The impact of 9/11 on bank directing

At first blush, you might think that the terrorism attacks of Sept. 11, 2001, which resulted in the destruction of the World Trade Center towers and the wounding of the Pentagon, plus the death of more than 3,000 American citizens and others, would not have had a direct impact on bank directors and the direction of financial institutions. Your first blush would be incorrect - there are at least two areas of reaction to 9/11 that have had a significant impact on bank direction: (1) contingency planning; and (2) the role of the director regarding management and its operations. Let's discuss these reactions in sequence.

Located in the World Trade Centers were more than 50 domestic and international banking organizations. They were all physically destroyed by the collapse of the towers, yet the American financial system did not collapse. Why not?

The answer is simple: There had been extensive contingency planning by the various domestic and international financial intermediaries located there. Whether a brokerage house, a bond house, or an international or domestic commercial bank - they all had contingency plans that were placed into operation immediately upon the destruction of the WTC.

I am not implying that there were not problems; there were catastrophic problems. But as you read in the Wall Street Journal or the American Banker during the months following 9/11, it was impressive to recognize the amount of forethought and planning that had taken place and the quick reaction by all. Not only was there extensive contingency planning, there were also financial institutions, banks and corporations which normally compete with each other that cooperated to provide backroom capabilities, research analysis and/or order-taking so that the financial system remained stabilized and functioning.

Significant strategic planning accomplished by the major international and domestic financial intermediaries located in New York was not lost on the average bank or thrift director subsequent to those momentous disasters. Every bank and thrift reacted immediately to determine what kinds of contingency planning were available in their communities:

Did they have back-up hot sites that actually worked?

Were the cold sites they had joint-- ventured into actually workable?

Bank managements analyzed weaknesses and attempted to bolster contingency planning by working with other financial intermediaries within their market areas. Much time was spent at board meetings working out details of new agreements with other financial intermediaries or computer providers so that contingency planning could improve.

There was a comprehensive analysis of strengths and weaknesses of operations of all financial institutions, and remedial actions were taken quickly, often at significant expense, to shore up some areas and to provide for alternative planning avenues to keep the financial institutions functioning. The events of 9/11 led directly to improved emergency planning and remedial actions so as to provide a more stable financial environment throughout the United States.

The other major impact was not really a 9/11 tragedy, but has been adopted by the media and almost all of us intuitively as being caused by those events. This is the complete breakdown in the trust, respect and confidence of the American corporations' accounting philosophy and results occasioned by the implosion of Enron, the collapse of Global Crossing and WorldCom, the alleged fraudulent actions of Tyco International, the alleged disclosure violations of Adelphia Communications Corp., and the alleged insider actions of ImClone and Martha Stewart. It seems that the 9/11 tragedy caused all of this, although they are not really connected - and yet they are.

They are connected because, from a Wall Street stock market philosophical ambiance and environmental impact, the market has been in the tank since January in spite of favorable economic and financial conditions, increased personal confidence in the economy, lower unemployment rates than anticipated and far more favorable international news vis-a-vis the war on terrorism. In spite of all recovery signs, Wall Street and the markets in general are at levels today close to those post-9/11.

Much of this is situation due to the loss of confidence and belief in the American corporate system, especially the ethical behavior questions concerning management's greed, avarice, hubris and inability to follow ethical standards in providing information to the market. No one trusts the numbers anymore, and they have plenty of reason to feel that they are being conned by the largest, most aggressive public corporations. Whatever happened to the quality of the auditing by the Big Eight, then Big Six, now Big Five and, by the death of Arthur Anderson, the tainted Big Four?

At the time of the writing of this commentary, it is about one week after WorldCom announced that it had misclassified $3.85 billion worth of expenses as capital expenditures. If I tried that trick in my consulting firm's 1120, I would be writing next year's columns from Leavenworth, Kan., or maybe from some nice, white-collar federal prison. On the other hand, when the announcement came out about WorldCom's misclassified expenses, guess who the auditors were? Arthur Anderson! Now they are going to solve their problems by suing the chief financial officer to get back his $10 million bonus (kind of like closing the barn door long after the horse left).

