday, January 30, 2009

Ken Lewis, Off Message

I hate to see a past Directors & Boards author getting beat up in the press. That's what has been happening to Ken Lewis. The Bank of America chairman and CEO, who graced our cover three years ago as a paragon of good governance thought leadership, has taken a pummeling this week. No CEO wants to be on the receiving end of a gut punch like this one from the news and views service.

Here is the thought that I had when digesting what happened to BofA re the Merrill losses disclosure in December, after the shareholder votes were in. When Paulson and Bernanke were apparently browbeating Lewis into going through with the Merrill acquisition, maybe this is what Lewis should have said: 

"Listen, guys, I have to go back to my owners on this. You can't expect me to make this decision on my own. Haven't you heard — the age of the Imperial CEO is over. It's not my company. I know if I tell my board — oops, the board — that we should go through with this, they'll bless that decision. But let me at least fully disclose the changed circumstances to the shareholders. They own the company, believe it or not. Let the chips fall where they may, but they should make the final call on going through with this deal."

Not a bad retort. Maybe a bit naive, considering what this broken deal might have done to shatter already bleak and fragile circumstances as 2008 was coming to a close. And it's certainly idealistic as to best practices in corporate governance.

But Lewis might have brought with him to his meeting with the Treasury Secretary and the Fed head a copy of the Third Quarter 2006 edition of Directors & Boards, and pointed to the concluding paragraph of his authored article. 

He would have done a great service to the shareholders by reminding himself, as well as the government biggies, of what he wrote then: "My hope for all of us is that we will find the courage and the wisdom to perform both of our primary functions as directors with equal skill — that of protecting wealth, and of building it for future generations." 

Sunday, January 25, 2009

Leaders Create 'A Special Moment'

As George W. Bush is completing his first week in the ultra-exclusive club of being a former President of the United States, I'll share with you a passage that I have just come across in a newly published book I'm reading. It resonates under the circumstances of the change in the White House. It also contains a leadership lesson for all. The book is "The Power of Who," by Bob Beaudine, president and CEO of Eastman & Beaudine, an executive search firm. Bob rewinds in time with this following anecdote:

"I met George W. in 1983 while planning a political event for his dad (then vice president) and President Ronald Reagan. We couldn't get either of the two fathers to come speak at our event, so we did the next best thing—we invited their kids: George W. and Maureen Reagan.

"When my wife, Cheryl, and I picked up George W. at Love Field in Dallas, I expected to see Secret Service and an entourage of helper bees swarming the vice president's son. But to my surprise, there was no one with him. The future president of the United States came off that Southwest Airlines flight from Midland, Texas, wearing the basic uniform of a Texas oilman: a blue work shirt and jeans. He even carried a backpack.

"George W. was down to earth and charismatic and had an engaging smile. It wasn't long before he made Cheryl and me feel like we were his closest friends, partly by his endearing style of calling me Bobby instead of Bob. Nobody had called me a nickname since college. Through the years, this term of affection went from Bobby to Bobby Boy.

"We hosted George throughout the event. Watching him, my wife and I both commented that he seemed naturally gifted with the skills needed for this type of political fund-raising event. He made friends easily and seemed like he cared about those he met. He also had one exceptional skill that cannot be learned. When he first meets you, he has the rare ability to create a special moment just between the two of you. He would put a hand on your shoulder or tell a story or a joke as if it were meant just for you.

"Had I been more perceptive perhaps I would have recognized some of the clues that indicated greater things to come in George W.'s future."

A poignant reflection, indeed. And, no matter what your political persuasion, a singular insight into the character of leadership. By the way, Bob Beaudin's book is subtitled "You Already Know Everyone You Need to Know." To be honest, that intriguing subtitle is what got me to crack the cover. It's a worthy read, particularly for the times we're in now when relationships—and leadership at every level—are being tested by the economic crisis. 

Wednesday, January 21, 2009

Such an Unnecessary Crisis

Optimism suffused the ether just about everywhere on Inauguration Day, including in a Wharton School lecture hall. 

