Where was the Lehman Board as the Crisis Unfolded?

The collapse of Lehman Brothers, with its massive losses for shareholders and employees and near-catastrophic market consequences, obviously reflects an abject failure of management in risk oversight.

But who allowed the management to take these risks? Where was the Lehman board of directors in all this?

For too long in this country, managements have been given free rein to do as they please by timid boards who don’t make waves or hold managements accountable. In many cases, these boards are appointed by the very managements that they oversee.

Shareholders deserve better, which is why I urge everyone to join my new initiative, United Shareholders of America. Only with numbers will shareholders be able to compete with the Business Roundtable and get legislation passed in Washinton to finally make boards accountable.

Evidence of the Lehman board failures was blatantly apparent in hearings last week before the House Oversight Committee.

The Lehman Finance & Risk Management Committee, for instance, met only twice a year in 2006 and 2007 - years when Lehman’s crisis was brewing, according to testimony by the Corporate Library research group.

"A company in this sector should have a risk management committee that is vitally involved and has a great depth of expertise," Corporate Library editor Nell Minow testified to lawmakers. "A company that had $7 billion in losses after becoming embroiled in the global credit crisis had a risk management committee that didn’t understand or manage its risk."

"The board was too old, had served too long, was too out of touch with the massive changes in the industry, have too little of their own net worth at risk and was too compromised for rigorous independent oversight," Minow testified.

Incredibly, only a few Lehman board members actually had financial industry experience, Minow testified. "Most of their working lives were tied to a different era - the one before massive securitization, credit-default swaps, derivatives trading and all the risks those products created," he said, citing a Wall Street Journal report.

For too long, boards of directors in America have for the most part simply been sounding boards and rubber stamps for managements with little accountability to shareholders, who are the true owners of America’s corporations. We need boards who exercise a stronger hand and hold managements accountable.

Why, for instance, did the Lehman board allow Richard Fuld to occupy both the chairman and CEO role? The CEO is the chief manager of the company but the chairman’s job is to look after shareholders interests. Clearly these two roles should have been separated a long time ago, as they should in most companies.

And why did the board’s Compensation and Benefits Committee approve $20 million in payouts to two executives who were fired just days before the Lehman’s Sept. 15 bankruptcy filing?

According to Congressional testimony last Monday, one "involuntarily terminated" executive was Andrew Morton, the head of fixed income who got a $2 million payout. Wasn’t it highly leveraged exposure to fixed income securities that got Lehman in trouble to begin with?

And why did the chief operating officer for Europe, Benoit Savoret, get a $16.2 million bonus when he was also fired?

Fuld testified in Congress that this money was owed to Savoret as part of a contractual obligation. But wasn't this contact rejectable in bankruptcy court, which would have made it simply an unsecured claim? Therefore was this simply an excuse to give a gift to a departing executive? In my opinion, this money should be returned to the Lehman bankruptcy estate.

It is completely incomprehensible that the board would allow these payments when other workers had their contractual severance payments simply cancelled, according to reports in the New York Post and Bloomberg. Many Lehman employees, the owners of 30 percent of Lehman’s equity, were wiped out in this debacle.

To make matters worse, the bonus gifts came at the same time that Fuld was imploring Treasury Secretary Paulson to bail out the bank with taxpayer money. This rightfully gives Wall Street critics fodder for their complaints about undue executive compensation.

The Lehman failure arguably was a big cause of the current crisis. The ensuing lockup of the credit markets caused by banks to stop lending to each other for fear their counterparty might end up in bankruptcy court like Lehman.

This sorry episode on Wall Street only does further to highlight the need for better corporate governance controls to reign in reckless CEOs and spur ineffective boards. We need a change in corporate America.

Join our cause and sign up on this blog.

Comments

[Fernando L., nyc]

Well said, Fuld had a huge conflict of interests being both Chairman and CEO. The Lehman collapse is bitter sweet because Fuld had this coming but many of their employees were left with nothing while Bear employees/shareholders got rescued (for the most part).
The Fed should have let Bear collapse and we would have reached this point much sooner.

[DomainDiva]

Board members on the boards of financial institutions that did not understand finance. Sounds like something only a madman could possibly envision...

Should there not be qualifications for board members that directly relate to the business of the company they are overseeing? For financial companies, economists, accountants for pharma doctors or other medical professionals, researchers, professors?

In addition maintaining a board with strong financial and moral sense.

[Mary Adams]

Thank you for this. I agree that there are a number of structural and legal protections that have been inappropriately given to boards and I support your fight against them. I do think that there is a very important sub-text to the weaknesses of today's boards: information. Value creation in almost every company has moved off the balance sheet. Growth in earnings comes from smarter people, better technology, better process, more effective networks, etc. None of these are reported in the financials upon which management, boards and investors rely. They are all flying blind. This situation leaves a lot of room for mistakes, as we have all seen in recent months. The battle for better management must include a battle for better information.

[Nick Choukair]

Dear Carl,

Try not to indulge your thinking on hope. The risk fanatical management failed and urgently needs reinventing.

[Virgil Bierschwale]

Folks, the demise of the good ole boy system has been misrepresented as it is still alive and well.

