As bank failures increased during the 1980s in the wake of worldwide recession, US regulators decided that banks' capital ratios, which had been falling for many years, were indeed too low, and they established higher minimum requirements. My gut reaction was vindicated, but I felt like an idiot for not having followed my instincts and spoken up at that earlier board meeting; I had certainly muffed one chance to try to make a difference. The new, higher capital requirements in turn proved badly inadequate when large banks' headlong increase in risk taking propelled them into the center of the worldwide financial crisis of 2008–9. So why had banks' boards of directors been so easily reassured? Why hadn't we all learned to ask harder questions?
My education in banking, and in the responsibilities of directors, took another leap forward in the 1980s when Manufacturers Hanover had a near-death experience caused by a severe debt crisis and spreading loan defaults in several Latin American countries where the bank was a major lender. Things were shaky enough to bring on quarterly visits to board meetings by the president of the New York Federal Reserve Bank, our main regulatory supervisor. Despite that gentleman's low-key style, these visits were an ominous signal, a sharp reminder of the directors' responsibility for overseeing and guiding improvement in the bank's condition. We got the message that our job was not to be simply rubber stamps for management, and, under our polite but persistent prodding, the painful but necessary changes were made. Most significantly, we prevailed on the CEO to fire the executive in charge of the bank's international lending, sending a sharp message about personal accountability.
Over the years that I spent on the board, the bank I had joined as Manufacturers Hanover provided a crash course in mergers and acquisitions. The bank, itself the creation of a major merger in 1961 and numerous smaller ones since, merged with the Chemical Bank and adopted the latter's name in 1992; the process was repeated when Chemical became Chase Manhattan in 1996, which in turn became JPMorgan Chase in 2000. The days and weeks leading up to these decisions involved difficult meetings, intense discussions, and the knowledge that any slip of the tongue could put a director at risk for violating strict regulations against trading on inside information, with the possibility of a serious fine or even jail time.
This exposure was brought home to me when I was suddenly called to a meeting in New York in connection with one of the mergers and had to make apologies to the hosts of a dinner party we had promised to attend, saying simply that I “had to go out of town.” The host, an active and knowledgeable investor, asked casually, “Oh, by the way, are you still a director of Chemical Bank?” I realized immediately that he had guessed the reason for my trip, and my heart sank as I contemplated the potential fallout if he took advantage of his knowledge to trade in the stock. When I returned, just after the merger between Chemical and Chase had been announced, he called to tell me that he had indeed guessed that the merger was about to occur, but, he added, “I didn't trade.”
Our vote authorizing a merger was just the beginning. Actually merging previously distinct executive ranks, workforces, branch systems, information technology systems, and, above all, cultures was a complex and often painful process, as employees from the top to the bottom of the organization were squeezed out in order to avoid redundancy and achieve the cost savings from consolidation that were the whole point of the merger. Many of the surviving employees also felt extreme stress, as their job descriptions changed or, at the least, they had to adapt to new ways of doing things. The one-on-one competitions to be the survivor in a particular job slot were fierce, and persuading old Manny Hanny and old Chemical survivors to regard themselves as part of one team often seemed like a Sisyphean task. My heart ached for Manny Hanny's CEO, John McGillicuddy, a warm and public-spirited man, as well as an outstanding banker, as he was gradually but inevitably marginalized during his brief time as head of the merged entity by the former CEO of Chemical, who, by mutual agreement, had been designated as McGillicuddy's successor.
When I joined the board of Manufacturers Hanover in 1973, banks, even sophisticated money center banks, generated earnings primarily by taking in deposits, using those funds to make loans, and deriving profits by charging higher interest rates on the loans they made than they paid out on their deposits. By the time I retired from the board of JPMorgan Chase in 2002, the activities that produced the earnings of money center banks had changed dramatically. Of the loans originally made by the bank, less than 25 percent remained on its own books. The rest were either sold outright or “securitized”—that is, packaged into groups of loans with differing characteristics and sold to a variety of investors.2 The bank's profits now came mainly from the fees it charged for these and many other financial services, and from trading in currencies or securities for its own account.
Understanding the risks these varied activities carried was a complex business. As a member of the bank's Risk Policy Committee, I was actively involved in discussions about the sophisticated statistical techniques used to estimate various types of risk to which the bank was exposed. Yet no one from management ever mentioned to us that the structured transactions it had entered into with Enron before the latter's collapse in 2001 might entail financial risk, as well as risk to its reputation. The bank's leadership apparently believed that it was fully hedged against financial losses, although these transactions eventually cost the bank several hundreds of millions of dollars. As the world of banking changed, we directors struggled to keep up, but we weren't fast enough up the learning curve and neither, it turned out, were the managers. Neither group seemed to learn from experience either; the same sort of failure by banks, on a vastly larger scale, to understand or estimate accurately the risks they were taking culminated in the financial crisis of 2008–9. By then I had retired from all corporate directorships and could only join my fellow citizens in shocked disbelief as I watched the financial sector's house of cards collapse into a global disaster.
