Can We Blame Bad Corporate Governance

Questions for this session

• Could the financial crisis have been prevented if the governance of the major perps had been better? Can we blame bad corporate governance • Were AIG, Fannie Mae, Lehman Bros, Bear Stearns, for failing financial or Washington Mutual demonstrably worse than their institutions? peers? If so, in what ways?

Jerry Davis “Capital Matters: Managing Labor’s Capital” Harvard Law School 30 April 2009

Prologue: A (very brief) history of corporate Case #1: commercial banks governance among financial institutions

• The most troubled players were in highly diverse • Commercial banks in the US were traditional industries segregated geographically (by state) and industrially – Commercial banking (Citi, Wachovia) (from investment banking and insurance) – Savings and loans (WaMu) • Bank boards were traditionally much larger (2X) and – Investment banking (Bear, Merrill) more star-studded than industrial boards – Mortgage banking (Countrywide, New Century) • Money center banks and local banks had distinct – Insurance (AIG) governance profiles – GSEs (Fannie, Freddie) • Corporate governance has very different histories across these industries

3 4 Money center banks were largely staffed with CEOs of In ~ every major city, local corporate executives staffed multinationals the boards of local banks… • Boston: Bank of Boston Top executives on bank boards, 1982 – Computervision – Dennison Manufacturing Chase Manhattan Chemical Bank JP Morgan Manufacturers Hnvr – General Cinema •AT&T • American Standard • Corning • American Home – Gillette •Amoco •AT&T • Dupont • Campbell Soup – Prime Computer • Bethlehem Steel • Burroughs •Merck • Cluett Peabody –Raytheon • Celanese • Champion Intl • NL Inds • Phelps Dodge – Wyman Gordon • Chesebrough • Dupont • Tenneco •Revlon • Pittsburgh: Mellon Bank • Continental • Eli Lilly • Texaco – Air Products • Cummins •Mobil • US Steel – Allegheny International • Exxon –Alcoa • Federated Dept – Joy Manufacturing Stores – PPG Industries • General Foods – Quaker State Oil • Georgia Pacific – Sperry • Macy’s – US Steel • Xerox Data for 1986 from Davis (1991)

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Why? Legitimacy and information JP Morgan Chase board, 2001

• Impressive boards served a signaling function to reassure potential clients and others of the banks’ legitimacy • Well-connected outside directors provided far- sighted information to broadly guide future investments • A result of this strategy was that bank boards were highly “central” in the shared director network

7 8 Corporate boards are all connected by shared directors …and banks sit somewhere in the middle of the network

GOLDEN WEST FINANCIAL CORP ONEOK INC NEW

WESTERN RESOURCES INC KS

ABM INDUSTRIES INC MURPHY OIL CORP

REGIONS FINANCIAL CORP

ALASKA AIR GROUP INC

AVISTA CORP

SCHOLASTIC CORP

LANDSTAR SYSTEM INC

TESORO PETROLEUM CORP

GEORGIA GULF CORP PERFORMANCE FOOD GROUP CO

UNIVERSAL FOREST PRODUCTS INC

TECH DATA CORP NATIONAL FUEL GAS CO The Fortune

QUINTILES TRANSNATIONAL CORP WATSCO INC

NASH FINCH CO PROVIDENT FINANCIAL GROUP INC OLD KENT FINANCIAL CORP

PINNACLE WEST CAPITAL CORP SILGAN HOLDINGS INC

CHAMPION ENTERPRISES INC

M&T BANK CORP

GENERAL CABLE CORP NEW DEVON ENERGY CORP NEW JDS UNIPHASE CORP 1000 board of FAIRCHILD SEMICONDUCTOR INTL INC UNITED STATIONERS INC

SERVICE CORP INTERNATIONAL HUB GROUP INC PAYCHEX INC SIERRA PACIFIC RESOURCES GENESIS HEALTH VENTURES INC FOAMEX INTERNATIONAL INC RGS ENERGY GROUP INC PUGET ENERGY INC GREENPOINT FINANCIAL CORP PAYLESS CASHWAYS INC PHAR MOR INC PSS WORLD MEDICAL INC JABIL CIRCUIT INC UNIVERSAL CORP EMCOR GROUP INC PENTAIR INC VALERO ENERGY CORP NEW MICRON TECHNOLOGY INC

