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From the September 2002 ABA Banking Journal Copyright 2002 American Bankers Association WASHINGTON PROFILE Susan Bies is a kickFed governors are referees of sorts, which fits well with Sue Bies’ background–bank economist and soccer "ref" Banker D.W. "Bill" McGaughey first came to know Susan Schmidt Bies, now a Federal Reserve Board governor, about 20 years ago. Both the Bies and McGaughey households were in Germantown, a suburb of Memphis, and the two families’ paths crossed in three distinct ways–career, civic duty, and kids’ sports. Bies (pronounced "buys"), who was then working at First Tennessee National Corp., was serving as a volunteer member of Germantown’s Finance Advisory Board. McGaughey, CFO at the Bank of Germantown, was serving as the liaison to the advisory board for the Board of Aldermen, on which he also served. Having banking in common, they became acquainted. One thing McGaughey found refreshing was that Bies was very natural. While she could always be counted on for cogent observations and input at the board meetings, she didn’t put on the airs that a doctor of economics (Northwestern, 1972) might have felt entitled to. "She didn’t come across as, ‘I’m Doctor Bies, and you have to listen to what I say’," recalls McGaughey, who is now executive vice-president, Trustmark National Bank, Tennessee Division. Instead, he continues, Bies distinguished herself on the board by being personable, often persuasive, and, above all, intelligent. One other thing the two households shared was involvement in local youth soccer. Both of Bies’ sons, John and Scott, played. Indeed, soccer was–and is–something of a passion in the Bies household. Both Governor Bies and her husband, Dr. John D. Bies, until recently a visiting professor of geography at The University of Memphis, became licensed soccer referees, and both held official posts in local or state-level soccer organizations. Both were also players in adult leagues. Among the parting gifts Bies received from fellow employees on departing for Washington was a soccer ball, signed by all of the officers she’d worked with at First Tennessee. And, if anyone noticed a bleary eye on Bies on a few mornings early this summer, it was because she’d risen in the small hours more than once to watch the World Cup. "Yes," Bies admits, "I am a soccer nut." A governor dropped by… Whomever you ask about Governor Bies–former co-workers, banking lobbyists, industry figures–they invariably mention her easy-going style, her lack of pretense. She’s always "Sue" or "Susan" to those she works with, they say–never "Dr. Bies." Case in point is a story told about her after her arrival at the Fed in December 2001, along with Mark Olson, former banker and ABA president. (Bies has past involvement with ABA too, as a member in the late 1980s of its CFO Committee.). The Fed’s Washington headquarters consists of two buildings, the traditional white marble building where the Board of Governors and certain staff members are housed, and the modernistic, utilitarian building across the street–connected by an underground tunnel–that contains many other Fed offices. In the main building, the governors’ offices sit in a separate, upper-floor area. To enter, one passes through an impressive portal where the Fed emblem is set into a marble floor. There’s gilding here and there, and several fluted columns. The effect is vaguely Olympian–as in "Mount Olympus." It would be pretty easy for a newcomer to get carried away with the formality, but Bies took it in stride. Early on, she had questions for some economists elsewhere in the building. She left her office and materialized in their doorways, much to the surprise of the staffers. It’s not that other governors don’t move out of their offices, but these particular staffers were more used to being summoned than to having a governor "drop in" with a question. "Don’t deny the economics" Cheerful and natural she may be, but Bies is known for tenacity when she believes she is on the right side of a technical point. "She’s willing to listen to just about any view," explains Donna Fisher, ABA’s director of tax and accounting. Yet Fisher, who has known Bies since her days on the CFO committee, notes that the governor stresses discussing the reality of things–the true economics–rather than what people would like a situation to be. This is a view learned through experience. Bies, 55, spent 22 years in business, starting out in economics at First Tennessee and finishing there as executive vice-president for risk management. Prior to that, her career included a stint at the St. Louis Fed as well as academic positions in economics. Ralph Horn, chairman and former CEO at First Tennes-see, notes that during her time at the company Bies chaired the asset-liability management committee, de-veloping a deep command of the details that go into making a financial operation, and the financial system, work. A good example of Bies’ grounding in reality was when she served on the Emerging Issues Task Force of the Financial Accounting Standards Board (from 1996 to mid-2001). Ed Jenkins, until recently the chairman of FASB, recalls that Bies was initially invited to join the task force because of her knowledge of derivatives and other complex instruments. While she made forceful points, he adds, "She was never confrontational." Bies, in an interview with ABA BJ, used FAS 115 (accounting for a bank’s securities portfolio) as an example of how FASB sometimes has the wrong end of things. "When you see something that doesn’t seem right, you’ve got to know what the root cause is, because if you don’t, you are not going to stop that abuse in the future," she explains. "More importantly, you run the risk of putting a new regulation or accounting rule in place that creates a burden on companies with no real benefits. Personally, that’s how I felt about 