With one notable exception, every one of the large, successful firms whose boards of directors I joined soon found themselves threatened, as Manny Hanny was, by challenges they hadn't prepared for, challenges that forced on them wrenching changes in form or function or, often, both. One of those companies was Westinghouse Electric, long established and highly respected as one of the premier firms headquartered in our hometown of Pittsburgh, but with operations in many countries. Its major business, nuclear power, was one of special interest to me—after all, my father had been a major figure in the Manhattan Project; my mother had been a founding employee of Brookhaven Laboratory, one of the national labs created to explore the peacetime uses of atomic energy; and I had argued with Edward Teller over the role of nuclear energy as a member of Nelson Rockefeller's Commission on Critical Choices for Americans. As the clincher, my brother George had spoken admiringly of its CEO, Don Burnham, whom he had gotten to know while he, George, was director of the National Productivity Commission.
About the time Bob Kirby succeeded Burnham as chairman and CEO of Westinghouse, soon after I joined its board, the price of uranium began to shoot up, reaching forty dollars per pound by 1975. This escalation meant that the company would have gone broke trying to fulfill contracts it had signed when the price was five to six dollars per pound, promising to deliver the uranium they needed to the owners of the nuclear power plants it had built. Instead, it reneged on the contracts. The twenty-seven utility customers promptly sued, exposing Westinghouse to a potential two billion dollars in liabilities and setting off a round of suits, countersuits, and associated suits that would occupy the firm for the next five years, tie up many of the nation's major law firms, and set the company on a path of diversification that would ultimately end in its transformation into an entertainment company, CBS.
The situation created a great deal of tension for the directors personally. At one point, we were advised that the board as a whole should hire its own lawyer to protect itself against the numerous lawsuits in which we were named as defendants, quite separate fro
m those who were defending the company itself. Our choice was John McCloy, the elderly but still canny establishment lawyer, banker, and adviser to presidents who had been US high commissioner for Germany just after World War II, the president of the World Bank, chairman of Chase Manhattan Bank and the Ford Foundation, and president of the Council on Foreign Relations. Despite his awe-inspiring pedigree, McCloy's advice to the members of the board was down to earth and practical, always cautioning us to keep our heads and not panic, however much our personal assets and reputations might appear to be threatened. “The worst thing you can do,” he told us, “is let your opponents see that you feel threatened by their accusations.” We swallowed hard and tried to remain calm in the face of the huge sums for which the other side tried—ultimately unsuccessfully—to hold us personally accountable.
Although my six years on the board had been dominated by those lawsuits and the tensions they created, both inside and outside the company, I had actually felt more comfortable on that board than I did during my early years at Manufacturers Hanover. Even though I was, once again, the first and only woman, I didn't stand out as an oddball nearly as much in Pittsburgh as I did in New York. Perhaps it was because we were all too busy concentrating on the company's problems; there's nothing like a crisis to create team spirit.
Neither the Westinghouse management nor any of my fellow directors was directly responsible for the gender-related restriction that separated me from the rest of the pack. All of Westinghouse's senior executives, along with the top executives of every major corporation headquartered in Pittsburgh, belonged to the Duquesne Club. The companies generally paid their executives' membership fees and deducted them from taxes as a business expense. It was illegal, though, for any club that served a business purpose to discriminate in its membership policies, and, during the late 1970s, feminist and minority activists were beginning to bring lawsuits against these firms, arguing that they could not deduct the dining club and country club fees they paid and at the same time insist that the clubs were purely social.
I had been freed from the humiliation of being relegated to the Duquesne Club's ladies' entrance when the club tightened its security, by closing that door, after it was briefly stormed by a group that included some of my more radical faculty colleagues. Now, I figured, I ought to strike my own blow for equality by joining any such lawsuit, if the opportunity came up. This would have been highly embarrassing to Westinghouse, and when I told Bob Kirby of my intention, he replied, “I hope there will be enough time for me to get the club to shape up before that happens.” Kirby was as good as his word, and the Duquesne Club soon took in its first minority member, the African American dean of the Duquesne University Law School. He and I had made a bet as to which of us would be invited first; he was, so I won the bet. It wasn't long before the first woman joined as well, but it wasn't me; by that time I no longer lived in Pittsburgh.
McCloy's wisdom stood me in good stead on a very different issue from the one he had been engaged for. While I was still on the Westinghouse board, Ben Stein, Herb Stein's son, coauthored with his father a novel about the chaos created by runaway global inflation and an attempt by the Chinese to secretly acquire the world's supply of gold. It was a suspense story and also a roman à clef, featuring thinly disguised individuals who had served in the Nixon administration along with Herb. My fictional counterpart was the heroine, who rescued civilization by figuring out where the gold was disappearing to and getting it back, enabling the United States to go back to a gold standard, stopping the worldwide inflation in its tracks.
No one could object to being cast as the savior of Western civilization. But the authors also enmeshed my character in a torrid love affair with one Peter Hanrahan, who would be immediately recognizable by any journalist or Washington insider as Peter Flanigan, who had succeeded Pete Peterson as director of the Council on International Economic Policy while I was at the CEA. I was amused but also ticked off by this linkage, not least because Flanigan was on my personal blacklist. I had been annoyed and embarrassed at a dinner party given by him and his wife, when I was sent off with “the ladies” after dinner. “How pretentious can you get,” I had thought to myself, “emulating a custom still practiced only by the stuffiest of embassies?”
