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BofA is in Need of Directors

or in other words, should we still expect the bank to get through this crisis?

Where’s the commotion in the banking industry? After months of corporate turmoil and internal disagreement, Bank of America finally succumbs to pressure as shareholders decided to oust several directors including CEO Ken Lewis and lead director O. Temple Sloan Jr. Surprisingly, other directors were allowed to stay in the company but Lewis and Sloan received no mercy from the people who voted them out. Lewis however was lucky to have retained his CEO role after his duties as chairman were delegated to Walter Massey.

It’s widely reported in Wall Street that after consultation with Federal Reserve officials, the bank is currently scouting for new directors who have enough banking experience. We’ve been reading about the critics’ pan against this recourse. For one, they’re deploring that seasoned bankers have brought the industry to where it is plummeting today. It may sound absurd but we can’t help but agree anyway. If you may recall, the mortgage crisis finds its roots in the loose regulation that top bankers have taken advantage of when they secured loans to risky borrowers. So haven’t they learned their lesson yet? But this isn’t a matter of career history that is currently on the grill.

From the commotion that has taken place at BofA, it’s evident that the top management is always at the helm of the shareholders obviously. But make no mistake of steering the company to shambles or you’ll be relieved of your post. And the effects are not only felt by the shareholders. In a study by Sudheer Chava and Amiyatosh Purnanandam in 2007 entitled, “The Effect of Banking Crisis on Bank-Dependent Borrowers” they found out that bank-dependent firms face adverse valuation consequences when banking sector’s financial health deteriorates. Among bank-dependent firms, firms with higher growth opportunities and lower financial flexibility suffer larger value losses. This clearly shows that not only shareholder’s assets are at stake but that of the borrowers’ and depositors’ too.

To combat this outcome, why not hire directors who are ready to provide immediate and long-term operational fixes but at the same time prepared to accept the consequences of their failure to solve the crisis without having to accept enormous bonuses when they’re discharged from the company? This sounds easy but it’s terribly difficult to find a qualified one.

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