Big banks continue to have a governance problem, which poses significant risks not just to them but potentially to the entire economy.
Big banks have become too complex for boards to govern them effectively, writes a former top executive at Bank of America and Citigroup. Directors need simple tools to cut through that complexity, and Krawchek suggests four:
- Pay top executives with bank debt instead of just stock and stock options, to give them more incentive to worry about risk.
- Pay dividends as a percentage of earnings instead of as a set amount, to preserve capital in downturns.
- Ignore net interest income in judging bank performance, and pay much more attention to customer satisfaction metrics.
- Focus board attention not on the most troubled business segments, as is customary now, but on those that are using the most capital.