When Mark Perlman, my rigidly moralistic friend and chairman of the Pitt economics department, learned about this story line shortly before the book's publication, he insisted that I should be prepared to sue the authors to protect my good name. “Come on, Mark,” I responded, “how Victorian can you get?” But I decided to ride Westinghouse's coat-tails by seeking some free advice from McCloy. After he had skimmed a prepublication copy of the book, he advised me that my best chance of winning a suit would be to sue not for libel, which is very hard to win under US law, but for calumny. “What on earth,” I asked, “is calumny?” “The false imputation of unchastity,” he replied with a straight face.
“Are you suggesting that I do that?” I asked. “Well,” McCloy said, “let me put it this way: it's a perfectly dreadful novel, and I'm sure it will sink like a stone. The one thing that might save it is the publicity that would result if you sued.” I took his advice, and the novel did sink, although that didn't prevent Ben Stein from later gaining fame as an actor, columnist, and television personality.
I really began to flex my muscles as a director at Marcor, a Chicago company that, among other things, owned the catalog retailer Montgomery Ward. Just after I joined that board in 1974, Mobil Oil Company announced its intention to buy 51 percent of the company's stock, in addition to the 4.5 percent it already owned. Despite objections from Marcor's management and the Department of Justice, Mobil persevered and won.
Mobil's representative in discussions with Marcor's board about the price that Mobil would offer for the remaining shares of Marcor stock was its president, William Tavoulareas. A tough-talking lawyer and accountant, Tavoulareas was already famous as the canniest of all the Western oil companies' negotiators with Middle Eastern governments. He used every one of his negotiating tricks to keep the price offered for those Marcor shares as low as possible. He would challenge us with statements such as “What do you mean I can't be part of the discussion about the price that's paid for the remaining shares? We now own a controlling interest in Marcor, dammit.” We reminded him that it was the Marcor board's fiduciary duty to represent the interests of the remaining minority shareholders by getting the best possible deal for them, and he wasn't yet a member of the board.
The more Tavoulareas tried to manipulate us, the angrier I got. My pent-up frustration boiled over during the board's discussion of Mobil's “absolutely final offer,” and I found the courage to pipe up. “That doesn't seem fair,” I objected. “Let's tell him no and see what happens.” I was the youngest, newest, and most inexperienced director, and my more seasoned colleagues were dubious—after all, Mobil held all the cards—but they agreed to try. Tavoulareas, caught off guard by our unexpected stubbornness, raised his offer. So the last act of Marcor's board of directors before it was dissolved was to get a slightly better deal for the company's remaining minority shareholders. Among all the boards I sat on, my tenure on Marcor's was the briefest, but it was also the one on which my input most immediately affected the outcome, and I felt a flush of satisfaction as we shook hands at the end of our farewell dinner.
With the Marcor board dissolved, I was free of any potential conflict of interest in joining the board of Procter and Gamble (P&G), one of the world's largest consumer products companies. That firm had won its way into my heart even before I attended my first board meeting. Just after my appointment was announced, two young women who were on the first rung of the its famed process for grooming future executives came to visit me in my office. They wore blue suits and matching pumps, then the regulation uniform for aspiring females in the business world, but their manner was open and friendly. They said they had come simply to introduce themselves and welcome me to the company. I asked them what it was lik
e to be female pioneers in P&G's highly sought after and competitive program. “Lonely,” was their answer.
I had assured the CEO, and I meant it, that I had no intention of using my board seat to be an advocate for women as a special-interest group. But I did bring a different and therefore useful perspective on some issues important to the company. Soon after I joined the board, I met and talked informally with a large group of women employees; quite a few of them told me later how much such interaction with a director of the company had meant to them. When I was shown some of the advertising department's favorite ads as part of my introductory training program, I commented that several of them, featuring a male authority figure and a smiling housewife, struck me as sexist. Although their initial reaction was open-mouthed astonishment, gradually P&G's ads came around to recognizing that women are not obedient automatons but capable decision makers, able to evaluate detergents and diapers without male guidance.
I had to wait a long time, though, before my hope of no longer being the only woman on every board I sat on was fulfilled. When Lynn Martin joined the P&G board in 1993, I greeted her by saying, “Welcome, Lynn; I've waited seventeen years for you!” A former Republican congresswoman from Illinois, Lynn had also been the secretary of labor who coined the term glass ceiling in her efforts to reduce or eliminate the barriers that confronted women in the workplace. Once she had joined, Lynn distinguished herself by being the only member of the board who tried out every new P&G household product herself and gave her opinion at the next meeting. “The Swiffer did a really terrific job on my floors,” she reported when the innovative sweeper was introduced, but she didn't see much use for Fit, a rinse tailored for fruits and vegetables, which never did catch on with the American public.
Martian's Daughter: A Memoir Page 24