Crisis Management

The board of Gold Banc Corp. skirted corporate disaster and lived to tell the tale after a scandalous ouster of its founding chairman and CEO. Today the bank is undergoing a structural transformation and thriving under new ownership, largely due to its board’s unwavering courage and commitment to good corporate governance.

It’s every director’s worst nightmare. In the fall of 2002, the chief financial officer at Kansas City-based Gold Banc Corp. discovers that an improper payment totaling well over half a million dollars was made to the personal account of one of his fellow officers. Digging further, he finds that the bank’s internal controls appear to have been circumvented, and he dutifully reports this information to the board of directors.

But that’s not the worst of it, because the culprit turns out to be Chairman and Chief Executive Officer Michael W. Gullionu00e2u20ac”the same person whose entrepreneurial drive built the company from a small country bank into a multistate institution with $4 billion in assets. Before the ordeal is over, representatives of the Federal Reserve Bank of Kansas City, the Securities and Exchange Commission, and Federal Bureau of Investigation will be crawling all over the bank like ants at a 4th of July picnic.

“I was sicku00e2u20ac”I think we all were,” says D. Patrick Curran, a Gold Banc independent director who lived through the emotionally wrenching experience. “You just don’t like something like that happening to you. You feel like you’ve been violated.”

If the story of Gold Banc and Mike Gullion is one of shame and double-dealing, it is also a textbook case of how to deal effectively with a boardroom crisis. Indeed, the company has won praise from regulators and securities analysts alike for the forthright way in which it has handled the scandal. “If quick action had not been taken, it definitely could have crippled the bank,” says Eric Rothman, an analyst with RBC Capital Markets.

Much of the credit goes to 57-year-old Malcolm M. “Mick” Aslinu00e2u20ac”previously the bank’s president and chief operating officeru00e2u20ac”who replaced Gullion as chairman and CEO. Aslin undertook a thorough overhaul of Gold Banc’s boardroom culture, and the changes are a reflection of his strongly held views on corporate governance. Most important, he wanted a board that was independent of managementu00e2u20ac”a position he freely admits is “heresy in the CEO club.”

“To a large extent, what we’ve tried to do is create an environment of constructive tension that can result in better decisions,” he says.

Aslin did his job so well that Gold Banc has since been acquired by a group of private investorsu00e2u20ac”headed by veteran banker C. Stanley Baileyu00e2u20ac”that was willing to pay a 16% premium over the company’s share price. When Gold Banc went public with the Gullion affair in January 2003, its stock dropped 25% within a few days. Aslin saw the restoration of shareholder value as one of his principal goals, and he believes the sale is a positive situation for all involved. Gold Banc will also become a private company after the deal closes, but Aslin believes a strong governance culture is just as important in a privately owned bank. He will become the company’s nonexecutive chairman after the deal closes, giving him an opportunity to ensure the permanency of the new governance culture he helped put in place.

Once Gullion’s activities came to the board’s attention in late 2002, it acted quickly. According to Gold Banc’s public filings, as well as interviews with bank officials, Chief Financial Officer Rick Tremblay first took his suspicions to the board’s audit committee. Over the next several months, Tremblay led an internal investigation that uncovered a series of transactions in which bank funds had been improperly diverted to Gullion’s personal bank account at Gold Banc-Kansas. The first person Tremblay turned to after he had informed the audit committee about the activity in Gullion’s account was Aslin, a veteran banker who had joined Gold Bank in 1999 after it acquired a computer services company he had founded a few years before. Aslin says he was shocked by what he heard. “There were still a lot of unknown facts at that point, but there was a general feeling that these were actions that could not be tolerated [from] any officer of the corporation,” he says. “So, yes, I was quite upset.”

Tremblay’s investigationu00e2u20ac”which ultimately involved the audit committee’s outside legal counsel as well as the bank’s principal regulators, the Federal Reserve Bank of Kansas City, and the Kansas State Bank Commissioneru00e2u20ac”ended up taking several months to complete. Gullion was fired as CEO in March 2003 and pressured to resign as chairman of the board. Also dismissed was Steven Rector, the cashier at Gold Banc-Kansas who is accused of helping Gullion circumvent that unit’s internal controls. Gullion and Rector were longtime friendsu00e2u20ac”Rector was even the best man at Gullion’s wedding.

These transactions are the subject of an ongoing investigation by the FBI and U.S. Department of Justice. When this article went to press in mid-April, Gullion and Rector had not been charged with any crimes stemming from the activity in question, although both men have made restitution to the bank. Gullion and Rector declined through their attorneys to be interviewed by Bank Director.