The questionable activities of Enron, WorldCom, Global Crossing, Tyco International, Adelphia Communications, ImClone and Martha Stewart all have led to an environment where directors are under tremendous pressure to act more assertively, aggressively and vigilantly. There have been no changes in the duties of care, loyalty and candor faced by directors. There have been no landmark legal cases announced in the year since the events of 9/11. But rest assured, directors have come under fire simply because they are directors.

This environment is having an effect on banks and thrifts, holding companies and financial holding companies - no different than the effect on Fortune 500 organizations. The pressure is ostensibly on the financial and bank holding companies which are public corporations trading on the NYSE, AMEX or NASDAQ but that is just the tip of the iceberg.

This titanic impact affects all directors, whether they direct big banks or small banks, big thrifts or small thrifts, or even serve as volunteer directors of credit unions. Directors are under the gun to improve their supervision and oversight of the managements they control. In the same regard, managements, regardless of location or ability, are under intense public scrutiny from the marketplace, as well as from shareholders and stakeholders.

The markets are demanding increased scrutiny of the managements that directors control. Much of this scrutiny would be through increased time spent by those directors on the job. The days of the short and infrequent committee meetings and half-day board meetings complemented by golf outings may be gone forever.

Shareholders - through the mass media and the markets are demanding more full-time directing by their elected representatives.

In this respect, directors are expected to analyze and question management far more thoroughly than in the past and to not accept management decisions and recommendations without full analysis and perhaps independent confirmation through outside legal counsel, accountants and consultants.

The supervision/oversight bar has been raised by the 9/11 events. Although they are not directly tied, they are (in the minds of the mass media and the marketplace) tied in to the significant attack on the United States and its free enterprise economy. There is just as much a war on corporate irresponsibility and unethical behavior as there is against the Al Qaeda and the Taliban.

Several corporate chief executive officers are morally equivalent to Osama Bin Laden. These CEOs have terrorized their corporations as much as if they had waged war, siding with the Al Qaeda.

Enron is in bankruptcy. Global Crossing is in bankruptcy. Tyco International's accounting records are in disarray. WorldCom may soon be in bankruptcy after announcing the misclassification of nearly $4 billion. These catastrophes have destroyed the confidence and the respect of the American public against the supervision and monitoring of American corporations by their directors.

So far, the banking industry has been fortunate. There have been no major accounting nor financial scandals in the American banking industry. This does not mean it will not happen, or that the industry is perfect. There is less accounting manipulation in the banking industry, due to pervasive regulation and sophisticated accounting and tax restraints on the industry - but that does not mean that somebody hasn't been cooking the books somewhere.

It doesn't make any difference that there has not been any scandal at a major US. bank. All directors at all publicly traded banks - even you as directors of closely held community banks and thrifts - are starting to get the "evil eye" from employees, customers and especially shareholders. Shareholders are starting to wonder, sometimes out loud, whether you are performing your duties properly.

No director in any bank or thrift in this country will be able to sit and relax through a board meeting anymore. There will be no golfing trips accompanied by directors' meetings - the opposite will be the case, with emphasis on the meeting and de-emphasis on the golf. The directors will examine management more closely, and the independence of directors and management will be emphasized in the years to come.

Management will be curtailed, controlled and supervised to a degree not known within the industry thus far. Directors who cannot spend the time nor understand the importance of controlling the management, and those who believe that the director's job is one of status and reputation rather than business, will not serve their boards well in the future.

The events of 9/11 have changed the role of the director forever and especially have changed the environment between management and the board itself. In essence, management is no longer trusted.

It will be up to the directors to control the situation at their financial institutions or corporations so that rude awakenings do not occur.