A recent article in the Washington Post reported that the new SEC Chairwoman Mary Schapiro is planning to look into whether the boards of these financial institutions were structured correctly and provided the effective oversight needed to ensure long term sustainability. According to the article the SEC is considering asking boards to disclose more about Directors' backgrounds and skills and how much they actually know about managing risk. To put all of this in ABA terms the SEC is asking what we have been asking of our advisory and governance board "leaders" since our inception. As a director or advisory board member what value do you bring to our clients organization and how are you going to contribute so that we can hold you accountable to the management team and ultimately its shareholders.

According to the article they are going to begin to also analyze the true independence of these Directors and potential conflicts like serving on multiple boards, having a CEO who it also the Chairman or having other high level management team members in key positions on the board or on committees. Once again these are part of ABA's current board analysis processes (although ours is much more encompassing).

Based on this you would think that we at ABA were pleased that the SEC is finally coming around to our way of thinking but we also have some real concerns (especially any time the SEC is involved):

• You can't regulate board leadership! I say this far too often. In the end a systemic board shift is needed to make a real change from a "police" board to a "pilot" board and unless the current leadership is focused on building a board for shareholder value and not developing a board of names or "B" school buddies the SEC is going to just put in more regulations that have the reverse effect and decrease long term shareholder value.
• They over regulate. If you think I am crazy think about Sarbanes Oxley. The fact is that Congress over-regulated in a way that in the end really didn't provide any shareholder value. If you still think I am crazy, look at Bear Stearns, Washington Mutual, Merrill Lynch, AIG, Lehman all of these companies followed the Sarbanes Oxley regulations to the letter and where is the value to shareholders? These regulations have failed in large part because it left a culture of "CYA" in board rooms and when we hear "manage risk" this sounds very similar.
• Nothing will change. This is probably the most likely scenario. We will have all of this great dialogue and bring all of these Directors in front of a congressional hearing and in the end nothing will happen. Let's be honest many politicians are also getting on these boards because of (you guessed it) their names and not because they actually provide any value to the shareholders and I doubt they are about to kiss their meal ticket goodbye.

If ABA was advising the SEC (feel free to forward this posting onto the Chairwoman if you are so inclined) we would applaud the undertaking and would hope they realize that they need to come up with recommendations and not regulations. Those recommendations need to be based on suggestions and input from "recognized" board "leaders" that have been there and done it. We would like to see those "recognized" individuals be people who have served on a publicly traded company board and have developed boards that are highly efficient, accountable and have a history of providing shareholder value. An objective way of analyzing these participants (not unlike ABA's) is where we would recommend they start (unlike the normal subjective way boards are built). As with anything there are 1000's of ways to build a board incorrectly and only a few ways to do it right and bringing together a group that knows the difference could make some real change.

Sounds like they need an advisory board!

Bob Arciniaga
Managing Partner
Advisory Board Architects