Chief Risk Officer Rises to $10 Million Job Following Derivatives Meltdown
Bank of America Corp. (BAC) Chief Risk Officer Bruce Thompson received $11.4 million in compensation in 2010, the most awarded to an executive at the bank and this year he was promoted to chief financial officer. His stature isn’t an anomaly.
Citigroup Inc. (C), American International Group Inc. (AIG) and UBS AG (UBSN) are among other companies raising the profile of risk executives. The derivatives meltdown that sparked the 2008 Lehman Brothers Holdings Inc. collapse and an 18-month recession catapulted the role from obscurity to contention for future chief executive officers.
“The person sitting in the risk chair now is reporting to the CEO so the caliber has to be higher,” said Neil Hindle, who runs the CRO search practice at Egon Zehnder International in New York. “There has been a real increase in power over the last two years.”
That’s evident in the compensation, which can reach $10 million at large financial institutions now, compared with $500,000 as recently as 2001, Hindle said. Five years ago, a CRO typically reported no higher than the CFO, he said.
Citigroup Chief Risk Officer Brian Leach said it’s expected he’ll have a seat at the table when Chief Executive Officer Vikram Pandit makes key decisions. A decade ago, a bank risk executive often wasn’t in the room, he said.
“It has to be embedded now from the top to the bottom of the company,” said Leach, who helped with the rescue of hedge fund Long-Term Capital Management LP in 1998 when he was at Morgan Stanley. “The CEO has to have a risk mindset and really be able to live that foundational element of risk management.”
Leach, like Thompson at Bank of America, and Barry Zubrow at JPMorgan Chase & Co. (JPM), reports to the CEO. That was not the case at banks including Lehman Brothers and Bear Stearns Cos. that had the most serious problems in the economic crisis, Hindle said. Private equity and hedge funds are also seeking risk executives, Hindle said.
Pandit and Leach left Morgan Stanley in 2005 to form hedge fund company Old Lane LP, which Citigroup bought two years later. When Pandit was tapped to run Citigroup in December 2007, he brought Leach into the risk job because of their previous experience dealing with risk assessment, Leach said.
In the 1970s, risk for banks was limited because most trades were on behalf of customers, Leach said. In the ensuing 40 years, financial institutions bore more of the exposure to losses directly in trades. The addition of derivatives made it harder to understand the full risks -- and the unexpected risks were what ultimately overwhelmed old habits, he said.
Companies have had plenty of warning about unexpected risk, Leach said, pointing to his experiences with Long-Term Capital Management. The hedge fund, whose partners included Nobel laureates Myron Scholes and Robert Merton, lost $4 billion in 1998 after a debt default by Russia and had to be rescued by a group of 14 securities firms and banks.
After Lehman Brothers, Long-Term Capital seems “quaint,” Leach said.
“The value of the job has gone up because people have seen how badly things can go if you aren’t paying attention,” said Kevin Blakely, chief risk officer at Huntington Bancshares Inc. in Columbus, Ohio, and former CEO of the Risk Management Association. “There is no shortage of companies that will pay for a good risk officer now.”
They typically have direct access to the board of directors’ risk committee and ensure that all areas of the company have considered the risks of their business activity, said Blakely, 60, who has worked in the CRO field for more than two decades. He was also a regulator with the U.S. Comptroller of the Currency.
Another change is the CRO’s role in working with the board to define what the appropriate risk is for the company and for each business unit so that operating executives have to take responsibility for avoiding risk that doesn’t fit the company rules, he said.
Thompson was appointed to the Bank of America risk job in January 2010 as CEO Brian Moynihan put together a new leadership team. The team is working to recover from mortgage losses inherited in the 2008 purchase of Countrywide Financial Corp. and restore the Charlotte, North Carolina-based bank into a “growth company.” Thompson wasn’t available to comment.
He was one of three executives at the nation’s largest bank whose 2010 compensation exceeded Moynihan’s $1.94 million, according to a company regulatory filing. Sallie Krawcheck, president of global wealth and investment management and Neil Cotty, chief accounting officer, also received more than Moynihan, the filing showed. Moynihan’s $950,000 base salary was the highest among all the executives where pay was disclosed, exceeding Thompson by $150,000 for the year.
Much of Thompson’s 2010 variable pay related to his performance in 2009 as head of the company’s global capital markets business, the company said in a statement.
Under Thompson, the company “successfully created and implemented a new enterprise risk framework and further expanded its international risk-governance programs,” and positioned the bank for regulatory changes this year, the company said.
Bank of America selected Terry Laughlin, the company’s top manager for sour loans and foreclosures, to take over as chief risk officer late in the third quarter, according to an internal memo obtained July 8 by Bloomberg News.
Membership in the Global Association of Risk Professionals rose to 175,000 this year from 55,000 in 2006, the group said. At smaller financial companies, pay ranging from $3 million to $8 million is more common, said Tim Holt, who helps recruit risk officers for Heidrick & Struggles in New York.
Some experience as a risk officer or in a similar job is increasingly required for CEO candidates at financial companies, said Tom Flannery, managing director for the Pittsburgh office of executive search company Boyden.
“The risk chief used to be like the human resources leader. You had to have one, but generally speaking, the risk guy was never going to be CEO of the company,” Flannery said. “That’s changed.”
A client, which Flannery wouldn’t identify, set up a succession plan so that when the CEO retires and is replaced, the next candidate in line will serve a rotation in the chief risk officer job as part of training for the CEO job, he said.
Like a Fad
“Business, by its very nature, is risky” and the focus on risk managers feels “kind of like a fad” as companies want to show investors they are working to avoid the pitfalls that led to the recession, said Jay Lorsch, a corporate governance professor at Harvard Business School in Boston.
Directors need to ensure they are taking responsibility for setting a real strategy for the executives, he said.
“It’s clear that risk has everybody’s attention,” said Elaine Eisenman, dean of executive and enterprise education at Babson College in Wellesley, Massachusetts, and a director at shoe retailer DSW Inc. (DSW) and corporate bartering company Active International.
She worked with the CFO and treasurer at one of the companies where she is a director to use a so-called dashboard to communicate the risk related to decisions to the board, ranging from green to red, Eisenman said.
“The meltdown of the market was the first time many people really started to wake up,” said Eisenman, who helps educate executives at Babson in management issues. “What the focus on risk is doing is sensitizing people to issues they weren’t paying attention to. This is how a board gets blindsided.”
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