Best Board

November 29th, 2017

Summary Analysis

T.pnghere was a time in the not-so-distant past when service on a bank board of directors was considered to be an earned honor—a high profile, article-in-the-paper achievement with prestige, excellent compensation and limited performance expectations. Those days began to fade during the savings and loan problems in the 1990s and effectively ended with the 2008 financial crisis. Bank boards have been in the crosshairs of regulators and politicians in Washington, D.C., ever since.

In ranking the boards of the 10 largest U.S. banks, we analyzed board composition by a variety of factors including diversity, critical skill sets, median compensation relative to profitability, and independence. The board that best balanced all components was Citigroup, whose financial performance and stock price has steadily improved under CEO Michael Corbat and independent Chairman Michael O’Neill. The board under O’Neill’s leadership forced out former CEO Vikram Pandit in 2012 and elevated Corbat, who had been running Citi’s activities in Europe, the Middle East and Africa, to the top job. Since then, Corbat has been sharpening Citi’s strategic focus by selling off non-core businesses in the bank’s sprawling global empire and cutting expenses.

“In Citi’s case, the board in general and Mike O’Neill in particular, really have had a big impact there,” says veteran financial services investor and analyst Tom Brown, president of the hedge fund Second Curve Capital. “I would also give Mike Corbat some credit for that. He leans on his chairman more than most CEOs lean on their chairman.” Brown says that Corbat and O’Neill have developed an effective partnership that has some give and take. “I have a sense that there has been a great balance on the Citi board,” says Brown. “Mike Corbat has got to be interested enough in Mike O’Neill’s advice to seek it, and Mike O’Neill has to give his advice and realize that not all of it is going to be followed.”

Tom-Brown.pngFinishing in second place is TD Bank, which has done a good job of developing a strong executive bench and increasing market share in the U.S. compared to its peers. It also scored well for the composition and independence of its board. (Data for TD in the board category reflected its publicly traded parent in Canada.) Third-place finisher PNC Financial Services Group emerged from the financial crisis in healthy enough shape that it was in a position to acquire the ailing National City Corp. in 2008, expanding its franchise throughout the Midwest. The board successfully handled the transition to CEO William Demchak in 2013. It< rated well for age and gender diversity compared to its peers. Fourth place went to U.S. Bancorp, where the board oversaw a smooth transition to new CEO Andrew Cecere, who took over in April of 2017. The board’s median compensation, at $252,168, was balanced well compared to return on equity, at 12.86 percent. Bank Director’s expert panel also noted the bank’s intense focus on strategy, compliance and risk management. Rounding out the top five is BB&T Corp., where the board was considered to be active, engaged and thoughtful about emerging issues.

Coming in last—not unexpectedly—is Wells Fargo & Co. The organization’s reputation was stained by its widely-reported and embarrassing scandal involving employees who opened new customer accounts without their knowledge or authorization. The problems at Wells Fargo point to a challenge that all boards of very large banks face—getting important information about potential problems in time to do something about them. And that is why it’s so important that these banks do have risk management, compliance, legal and internal auditing functions that are robust, independent and have sufficient resources. Boards have to make sure they have the right people performing those functions.

Tom-Brown-2.pngRegulation has become a much bigger challenge for the boards of very large banks thanks to the passage of post-crisis laws like the Dodd-Frank Act, and persistently low interest rates have at times dampened the banks’ financial performance in recent years. But banking has also become much more complex, and for a megabank, that complexity might be the biggest challenge of all. “When I started in banking, a $5 billion bank was huge,” says Eugene Ludwig, CEO of the Promontory Financial Group and a former Comptroller of the Currency. “Today, a $5 billion bank is viewed as a super-community bank, and the governance of those enterprises, which would have been thought of as challenging 40 years ago, is viewed as a piece of cake now.”

