Monday, October 24, 2011

The Federal Reserve: A Bunch of Old, White, Male Bankers

The United States Government Accountability Office recently released a report entitled "Federal Reserve Bank Governance - Opportunities Exist to Broaden Director Recruitment Efforts and Increase Transparency".  This report was undertaken to study the composition of those who govern the 12 Federal Reserve Banks, in particular how the Bank's boards of directors involve themselves in activities that are related to supervision and regulation.  The study looked at the composition of the boards and whether they are diverse in both gender and race and whether the Bank's policies identify possible issues of conflict of interest between board members and industry.  The study looked at the composition of FRB boards for the years from 2006 to 2010, during the lead up to the Great Recession, during the Recession itself and during its aftermath.  For the purposes of this posting, I will be examining the gender and racial/ethnic composition of the various boards and will leave the GAO's examination of potential conflicts of interest for another posting for the sake of relative brevity.

Let's open with a map of the Federal Reserve Districts:

As background information, the Federal Reserve Act requires each of the 12 regional Federal Reserve Banks be governed by a nine member board with three Class A directors elected by the member commercial banks within the region to represent their interests, three Class B directors elected by member banks to represent the public and three Class C directors that are appointed by the Federal Reserve Board to represent the public.  See how nice the Federal Reserve is?  A full two-thirds of their Federal Reserve Banks' boards consist of members that, at first glance, appear to represent the sweaty masses!

Federal Reserve Bank directors have three main functions; they participate in the formation of national monetary and credit policies by providing input on their local economic conditions to the Reserve Bank President, they oversee the management of the Reserve Bank and the act as a link between the Federal Reserve Bank and the community.  It is so heartwarming to see that they are such a community-minded group!

Let's take a brief look at a few examples of just who it is that sits on the Federal Reserve Bank boards representing the public followed by their class of directorship where available:

Boston: John Fish, CEO, Suffolk Construction Company Inc (Class B)
Boston: Henri Termeer, Chairman, President and CEO Genzyme (Class C)

St. Louis: William E. Chappel, President and CEO, The First National Bank
St. Louis: Robert G. Jones, President and CEO, Old National Bancorp

Dallas: Herb Kelleher, Executive Chairman Emeritus, Southwest Airlines (Class C)
Dallas: Joe Kim King, CEO, Brady National Bank (Class A)

San Francisco: Blake W. Nordstrom, President, Nordstrom Inc. (Class B)
San Francisco:  Betsy Lawer, Vice Chair, First National Bank Alaska (Class A)

In looking through the lists for the members of the boards, there certainly do not appear to be too many of America's 99 percent represented, rather, it is a rather interesting collection of the who's who of America's corporate and banking elite.  This, despite the fact that according to the Federal Reserve Act, Class B and C directors are supposed to be elected with due consideration for balance between the interests of agriculture, commerce, industry, labour, services and consumers.  Here's a table showing the requirements for the selection of Federal Reserve Bank directors:

Before we discuss the detailed composition of the Federal Reserve Bank boards, let's look at racial and ethnic diversity in the United States. Between the years 2000 and 2010, the Asian population in the United States grew by the greatest amount of all racial groups and now accounts for about 5 percent of the total (14.7 million people).  The white population grew the slowest over the decade and accounts for 72 percent of the total (223.6 million people).  The African-American population accounts for 13 percent of the total (38.9 million people).  Over the decade, the Hispanic population grew by 43 percent to reach 16 percent of the total (50.5 million people).  With these statistics in mind, let's now take a look at the actual composition of Federal Reserve Bank boards.

In the period between 2006 and 2010, minorities and women accounted for a rather small portion of the overall Federal Reserve Bank membership.  In 2006, minorities comprised only 13 of 108 directorships (12 percent) and that had not improved by much in 2010 when minorities comprised only 15 of the 108 directorships (14 percent).  Here is a graphic showing the race and ethnic composition of the Federal Reserve Bank directorships from 2006 to 2010:

Over the 5 year period, women didn't fare all that well either with 39 female directors out of a total of 202 (19.3 percent), well below their proportion in the overall population.  In 2010, Federal Reserve Bank directors consisted of 78 white men, 15 white women, 12 minority men and 3 minority women.  Here is a figure showing the representation women and men on the Federal Reserve Bank boards over the period from 2006 to 2010:

When looking at the annual bar graphs, note that the gender situation is actually getting worse as the five year period passes with fewer women receiving one of the much coveted directorships for reasons that I will outline later.

Here is a graphic showing a more detailed look at the gender and race breakdown for each of the 12 Federal Reserve Bank branches:

As mentioned earlier in this posting, Federal Reserve Bank directors are supposed to reflect a broad industrial background.  Unfortunately, that is not the case.  More than half of the 2010 directors have experience in the finance industry.  Here is a graphic showing the over-representation of directors with connections to the finance industry, a ratio that is far in excess of their representation in the American economy as a whole:

As well, almost all of the Federal Reserve Bank directors serve on the boards of other for-profit corporations, universities and non-profit organizations, hardly a phenomenon shared with the general public.  Federal Reserve Bank officials stated that, in practice, they generally focussed their search for directors on senior executives, mainly CEOs and presidents.  In fact, in 2010, 72 of the 108 directors were either the CEO or president of their company with at least 23 being employed by Fortune 500 companies.  When asked whether board diversity would be increased if non-executives were included, the authors of the study were told that "...having senior executives on the board of directors helps elevate the stature of the board.  In addition, they said that the individuals working at the top of their organization may have a broader view of how their industry is being affected by the economy...".  Apparently, the 1 percent really do have us under their thumbs!

Surprisingly, compensation for directors is rather poor compared to the private sector; perhaps the power they wield is compensation enough.  The per diem for directors ranges from $100 to $300 depending on their position and head office directors receive annual retainers ranging from $2000 to $5000 again, depending on their position.  The Fed maintains that they are competing with the private sector for the relatively rare female and minority directors which makes it difficult for them to reduce the imbalance on their boards.  More's the pity for all of us, particularly since the Fed has backed itself into a corner by wishing only to recruit among America's white, male, corporate elite.

Perhaps the American economy is stuck in limbo largely because the policies used by the Federal Reserve stem from the great and imaginative minds of the powers that already control the U.S. financial industry, the same minds that largely were responsible for the issues that led directly to America's near collapse.  Perhaps the Fed's decision-making processes would be different if the diversity of their directors was more closely aligned with diversity in the country that they are supposed to represent.  One thing is quite apparent, whatever the current system, it is not working for reasons that may well be a reflection of the single-mindedness of America's white, male, banking elite.  

Apparently, we are caught in one gigantic case of clusterthink and we can't get out!  To complete the story, in a future posting, I'll take a look just how inbred the commercial banks and Federal Reserve Banks are and the implications for conflicts of interest among Federal Reserve Bank directors.

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