Boards

Four Ways to Fix Banks

A Wall Street veteran suggests how to cut through the industry’s complexity.

by

Sallie Krawcheck

by

Sallie Krawcheck

From the Magazine (June 2012)

Summary.

Reprint: R1206G

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.

It is tempting to view the financial downturn as a closed chapter whose primary causes have been resolved—perhaps not perfectly, but fairly comprehensively—by the Dodd-Frank Act’s reregulation of the financial services industry. But big banks continue to have a governance problem, which poses significant risks not just to them but potentially to the entire economy during the next downturn.

A version of this article appeared in the June 2012 issue of Harvard Business Review.

SK

Sallie Krawcheck is the author of Own It: The Power of Women at Work. She is the CEO and co-founder of Ellevest, a digital investment platform for women. She is the chair of Ellevate Network and the Pax Ellevate Global Women’s Index Fund.

Four Ways to Fix Banks

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