115." Bies explains that the matter came about because a handful of banks were "cherry picking"–taking securities in the portfolio that had gains and selling them–leaving underwater bonds alone. "Most banks clearly understood that if you wanted to actively buy and sell securities, the securities should be put in a trading account and marked to market," says Bies. Cherry picking, done by a few, could have been treated as an audit failure, says Bies, and addressed directly by auditors. "Instead of focusing on an audit failure, we ended up writing a whole new set of rules," says Bies. "They are very complex–and, at the end of the day, they still allow somebody to take gains in their ‘available for sale’ securities and run them through the income statement. So I don’t know that we gained a lot." Following are highlights of the interview with Gov. Bies conducted in her office at the Fed in July. ABA BJ: The situation you described relating to "cherry picking" has happened over and over–a handful of banks transgress and the response is broad. How can regulators resist such "regulation by blunderbuss"? BIES: Regulators have to make sure that all the affected parties have a chance to comment and that we listen to those concerns. But, putting on my regulator’s hat, we’ve got to remember that many organizations who feel that they are not abusing the existing system look at any new regulation, no matter what, as a burden. Sometimes regulators have to encourage change to happen. ABA BJ: At times FASB’s processes and policies drive many bankers to the point of apoplexy. Does the FASB process still work? BIES: The accounting rules-setting process in the U.S., overall, is very effective. Capital costs are so low in this country because we have had good accounting standards and good disclosure. Indeed, we have the best accounting standards in the world. So we are starting from a high plateau. But on the other hand, there are always opportunities to do things better. One of the reasons bankers always react when FASB is looking at a change is, it’s probably going to affect either their balance sheet or earnings statement. That’s why it is important that the rulemakers understand why they are writing a new standard. Is it to clarify something? Is it because business practices have so changed that accounting hasn’t kept up? Then it’s appropriate to write new standards. But FASB needs more discipline in its process. One project that FASB has been working on for a decade is consolidation. That’s because we have seen much more in the way of joint ventures that go on with companies’ special purpose vehicles. But any project that takes more than ten years–as that one has–probably isn’t well defined. What likely needs to be done is to focus more on those new vehicles, rather than trying to re-write what’s been working for 99% of the arrangements. ABA BJ: What impact will the new Public Company Accounting Oversight Board have on FASB’s process and authority? BIES: The new board should complement it. FASB writes the accounting standards. Parallel to that, you need effective audits; because you’ve got to make sure standards are followed. We have had an industry-driven process up until now: the American Institute of Certified Public Accounts’ peer-review process. The self-regulatory process wasn’t strong enough–not enough teeth. With a strong audit oversight board, FASB won’t have to get so detailed, because you are going to make auditors professionals again. I mean, the saddest thing in all of what’s been going on is that the auditors stopped understanding that companies hire them to ensure fair disclosure to investors and to customers. They are not there to do only what the company wants. ABA BJ: What can bankers learn from what’s been going on? BIES: They should ask themselves, "What is our vital corporate culture? What is the one thing that we have to protect, to protect our franchise value?" For an accounting firm, it’s integrity. If they lose that integrity, they have lost the ability to opine on statements. Bankers have the same issue. As bankers try to serve customers better, they are pushing decisionmaking out into the front line. But the more you decentralize decisionmaking, the more you need to make sure you have accountability and control. That’s where quality assurance, internal controls, loan review, etc., need to get stronger. ABA BJ: You seem to have taken the lead on corporate governance for the Fed’s board. Is this a personal mission? BIES: Corporate governance is something I care very much about. But what I am saying in my speeches is, all this has been laid out for decades, in Fed supervisory letters and examination procedures. The SEC has had commissions over the years that have come up with the same recommendations that deal with the quality of the board and its independence, the mission of the audit committee, internal auditors, etc. There’s really nothing new. I am using what’s been hitting the media every day for months as a way to remind bankers of best practices. That’s why I am calling some of my speeches, "lessons re-learned." I believe strongly–and this is personal opinion–that we have to look at how the internal audit function is organized in a banking company. First of all, internal controls are the responsibility of line management. Everyone who is responsible for running a business in a bank must decide how much and what type of risks they want to accept to make that business effective, profitable, and of service to customers. Then they’ve got to make sure that effective controls are in place, so that the actual risk they end up with is what they thought they were going to face. Internal Audit’s role is to come in and help in the design of those controls, and later, in measuring the controls’ effectiveness. When banks outsource internal audits, we need to understand why. Cost savings shouldn’t really be the main motive. ABA BJ: