Bear Stearns, Corporate Governance, and the Capital Markets: The Role of the Board (Part 2)

So let's ask the Enron question. Where was the board in all of this?

We don't have complete information. Bear Stearns had not filed its proxy statement for its upcoming meeting so we are largely left with the 2007 proxy statement and the Company's web site. First, it is a remarkably undiverse board. Out of the 12 members, there are no women and, apparently, only one person of color. A veritable mirror image board.

Second, it is an insider dominated board. Until the ouster of Warren Specter last summer over the hedge fund debacle, four of the 13 directors were insiders and had been on the board for over two decades, including James Cayne (1985); Alan Greenberg (1985); Alan Schwartz (1987) and Warren Spector (1987). The nine outside directors?  Most have been on the board for more than a decade. They include: Glickman (1985), Harrington (1993), Nickell (1993), Tese (1994), Novelly (2002), and Salerno (2002). Only three directors, Williams (2004). Bienen (2004), and Goldstein (2007), have been on the board for less than five years.

In other words, most of the directors have been together for more than a decade.  Can directors in this type of environment act in a truly independent manner?  As a legal matter the question is irrelevant.  Friendships that arise out of board longevity ("structural bias" in a phrase) are categorically ignored by the Delaware courts.

Was this the only factor that suggested a complacent board?  As usual, the outside directors were well paid.  According to the 2007 proxy statement: 

Compensation for Non-Employee Directors

Name	Total ($)
Henry S. Bienen	215,000
Carl D. Glickman	231,000
Donald J. Harrington	204,500
Frank T. Nickell	207,500
Paul A. Novelly	222,500
Frederic V. Salerno	216,500
Vincent Tese	298,750
Wesley S. Williams Jr.	213,500

Not exactly Countrywide levels, but awfully good pay for modest work.  See Bear Stearns 2007 Proxy Statement ("The Board held six meetings (exclusive of committee meetings) during fiscal 2006.").  And, in contrast to the views of VC Strine, the only realistic way to lose this sinecure is to irritate management and not get renominated.  In other words, it encourages a solicitous attitude towards management. 

Moreover, in the case of Bear Stearns, management would not even have to wait until the next meeting to remove a recalcitrant director.  According to the Company's web site: "Non-management directors are required to submit a letter of resignation to the Nominating Committee in the event of any significant change in their primary job responsibilities. The Nominating Committee shall review the director's continuation on the Board in light of all circumstances and recommend to the Board whether the Board should accept such proposed resignation or request that the director continue to serve on the Board."   In other words, the board could change a director's duties, force a resignation, and effectively remove them immediately.

Let's recap.  With a majority of the board sitting together for something like 15 years, a comfortable sinecure, and the ability to remove directors who management dislikes, one can imagine the likely lack of dissention within the board room on matters such as executive compensation. 

So, while the board's role in the debacle has yet to be explored, we can guess that it was highly generous to top executives.  And, in fact, it was.  Fortunately for top officers, the board was particularly willing to dispense generous amounts of cash in the form of bonuses.  In 2006, James E. Cayne, the then CEO and Chairman, received compensation of $33 million, of which $17 million was a cash bonus. Alan Schwartz, who was then only the president (now the CEO), received around $35 million, of which $16 million was a cash bonus.  These may understate the total return.  According to a Current Report on Form 8-K, Schwartz earned almost $3 million for various investment opportunities.  See Form 8-K, January 8, 2008 ("The Company has formed several limited partnerships that provide investment opportunities for the Company's key employees. For the fiscal year ended November 30, 2007, distributions from these partnerships consisting of return of capital and gains to Mr. Schwartz were $2,808,812."). 

A complacent board, extremely well paid top executives.  As we discuss possible legal reform, attention should be given to the duties of the board.  As we have said time and time again, the Delaware courts (yes, Bear Stearns is a Delaware corporation) do not impose meaningful duties on board with respect to their oversight obligations.  It was true at Enron.  We shall see as matters unravel how much this absence of obligations contributed to the debacle.