MITCHELL ENERGY & DEVELOPMENT CORP

ABERCROMBIE & FITCH CO DE MILACRON INC COVENTRY HEALTH CARE INC STEELCASE INC MASCO CORP KELLY SERVICES INC LANDAMERICA FINANCIAL GROUP INC GREAT LAKES CHEMICAL CORP TYSON FOODS INC PUBLIC SERVICE CO OF NEW MEXICO directors MAXXAM INC ALTERA CORP MANPOWER INC

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DEL WEBB CORP WHOLE FOODS MARKET INC INTERSTATE BAKERIES CORP ALLIANT ENERGY CORP DIEBOLD INC PERKINELMER INC

LAM RESEARCH CORP HARTFORD FINANCIAL SERVICES GROUP I LEAR CORP PATHMARK STORES INC MARSHALL & ILSLEY CORP TORO CO INTERNATIONAL MULTIFOODS CORP POLARIS INDUSTRIES INC CYPRESS SEMICONDUCTOR CORP EMC CORP TELLABS INC QUANTA SERVICES INC WESTERN DIGITAL CORP BORDERS GROUP INC MI NIAGARA MOHAWK HOLDINGS INC FURNITURE BRANDS INTERNATIONAL INC MARK IV INDUSTRIES INC ADMINISTAFF INC VECTREN CORP FLOWSERVE CORP BROADWING INC CARDINAL HEALTH INC E W SCRIPPS CO OH WILLAMETTE INDUSTRIES INC WHIRLPOOL CORP MERISEL INC DTE ENERGY CO MOHAWK INDUSTRIES INC SMURFIT STONE CONTAINER CORP AMERICAN ELECTRIC POWER CO INC HEILIG MEYERS CO KENNAMETAL INC

LSI LOGIC CORP HEALTH NET INC TERADYNE INC WESCO INTERNATIONAL INC SUPERVALU INC WORLDCOM INC NEW REYNOLDS & REYNOLDS JACOBSCO ENGINEERING GROUP INC FOOTSTAR INC UNIFI INC QWEST COMMUNICATIONS INTERNATIONAL network AGCO CORP DE MANDALAY RESORT GROUP STANDARD REGISTER CO RITE AID CORP ANIXTER INTERNATIONAL INC PRINCIPAL FINANCIAL GROUP INC DOLLAR GENERAL CORP GALILEO INTERNATIONAL INC AMERICAN AXLE & MANUFACTURING HLDGS MCN ENERGY GROUP INC CALPINE CORP SMITHFIELD FOODS INC IMATION CORP VOLT INFORMATION SCIENCES INC FMC CORP CABLEVISION SYSTEMS CORP NEW DQE OCCIDENTAL PETROLEUM CORP MELLON FINANCIAL CORP LINENS N THINGS INC UNITED AUTO GROUP INC STATE STREET CORP AK STEEL HOLDING CORP A O SMITH CORP VALSPAR CORP LIZ CLAIBORNE INC ALBERTSON S INC RYLAND GROUP INC HEALTHSOUTH CORP ITT INDUSTRIES INC OSHKOSH TRUCK CORP HUMANA INC LENNOX INTERNATIONAL INC MCCORMICK & CO INC LA Z BOY INC BANTA CORP QUESTAR CORP ALLEGHENY ENERGY INC HILLENBRAND INDUSTRIES INC NAVISTAR INTERNATIONAL CORP STARWOOD HOTELS & RESORTSPPG WORLDWIDE INDUSTRIES INC SUNGARD DATA SYSTEMS INC TRIGON HEALTHCARE INC WGL HOLDINGS INC NSTAR MOLEX INC STATER BROS HOLDINGS INC HALLIBURTON CO 3COM CORP DELPHI AUTOMOTIVE SYSTEMS CORP SEALED AIR CORPAMGEN NEW INC ENCOMPASS SERVICES CORP TECO ENERGY INC R R DONNELLEY & SONS CO IMS HEALTH INC J B HUNT TRANSPORT SERVICESRELIANT INC ENERGY INC WELLS FARGO & CO NEW WELLPOINT HEALTH NETWORKS INC NEW DEL MONTE FOODS CO AVNET INC READER S DIGEST ASSOCIATION INC

