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Companies May Fail, but Directors Are in Demand

For 16 years, Marshall A. Cohen served as a director of the American International Group, stepping down just months before the company’s near-collapse in 2008. Several months later, Mr. Cohen was again in demand, joining the board of Gleacher & Company, a New York investment bank.

Richard Fuld
Getty Images
Richard Fuld

Gleacher expanded its board last year to include not only Mr. Cohen but Henry S. Bienen, who served as a director of Bear Stearns from 2004 until its rescue by JPMorgan Chase in March 2008.

On the second anniversary of the Lehman Brothers bankruptcy, appointments like those of Mr. Cohen and Mr. Bienen highlight how the directors of the companies at the center of the financial crisis — A.I.G. , Bear Stearns and Lehman itself — still play an active role in the governance of corporate America.

“In too many cases, the radioactivity of a board member of a collapsed company has a half life measured in milliseconds,” said John Gillespie, a longtime Wall Street investment banker and the co-author of “Money for Nothing” (Free Press), a recent book on corporate boards.

While in some cases investors are suing members of the boards of the failed companies, shareholder advocates have for the most part focused their energies on other issues. And public outrage over the financial crisis has been mainly focused on the executives in charge of firms like Bear and Lehman.

Some, like James E. Cayne of Bear, have not re-emergedat other companies. Richard S. Fuld Jr. of Lehman, which filed for bankruptcy on Sept. 15, 2008, is running a small advisory firm.

Yet the decisions that led to the collapse of the firms they steered were not theirs alone. Directors are elected by shareholders to oversee the activities of a company and play an important role in appointing senior officers and setting corporate strategy. In many cases during the real estate bubble, directors approved the strategy that paved the way for executives to make risky investments on borrowed money.

These directors also approved pay packages that fed the risk-taking.

“The C.E.O.’s get most of the attention because there’s so little expectation that the board should have done something,” Mr. Gillespie said. “In our corporate system the directors are supposed to be in charge, not the C.E.O., yet they rarely get any of the blame because they’re typically dominated by the C.E.O.”

A Gleacher spokesman declined to comment. Mr. Cohen, a Toronto lawyer and businessman, did not return a telephone call and e-mail seeking comment. Mr. Bienen, president emeritus of Northwestern University, did not return a telephone call and e-mail seeking comment.

Directors Staying Put

Many directors of failed financial institutions have kept the other director posts they had before the financial crisis.

Marsha J. Evans, a former Lehman director, has not landed any new board seats, but continues to serve as a director of Weight Watchers , Huntsman and Office Depot , positions that earned her about $500,000 in compensation in 2009. Ms. Evans declined to comment.

Some directors were named to the boards of the companies that acquired their ailing firms.

Bank of America named two longtime Merrill Lynch directors, Charles O. Rossotti and Virgis W. Colbert, to its board after acquiring the ailing investment bank for $29 billion. Mr. Rossotti and Mr. Virgis did not respond to requests for comment.

Merrill’s former chief executive, E. Stanley O’Neal, resigned from the firm in 2007 after billions of dollars of mortgage-securities losses, but he was soon snapped up as a board member by Alcoa . An Alcoa spokesman declined to comment. Mr. O’Neal did not respond to requests for comment.

Some board members, who spoke on the condition of anonymity, say their experience on the boards of troubled companies, made them stronger directors, giving them hands-on experience that will help them stop other companies from repeating the same mistakes.

“Directors of these financial institutions may or may not have been asleep at the switch, and if they were, they had a lot of company,” said Michael Klausner, a corporate law professor at Stanford. “Leaving that question aside, they may well have gained valuable experience that will make them good directors today.”

Two months after Wells Fargo acquired Wachovia in a government-forced transaction, a former Wachovia director, Robert A. Ingram, was named to the board of the semiconductor company Cree. Mr. Ingram, the former chairman of OSI Pharmaceuticals , had served as a Wachovia board member since 2001. Cree will pay Mr. Ingram $303,000 in compensation for 2010, a filing shows.

Stanley O'Neal
Stanley O'Neal

A spokeswoman for Cree declined to comment but cited a December 2008 press release on Mr. Ingram’s appointment citing his “wealth of experience.”

In 2008, the Outstanding Directors Exchange, a unit of the media company Pearson , named Stephen E. Frank an “outstanding director” for “the masterful chairmanship of Washington Mutual’s audit committee during a period of intense change.” Mr. Frank, a longtime utility industry executive, had served on the board of Washington Mutual for more than a decade when the savings and loan — buffeted by excessive exposure to subprime loans — was seized by the government in September 2008 and sold off to JPMorgan Chase.

Last year, the Las Vegas utility NV Energy elected Mr. Frank to its board and he earned $109,000 in compensation.

A spokesman for NV Energy declined to comment. Mr. Frank could not be reached. In a 2008 interview with Agenda, a corporate-governance newsletter, referring to his experience at Washington Mutual, he said that “to suggest, with 20/20 hindsight, that an audit committee or a finance committee could easily have prevented these things, I think, is naïve.”

Rakesh Khurana, a Harvard Business Schoolprofessor specializing in corporate-governance issues, says there are legitimate questions surrounding these boards. “When selecting individuals to oversee an organization, what criteria should we be using other than their previous performance on a corporate board?” he said. “If there’s no accountability here, then what is the system of accountability?”

Inquiries into the 2008 financial crisis have spent relatively little time looking at the role of corporate boards.

The Senate Permanent Subcommittee on Investigations held four hearings on the causes of the financial crisis, none of which focused on the role of directors.

The Financial Crisis Inquiry Commission, appointed by Congress, has held myriad hearings and interviews with executives of failed institutions. Although the public sessions have not included testimony from any outside directors, the hearings did touch on corporate governance, and the commission has privately interviewed directors, according to Phil Angelides, the commission’s chairman.

“I don’t think there’s any question that a dramatic failure of corporate governance was a central issue of the crisis,” Mr. Angelides said. “You’re going to find when our report is released that this will be a major point.”

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