Commentary: Memo to PNC: Show Rohr the Door
By Joseph Weber
Judging from the headlines, we're in a stern new era of CEO accountability. One test of that will be how things turn out for James E. Rohr, chairman and CEO of PNC Financial Services Group Inc. So far, accountability isn't making much headway.
Under Rohr, Pittsburgh's PNC made an accounting maneuver that on July 18 brought down the ire of the Federal Reserve, the Securities & Exchange Commission, and the Office of the Comptroller of the Currency (OCC). By putting $762 million of bad assets into three off-balance-sheet entities, PNC "camouflaged" risk, sold stock after "inaccurately" portraying its financial performance, and misled shareholders, the SEC said. Worse, disregarding a Fed directive to consolidate the entities, it published 2001 accounts that left out the entities, overstating earnings. PNC shares fell 10% when it later restated 2001 earnings and have lost 23.5% this year.
Regulators say privately they wanted to make an example of PNC because it abused off-balance-sheet entities--a particular concern post-Enron. If so, the guy at the top should take the bullet. But so far, it looks as if he'll dodge it. The Fed, which has the bank under close scrutiny, ordered PNC's board to hire an independent consultant to study whether management and the board should keep their jobs. The consultant, Eugene A. Ludwig, a former comptroller of the currency, now managing partner of Washington's Promontory Financial Group, gave Rohr a pass last week in an oral report, says director George A. Davidson Jr., a retired chairman of Dominion Resources Inc. who chairs PNC's special regulatory affairs and oversight committee. The board unanimously agreed. "We want to maintain that leadership at the top," he says. When that was announced Aug. 28, PNC's stock fell 3.5% to $46.20.
But leadership--or lack of it--seems to be PNC's problem. PNC, with partner American International Group Inc., continued to create off-balance-sheet vehicles and to shift bad assets into them last fall as Enron was collapsing. That shows at best a startling lack of awareness of public concerns on Rohr's part, even if accountants Ernst & Young O.K.'d the deal.
Despite the large sums, Rohr was not involved in the details, say two people familiar with the matter. He relied on the advice of his lawyers and financial experts. Rohr wasn't present on Jan. 15, 2002, when Fed officials called a meeting to tell the bank that it had to consolidate the entities, says a senior bank official. Two days later, Rohr signed off on an earnings release that only hinted at the units' existence. The restatement a few weeks later cut reported earnings by $155 million, to $412 million.
Rohr has apologized but has not personally taken the blame. "I am disappointed by these events," he told investors in a July 18 conference call. "This falls on my watch, and I regret the impact it has had on our employees and investors." There has been a wave of departures in the executive suite and the boardroom. On Aug. 28, Chief Financial Officer Robert L. Haunschild became the sixth PNC official to quit. In September, he'll pass his job to J.P. Morgan Chase structured-finance chief William S. Demchak, who also becomes PNC vice-chairman. Three board members--including Vice-Chairman Walter E. Gregg Jr., lawyer David F. Girard-diCarlo, and H.J. Heinz CEO William R. Johnson--are among the departures. Rohr, who declined comment for this story, also ceded one of his three functions, the president's job, to a PNC community bank executive.
No doubt Rohr, a respected Pittsburgh businessman, was genuinely chagrined. (The bank agreed to take corrective action in pacts with the SEC, the Fed, and the OCC without admitting or denying fault.) Yet his arm's-length apology about things happening on his "watch" is scarcely taking responsibility. If he's not prepared to bow out, the board should show him the door. Certainly, PNC is no Enron. It's the 17th-largest U.S. bank, with $67 billion in assets. But it has important retail, asset management, and investment activities. Leaving Rohr in place sends the wrong message to the executive class. With a new leader--preferably an outsider--PNC could become a symbol of how to restore confidence in management, not a case study in what's wrong.
Weber covers finance from Chicago.