New BofA Chairman Chad Holliday

It strikes me as a superb decision by the Bank of America board to have Charles "Chad" Holliday Jr., former chairman and CEO of DuPont Co., be the company's new chairman.

Directors & Boards author Jack Roddy visited with Mr. Holliday last year — a meeting that resulted in a Q&A article on Holliday's style of leadership that we published in the Fourth Quarter 2009 edition.

I had come to know Roddy as an avid devotee of leadership. He studies it intently in his role running J.P. Roddy Consultants, through which he specializes in recruiting leadership candidates in the automotive, transportation, plastics, and chemical industries. When he shared with me the transcript of his conversation with Chad Holliday on what makes a good leader, I jumped at the chance to share it in turn with the Directors & Boards audience.

As I reread this now six-month-old article in light of Holliday's new appointment at BofA, I am even more persuaded that the troubled institution and its shareholders are in good hands. Here is one of Holliday's answers to Roddy's question as to the importance of spontaneity as a leadership trait. Keep in mind as you read his answer the fateful decision by BofA to complete the Merrill Lynch acquisition:

"My style has always been to be spontaneous as a way of managing in a meeting or other situation. I find myself constantly asking, 'Am I listening well? What is this person saying that I need to hear?' I believe being comfortable with spontaneity is important for a good leader.

"I remember once we were considering an acquisition and we were far along the way to going forward with a positive decision. Then suddenly someone asked a new question about certain factors. This opened up a whole new way of looking at the acquisition such that we said to ourselves, 'What did we miss that caused us to move this far without seeing another important viewpoint?'

"Ultimately, we decided against the acquisition, which was the right decision, yet we almost missed the boat on that one due to singular-direction thinking. The fact that we were open to new questions helped us to make the right decision."

Singular-direction thinking is a threat to many boards. To the extent that such thinking may have almost sunk BofA, my guess is a change in board culture is coming with Chad Holliday chairing the board meetings.

Louis Lowenstein (1925-2009): 'A Stitch in Time...'

Hang around long enough as a publication's editor and one thing that happens, sadly, is you begin to see a steady stream of your past authors move on to the big boardroom beyond. A loss this past month was Louis Lowenstein. 

The New York Times in its April 25th obit described him as an "influential law professor and former corporate executive who for nearly three decades dissected the excesses of Wall Street and warned of the dangers of short-term investing." I describe him as one of the most incisive analyzers of corporate governance to appear in the pages of Directors & Boards during my 28-year tenure as editor. 

I had the pleasure of publishing several pieces by Mr. Lowenstein. An article he wrote for me in 1997 is as vital to pointing the way forward for a sound governance system as it was when it first appeared a dozen years ago. Titled "A Governance Tool that Really Works," Lowenstein highlighted a factor that often is not fully recognized and appreciated in debates over how to make corporate boards and managements more effective: our financial accounting and disclosure system.

In the nonstop handwringing over how to improve governance, he wrote, "we usually look to board structures, compensation patterns, independent oversight, and the like. The debate has thus far been waged without so much as a nod toward the day in-day out impact of our accounting standards. I will suggest that good financial accounting, the extensive disclosures mandated most often in the English-speaking world, and notably in the U.S., is an often overlooked but powerful tool for enhancing corporate performance."

He went on to flesh out brilliantly this thesis. Let me cut to his two concluding paragraphs:

"According to a proverb that was popular in America when I was a child, 'A stitch in time saves nine.' My mother darned my socks, as most mothers did in those days, and as few if any mothers do today. But my mother would have understood corporate governance in those same terms: It is better to act before more damage is done.

"As we have recognized in the U.S. for over a half-century, good financial accounting is important to the integrity of our markets — but it is also an important corporate governance tool. It provides the brightest light and the most objective, detailed, and textured portrait of managerial performance. Without it, neither the financial press, nor shareholders, nor markets could scrutinize that performance, except by inference from sketchy data or by reliance on inside information of uncertain quality and consistency. Without it, the necessary stitches will not be taken in time."

Did I say his article is as vital as ever? My misspeak. Make that more vital than ever. As this Great Recession grinds on with its profusion of accounting and disclosure atrocities (hello Citigroup and Bank of America/Merrill Lynch, et al), Mr. Lowenstein's paean to accounting integrity and full disclosure should be Exhibit A in the reading list for all new board members, especially those assigned to audit committees. From my past interactions with this famed Columbia Law School prof and former president of Supermarkets General Corp., I believe he would approve.

[Photo by Gabriel Cooney] 

Just the Facts

Fortune reporter Shawn Tully did a good job dissecting how the Bank of America/Merrill Lynch deal, and the attendant Ken Lewis/John Thain relationship, went careening off the rails in an article titled "Divorce — Bank of America Style." Here is a key observation that Tully makes: 

"There's no doubt that Thain bears a lot of the responsibility for Merrill's recent woes... But Lewis, too, must shoulder a share of the blame... He failed to recognize how perilous [Merrill's legacy trading] positions were, and placed far too much confidence in Thain's assurances when the numbers told a different, dangerous story" [emphasis mine].

Readers of Directors & Boards will know what Tully is talking about — and where Lewis allegedly went wrong. In the First Quarter 2009 edition, author Jonathan Tuttle, a partner of Debevoise & Plimpton, examines the intricacies of internal investigations in his article, "The First 48 Hours: No Board Missteps." The first critical question to be addressed, Tuttle advises, is whether to conduct an internal investigation at all. Here is his advice:

"A single question can be an important starting point for making that judgment: Is the board receiving assurances or facts? Mere assurances of compliance programs working or accounting entries being properly recorded will wilt in the glare of hindsight, particularly if offered by those who may later turn out to be culpable in some form. Facts, on the other hand, may be more difficult to harness initially, but provide a much more concrete basis on which to determine the best path forward" [emphasis Jon Tuttle's].

If we needed a third opinion to seal the deal for facts vs. assurances, we would of course turn to "Dragnet" star Jack Webb (pictured), whose character Sgt. Joe Friday became famous for his investigative line, "All we want are the facts, ma'am." (Apparently, he never actually said "Just the facts, ma'am," as is widely thought — and which would have made for a catchier title for this blogpost.)

Boards have a big job helping their companies crawl out of this recession crater. To do this with agility and as proper fiduciaries, they are going to need to anchor themselves with facts, not assurances.

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 breakingviews.com 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."