Another bank, another failure of the board.
New York Community Bancorp (NYSE:NYCB) last week became the latest commercial bank to find itself on the brink of collapse only to be pulled back from the precipice by a last-minute lifeline. This time the rescue came in the form of a $1 billion infusion of capital from a group of investors led by former U.S. Treasury Secretary Steve Mnuchin. However, in a sweeping indictment of NYCB’s board, the investment comes with a catch -- 7 out of 12 of the bank’s current board members must resign.
While I acknowledge there is always a fair amount of Monday morning quarterbacking in these circumstances, in the case of NYCB’s board, Mnuchin is right. This board (or at least a majority of it) had to go in order for the bank to have a chance of survival.
Bank boards in the U.S. are unique, or at least should be, when compared to typical corporate boards. The U.S. banking industry is one of the most complex and highly regulated industries in the world and necessitates independent board members with deep industry expertise. And unlike Silicon Valley Bank, which infamously collapsed last year, NYCB did to its credit have a board replete with seasoned financial executives with deep experience in the banking industry.
So where exactly did NYCB’s board go wrong? Experts claim that the bank’s acquisition last year of Signature Valley Bank, a failed regional bank, exacerbated a balance sheet compromised by significant exposure to commercial real estate loans. As I am not a banking expert, I can’t opine on the soundness of these tactical decisions. However, from a corporate governance perspective the actions of the board this past month certainly support the position that they were part of the problem and not the solution.
On February 7th, NYCB announced that board member Alessandro DiNello, who was the former CEO of Flagstar Bank which was acquired by NYCB in 2022, would be taking the bank’s new title of executive chairman. The announcement followed the bank’s slashing of its dividend and the report of a net quarterly loss of more than $250 million.
A week later, in a somewhat bizarre effort to clarify any confusion, NYCB announced that DiNello would actually be the “most senior executive of the company” and that CEO Thomas Cangemi would report directly to him. Feeling confident in NYCB’s board yet? Neither were directors Toan Huynh and Hanif Dahya, both of whom resigned shortly thereafter.
Fast forward to last week when NYCB announced that it actually had losses of more than $2.7 billion in Q4 and that management had discovered “material weaknesses in the company’s internal controls.” As part of that announcement the board announced that Cangemi was stepping down immediately and would be replaced by DiNello. While this is certainly not unique in the wake of bad financial news, what was extraordinary was the bank’s decision to allow Cangemi to remain on the board.
In what world is substantial underperformance by management rewarded with a board seat?
Consider the recent examples of Peloton’s John Foley, VF (NYSE:VFC) Corporation’s Steve Randel and Discover Financial’s Roger Hochschild -- all of whom were immediately dismissed as both CEO and member of the board upon the disclosure of poor financials.
Allowing Cangemi to remain on NYCB’s board is demonstrable evidence of a board which was either failing to appreciate their own reality or simply unwilling to admit they were a part of the problem. Either way it is clear that there was a dysfunctional board at the helm of NYCB.
The very public and embarrassing actions at NYCB during the past month should underscore to boards that talent alone is not sufficient to meet the challenges directors may encounter in the boardroom. It is critical during the board recruitment process to understand the other skill sets, character traits, and experiences a director will bring to the board.
Have they ever been immersed in a corporate fiasco? How do they approach conflict resolution? Are they able to work collegially with others in an intense atmosphere. Although it unlikely these questions would have prevented NYCB’s financial collapse, it may have prevented the circus of the past month.
It’s far too early to determine whether Mnuchin, who will join NYCB’s board as part of this new infusion of capital, will be able to steady NYCB. Nevertheless, his first move to reconstitute the board is a significant step in the right direction.
*Mark Rogers (NYSE:ROG) is a corporate governance expert and the CEO of BoardProspects, the premier board recruitment solution for public and private corporations.