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BRIGGS & STRATTON CORP MERITOR AUTOMOTIVE INC NEWPORT NEWS SHIPBUILDING INC BANK ONE CORP GRAND UNION CO CRANE CO SHERWIN WILLIAMS CO UNUMPROVIDENT CORP DOW CHEMICAL CO CABOT CORP FIRST TENNESSEE NATIONAL CORP UNOCAL CORP ABBOTT LABORATORIES CONSTELLATION ENERGY GROUP INC AMERISOURCE HEALTH CORP ALLIED WASTE INDUSTRIES INC WALGREEN CO FINOVA GROUP INC JOHNSON CONTROLSSPRINT INC CORP UNITED RENTALS INC NEW RUSSELL CORP CAMPBELL SOUP CO KELLWOOD CO H & R BLOCK INC ECOLAB INC WISCONSIN ENERGY CORP NEW YORK TIMES CO HERSHEY FOODS CORP PHARMACIA CORP DE TRIBUNE CO SERVICE MERCHANDISE CO INC RYERSON TULL INC NEW AIR PRODUCTS & CHEMICALS INC CINTAS CORP INGRAM MICRO INC SAKS INC TEKTRONIX INC CHARMING SHOPPES INC ILLINOIS TOOL WORKS INC AETNA INC PA HERMAN MILLER INC WALTER INDUSTRIES INC LOUISIANA PACIFIC CORP TRICON GLOBAL RESTAURANTS INC IBP INC EXXON MOBIL CORP WAL MART STORES INC RADIOSHACK CORP TENNECO AUTOMOTIVE INC DOW JONES & CO INC SOLUTIA INC IMC GLOBAL INC NORTHERN TRUST CORP CLEAR CHANNEL COMMUNICATIONS INC HORMEL FOODS CORP CADENCE DESIGN SYSTEMS INC UNIVERSAL HEALTH SERVICES INC ALCOA INC NEWMONT MINING CORPHOME DEPOT INC BRIGHTPOINT INC AT&T CORP CONVERGYS CORP JOHN HANCOCK FINANCIAL SERVICES INC BRM HOLDINGS INC KOHL S CORP LIMITED INC UNITED TECHNOLOGIES CORP LEHMAN BROTHERS HOLDINGS INC TARGET CORP AMERICAN STANDARD COS INC CVS CORP UGI CORP PA AES CORP E I DU PONT DE NEMOURS & CO USEC INC STAPLES INC HOUSEHOLD INTERNATIONALCSX CORP INC PUBLIC SERVICE ENTERPRISE GROUP INC PEPSI BOTTLING GROUP INC CUMMINS INC PFIZER INC LEXMARK INTERNATIONAL INC THOMAS & BETTS CORP INTERNATIONAL FLAVORS & FRAGRANCES THERMO ELECTRON CORP CONTINENTAL AIRLINES INC FLEETBOSTON FINANCIAL CORP GPU INC COUNTRYWIDE CREDIT INDUSTRIES INC EXELON CORP SNAP ON INC CDI CORP CHUBB CORP TECUMSEH PRODUCTS CO WEYERHAEUSER CO ARMSTRONG WORLD INDUSTRIES INC USG CORP PHILIP MORRIS COS INC EMERSON ELECTRIC CO COMCAST CORP TEXTRON INC KMART CORP CONEXANT SYSTEMS INC AUTOLIV INC PEPSIAMERICAS INC NEW VIACOM INC PETSMART INC TEMPLE INLAND INC HARMAN INTERNATIONAL INDUSTRIES INC CITIGROUP INC HONEYWELL INTERNATIONAL INC FEDERATED DEPARTMENT STORES INC NEW XEROX CORP SERVICEMASTER CO PNC FINANCIAL SERVICES GROUP INC J C PENNEY CO INC DANA CORP GENERAL ELECTRIC CO OHIO CASUALTY CORP STANLEY WORKS HARCOURT GENERAL INC PHELPS DODGE CORP STANCORP FINANCIAL GROUP INC WASHINGTON MUTUAL INC MICROSOFT CORP ASHLAND INC AUTOZONE INC ALLSTATE CORP STORAGE TECHNOLOGY CORP QUEST DIAGNOSTICS INC LEGGETT & PLATT INC ZIONS BANCORPORATION MDU RESOURCES GROUP INC EASTMAN KODAK CO SUMMIT BANCORP NJ ELECTRONIC DATA SYSTEMS CORP SHOPKO STORES INC KB HOME PEPSICO INC W R GRACE & CO NEW MINNESOTA MINING & MANUFACTURING CO V F CORP HARLEY DAVIDSON INC ST PAUL COS INC ARROW ELECTRONICS INC DYNCORP INTERNATIONAL PAPER CO AON CORP BAXTER INTERNATIONAL INC ROHM & HAAS CO TRANSMONTAIGNE INC W R BERKLEY CORP DPL INC SEARS ROEBUCK & CO OWENS ILLINOIS INC GOLDMAN SACHS GROUP INC FEDEX CORP 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DELTA AIR LINES INCAOL TIME WARNER INC MANOR CARE INC NEW BORDEN INC KERR MCGEE CORP ROADWAY CORP SPORTS AUTHORITY INC NORFOLK SOUTHERN CORP ANHEUSER BUSCH COS INC AUTOMATIC DATAFLEMING PROCESSING COS INC INC PROVIDIAN FINANCIAL CORP PITTSTON CO MARSH & MCLENNAN COS INC DUN & BRADSTREET CORP DE NEW ENGELHARD CORP WINN DIXIE STORES INC UNOVA INC JONES APPAREL GROUP INC LONGS DRUG STORES CORP EDISON INTERNATIONAL DOVER CORP KEYCORP OHIO MCKESSON CORP DE BANK OF AMERICA CORPCOLGATE PALMOLIVE CO EL PASO CORP NACCO INDUSTRIES INC COMFORT SYSTEMS USA INC NORTHROP GRUMMAN CORP NEW AMERICAN GREETINGS CORP QUORUM HEALTH GROUP INC STILWELL FINANCIAL INC SUNTRUST BANKSCOCA INC COLA ENTERPRISES INC TJX COS INC NICOR INC GENTEK INC TRW INC BOEING COOMNICOM GROUP INC KEYSPAN CORP DIMON INC RALSTON PURINA CO LEGG MASON INC SOUTHERN CO CENTEX CORP AUTONATION INC DE ANNTAYLOR STORES CORP AMES DEPT STORES INC LOWE S COS INC SCHERING PLOUGH CORP MERRILL LYNCH & CO INC YELLOW CORP ENTERGY CORP DE APPLE COMPUTER INC PROGRESSIVE CORP PAYLESS SHOESOURCE INC NEW LITTON INDUSTRIES INC BEAR STEARNS COS INC SONOCO PRODUCTS CO PRICELINE COM INC ANALOG DEVICES INC ENTERASYS NETWORKS INC APPLERA CORP NORTHWEST AIRLINES CORP NEW PROGRESS ENERGY INC DEAN FOODS CO TRUE NORTH COMMUNICATIONS INC GRANITE CONSTRUCTION INC METRIS COS INC USA NETWORKS INC SEMPRA ENERGY ENRON CORP OR LOCKHEED MARTIN CORP BRINKER INTERNATIONAL INC BETHLEHEM STEEL CORP PHILLIPS PETROLEUM CO RELIANCEGILLETTE GROUP COHOLDINGS INC FIRSTENERGY CORP LTV CORP SUN MICROSYSTEMS INC ENERGIZER HOLDINGS INC COMPUTER SCIENCES CORP ALLERGAN INC TXU CORP VIAD CORP GENUINE PARTS CO AMAZON COM INC OFFICE DEPOT INC FISHER SCIENTIFIC INTERNATIONAL INC CHEVRONTEXACO CORP METALS USA INC UNITED PARCEL SERVICE INC

