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 © 2009 by The Regents of The University of Michigan • All Rights Reserved 2 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) 5 6 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 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