Famed finance professor Jeremy Siegel (pictured) started off a special lecture on the financial crisis by asking the class, a mix of undergrads and MBA students with a few invited outsiders, to what extent they agreed or disagreed with this statement: "I am confident that President Barack Obama will lead us back to prosperity in his first term." Using their handheld instant-recording devices, a tool becoming familiar in many business conferences, the answers soon splashed up on the screen: 9% strongly agree, 13% agree, and 31% somewhat agree. Okay, not a commanding majority — but this is, after all, an analytical bunch of number-crunching financiers in training. At least their tempered optimism was better than the raspberry the stock market blew the incoming President by sinking over 300 points on his swearing-in day.

If you are like me, you're seriously wondering if this crisis was really necessary. And your ire is getting pretty up there with each shovel of government billions into the banks. What we're basically doing, aren't we, is paying off Wall Street's gambling debts? For a raging outburst of ire, see my Jan. 15th post below about WaMu and its boiler rooms.

It seems that Prof. Siegel would concur that this crisis didn't have to happen. Here is what the good professor has fingered as the cause of the mess: "The financial institutions buying, holding and insuring large quantities of risky mortgage-related assets on borrowed money." That's it, in one sentence. And you know what? This is the killer — "Banks didn't have to hold those assets," Siegel declares. They could have flipped them, he says — much as the investment banks flipped the risky IPOs they brought to market in the 1998-2000 tech bubble. When the tech crash came, the banks weren't holding onto those IPO securities; they had flipped them off their ledgers.

Why didn't the banks flip these real estate securities? After all, as Siegel explains, most of the profit was generated through creating these securities. But no, in their infinite wisdom, the banks "decided these were great assets to hold" — and then compounded this deadly decision by greatly underestimating the risk of these assets. 

It's just all so maddening. If he had to pick the No. 1 culprit for this crisis, Siegel aims his laser pointer right at the CEO's office. It's the CEO's responsibility "to stand back and look at the big picture," he says. To which I would add: That's what the board should be doing, too; that is the value-added of a board.

If it was a lack of big-picturing that got us into this morass, boards may need to do what the country has just done — get themselves a new leader with a new vision of how to get us back on the road to prosperity. Some have already done that, documented by Joann Lublin in the Wall Street Journal, and more changes at the top are happening each day. And they certainly need to refresh their own board composition by adding members with a knack for "seeing around corners," as I like to say. 

As our new President declared on Tuesday, "For the world has changed, and we must change with it." Boards, make your move to help reverse this unnecessary crisis.

Monday, January 19, 2009

Why Volunteer? Let Us Count the Reasons

Tied in with the record-high spirit of optimism generated by tomorrow's Inauguration of Barack Obama, the ethic of service and volunteerism is running sky high as well this Martin Luther King Day.

In addition to MLK, I turn on this day for inspiration on volunteerism to a very personal source  — a distant relative of mine named Marcella Sembrich (pictured). She was a famous opera singer at the dawn of the 20th century, performing in the grand opera houses of Europe and the U.S. Next month will mark the 100th anniversary of Madam Sembrich's retirement from the Metropolitan Opera. She then devoted her life to teaching, including at such renowned institutions as the Curtis Institute of Music in Philadelphia (which I can see from my office window) and at her summer home in the Lake George area of New York. That home has been converted into a museum in her honor.

As a supporter of the museum, I get its quarterly newsletters. A recent issue addressed the subject of volunteering, and offered up this useful — and cleverly composed — insight:

"People volunteer for many reasons. The main reason is a desire to serve others, but this does not exclude other motivations as well. Think of volunteering as an exchange, something for you. something for the organization. Think about that you receive when you give and consider why you want to volunteer. Here are possible motivations to volunteer —

• for fun
• to feel good
• to keep busy
• to share a skill
• for recognition
• to make friends
• to be challenged
• to have an impact
• to keep skills alive
• to be part of a team
• because you were asked
• for the freedom to schedule
• to have an excuse to do what you love
• to get to know people in your community."