CISCO SYSTEMS INC CONSOLIDATED EDISON INC GAP INC ELI LILLY & CO COMPAQ COMPUTER CORP SYNOVUS FINANCIAL CORP PETER KIEWIT SONS INC NEW LOEWS CORP NISOURCE INC REPUBLIC SERVICES INC WEATHERFORD INTERNATIONAL INC NEW SODEXHO MARRIOTT SERVICES INC CONAGRA FOODS INC TORCHMARK CORP WACKENHUT CORP CB RICHARD ELLIS SERVICES INC RAYONIER INCNIKE INC TRANS WORLD ENTERTAINMENT CORP ALLTEL CORP AMERICAN GENERAL CORP URS CORP YORK INTERNATIONAL CORP ULTRAMAR DIAMOND SHAMROCK CORP GOLDEN STATE BANCORP INC BROWN SHOE CO INC HON INDUSTRIES INC INTEL CORP FIRST DATA CORP CHARTER ONE FINANCIAL INC BURLINGTON INDUSTRIES INC ELECTRONIC ARTS INC CORN PRODUCTS INTERNATIONAL INC PHILLIPS VAN HEUSEN CORP BEVERLY ENTERPRISES INC NEW IKON OFFICE SOLUTIONS INC PENNZOIL QUAKER STATE CO HILTON HOTELS CORP OAKWOOD HOMES CORP FERRO CORP ARCHER DANIELS MIDLAND CO CARLISLE COMPANIES INC AMERICAN FINANCIAL GROUP INC NEW APPLIED INDUSTRIAL TECHNOLOGIES INC BORGWARNER INC EXPRESS SCRIPTS INC CONSECO INC CONSOLIDATED FREIGHTWAYS CORP AVERY DENNISON CORP FIRST AMERICAN CORP BECKMAN COULTER INC PRECISION CASTPARTS CORP RPM INC RUDDICK CORP BALL CORP IMPERIAL SUGAR CO TX R J REYNOLDS TOBACCO HOLDINGS INC BERKSHIRE HATHAWAY INC NEW DOLLAR TREE STORES INC AMERICAN MANAGEMENTNEXTEL SYSTEMS COMMUNICATIONS INC INC NEW TOYS R US INC NEW COOPER TIRE & RUBBER CO CAREMARK RX INC DST SYSTEMS INC BANKNORTH GROUP INC ME AFLAC INC ANADARKO PETROLEUM CORP PROTECTIVE LIFE CORP NUCOR CORP ROCK TENN CO UST INC CHIQUITA BRANDS INTERNATIONAL INC GROUP 1 AUTOMOTIVE INC FREEPORT MCMORAN COPPER & GOLD INC MILLENNIUM CHEMICALS INC COMDISCO INC BURLINGTON RESOURCES INC ADELPHIA COMMUNICATIONS CORP L 3 COMMUNICATIONS HOLDINGS INC OFFICEMAX INC NORTHWESTERN CORP LABORATORY CORP OF AMERICAE TRADE HOLDINGS GROUP INC

