At the peak of the housing mania, some of
Citigroup Inc.'s 375,000 employees were creating and trading among the most toxic mortgages and mortgage-backed securities the banking business had ever seen. Yet
Citigroup's board was poorly equipped to ask management probing questions about the dangers these instruments created—only one of Citi's non-employee directors, for instance, had any experience in financial services. That lack of board engagement is now widely seen as a big contributor to the bank's problems.
Citi's board was hardly unique at the time. Heading into the greatest economic crisis in generations, only a third of outside board members at the biggest banks had any background in financial services, according to a report released Tuesday by Moody's Investors Service.
Today, bank directors are a bit more clued in: Nearly half of the big banks' outside directors have financial industry backgrounds, Moody's reports.
“Ideally, these individuals can ask the right questions and be better equipped to challenge management in key areas such as risk and strategy,” Moody's analyst Christian Plath wrote.
Since the financial crisis, Citi has replaced much of its board and has brought on seven new directors with banking experience.
Bank of America Corp., which also had few outside directors with banking experience, has added five directors with financial services backgrounds.
The Moody's report suggests there's some correlation between the amount of banking expertise on board and the bank's ability to weather the economic crisis. For example, 62% of
Credit Suisse's outside directors had banking experience in 2007 and it steered through the storm much better than rival
UBS, where only 12% of board members had banking experience. At
Goldman Sachs, 45% of directors had financial services backgrounds three years ago; at
Barclays, 46%.
Traditionally, banks have been reluctant to invite even retired executives from competing institutions onto their boards. And it's clear that banks with strong management teams were able to muddle through the crisis even without help from other bankers on their boards.
The board at J.P. Morgan Chase & Co. has no outside directors with financial industry experience, for instance. Its 11 members include the chief executives of Honeywell International, Johnson & Johnson and Yum Brands and the former chief executive of Exxon. It also has two people deeply familiar with the housing industry: the CEO of a real estate development company and the chairman of a window manufacturer. The only banker on the board? CEO Jamie Dimon.
A J.P. Morgan spokeswoman declined to comment.
Mr. Elstein is a reporter at Crain's New York Business, a sister publication of InvestmentNews.
