Following MF Global's sudden meltdown, the company's board of directors is under harsh scrutiny.
In particular, corporate governance and executive compensation experts are raising questions about how effectively the board evaluated and oversaw the risky strategy pushed by its CEO Jon Corzine.
While it is not being accused of any illegalities, critics say the brokerage and clearing firm's board tolerated at least one possible conflict of interest, bent its own rules and failed to rein in Corzine as he drove the company into dangerous bets.
The former Goldman Sachs head piled on leverage, amassed an astonishing $6.3 billion exposure to debt from European governments caught up in the euro zone crisis, and ultimately allowed MF Global to lose the market's confidence.
The board also approved a pay package for Corzine that the experts say may have encouraged the former New Jersey governor to take big risks.
Experience certainly wasn't the problem. All of the eight board members had years of financial sector experience, including a former bank CEO and a former insurance company CFO. The most seasoned member spent more than 40 years at Merrill Lynch, including as executive vice president of operations and as a member of the executive management committee.
Directors did not respond to requests for comment. But a source familiar with the board's discussions said directors did not allow Corzine to do everything he wanted and that "there was a significant amount of debate and discussion with (Corzine) about many things, including the European portfolio."
He did not provide further details about the discussions but stressed that the board disclosed everything required under listing rules and securities law.
MF Global declined to comment and Corzine could not be reached.
The board, though, did indicate that it was very happy with Corzine, and some critics say it may have been too star struck by his presence. When Corzine joined MF Global in March 2010 there had been some surprise that he would take a job running a relatively little-known firm.
As recently as July, MF Global's Compensation Committee lauded his leadership as "exemplary" and praised the strategy he set for the firm, "including significant improvements in the reputation of the firm" and "its improved posture with regulators," according to its proxy statement ahead of its annual meeting.
"I think they were intimidated by him," said Jack Connell, managing director of Connell & Partners, a Woburn, Massachusetts, executive compensation consultant who has advised other boards who hire powerful CEOs. "They just gave in to his demands as they really, really wanted him to run MF."
GovernanceMetrics Inc gave MF Global a "D" grade for corporate governance and ranked the firm's risk management profile among the bottom 20 percent of U.S. companies before the past week's crippling blows.
"We had concerns over conflicted directors and directors who were not expert in the field, and (about) executive compensation that had perverse incentives," GMI corporate governance expert Nell Minow said.
The issues existed well before Corzine became MF Global's CEO in March 2010. But GMI said the company's risk management profile worsened after Corzine arrived.
One board member's connections raise questions of conflict of interest from the start, experts said.
J.C. Flowers & Co, a private equity firm and a major MF Global shareholder, recruited Corzine for the CEO job at MF Global. And until Thursday, Corzine was a non-salaried operating partner at J.C. Flowers, which is led by former Goldman banker Christopher Flowers.
David Schamis, a partner at Flowers, sits on the MF Global Board and was deemed an independent director by the firm, citing New York Stock Exchange rules, despite his close ties to the shareholder.
That allowed him to serve on the firm's compensation committee, setting Corzine's pay package, which is seen by governance experts as a far from ideal arrangement.
Corzine was allowed under his MF Global contract to keep a business opportunity or deal he came across in his capacity as a partner at J.C. Flowers away from MF Global.
"Many governance experts will call for having an investor on the board, but when you have separate third party relationships like this one, that's a different story," says Robert Jackson, governance expert at Columbia Law School and a former advisor to the U.S. Treasury.
A source close to JC Flowers said that as an operating partner Corzine worked part time for the private equity firm. His only compensation from the firm was a small share in profits from Flowers' latest fund, the source said.
Schamis also sits on MF Global's audit and risk committee, which is supposed to provide defense against dodgy accounting and reckless risk taking.
The firm says in the proxy that the committee, among other things, is supposed to review its risk management framework and discuss "the risk profile of the Company against the risk appetite and risk tolerances" adopted by the board.
The 2002 Sarbanes Oxley Act, which was introduced after the Enron and WorldCom corporate scandals, mandated that only independent directors with no material relationship to the company are allowed to be members of such committees, largely to avoid conflicts of interest that could lead to fraud or large losses.
More than 70 percent of audit committee members surveyed by KPMG in 2004 believed the losses incurred in high profile scandals could have been avoided if audit committees had been made up of independent directors.
In what may be the first of many such investor lawsuits, MF Global's Corzine and three other company executives were sued on Thursday in Manhattan federal court by a shareholder over the collapse. Shareholder Joseph DeAngelis accused executives of having "continuously touted" MF Global's financial controls and liquidity, despite knowing their statements were false and misleading at the time they were made.
Proxy documents also reveal a board that was prepared to bend its own rules and disregarded established best practices for governance.
The board's guidelines prohibit members of the audit and risk committee from serving on similar committees at more than two other public companies.
And though it's not a hard and fast rule, GMI compensation expert Paul Hodgson says typically two audit committees should be the maximum on which any director should serve.
And yet two members of MF Global's five-person audit and risk committee, former HSBC Bank USA CEO Martin Glynn and former ICAP Plc Chief Operating Officer David Gelber, sit on the audit committees of three other public companies.
"Being on an audit committee of four boards in today's environment is a stretch even for someone who is retired," said Ralph Ward, publisher of BoardRoom Insider magazine.
But the MF Global board told shareholders that it believed the commitments would "not impair (their) ability to effectively serve" on MF Global's audit committee.
"If they adopt a policy because they're concerned about the time constraints they should abide by them," said Hodgson.
Still, not every corporate governance expert was as worried. Proxy advisory firm Glass Lewis & Co said in a report ahead of MF Global's annual meeting in August that it found the number of audit committees on which the two serve was acceptable given they were both retired, and that MF Global could benefit from their accounting expertise.
ALL THAT GLITTERS
Corzine's compensation also raises red flags among governance experts, who contend the way he was paid had the potential to influence the executive's willingness to take risk.
A source close to J.C. Flowers told Reuters that all four members of the compensation committee agreed unanimously on all decisions regarding Corzine's compensation.
Among a peer group of companies, Corzine's total 2010 compensation was the highest at $14.25 million, primarily due to the large number of stock options he was awarded, according to Equilar, an executive compensation data firm.
Corzine received a $1.5 million sign-on payment and was guaranteed $2 million in bonuses, regardless of performance. He received $2.75 million in bonuses since joining MF Global in March 2010, according to proxy documents.
As part of his compensation, Corzine was granted 2.5 million stock options with a strike price of $9.25. Corzine was also guaranteed severance of $9 million, plus an additional $3 million bonus if he were terminated without cause or quit for good reason.
Little of Corzine's personal wealth - last estimated to be about $140 million in 2009 - was at stake since he owned relatively little company stock. He owned 442,000 shares, which were worth about $2.3 million when he last made a stock purchase on August 18. The bulk of the shares, 352,000, were held in a trust for his children.
"A cynic would say that he had the incentive to take a lot of risks," said Alan Johnson, a New York-based executive compensation consultant who works with Wall Street firms.
MF Global also went beyond the standard in one other regard, agreeing to reimburse Corzine $383,000 for legal expenses related to negotiating his compensation plan.
"I have seen committees pushing back strongly if it starts to cross $25,000," Steven Hall of Steven Hall & Partners said of the legal expenses.
Boards almost always resist requests for more than $100,000 in legal fees, independent executive compensation consultant Brian Foley said.
"It just feels like they gave him carte blanche," he said.
(Reporting by Joseph A. Giannone and Jessica Toonkel in New York, and Nanette Byrnes in Chapel Hill, N.C.; Editing by Jennifer Merritt, Martin Howell)