Citigroup’s announcement on Monday that it plans to stress finance and investing know-how in filling upcoming openings on its board of directors could be the tip of an iceberg.
More financial-services companies whose earnings were hijacked by their investments in subprime mortgage-backed securities and other kinds of companies simply struggling with the current economic downturn are likely to adopt the same strategy, according to some who are familiar with the workings of corporate boards. But that doesn’t necessarily mean the strategy is a sound one.
Citigroup stated on its website that it is “actively seeking new directors” and is placing a “particular emphasis on expertise in finance and investments.” As to its reasons, the notice said only that the move is “in response to shareholder inquiries related to the scheduled retirement of certain directors.” A company spokesman declined further comment.
The Securities and Exchange Commission requires public companies to disclose whether they have at least one audit committee member with expertise in generally accepted accounting principles, financial statements, and internal controls, and if they do not, to explain why. At Citigroup, retired Medtronic CFO Robert Ryan is on the audit committee. Also on the board is Richard Parsons, chairman of Time Warner, who ran a New York thrift in the 1990s. Former treasury secretary Robert Rubin, the chairman of the company’s executive committee, is an internal board member.
Companies in all businesses, not just financial services, can be expected to follow Citigroup’s lead. “The financial people will come to the fore now,” said Milan Moravec, chief executive officer of Moravec & Associates, a management consulting firm that provides expertise on the makeup of boards. “Hopefully they’ll provide a better understanding of the direction companies need to go.” The operative word, though, was “hopefully.” Moravec told CFO.com that he doesn’t really expect such decisions to have much impact. He called Citigroup’s announcement “a knee-jerk reaction.”
Loading a board with financial people, even at a financial-services company, makes for a bad mix, according to Moravec. “You’ll have a bunch of technical experts who are not really very good at communicating with one another or at bringing about the right levels of constructive conflict and differences of opinion,” he said. “They’ll be likely to make the same kinds of poor decisions that were made before.”
Indeed, having too many finance experts could undermine one of a board’s chief functions, which is to ask “the dumb question,” according to Keith Hall, a former CFO of Lending Tree who now sits on three boards (public company, private company, and non-profit organization). Asking and answering such questions could have insulated companies from exposure to the subprime mortgage meltdown, he suggested.
Noting that he wasn’t singling out Citigroup and that he wasn’t familiar with what its board was doing, Hall told CFO.com, “If a board had an environment supportive of members asking dumb questions, they might have asked, ‘What are all these alphabet soup-like things like CDOs? How do they really work?’ If you had probed further, could it have been revealed whether there was proper documentation of the underlying instruments supporting these mortgages? Perhaps the most important dumb question would be, ‘What were the facts behind these subprime loans?’”