Gold Banc has 53 retail branches in Kansas, Missouri, Oklahoma, and Florida, as well as a variety of nonbank businesses including securities brokerage, trust and investment management, and merchant banking. The Kansas City Fed ended up revoking Gold Banc’s rating as a “well-managed” institution because of the Gullion affair, and the institution could have been forced to sell off some of its businesses had it not taken prompt corrective action. Under Aslin’s leadership, the company has strengthened its internal control environment, while also recruiting a financial expert to chair the audit committee, and an experienced businessman to become chairman of the board. The Kansas City Fed restored Gold Banc to “well-managed” status in January, and bank officials say the Fed commended them on how quickly they handled the situation.

“Anyone can have a crisis,” says Rothman. “It’s how you work through that crisis that’s important. What do you learn from it?”

The names “Gullion” and “Gold Banc” were once nearly synonymous in Kansas City. Gullion started the company in 1978 whenu00e2u20ac”still in his early 20su00e2u20ac”he acquired the $2.5 million Oketo State Bank in Kansas and changed its name to Gold Banc. Over the next two decades, the now 49-year-old Gullion expanded the company through a string of 72 acquisitions, including several nonbank businesses. Aslin credits Gullion with building up the company “through hard work and a big vision. Not everyone can do that, which adds to the tragedy of the event.”

But if Gullion had won his spurs as an entrepreneur, he was more recently described as a strong-willed, hands-on manager who wanted to make every decision. “Mike was a good president of a $50 million bank, but not a $4 billion bank,” says one company executive. “Mike was truly a one-man show,” agrees Curran, an outside director who has served on the board for several years. “He tried to keep everything under his control.” Curran says Gullion “did not take questions or criticism very well,” and ran the bank as if it were his personal fiefdom. One manifestation of Gullion’s close identification with Gold Banc may have been a tendency “to view [the bank’s] money as his money,” adds Curran.

When problems at Gold Banc first came to light in October 2002, company executives were in the midst of a road show to sell a secondary stock offering. A group of insidersu00e2u20ac”including Gullionu00e2u20ac”had agreed to buy a total of 300,000 shares but one stipulation was that the insiders could not borrow from the bank to purchase their shares. Gullion was the only member who did not have his money in by the required date. It was during this time that Tremblayu00e2u20ac”whom Gullion had hired two years earlier with a mandate to strengthen the company’s internal control environmentu00e2u20ac”noticed that Rector had credited Gullion’s demand deposit account at the Kansas bank in the amount of $565,915. These funds were subsequently wired to the brokerage firm A.G. Edwards to cover the purchase of Gullion’s allotted shares.

Tremblay monitored the account, and a deposit to cover the earlier payment was not made until four days later. He subsequently informed the audit committee of the holding company’s board of directors that internal controls at Gold Banc-Kansas appeared to have been circumvented. The audit committee told Tremblay to dig further, and with assistance from the committee’s independent legal counsel he found two additional transactions totaling $225,000 that had occurred in June and October 2002 where Gullion’s personal account at Gold Banc-Kansas had been credited with funds before incoming wire transfers were received.

Gold Banc executives say that after these additional transactions were uncovered, the audit committee decided to expand the probe even further. The board also notified the Kansas City Fed and the state banking department. During the next few months, this expanded investigation turned up more troubleu00e2u20ac”particularly a November 2000 land purchase, purportedly for a new Gold Banc-Kansas branch office. The filing states that a “business acquaintance” of Gullionu00e2u20ac”identified by bank executives as a real estate agentu00e2u20ac”purchased the land for $2.4 million and immediately sold it to Gold Banc for $4.4 million. “This transaction was not presented to or approved by the board of Gold Banc-Kansas or the [holding company],” according to a detailed account in Gold Banc’s 2003 10-K filing with the SEC.

As part of this land purchase, Gold Banc-Kansas had given the real estate agent a $1 million check for escrow purposes. When this check was later returned to the bank, it was deposited into a broker/dealer account controlled by Gullion. The investigation found that Gullion later received three checks totaling $1 million from that account. The 10-K filing also states that in May 2001, Gullion’s personal checking account was credited with another $900,000 in proceeds from this real estate deal, bringing the total amount he received to $1.9 million.

The audit committee investigation also found that during a five-year period, Gullion received an additional $600,000 either from “improper credits” to his personal bank account or from “improper expenses” incurred for the personal benefit of Gullion and his family, including the purchase of cars. Gold Banc’s 10-K filing states that Rector likewise made an “unauthorized transfer” of $40,000 from Gullion’s account to his own accountu00e2u20ac”small potatoes when compared to the amount Gullion allegedly misappropriated.