How They Ranked

      SCORE TOTAL DIRECTORS OUTSIDE DIRECTORS WITH CEO EXPERIENCE*
  1 Citigroup 2.81 16 4
  2 TD Bank (U.S.) 3.53 13 9
  3 PNC Financial Services Group 3.74 14 6
  4 U.S. Bancorp 3.90 16 12
  5 BB&T Corp. 4.89 16 5
  6 JPMorgan Chase & Co. 5.04 12 8
  7 Bank of America Corp. 5.09 14 6
  8 SunTrust Banks 5.22 12 4
  9 Capital One Financial Corp. 5.25 10 4
  10 Wells Fargo & Co. 7.11 16 8

*Total directors and outside directors with CEO experience reflect each bank’s board as of October 2017.

Did You Know?

I.pngn the world of corporate governance, the buck always stops with the board of directors. And the Wells Fargo & Co. board has learned the bitter truth of its accountability over the past year as it tries to work through an embarrassing account opening scandal that has tarnished what was once the strongest brand in banking, with its iconic red stagecoach and rugged western ethos.

Like many of the 10 largest U.S. banks, Wells Fargo is the product of a series of mergers over the past 20 years, most recently its 2008 acquisition of Wachovia Corp., which created the largest branch network in the country and made it a true nationwide bank. Wells Fargo had a reputation for sound management going back to former CEOs Carl Reichardt and Richard Kovacevich and has long enjoyed strong investor support. That perception changed in September 2016 when federal regulators announced that over the previous five years, Wells Fargo employees had systematically opened 2.1 million new deposit and credit card accounts for existing customers without their knowledge or consent, some of whom were charged fees on the unauthorized accounts. Some 5,300 people lost their jobs, including CEO John Stumpf, and the company paid a $185 million fine. As if this wasn’t bad enough, Wells Fargo announced this August that it had uncovered an additional 1.4 million bogus accounts going back to January 2009, bringing the tally to a stunning 3.5 million.

Brian-Kleinhanzl.pngEvery large bank has three important constituencies that it must pay close attention to: shareholders, regulators and customers. The challenge facing the Wells Fargo board is how it should go about repairing its reputation with each of those groups.

Institutional investors, who hold almost 80 percent of the stock—including Warren Buffet’s Berkshire Hathaway, which is the single largest shareholder with a 9.43 percent holding—have largely stuck by the bank through most of the scandal. The company’s stock price dropped sharply last September when news of the account opening fiasco surfaced, but has largely recovered since then. “A lot of investors that we speak to are certainly giving Wells the benefit of the doubt [that it will] be able to put these issues to rest and move forward in a manner that’s not too dissimilar from how they operated in the past,” says Brian Kleinhanzl, a research analyst who covers the bank for Keefe, Bruyette & Woods. “So from that perspective, I think investors are still supporting the company.”

Bank regulators such as the Federal Reserve Board, which supervises Wells Fargo at the holding company level, no doubt approved of the board’s decision to elevate Vice Chairman Elizabeth Duke, who joined< the board in October 2016, to the chairman’s role next January. She will replace the current chairman, former General Mills Chairman and CEO Stephen Sanger, who will leave the board in January. Duke was a member of the Fed’s Board of Governors from 2008 to 2013, and will bring the credibility of a former senior regulator to her new position. It is not unusual for large banks in trouble to appoint a former regulator to their boards. In 2008, when the Bank of America Corp. board was being criticized for its lack of financial expertise as it struggled to recover from the financial crisis, it appointed four new directors with banking backgrounds including Donald Powell, a former chairman of the Federal Deposit Insurance Corp., and Susan Bies, like Duke a former Fed governor. Bies remains on the Bank of America board today.

Wells Fargo must also repair its relationship with existing and prospective customers. Kleinhanzl says there has been sluggish new account growth in certain retail products like credit cards, “so they really do have to get the consumers back on.” The bank has reimbursed customers who were charged fees on accounts they didn’t know they had, and in time should be able to re-establish a level of trust—assuming there are no more revelations of fraudulent account openings.

January.PNGAnd that’s really the key factor in the board’s ability to win back credibility with all of its constituencies. “They just can’t have any new scandals arise,” says Kleinhanzl. “They need to put all that to rest and then not have anything new come up. Part of the challenge is to see how the board adds value. In this [situation], it would be to maintain a focus on compliance, and over the longer term, change the culture of the institution. It’s up to the board to make sure they are [putting] pressure on management to achieve both.”

Bank Director Research Group