Shareholders call for directors’ heads over sub-prime market decisions

Howard Davies

Pressure to leave: Howard Davies

In the wake of the global credit squeeze, risk management and corporate
governance have been of highest priority on the corporate agenda since Enron.

Amid the firing of auditors and calls for new audit committee members, as
well as audits of risk management processes, there is a growing clamour by
shareholders for a full account of the massive losses that have plagued banks
around the world.

Share activists have been leading the calls for full explanations and
directors are facing seemingly endless questions about the role they played in
the sub-prime market turmoil. This year could be dubbed the year of the
shareholder activist.

The latest action comes from CtW Investment, an investor lobby group
representing $1.5trillion (£737bn) in investments.

CtW has held talks with directors of the six large US banks including
Citigroup, Morgan Stanley and Wachovia. They account for 88% of the $87bn in
total sub-prime-related writedowns and credit losses.

Following the meeting with Morgan Stanley, CtW has urged shareholders to vote
to eject the bank’s chairman and chief executive John Mack, and directors Howard
Davies (pictured) and Robert Kidder, even though all three executives have been
nominated for re-election. Details of CtW’s meetings with Citigroup and Wachovia
Bank have not yet emerged.

Shareholders are no longer willing to stand by and accept further losses.
They are demanding change to prevent a repeat of events.

Investors have become concerned that experienced individuals with stellar
reputations who served on audit and risk committees failed to notice the red
flags raised by reports and economists who warned about relaxed lending
practices and unsustainable pricing of property as early as 2005.

The shareholder activists are even more furious about the picture emerging,
which suggests the directors, paid massive bonuses and charged with risk
oversight, knew little about their company’s holding of high-risk off-bala
nce-sheet structures.

Auditors are also in the firing line, with investors asking why more was not
made of the sub-prime risks companies were carrying on their books. With the
accounting for off-balance sheet vehicles still under scrutiny, the spotlight on
auditors will be harsh.

Shareholders who have suffered losses want to see those who decided to expose
banks to sub-prime instruments held accountable. CtW’s calls for audit committee
heads to roll could be the beginning of a year of director and auditor culling.

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