http://chronicle.com/daily/2008/10/5990n.htm
The Chronicle of Higher Education
Today's News
Tuesday, October 28, 2008
2 College Presidents Had Ringside Seat to Wall Street Meltdown
By PAUL FAIN
The collapse of the investment bank Bear Stearns has led to some of the
first repercussions over the credit crisis, including shareholder
lawsuits, criminal proceedings, and Congressional scrutiny.
Feeling some of the heat are the 12 members of the Bear Stearns
Companies' Board of Directors, which included Henry S. Bienen, president
of Northwestern University, and the Rev. Donald J. Harrington, president
of St. John's University, in New York.
Through a university spokesman, Mr. Bienen, who also served on the
firm's audit committee, declined to discuss Bear Stearns. Father
Harrington did not respond to two requests for interviews.
While the board has yet to be officially accused of mismanagement,
directors are likely to be named in lawsuits. And if the aftermath
follows the course of other high-profile corporate implosions, they may
also be summoned to testify on Capitol Hill.
"They're now looking for heads to roll on this," said Nancy B. Rapoport,
a professor of law and a corporate-governance expert at the law school
of the University of Nevada at Las Vegas.
The two university presidents' relationship with Bear Stearns is a
cautionary tale of the risks of serving on corporate boards. While board
seats offer college leaders fund-raising opportunities, prestige, and
substantial supplemental income, they also can lead to litigation and
unwelcome attention for presidents and their institutions.
With strong academic credentials and their institution's name, college
presidents are attractive candidates for corporate boards. In addition,
they typically have limited ties to the company and its related
industries, an independent quality that companies have been required to
look for following several prominent corporate accounting scandals.
However, governance experts said it was unusual for two university
chiefs to serve on one board.
"That's a lot of college presidents on a board," said Charles M. Elson,
director of the John L. Weinberg Center for Corporate Governance, at the
University of Delaware, "particularly for a complex financial-services
organization."
Before its collapse, Bear Stearns was highly leveraged and heavily
dependent on mortgage-related securities. Critics, backed by a recent
audit by the Securities and Exchange Commission, charge that the board
was overly lax about the risks associated with the firm's holdings.
Jacob H. Zamansky, a New York-based lawyer, is leading the first of
several shareholder lawsuits filed against Bear Stearns.
"Investors counted on members of the board to scrutinize the investments
of the firm," he said in an interview. Although Mr. Zamansky's claim
does not name directors, he expects other lawsuits will do so.
"They may end up paying financially for putting their heads in the sand
while their firm is melting," he said.
Resignations and an Implosion
March was a busy month for Bear Stearns, and for Mr. Bienen. He
announced on March 3 that he would retire as Northwestern's president,
effective in August 2009.
Mr. Bienen, who has served as the university's president since 1995, has
been widely praised for helping to improve the institution's financial
position and academic profile. In an interview in March, he told the
campus newspaper that he had discussed his retirement with members of
Northwestern's Board of Trustees as early as 2006 and decided to move
the planned April announcement up one month to add time to the search
for his successor.
While Mr. Bienen was announcing his retirement, Wall Street insiders
were buzzing over the possible demise of Bear Stearns, an 85-year-old
institution. Experts were worried about the firm's liquidity—its ability
to access cash. On March 10, the company took the extraordinary step of
issuing a news release to try to knock down the rumors.
"Bear Stearns's balance sheet, liquidity, and capital remain strong,"
said Alan D. Schwartz, the company's chief executive.
The pitch fell flat, and Bear Stearns lurched toward bankruptcy as
investors yanked their money. Although the rumors hastened the firm's
fall, investors had legitimate cause for concern. Its leverage ratio, a
measure of debt compared to assets, had risen to an astonishing 33 to 1,
according to the SEC.
With the firm's troubles mounting, Mr. Bienen announced on March 11 that
he would leave the board in April.
The announcement drew headlines, as panicked investors scanned for news
about the company's health. The Dow Jones Newswire reported that Mr.
Bienen's departure was the latest in a shake-up that included the ouster
of two Bear Stearns executives in the previous nine months. Mr. Bienen,
who had been on the board since 2004 and served on its audit and
legal-compliance committees, declined to comment on his reasons for
stepping down.
An emergency loan backed by the U.S. government could not save the firm,
and by March 16 Bear Stearns was sunk. JPMorgan offered to buy the
company for $2 per share, or $236-million, a remarkable bargain for a
firm with 14,000 employees and a $1-billion Manhattan office building.
Bear Stearns's board unanimously approved the deal.
Investors were outraged, and a new deal was struck a week later to
increase the sale price to $10 per share.
Two of the firm's hedge-fund managers face criminal and civil charges
for allegedly misleading investors about the flimsy subprime-loan
holdings in two of the company's funds. And the criminal probe may now
be expanding. According to news reports, federal prosecutors are
investigating whether Bear Stearns officials may have defrauded wealthy
investors, including banks.
A Cautionary Tale
About one-third of college presidents serve on a corporate board. And
both Mr. Bienen and Father Harrington, who has been president of St.
John's since 1989, had good reasons to be directors of Bear Stearns, for
the company, their universities, and themselves.
Before coming to Northwestern, Mr. Bienen was dean of Princeton
University's Woodrow Wilson School of Public and International Affairs.
He had previously served as a consultant to the World Bank, the Boeing
Company, and an investment company.
As president of St. John's, Father Harrington helped forge deep ties to
Bear Stearns, which was a short subway ride from the main campus in
Queens. Bear Stearns executives have spoken to the business school and
given the university's commencement address. And Father Harrington, who
joined the Bear Stearns board in 1993, once brought in the company's
head of corporate security to review campus safety.
William J. Montgoris, a St. John's alumnus and a retired chief operating
officer of Bear Stearns, is a member of the university's Board of
Trustees. A donor himself, he recently led a $271-million capital
campaign for St. John's. Among the new buildings financed by the
campaign was the Montgoris Dining Hall.
In addition to the benefits to their universities, both presidents were
well compensated for their board service. In 2007, Mr. Bienen earned
$59,500 in cash fees, $103,510 in stock awards, and $62,808 in stock
options, according to company filings with the SEC. Father Harrington
made $78,500 in cash, $78,510 in stock, and $62,808 in options.
With the money came the expectation that the board members would be the
primary fiduciaries for Bear Stearns. The two presidents were to join
other directors for at least 10 of the 13 annual board meetings, as well
as at multiple gatherings for individual committees.
Mr. Bienen and the rest of the seven-member audit committee were
responsible for the integrity of the company's financial statements and
audits, a task for which each director was required to be "financially
literate" and have "accounting or related financial management expertise."
The Bear Stearns board may have mismanaged the company, said J. Robert
Brown Jr., a professor of securities law at the University of Denver's
law school, and it is highly likely that the directors, including Mr.
Bienen and Father Harrington, will be sued.
Even if the lawsuits were settled quietly, Mr. Brown said, they would
raise questions about the competency of the college leaders.
Several commentators have been less diplomatic in their critiques of the
board.
Directors of Bear Stearns and other failed financial firms failed to
exercise their fiduciary duties, said Ben W. Heineman Jr., a senior
fellow at Harvard University's law school and John F. Kennedy School of
Government and former senior vice president for law and public affairs
at the General Electric Company.
The Bear Stearns and other boards "are ultimately responsible for the
sharp decline or disappearance of their companies," Mr. Heineman wrote
in a column published in BusinessWeek. "It is clear that the boards of
our major financial institutions did not understand the risks the
entities were taking."
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