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For information or to subscribe, call Steve Cocheo, editor, 212-620-7219, scocheo@sbpub.com Headlines concerning the Enron scandal grow more numerous and villainous with each day. The thought of the suspicions, accusations, and more that will be left at the feet of the Enron board of directors should make anyone who serves on any type of corporate board think hard about what it takes to maintain good governance. Fortunately, the vast majority of what you’ve read about at Enron is unlikely to happen at your bank. However, an old sage once said there are two ways to learn the important things in life. One is to ponder on the causes of one’s own suffering. The other is to observe and learn from others’ predicaments. In the spirit of the latter, we turned to Roger Raber, an expert in corporate governance. Raber is the president and CEO of the National Association of Corporate Directors, Washington, D.C. (www.nacdonline.org) and is also a member of the advisory council of the American Association of Bank Directors’ Institute for Bank Director Education. A former bank director himself, in New Jersey, Raber has been exposed to the workings of many boards, including those of banks, especially through his previous job as director of member services for America’s Community Bankers, a banking trade association. STARTING FROM A GOOD PLACE In an interview, Raber says that when Enron’s problems first came to light, he considered the situation a limited one that would soon be put to rights. After four or five weeks of revelations indicated that Enron’s trouble was systemic and had momentum, he says, he began hearing from members from all over the place. Raber says he then realized that the nation’s directors were seeing a watershed event unfolding. The most immediate lesson that came to mind was this, he says: "The director always wants to remember that it’s the board that is in charge." Raber is actually quite impressed with what he’s witnessed in the banking industry. "I’ve seen some of the most energized boards in community banks," he says. In fact, he observes, the community bank directors’ job is tougher in some ways because they must not only worry about shareholders, as does every board, but also about two other "stakeholders": the regulators and the local community. Raber admires their track record in this regard. "I look up to community bank boards as exemplars," he says. ROUTES TO IMPROVEMENT Still, there is much to be learned from Enron, says Raber. His points: 1. There is no substitute for knowing the business of the bank you are serving. At Enron, part of what’s been charged is a complicated web of off-balance-sheet partnerships that made the company’s financial statements considerably different from the reality they purportedly described. Enron is involved in complicated businesses to begin with, and this, plus the fact that even 100% honest off-balance-sheet deals are hard to understand, would make even the most honest setup difficult to follow without a scorecard. Community banking isn’t nearly as complicated–but it isn’t finger painting, either. "Community bank directors need to know the business of banking," says Raber. "They need to know and understand key performance measures, matters of regulatory compliance, and basics of finance and accounting." This was always the case, Raber adds, but it applies more than ever as community banks’ business lines expand and become more elaborate. The widespread adoption of the internet and similar technologies in community banking has broadened the challenge further, says Raber. Privacy and information security issues, for instance, while often considered technical matters for specialists, must be at least fundamentally understood by active directors. 2. The importance of true, independent directorship. The list of Enron insiders accused of conflicts of interest has been building over recent weeks. Raber says this underscores how critical it is, in his mind, for bank boards to not only have outside directors, but for directors to ensure that their boards reflect sufficient independence of thought and interests. "I have concerns when I am invited to sit on the board of a company where fellow directors have a financial interest in the company," says Raber. By this, he doesn’t mean he has something against financial interests in the form of an ownership stake in the same firm. What Raber objects to are situations where the director’s personal or business affairs ride on the bank. For example, Raber frowns on a bank having directors who serve the bank in some vendor capacity, such as outside counsel, insurance broker, or supplier of computer equipment or other essentials. "I personally have a problem discerning real from perceived conflicts of interest," says Raber. To him, they smell pretty similar. 3. The board should never be the last to find out that there is a problem. Indeed, why shouldn’t the board be the first stop for bad news? At least as of early February, it’s fair to say that the overall portrayal of the Enron board–at least the outside directors–has been as unwitting dupes, not as co-conspirators, in the firm’s trouble. But let’s put aside situations of fraud or deceit for the "ordinary" situation of business problems. For a board to know there is a problem, there must be clear communication between the board and the bank’s CEO. Obviously, Raber points out, the board isn’t in the bank all the time, so directors need to hear clearly, plainly, and regularly from the CEO about what is going on. And, then, of course the board must give what it hears sufficient consideration to judge when it has a real problem on its hands versus a "speed bump." 4. Bank directors need to get the right information about their banks. Raber believes that directors need to find a manageable balance between the extremes of everything and hardly anything. "All of us are overwhelmed with information these days," Raber notes. But he says directors must find a way of obtaining information packets that get at the heart of their banks’ activities without bulk that makes it impossible to monitor that heart. 5. Clean up your board meeting. One moderating influence on the previous step is Raber’s insistence that directors remember that directors direct and managers manage. He believes too many bank boards get tied up in a level of detail that should properly be left to management. This is not to argue in favor of ignorance–you don’t want to be blindsided by bad news that you should have known about early–but instead in favor of maintaining the strategic, oversight role that boards should generally attempt to exercise. 6. Monitor dealings with your audit firm. Much has been published about the role of Enron’s accounting firm, Arthur Andersen. Raber says one of the basics of good corporate governance is that the board’s audit committee, not management, should hire the outside accounting firm. "If you have management hiring the external auditor, you have a big, red flag," he points out. (In community banks, of course, the dividing line isn’t always that simple. Federal law requires outside audits of banks with $500 million or more in assets, and those institutions are required to maintain audit committees composed solely of outside directors. In smaller banks that are closely held or family owned, however, management and board, of course, often mostly or completely overlap.) 7. Avoid the "quarterly trap." As head of NACD, Raber has seen much of the "we have to do better than last quarter" syndrome, which he believes has wreaked havoc on much corporate thinking. It leads to the kind of atmosphere where people don’t much care how a company improves its quarterly results, so long as it does so. At the extreme, this leads to financial shenanigans such as those Enron has been tarred with. Raber believes many banks have avoided the worst of this syndrome, taking more of a long-term view than some other companies. Some of this comes from their widespread conservatism, and some of it from banking’s extensive regulatory oversight. Raber hopes bank boards will continue this attitude as business trends down for a time. 8. Directors must remember that they ultimately work for shareholders–and don’t be surprised if shareholders start reminding you of that. In many community banks, the board represents the family or closely knit group that owns the bank. But in a growing number of community banks, increasing size has seen a broadening of the ownership base. Many banks and their boards have been spared the "activist shareholder," but Raber suspects that formerly quiet shareholders of many firms are going to be paying better attention in the wake of the Enron scandal. His final warning: "They are going to be demanding more accountability."
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