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EXIDE TECHNOLOGIES GUIDANT CORP HOUSE2HOME INC WILLIAMS SONOMA INC BARNES & NOBLE INC WABASH NATIONAL CORP

ADC TELECOMMUNICATIONS INC HARSCO CORP TEREX CORP MARTIN MARIETTA MATERIALS INC DOLE FOOD CO INC Citigroup SOLECTRON CORP BJ S WHOLESALE CLUB INC LANDS END INC APACHE CORP COMPUTER ASSOCIATES INTERNATIONAL I

WORTHINGTON INDUSTRIES INC CNF INC NORTHEAST UTILITIES COSTCO WHOLESALE CORP DE HUGHES SUPPLY INC CAPITAL ONE FINANCIAL CORP TEXAS INDUSTRIES INC CDW COMPUTER CENTERS INC PIONEER STANDARD ELECTRONICS INC COMPUWARE CORP

PACIFICARE HEALTH SYSTEMS INC NEW TOWER AUTOMOTIVE INC SYMBOL TECHNOLOGIES INC

FISERV INC MICHAELS STORES INC

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BANK UNITED CORP PPL CORP

DURA AUTOMOTIVE SYSTEMS INC

SPX CORP

SEABOARD CORP

EXPEDITORS INTERNATIONAL OF WASH IN

MASTEC INC MAXTOR CORP

POTLATCH CORP

NABORS INDUSTRIES INC

BJ SERVICES CO

COOPER CAMERON CORP 9 10

Banking has changed dramatically since the 1980s Bank consolidation since 1990: (Almost) every New York-based commercial bank became JP Morgan Chase

