Benefits Column

Ideological Diversity

Ideological Diversity | Human Resource Executive Online A look at the Federal Reserve Banks' board selection and director independence -- and its possible relationship to the continuing financial crisis -- offers a lesson for HR leaders, who are frequently involved in the complexity of building a board of directors.

Monday, May 11, 2009
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Corporate-governance issues surrounding say-on-pay, board selection, independence of directors, separation of the chairman and CEO, and related topics, have heated up as the financial crisis continues.

The recent vote of Bank of America shareholders to move to a non-executive chairman is just the latest example.

Human resource executives are frequently intimately involved in these issues, and are likely to be more involved in the future, as the complexity of building a board becomes a more carefully scrutinized public process.

The complexity of these issues is highlighted in the Federal Reserve System itself -- an appropriate organization to study in these economic times.

HR leaders may be able to glean insights into ways to approach transparency issues -- and to avoid pitfalls -- by studying the way Congress addresses the structure and membership of the regional Federal Reserve Bank boards.

It is interesting to review some of the actions already taken by the Federal Reserve Board of Governors in Washington, to date, as well as ponder some of the membership moves that will take place in the months ahead.

As is well known, the governors of the central bank are appointed by the President of the United States and confirmed by the United States Senate. Less broadly understood is the fact that the regional banks take on a strong flavor of being self-regulatory organizations.

For example, each of the regional banks, by statute, has a nine-member board of directors. Six of the nine are appointed by the member banks of the regional Federal Reserve Bank. All members of the board must limit their partisan political activity.

Three Class A directors are appointed by the member banks and they can be bank directors, officers, employees and shareholders.

Three Class B directors are appointed by the member banks to represent the public and they can own shares in banks.

The final three -- Class C directors -- are appointed by the central bank board of governors to represent the public as well, but they cannot be bank directors, officers, employees or shareholders.

The board of governors also appoints the chairman and deputy chairman of the board from among the three Class C members on the board. The board of directors is responsible for hiring the president of the regional bank.

A review of the biographical listings of directors found on the regional banks' Web sites finds that all Class A directors are member-bank executives, and Class B and C directors are largely CEOs of corporations -- including some large financial institutions that do not meet the statutory definition of a bank -- which restricts Class B and C board membership.

For example, until he resigned his seat on May 7 following a growing number of calls for him to step down, Stephen Friedman was a New York Federal Reserve Class C director and also served as chairman of the board. He is chairman of Stone Point Capital LLC, and a member of the board of directors of Goldman Sachs, which became a bank-holding company in order to qualify for government bailout assistance.

The Federal Reserve Board of Governors granted Friedman a waiver from both the restrictions on bank-board membership and share ownership so that he could continue as a Class C director and as chairman of the New York Federal Reserve. The rational was, in part, that Goldman became a "bank-holding company" after Friedman was appointed, and a "bank-holding company" was not a "bank."

HR executives might contemplate how drawing such a definitional line -- one that might be viewed by some as approaching the famous words of former President Bill Clinton: "It depends on what the definition of 'is,' is" -- will play in the current activist world of shareholder and public-sector demands for corporate transparency.

Private-sector executives might also contemplate whether they can expect the government to hold itself to the same high standards that it is urging and requiring of private firms, and the consequences for public confidence if they do not do so.

Trust is at the core of workforce commitment to their employers; to the willingness of citizens to trust private and public institutions; the determination to save and to take on debt or risk; and the basic support for democracy.

Corporations have been urged by activists and the government to seek diversity in their boards' memberships, including customers and individuals who represent the public interest, as opposed to customers or others in business.

It's interesting to note that the regional Federal Reserve Bank boards are described on most of their Web sites as representing the public, which would seem to include those who are savers as well as borrowers.

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But, the New York Federal Reserve Bank Web site states that "directors represent borrowers from such areas as agriculture, commerce, industry, services, labor, and customers," and a review of the directors for all of the regional banks suggests that all of the banks define "public" as, in fact, "borrowers."

The financial crisis is said by government and private commentators to have come about due to a credit crisis, itself arising from too much leverage/borrowing. Yet, if all of those who drive bank policy are borrowers, or those that want to lend, is it any wonder the pressure was always toward allowing the expansion of lending/borrowing?

This is a lesson that corporations and human resource executives should understand.

The apparent lack of ideological diversity on the topic of borrowing on Federal Reserve Bank boards -- and the possible role that such an absence played in allowing the credit bubble to develop -- may provide a very strong argument for corporations to seek broad board diversity as a way to avoid their own future crises.

Too many directors, driven by the same value set, can bring trouble. That's not exactly startling news to human resource executives who specialize in assessing human behavior, but it's a message that these executives may want to carry to their C-suites with newfound vigor.

Tell your CEOs to look at the way limited diversity on the boards of directors of the Federal Reserve Banks may have contributed to the greatest credit and financial crisis since the Great Depression.

Human resource executives might also want to take the board-diversity message to their congressional representatives, as they consider regulatory reform of institutions such as the Federal Reserve.

My mom and dad frequently reminded me that, "What is good for the goose, is good for the gander." They intended it in a different way, but it might be applied to suggest that we should work as hard to encourage savings in the future -- and responsibility -- as we do borrowing and debt -- and the dependence that results. 

Human resource executives, as the "sponsors" of retirement-savings programs, are on the high ground on this and many other issues. Will our "new" financial regulatory system do as much to encourage savings as it does borrowing and debt? If it does, it could help avoid the retirement funding and income crises that may otherwise lie ahead.

Dallas Salisbury, an expert on economic-security issues, is president and CEO of the nonpartisan Employee Benefit Research Institute in Washington. The views expressed, however, are his own and should not be attributed to EBRI or others.

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