Bank execs face new 'stress'

Some financial firms may have little choice but to shake up their board room -- and some top officials could also be at risk.

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By David Ellis, staff writer

Banks that were deemed capital deficient as part of the 'stress-test' program, may have little choice but to shake up their boardroom lin the coming months, experts note.
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NEW YORK ( -- The nation's leading banks may have been deemed solvent, but it remains to be seen whether top management at those firms will soon go bust.

Among the findings in its two-month long "stress test" program announced May 7, the government not only told 10 institutions to raise a total of $75 billion in additional capital, but also pushed banks to take a hard look at their leadership.

Industry regulators specifically asked banks to review both top executives and board members over the next month "to assure that the leadership of the firm has sufficient expertise and ability to manage the risks presented by the current economic environment."

Some experts suggest those remarks could foreshadow a wave of management changes.

"There is some vulnerability there," said Gary Townsend, former bank analyst and current president of the Chevy Chase, Md.-based investment adviser Hill-Townsend Capital.

Of course, when talk of management surfaces within the financial services industry, it often centers around two of its most troubled firms: Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500).

Both companies have certainly made plenty of concessions to regulators so far this year. But with the government owning sizeable stakes in both institutions, there are expectations that the two financial giants may have to bend even further.

In the weeks leading up to the stress test results, the fate of the two firms' CEOs -- Citi's Vikram Pandit and BofA's Ken Lewis -- was certainly a subject of much speculation.

Other analysts suspect that there could be some pressure exerted on regional lenders as well, particularly those considered by regulators to be facing a relatively severe capital shortfall. Those banks include Cleveland-based KeyCorp (KEY, Fortune 500), Cincinnati-based FifthThird (FITB, Fortune 500) and Atlanta-based SunTrust (STI, Fortune 500).

Of the 10 banks that need to raise capital after the tests, none would comment on whether any changes to top management or the board were deemed necessary.

Even before the stress tests results were published, however, the White House had already indicated that it may push some lenders to make changes either in the c-suite or the boardroom.

Not surprisingly, bank leaders are giving a lot of credibility to those threats. In March, the Obama administration ousted General Motors chief Rick Wagoner because it believed the automaker did not have a suitable long-term viability plan. Chief executives at insurer AIG as well as the twin mortgage buyers Fannie Mae and Freddie Mac were also shown the door last year after the government intervened to rescue the three firms.

More blame for the board: Still, there are those who consider an imminent wave of management shake-ups across the banking sector as remote -- at least for now.

Graham Michener, a managing director at the Connecticut-based executive search and corporate governance recruiting firm RSR Partners, notes that it is not for a lack of available talent, but the fact that the government may be unwilling to make a lot of big changes in this important transition time as banks try to nurse themselves back to health.

"For the next three to six months, we will see little to no change in the senior ranks because continuity will be crucial for the success of their plans," said Michener.

Such changes, however, would hardly represent the first time that the nation's banking industry has undergone a massive management facelift since the crisis first took hold more than a year ago.

Citigroup's Chuck Prince and Stan O'Neal of Merrill Lynch became the first in a long line of executive casualties in late 2007 when both men were ousted from their respective firms. That was followed just months later with the departure of Wachovia's Ken Thompson and Washington Mutual's Kerry Killinger as part of both banks' last-ditch efforts to turn their companies around.

Many of the recent leadership changes, however, have taken place at the board level. Earlier this year, Citigroup replaced Sir Win Bischoff with former Time Warner chief and long-time board member Richard Parsons. (Time Warner is the parent company of

That's not to mention last month's high-profile decision by Bank of America shareholders to strip Ken Lewis of his title as chairman amid outrage over his last-minute purchase of Merrill Lynch.

Many experts contend that any further bank shakeup in the months ahead will happen in the boardroom.

Too cozy?: Bank of America has already indicated that the company was considering changes to its current roster of directors, which would match changes at Citigroup. Shareholders at the New York City-based bank confirmed a handful of new board members last month.

Experts argue that bank boardrooms are ripe for change, having become tainted by cozy relationships and clogged with directors who have little, if any, banking or financial experience.

Many shareholder activists and analysts cite that lack of experience with helping to create the current state of affairs at many troubled institutions.

"Why we have not wiped out the board of directors at a number of banks already is just shocking in my view," said Dick Bove, a bank analyst at Rochdale Securities. "It proves there is no accountability in banking at the board level."

Certainly many controversial directors are secure for now, having thwarted several activist shareholder challenges this proxy season.

But amid pressure from regulators and possibly even the Obama administration, it remains doubtful that the current board makeup of most troubled institutions will remain intact until next year's annual shareholder meeting, notes Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.

"The risks of making the changes are frankly minimal compared to the risks of not making the changes," he said. To top of page

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