Anyone reading this list — including corporate and advisory board members and trustees of all stripes — will recognize one or more motivations that have prompted us to say "yes" to an invitation to be of service to an organization that we deemed worthy of our support. 

That ethic of service and volunteerism will be put to the test in the times ahead. Let this day inaugurate a renewed ethic of service to help lead our nation out of its current travails as best we can, where we can — be it on the seat of a Fortune 500 board or in the trenches of a community nonprofit or in any other capacity that helps move the needle in a positive, life-affirming direction.

Thursday, January 15, 2009

Coffee Is for Closers ... at WaMu

JPMorgan Chase released its fourth quarter results today. It squeaked by with a tiny profit, but warned that its purchase of Washington Mutual is going to cause the bank some wretchedness this year. The New York Times reported that WaMu loan losses could reach as high as $36 billion, $3.5 billion more than what JPMorgan had accounted for.

Want to know wretched? Read about the boiler room run by the lending offices at WaMu, as profiled by the NYT's Peter Goodman and Gretchen Morgenson in their Dec. 28 article, "Saying Yes, WaMu Built Empire on Shaky Loans." Read it and weep for how WaMu has so recklessly contributed to the financial crisis. Here are a few snippets:

— "Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans...."

— "During [CEO Kerry] Killinger's tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers' incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients."

— "WaMu gave mortgage brokers handsome commissions for selling the riskiest loans... 'It was the Wild West,' [said a founder of an appraisal company]."

— "Employees in Tampa who fell short were ordered to drive to a WaMu office in Sarasota, an hour away. There, they sat in a phone bank with 20 other people, calling customers to push home equity loans. [Said one former employee] 'The regional manager would be over your shoulder listening to every word. They treated us like we were in a sweatshop.' "

— "WaMu's boiler room culture flourished in Southern California, where housing prices rose so rapidly during the bubble that creative financing was needed to attract buyers."

Now that you've read these slices of the seamy underbelly of subprime lending, if you have a few minutes click on this clip. It's the famous "Coffee Is for Closers Only" scene from the film (and before that, stage production) "Glengarry Glen Ross" (warning: language alert). That's Alec Baldwin pictured above, who plays the Big Closer in the movie. There's a Big Closer in Gretchen and Peter's article — "a bulldozer," as a WaMu colleague described him to the reporters — who might be role-modeling this film character. 

Maybe Jamie Dimon should have run out and rented this film before agreeing to buy WaMu. (The same could be said for Ken Lewis re Countrywide.) Maybe the directors of WaMu should have had a special screening before they took this sucker down. 

I better settle down. My ire is getting to me. Let me go get a cup of coffee. Coffee is for WaMu taxpayer bailer-outers too.

Monday, January 12, 2009

Jobs Report: And Now a Word from Mr. Van Gorkom

Friday's unemployment report was gruesome. We have a jobs mega-crisis in this country — the yearly job loss is the worst since 1945, and the Conference Board today said that the economy could lose 2 million more jobs in 2009. So why in this context do I bring up a famous name out of the annals of governance?

Those who recognize the name Van Gorkom know it as a bombshell Delaware court case — Smith v. Van Gorkom. The case involved a CEO — Jerome Van Gorkom (pictured) — and his board who sold their company, Trans Union Corp., under circumstances alleged by the plaintiffs to be insufficiently rigorous in trying to get top dollar. Plaintiffs won. The 1985 ruling jolted boards as to the heightened degree of due process they now needed to go through to prove their fiduciary responsibility. 

I can attest that Jerry Van Gorkom was more than just the namesake defendant in one of the game-changing cases in governance history. He was a decent fellow. I got to know him a bit when I arranged for him to speak to an audience of CEOs at the Harvard Club in New York in 1988, shortly after he published in Directors & Boards a convincing defense of his and his board's actions in the sale of the company. (Van Gorkom was also a sponsor of Directors & Boards Publisher Robert Rock's doctoral dissertation at Harvard in the early 1970s.)

