Friday, August 13, 2010

Simmons' Value on Goldman's Board

Ruth Simmons, president of Brown University, earlier this year stepped down from serving on the board of directors at Goldman Sachs--but not quietly.

All indications or evidence suggests she left the board because she decided to reduce her involvement in outside corporate activities. She wasn't pushed out or asked off. Yet while Goldman scrambled to confront the financial crisis and the accompanying storm of bad publicity, some questioned whether she and other academics on boards were sufficiently qualified to assess the market collapse, evaluate tough banking issues, and understand products, risks, businesses, and market structures.

Two weeks ago in a recent article, the New York Times ( summarized the ongoing discussion about academics (namely, university presidents) serving as board members of major corporations. The viewpoints about their involvement were multi-sided, and those in business, finance and academia weighed in.

Many appreciate the objective perspectives of academics, their experiences running complex organizations (universities with many constituencies and multiple missions), and their proven intellect (Ph.d. degrees and well-documented academic achievements). Nonetheless, some contend university presidents don't have the time to devote to corporate board issues or shouldn't allot the time when they must wrestle with more pressing issues on their campuses.

Some don't like the exceptional compensation packages academics receive serving boards and suggest potential conflicts. And some have outright argued that, without years of business and finance experience, they are out of their league in addressing corporate issues that might overwhelm them.

In the Times article, the head of an independent research firm (Nell Minow of the Corporate Library) says Ruth Simmons' presence on the board hurt Goldman. Minow claims Simmons, as a Goldman director, spent too much time on women's and diversity issues and didn't have the background or expertise to cull through financial issues. "That seat could have been held by someone who understood derivatives," she is quoted in the article. "You don't go on a board for networking, seeking contributions, or working for minorities. You go on a board for one purpose--to manage risk for the long-term benefit of the shareholder." (As many know, Simmons is the first African-American president of an Ivy League school.)

This way of thinking diminishes invaluable contributions someone like Simmons made while on the board or could have continued to make, if she had remained on the board. It's this perspective that undermines the courage some firms have in selecting outstanding outsiders (including women and minorities) to serve on boards to participate in all aspects in overseeing a global business.

Here is a rebuttal to the parochial view that only insider finance experts are capable of serving as board members of complex, global financial institutions.

Or rephrased: Why should Goldman be applauded for inviting Simmons to be a board member, if she were able to carve out the time and attention for such a responsibility?

1. Simmons is learned educator and the senior administrator of a major university, a large, complicated organization with many constituencies, challenges, issues and visions. And one with endowment and finances that must be managed as carefully as Goldman manages its capital and revenue streams. She understands organizational structures and issues and could provide insight and best practices on what works and what doesn't.

2. As an accomplished academic (with a doctorate degree), now responsible for the education of thousands of students, Simmons is likely capable of learning and understanding the primary aspects of banking quickly. One shouldn't discount her ability to master new material.

She may not at first have understood products, business lines, capital markets, mezzanine financing, currency swaps, derivatives, hybrid securities, mergers and acquisitions, or trading positions. But she likely has a knack for coming up to speed quickly. She has to do the same in her "day job," when appointing deans in schools, fields or divisions outside of her area of expertise or when assessing all academic departments at Brown--from biology and physics to art history and sociology.

3. Simmons comes from the outside. She would have little or no allegiance to certain people, divisions, or business lines. She would likely ask questions that others might not bother. She would offer a different perspective, a fresh point of view, and steer fellow board members to extract themselves from minutiae and focus on what makes common sense.

In other words, the outsider is more likely to feel comfortable asking, for example, "Why does it make sense to invest $100 million in new insurance derivatives when you can't explain it to me?"

4. Some would argue there is no way she could intelligently decide on numerous complex financial products Goldman offers, trades, manages, or sells--including, say, credit-default swaps, collateralized debt obligations, currency swaps, high-yield debt, total-return swaps, options and futures. No doubt the products are complicated. Often it takes in-depth knowledge of finance, markets and risk to manage related businesses. It takes experience and day-to-day familiarity, too.

That doesn't mean someone like Simmons couldn't understand the basics--the purpose, the business objective, the primary risks, the profit models, the clients, and the counterparties--to make prudent business decisions. In many cases, the products are new to the experienced bankers, too--the result of innovation the past decade or so.

Hence, even senior managers at Goldman, too, must learn, understand and get acquainted with them. The so-called ABX mortgage index and products derived from that didn't exist a decade ago. Almost no MBA graduate before 1995 would have learned about credit-default swaps in a textbook.

Some market observers, in fact, say that near financial collapse was caused, in part, by the unnecessary complexity of products and models and the inability to grasp or appreciate risks. Some products (e.g, "CDO-squared" instruments or synthetic CDO's) were deemed too complex, too unwieldy for experts, Ph.d.'s in finance, or veteran traders.

Going forward, many will assert that if the products can't be explained logically to smart, fast-learning outsiders (like Simmons), then they probably shouldn't be deployed, issued, or sold.

5. If Simmons didn't emphasize diversity, student recruiting, and women, then who would? When senior managers get distracted by other topics and issues, who reminds board members that successful diversity and inclusion aren't sometime activities--initiatives that get attention only when times are good?

And who helps to remind shareholders (and all stakeholders) how it hurts the franchise in the long term if diversity gets shoved aside if short-term priorities are focused entirely on maximizing current returns?

Simmons was likely the voice in the room who reminds the board to be fair and inclusive in the hiring of talent, in managing director promotions and in overall recruiting. (She has certainly be cited for pushing women's initiatives during her Goldman stint.) She may have been the voice that reminded all a market slowdown isn't an excuse to call time-out on diversity initiatives.

Those who argue that university presidents have enough on their hands and shouldn't accept board seats have a point, if presidents have taken on too many. That would, however, apply to any CEO who sits on perhaps more than three or four boards while trying to focus on his/her own global business. If those from academia manage their invitations to a handful, then they should be welcomed to the board table.

Instead of criticizing Simmons, many should have tried to convince her to remain as a director.

Tracy Williams

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