I encourage all of you to go back and read every single article that Mr. Icahn has written on these pages, especially the ones where people working their way up the ladder tend to surround themselves with people who are not a threat.

The problem with those who are not a threat to your position is that they most likely are not a contributor either.

My personal philosophy has always been that I want to teach anybody everything that I know because while that makes it possible for them to take my position, it also makes it possible for me to work my way up the ladder.

Surround yourself with people that are qualified. Mentor them and teach them well because one of these days you may want them to serve on the board of directors.

Now for myself, I personally believe the entry point to the board of directors should be that you have at least 10% of your assets invested in the company you are serving on the board for so that you will have a vested interest in seeing the company succeed and so that you will be willing and ready to take action should your management staff not be growing the company successfully.

Virgil
http://www.KeepAmericaAtWork.com

[Ben Bednarz]

I am wondering Carl - with the all the corporate fraud from unchecked executives and boards in the last decade and recently with Richard Fuld being exposed - what do you think the chance of there being laws passed in the next decade that would outlaw staggered boards or poisons pills?

It is my hope in the next decade the we allow the shareholders to actually gain control of a company should they have a sufficient number of shares. I am behind United Shareholders of America.

[Freem Huntley]

Carl - Why not create a scenario where we can pool our votes? I am involved in one public company presently where I own just over 1% of the total stock, and I can hardly get the CEO/chairman to answer my phone calls let alone make needed changes. I have been branded as difficult to work with etc. Meanwhile I have watched over 2 million dollars of my shareholder equity evaporate.

I am certain that shareholders are out there as well that are interested in making changes we just do not know who. We need to start an online registry where we register our shares. Since many of us have exposure across many sectors and stocks.

Just some thoughts.

[sadsack]

CEOs are employees. The best regulation for out-of-control compensation packages is to allow the owners (shareholders) veto power. If pay-for-performance permits a CEO to make many lifetimes of income (as compared to the average American)in a year gambling away shareholder value they will.
Most employees receive pay-to-do-a-good-job and their incentive is keeping their jobs.
Starting with a multi-million dollar salary, how much more incentive does a CEO need.

[Trent]

I am really enjoying the comments from the oracle and the direction of the movement. I totally agree with Mr. Icahn.

How do we address the bankruptcies of these companies and hardworking American's (Individual Investors) investments left out of the exit process? The American dream is being destroyed because of a lack of Integrity, Transparency, Greed, Trust, Confidence, etc.

Thanks for your Leadership Mr. Icahn!

[Billy]

Small shareholders need a representative on the Board of Directors of publicly traded companies.

[Max D]

I couldn't agree more with this blog!!

Having served on a number of Financial boards, I long ago came to the conclusion that the only effective director was one with industry experience and representing a significant investor in the company.

Financial Institutions are far too complicated for the average director, no matter how well-intentioned he might be.

[Karen Zaharatos]

Ah, Mr. Icahn, now I see we finally have the attention of the 1%. How obvious the reason, the 1% are being now exposed to the .001% who have finally crossed the line of greed and ripped them off in layman terms. The 1% has turned their heads for generations at the .001% because the .001% only affected the 99% and not the 1% who were all too happy making profits from the .001%. How can we tell the difference anymore from the Russian oligarchs and American CEOs? Presidential candidate Obama illuminates the fact that the 1% owns everything just proves he studied history of modern civilization. Yes, correct the figures do not add up just like gridlock politics and present global commerce. Loan modifications are the next fiasco. All homeowners should be permitted to refinance at fair market value and make a market bottom once and for all. Not quite the bailout the .001% received but it would keep homeowners paying their mortgage interest keeping the 1% happy and the .001% under the radar.

[Glen]

Carl,

You deserve much respect for your efforts. Yes, your intentions are to profit from your investments. However, your approach is straightforward and to the point. Stop messing around and make shareholders money. Period.

Now if you can only gather a large enough group of people similar to your stature and help reform the laws and regulations to make this country a better place and less corrupt, you and others would deserve the highest medal of honor and one that many Americans would certainly agree with.

And if you're ever looking to hire more people to take over any future public companies and bring costs down, return shareholder value, I'll send you my resume. It would not only be fun to do, but it would be the right thing to do in order to keep our free markets from crumbling again in the future.

I look forward to your future blogs.

Sincerely,

Glen F.

[Lukas Plattner]

Take a look here

Where Was Lehman’s Board?
Posted by Dennis K. Berman

http://blogs.wsj.com/deals/2008/09/15/where-was-lehmans-board/

_________

http://liberodaconfini.blogspot.com/

[Cliff]

It seems to me that execs who have been given excessive bonuses while their corp. failed should have the option of returning the money to the shareholders that they stole it from or spend some time behind bars, just as any other thief would.

[tc in toronto]

Mr. Icahn,

Your boardroom expertise combined with practical common sense needs to be heard by those who are interested in making the necessary changes to stabilize this bearish spirialing market.

Why are you not taking a more forefront approach as an elite investor and insisting to the necessary political powers to be that these "Fat Cats" need to be tamed and stopped?