My mind turns to Van Gorkom now because I've always been haunted by something he once said about his upbringing. The following was recorded in Autopsy of a Merger, a saga of the Trans Union deal written by William M. Owen, a former in-house attorney for the company:

"Made a millionaire when his Trans Union stock holdings were cashed out at the merger, Van Gorkom had risen from abject poverty. When he was only seven years old, his parents separated. He lived with his mother, and they survived the bitter Depression years on odd jobs, welfare, and assistance from his aunts.

" 'My mother and I were in severe financial straits several times in my youth,' he once recounted to a newspaper reporter. 'It left a very deep impression on me, and my children accuse me, properly, of having a Depression complex. I never forgot reading about the hundreds of men sleeping on lower Wacker Drive with newspapers wrapped around them. I developed a horrendous fear of being unemployed. Without a job, you're helpless.' " 

I'm sure boards hate to sanction management's layoff decisions. My wish is that both management and the board feel the way Jerry Van Gorkom (who died in 1998) felt about the preciousness of having a job — and that they're not engaging willy nilly in what often seems to be a wholesale axing of employees. Most especially, my wish is that directors long for the day when they can take pride in how many jobs management has created. Let's get ready — sooner rather than later — to build that into the performance evaluation metrics to get this country on the move again.

Wednesday, January 7, 2009

Leon Panetta, in New Territory Again

A past Directors & Boards author is in the news — Leon Panetta has been named by President-elect Barack Obama to be the next director of the Central Intelligence Agency. Initial reports hint that he may run into some flack in the approval process on Capitol Hill and within the intelligence establishment. Those criticisms, at least in regards to his governing philosophy, may be off the mark. 

A reading of Mr. Panetta's cover piece he authored for the Winter 2003 issue should assuage any doubters as to his intentions to lead an agency that will be run with a responsive notion of accountability and, crucially, one that will earn the public's trust.

He was all about trust six years ago in his article. As a board member of the New York Stock Exchange, he had just served as co-chair of a committee that proposed important new post-Enron standards and changes in the governance of NYSE-listed companies. 

His table-pounding thesis: It's one thing for boards to say that they are exercising proper oversight in the boardroom, but it's something else entirely to prove it ... and boards had better be thinking about how to prove it to restore the public's trust in corporate governance. "This is new territory for boards," he wrote in his article. "It isn't clear how far we will have to go — not to do our jobs well, but to make it apparent that we have done so."

Also this: "Can we end the long tradition of the boardroom as a sealed chamber from which we issue only unanimous endorsements of management's actions and results? Can we move toward more transparency about the boardroom process without undermining the ability of management teams to produce the results that shareholders want?" CIA vetters may want to read that last statement closely. 

Panetta pointed the way to restoring the credibility of a vital institution — the public company board of directors. I'm rooting for him to bring his quest for accountability and trust to the CIA.

Come to think of it, with his board experiences and laser focus on improving corporate governance, why wasn't he the choice for the new head of another three-letter government agency — the SEC? We desperately need a restoration of trust there.

Friday, January 2, 2009

Press On

Not many people would put Calvin Coolidge on a list of great Presidential orators. Although historians note that he was an effective public speaker, Coolidge was, after all, nicknamed "Silent Cal."

But he did put forward one of the most stirring principles of achieving success — his call to "Press On." Here it is:

"Press on. Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan 'Press On' has solved and always will solve the problems of the human race."

I have a nicely calligraphic version of this slogan hanging in my office. I also give a copy of "Press On" to all my Temple University students on the last day of class — to send them out into the world armed with a piece of wisdom for succeeding in the workplace and in life. A rendition of this slogan can be found here

On this first work day of 2009, the view ahead looks 3D — i.e., a scale ranging from Difficult on the high end to Dismal in the middle to Dire at the far end. If there ever was a time to 'Press On,' this is it. It will take persistence and determination to emerge from the rubble of 2008. 

I'd like to see Silent Cal's counsel imprinted on every board book that goes out this year and at the top of the agenda handed out at every board meeting. Let this be your mantra as you get your businesses back on the up-and-up.