What should be the main motive? BIES: When outside auditors look at internal controls, they only look at it to the extent that they need to, to opine on the accounting. They are not looking at the whole system of internal controls. That’s why in banks, you’ve got FDICIA looking at all internal controls. [The Federal Deposit Insurance Corp. Improvement Act requires an annual report in which the CEO and CFO, among other things, must acknowledge management’s responsibilities for establishing and maintaining an adequate internal control structure, and provide an assessment of the effectiveness of those internal controls.] Internal auditors should ask: "How does your asset liability process work? How does your chief risk officer evaluate things? How effective is your compliance function?" The broader control issues don’t get looked at by your outside auditor. When outside audit firms also take on Internal Audit, there is a real conflict. You are asking an outside auditor to opine on a fellow partner who running the internal audit. That’s too much to ask. Particularly for smaller banks, it’s good that when they outsource Internal Audit or choose their outside auditor, that they find a firm that is seeing more than one bank. They need to be dealing with firms that spend enough time in the industry that they are aware of all that’s going on. ABA BJ: Corporate governance and compliance don’t add anything to profitability–in fact, they can add many costs. How do you get CEOs to focus on them? BIES: Governance is a soft subject. But one of the most important strategic issues CEOs need to think about is their bank’s reputation, and protecting the bank from potential abuses and huge losses from internal fraud. We need to make sure that the executive management team sends the signals loud and strong that ethics and integrity are important to their organization. The FDICIA process should be more than just paper pushing. It starts out with the line unit managers themselves using it once a year. They must ask themselves: "How has my business changed? What are the risks in my business now? Am I comfortable I’ve got the appropriate level of controls and are they working the way they should?" When those officers sign off, then it goes up to the next level manager. He says, "Okay, the managers working for me, how has their business changed? What risks I am seeing today in my organization? Do I have the right level of controls?" And then you kick it up, all the way up to the CEO. Now, I think most banks are very well run. That’s the reason I have been emphasizing that my speeches are reminders. ABA BJ: That takes care of the CEO. What about the board? BIES: I find it striking that the companies that are coming under most scrutiny right now are generally companies in new lines of business, with hard-charging CEOs who are very entrepreneurial, very outside of the box. You need people like that to start new businesses. But when you have people like that on the one hand, that’s when you need balance–a system of strong internal controls. Banking is changing more rapidly today than it used to. We need to understand that the faster the pace of change, the more important internal controls become. So, in my speeches, I’ve been trying to tell audit committee members that they shouldn’t ask "yes" and "no" questions. For instance, they shouldn’t just ask, "Did you identify any weaknesses in the FDICIA review? Did your outside auditor find any?," and hearing "no,’ not take it further. They should ask: "While you were going through the internal controls- review process, what were the major issues indentified where you need to strengthen controls in the coming year, because your business has changed?" The audit committee should pose open-ended questions like that. ABA BJ: There is a coziness between some CEOs and their boards. Is that of concern? BIES: Good boards have a predominant membership of outside directors, people that are on that board because they bring a particular expertise. For various reasons, from time to time, there are members of the board who aren’t as effective as others. The bank may have inherited some through mergers. In some banks you have founding directors who are still there but are no longer actively engaged in business. The key is that you maintain a majority that is engaged, active, and independent. A board has to have a couple of internal managers sit on it, but they shouldn’t dominate it. You need to get a mix of talents on the board. Take, for example, the audit committee; you need directors to sit on that audit committee who really have an understanding of finance, audit, and control issues. Now, this doesn’t mean that some directors won’t know the CEO. In many cities, you know, people like that tend to run in the same circles. So they are going to be friends after a while. But CEOs and their boards should have a professional respect for one another. Their professionalism should be the dominant tone in the board meeting. But if a particular director is just a friend of the CEO, one who really brings nothing to the board, you need to question why that director is there. Of course, all the scrutiny that’s going on now, and all the potential liability, is going to make some potential board members stop and think, "Do I want to accept all this?" ABA BJ: What about shareholders? BIES: The whole risk management discipline is the link between internal controls and business strategy: "What are my exposures? What are my mitigating controls, relative to the return or rewards that I get?" That process forces management to look at risk and return. Once management understands the key elements, they should begin to disclose it. Because banks are growing more and more unique, they really need to take the lead in how they want to disclose information. And good disclosure draws in the shareholder. BJ |
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