• Market-based finance replaced corporate loans, and securitization meant that loans were not held in portfolio Æ banks shrank their boards and recruited far fewer CEOs and “stars” Of the 10 biggest • Consolidation meant a few large banks grew into US banks in 1989, truly national players 5 are now part of Æ bank boards saw increased churn in membership JP Morgan Chase

11 12 Bank consolidation since 1990: Effects of consolidation: NCNB/NationsBank/Bank of North Carolina National Bank bought the biggest banks outside New York America board composition, 1986-2007

20 FleetBoston (Old) Bank of America 15 Boatmen's Bank C&S/Sovran 10 NCNB/NationsBank/BofA Bank of America holds nearly 10% Directors of Number 5 of all deposits in the US through 0 6 8 0 its 5800 branches 98 8 92 6 1 19 0 199 19 1994 99 4 6 1 1998 200 00 0 Year 2002 2 20

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What does good corporate governance look like Case #2: investment banks (according to reformers)?

• Few investment banks were free-standing public • Boards are comprised primarily of truly independent corporations prior to the 1990s directors • The partnership model was still observed in some • Outside directors have relevant expertise and notable cases (e.g., Goldman Sachs) resources • Among publicly-traded investment banks (Merrill, • The CEO does not serve as Chairman of the Board Morgan Stanley), boards were relatively low-profile: • Directors are elected annually small, and few CEOs • Directors’ and top executives’ wealth is tied to the company via share ownership • [Optional] The firm has a large institutional blockholder to hold its board accountable

15 16 Board composition in 2006 Ownership structure in 2006

Company Board size Indep. CEOs “Stars” Annual? CEO=Chair? Company Largest shareholders % inside Auditor AIG 15 13 0 6 Yes No, by charter AIG CV Starr “group” 15.2%; FMR 6.8% 2.10% PWC Bear Stearns 12 8 0 1 Yes Yes Bear Stearns Private Capital Mgt, 6.1%; J. Cayne 6.5% 9% Deloitte Citi 16 13 6 4 Yes No Citi No 5% owner; Sandy Weill owns ~ 0.5% 1.10% KPMG Fannie 12 11 0 4 Yes No, by charter Fannie Cap Res 17.2%; Citi 6.3%; AXA 5.4% 0.40% Deloitte Goldman 11 9 2 4 Yes Yes Goldman GS “shareholder group,” 11.7% 2.90% PWC JP Morgan 14 11 3 4 Yes No JP Morgan Barclays 5.1% 1.20% PWC Lehman Bros 11 9 0 2 No* (2007) Yes Lehman Bros Smith Barney et al, 5.1% 3.90% E&Y Merrill Lynch 11 10 1 5 No Yes Merrill Lynch State Street (ESOP trustee) ~ 9% 1% Deloitte WaMu 13 10 0 3 No* (2007) Yes WaMu Cap Res 10.3%; Barclays 6.2% 1% Deloitte Wells Fargo 14 13 1 1 Yes Yes Wells Fargo Berkshire 5.7% <1% KPMG

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AIG after Greenberg: A model of governance reform Fannie after Raines: A model of governance reform

• Substantial turnover among former “Greenberg • Substantial turnover among former “Raines directors” (7/15) between 2004-2006 directors” (7/13) between 2004-2007 • Structural changes: • Structural changes: – Retained Arthur Levitt to advise on reforms, nominees – By-law requires separate CEO and Chairman of the – Director candidates not receiving a majority vote must Board resign – All directors but one are independent – 2/3 of directors must be independent (strictly defined) – Majority vote required for director election – By-laws require independent (non-executive) Chairman, – Stock ownership requirements for executives and who is evaluated annually directors – Former AIG CEOs cannot serve as directors – Directors limited to 4 other corporate boards – All employees must complete formal ethics training – Audit committee met 21 times in 2005! 19 20 Is executive churn a warning sign? Conclusion

Median tenure of top executives • Governance at financial institutions is unlike at other

25 corporations – Different roles for boards 20 – Changing functions over time 15 Wells Fargo • The “checklist” model of governance reform would WaMu not be effective for preventing financial collapse 10 • More “inside-focused” indicators may be more 5 effective

r 7 8 9 0 1 2 3 4 5 6 a 9 9 9 0 0 0 0 0 0 0 e 9 9 9 0 0 0 0 0 0 0 Y 1 1 1 2 2 2 2 2 2 2

21 22