Through the early months of 2003, the Kansas City Fed and the state banking department conducted a regularly scheduled joint examination of Gold Banc’s Kansas bank. The audit committee also contracted with accounting firm KPMG to perform a forensic examination during which, among other things, it looked at 44% of the bank’s real estate loans. The bank’s internal investigation initially went back just five years, which was the statute of limitations for any applicable crimes. However, federal investigators asked that the probe be extended back 10 years since any additional misappropriationsu00e2u20ac”even if the statute of limitations had expiredu00e2u20ac”could still be taken into consideration during a sentencing hearing should Gullion or Rector be convicted of a crime.

During this time, the SEC conducted it own informal investigation, and ultimately it required the bank to restate its earnings for both 2000 and 2001 to account for the misappropriations. The FBI and Justice Department initiated criminal probes, as well.

After Gullion and Rector were terminated in March 2003 each made restitution to the bank. Gullion paid back nearly $3.5 millionu00e2u20ac”primarily through a complicated transaction in which he turned over his considerable holdings of Gold Banc stock to the company. The bank had been seeking considerably more money from Gullion, including $1.5 million for the cost of the internal investigation and $3 million in compensation paid to him since 1998. But after examining his personal financial statement, the bank decided it would not be able to recover any additional money. Rector paid back $25,000 to the bank.

The actions of both men pointed to deficiencies in Gold Banc’s internal controls. Gold Banc had grown rapidly through a string of acquisitions, and when Tremblay arrived in December 2000 there were eight different general ledger systems in place. One of his first actions was to put the company on a single system, along with instituting new control policies and procedures. But some problems persisted: The company had maintained three separate charters for its state banking subsidiaries, and in addition to being CEO of the holding company, Gullion had also been CEO of the Kansas unit. Gullion and Rector were able to provide the necessary two signatures on all large wire transfers, which made it harder for others to see what they were doing. “The fact that [Gullion] had an accomplice helped make [the misappropriations] possible,” says Aslin. “They were able to circumvent some of the existing controls.” Another shortcoming was that large real estate transactions did not require the approval of either the holding company board or the Gold Banc-Kansas board.

A more difficult riddle to solve is what motivated Gullion to engage in a pattern of activity that put his life’s work at risk, along with his reputation. Gullion’s attorneyu00e2u20ac”Charles German at Rouse Hendricks German May in Kansas Cityu00e2u20ac”says Gullion has cooperated with FBI investigators who are looking into the case. According to German, Gullion does not disagree with Gold Banc’s description of the real estate transaction in its 2003 10-K. “The fact that it was handled poorly and inappropriately is not in dispute,” he says, adding that Gullion feels “very remorseful” about this incident. However, Gullion does dispute his responsibility for some of the credit extensions to his account that also were also spelled out in the 10-K. German says that Gullion did not manage his own checking account or pay his own billsu00e2u20ac”those services were performed by his administrative assistant and close friend Steve Rector.

Meanwhile, Gullion awaits the outcome of the FBI’s investigation as he contemplates his own future. “What he’s doing is trying to plan the rest of his life and career,” says German. It has been an emotionally wrenching time for Gold Banc’s former CEO. Just as the details of the real estate transaction were emerging, Gullion’s high-school-aged son was killed in an accident while on spring break in Mexico. “It’s a tragic situation,” says German. “He’s a strong guy. He’s going to get through it.”

Mick Aslin has turned out to be a pretty tough guy as wellu00e2u20ac”and he has brought a very different operating style than that of his predecessor. He had been president of UMB Financial Corp. from 1982 to 1994 and had served on various boards, so he is an experienced manager. And he doesn’t feel he has to make every decision. “Mick has been willing to delegate responsibility and then hold people accountable for their actions,” says Sherman Titens, a senior vice president and director of marketing. “Mike tried to micromanage everything.” Aslin’s differing style is also reflected in how he deals with other board members. “He has always been available to me as a director,” says Curran. “He listens. He’s thoughtful. He has done a very nice job in a very difficult situation.”

Working with Tremblay and the audit committee, Aslin oversaw significant changes to Gold Banc’s internal control environment. The internal audit function was outsourced to Deloitte & Touche, although it will be gradually brought back in-house. The audit committee also adopted a new “financial matters complaint policy” so that employees can bring matters involving impropriety to the attention of management without fear of reprisal. Other new controls include a monthly review by internal auditors of the bank accounts of executive officers and directors at the parent company and its subsidiaries.

One of the board’s first governance changes was to recruit Daniel P. Connealy, a former public accountant, to chair the audit committee. The Sarbanes-Oxley Act requires all public companies to disclose whether they have at least one so-called financial expert on the board and Connealy has served in that role since last year. The audit committee has the responsibility for managing Gold Banc’s relationship with its external auditor, as well as overseeing the internal audit function.