You are a man of integrity, honor, and a wealth of knowledge. I hope to shake your hand someday and personally thank you for stepping up and making the unnecessary boardroom antics visible to us investors so that we can invest in stablilized corporations proper management individuals.

Thank you Mr Icahn and please continue to write in this blog.

I wish you the best.
tc in toronto.

[Joshua Davis]

Hello Mr. Icahn I think you're dead on with what you say. I've become a fan watching you on CNBC. I think your concepts are very humorous too, please keep up your great work.

[Wilmo]

I applaud Mr. Icahn's USA initiative and hope several million concerned shareholders will join and bring the changes we sorely need in the governance of public companies. I really like Mr. Huntley's idea on pooling shareholder votes expressed in his Oct. 14 posting. Some very positive things can happen if enough concerned Americans get behind the USA effort!

[Robben Salyers]

Carl, as we both know, The International Swaps and Derivatives Association. (ISDA) is the largest financial trade association in the world, representing leading participants in the unregulated privately negotiated derivatives industry. The association was chartered in 1985, and includes more than 850 member institutions from 54 countries on six continents. These members include most of the world’s major institutions that deal in, and are leading end-users of, privately negotiated derivatives, as well as many of the businesses, governmental entities and other end-users that rely on derivatives to manage efficiently the financial market risks inherent in their core economic activities. Robert Pickel, and the actions of the ISDA and their members have been the main reason why this country of ours is in a state of crisis.

The truth is this: Wall Street has a market that runs within their market and it goes unregulated and it is called the derivatives market. If Wall Street is to be what it once was then the OTC derivatives market in this country needs to be brought to a standstill... The derivatives market that operates within the market can not and should not be.

Carl, as I see it, the next shoe to drop in this market crisis will come from collateral agreements that have been put in place by the OTC derivative market. There's a great deal of credit exposure that simply isn't being talked about at the shareholder meetings.

I look forward to being a part of your group.

Robben M. Salyers

[Marick P.]

The Lehman executives were incompetent and performed worst than low level operations. Workers making 60K a year. On top of that their arrogance of not taking the Korean deal was a complete suicide. They took risks with the shareholders money with the mentality that if they succeed they will make big bonuses and if they fail, they get their parachutes. This mentality is just wrong and has to be stopped!

Despite all the executives wrongs, the shareholders were the ones punished by Paulson's refusal to bail out Lehman and in turn contributed to the loss of confidence in the stock market. It would have been much cheaper for the treasury to bail out Lehman and to go
after the incompetent executives - then what they are doing today.

Anyway, I wish Carl had the opportunity to get on Lehman's board years ago, this would have never happened.

[Robin in Laurel MD]

For quite some time I have been shocked by the enormous compensation and Golden Parachutes that board members and CEO’s have been receiving . It’s like… “ while the cat’s away… the mice will play.” We need to get a cat with enough clout to impose some order and sanity and fairness into the situation… For too long the little guy hasn’t stood a chance! That needs to change! Cudos to Mr. Icahn for uniting shareholders in the fight to be heard! It’s time for the board members of the companies we invest in to remember they work for US and not the other way around!

[Ra Puriri]

Carl,

Thank you for trying to cut down the flagpole of corporate greed. Give me an axe and I will help, we all will need to help you because this pole is bigger than the giant redwoods in California.

Where are the moral corporate "metrics"? There are none.

The bailout is bad parenting. "That was not a nice thing to do Johnny, here's $50.00 for you and your friends"

The corporate structure has no real conscience, unless it gets a head transplant, as we are seeing. The emergency room is full of patients, out the door.

Can the laws be changed so there are no "get out of jail free cards" and accountability replaces creative accounting?

Keep up the fight
Kia Kaha

[Lois]

The Lehman bancruptcy would be laughable except that I'm crying over my lost investment. Exit packages must be curtailed and hopefully we can do something about that issue in the future. As far as Lehman saying they had a contract with those "fired" officers, they had a contract with me, the rest of the investors and their employees. We are the losers.

[D.Filmer]

The problem in America is that the Board appoint people to handle the Financial aspect of the company,giving no muscle to the actual people who run the business that generates the cash.

[Matthew Byrne]

The growing gap between executive salaries and benefits and wages for workers in non-supervisor positions reflects a more general trend of board failure in American business. Wages for these workers have not kept up with inflation -- they have actually gone down around 3% since last July.

The Presidential candidates are broken records on the subject, with Senator McCain proposing tax cuts to corporations in order to create jobs and Senator Obama citing the $4 billion dollar tax break for Exxon Mobil more often than anyone would really care to hear (yes, we get it).

But both candidates are missing out on an opportunity. They persistently point out that the financial crisis was driven by the greed of Wall St. but they fail to connect this to the drop in wages of the average American. The directors of American companies took their increased profits of the last decade and ballooned exective salaries and benefits to attract "top" executives to their CEO, CFO, COO, etc positions. Now we are seeing that these executives weren't all they were made up to be. And to think that this happened while wages for everyone middle management and down were decreasing. It's truly angering.

If there was ever a time to propose political solutions to financial problems such as the power these boards have, now is certainly the time.