The bank also took the unusual step of recruiting a nonexecutive chairman. When it comes to governance, one of Aslin’s core beliefs is that a CEO can actually have too much power. “When I agreed to accept [the job], I felt it was critical that the CEO not be all-powerful, and that the independent board have a chairman who could control the agenda at board meetings so there would be open dialogue and it wouldn’t be completely dominated by the CEO,” he explains. “We evaluated the idea of just having a lead director or some alternative other than the separation of CEO and chairman, and frankly it was my position that we should go the whole way and separate them.”

Aslin’s goal was to create a boardroom culture where independent directorsu00e2u20ac”including a nonexecutive chairman and audit committee chairmanu00e2u20ac”would regularly “talk with the CEO, the CFO, and the internal and external auditors, and attend meetings with regulators, so that everything isn’t interpreted to the board by the CEO,” he explains. “It’s important that there is another set of eyes and ears that can verify or contradict the interpretation of management based on their experience in some of these other meetings.”

To fill the chairman’s role, Gold Banc’s board recruited 66-year-old Robert J. Gourley, a Kansas City businessman who once served on the UMB Financial board and later founded a bank that was acquired by Gold Banc. Gourley has been serving in that capacity since his appointment last year, although Aslin will succeed him as chairman after Gold Banc’s sale to Stanley Bailey and his investment group has been completed.

Bailey led an investor group that acquired Fort Lee, Arkansas-based Superior Federal Bank in 1998, then sold it four years later. His investment vehicleu00e2u20ac”Silver Acquisition Corp.u00e2u20ac”is backed by two large private equity funds: Cypress Group LLC and DLJ Merchant Banking. Gold Banc will be taken private following the acquisition and also will switch from its current financial holding company charter to a federal thrift charter.

Both actions are linked to a strategic repositioning that had already been initiated by Aslin. Since last year, Gold Banc has been divesting branches in its slower- growing rural markets, and it wants to redeploy the proceeds in its faster-growing urban marketsu00e2u20ac”particularly the greater Kansas City and Florida markets. A federal thrift charter will provide the company with more flexibility when it comes to interstate branching, while operating as a private company will relieve it of the necessity of meeting Wall Street’s insatiable demand for quarterly earnings growth. “The pressure for short-term profit objectives can be lessened in a private company, and a plan for long-term growth can be put in place,” Aslin says.

Discussions about selling the bank began with a chance meeting between Bailey and Aslin at a bank research conference in February 2003. But with the Gullion crisis at its peak, and Gold Banc’s stock having dropped precipitously, the board was not interested in selling. Bailey and Aslin stayed in touch, however, and once the company’s stock had recoveredu00e2u20ac”largely due to the changes that were made to its internal control and governance processesu00e2u20ac”the board was receptive to an acquisition. Bailey’s offer of $16 a share fell in the midpoint of a range of potential valuations that five investment banking advisers had presented to the board at a strategic planning retreat in July of last year.

Aslin believes the deal is a good one for all concerned. Layoffs will be minimal since Gold Banc isn’t being merged with another organization, so employees have little to worry about. The bank will continue to expand both its product and geographic reach, which is good news for customers. And Aslin feels that investors have received a fair deal, although a shareholder suit has been filed against the board charging that it sold out too cheaply. “There is seldom an opportunity for a CEO to take care of all constituencies in one transaction,” Aslin says.

What was less clear as this story goes to press is how important corporate governance will be once Gold Banc goes private. Aslin says the bank’s current board will be asked to resign once the sale closes in July. A new board will then be formed, and it mostly likely will include people from the geographic markets that Gold Banc serves, along with representatives from the private equity investors backing the acquisition. Some current board members may be reappointed as well. Aslin also expects that much of the present board’s committee structure will be retained, although this decision has not yet been made.

One decision that has been made is Aslin’s appointment as chairman in the new organization. And in this position, he will have an opportunity to see that the corporate governance culture which he has worked so hard to createu00e2u20ac”and which reflects his own deeply held views on the matteru00e2u20ac”lives on. “I believe that the equity investors in this transaction will be looking for a board presence that is consistent with what would be seen in a public company,” he says. Aslin believes that a stronger governance culture, along with stricter internal controls, gave the private equity investors enough confidence to pay a 16% premium for the bank barely a year and a half after the Gullion affair was first discovered.

Aslin also maintains that governance is equally important in a privately owned banku00e2u20ac”particularly one that might go public at some future date. “Private companies need to have strong corporate governance,” he says. “It’s the right thing to do. It helps you run your business. But it also helps you maintain flexibility. It gives you the flexibility to go public if that’s the best option.”

But whatever the future holds for Gold Banc, Aslin and the current board of directors have shown how strong governance can rescue a failing company. Says Aslin, “We felt there were some opportunities to strengthen controls and really make our company a model from an internal control and governance standpoint, so that’s what we set out to do.”