As reported this afternoon on the Dealbreaker blog, the SEC has officially charged Angelo Mozilo, the former Countrywide Financial CEO, with insider trading.
It was on October 8, 2005, at the Waldorf-Astoria Hotel’s Grand Ballroom in New York City, that one Angelo Mozilo, of California, holder of raffle ticket number 271 in the Columbus Citizens Foundation’s Gala Dinner, for which he paid $1,000, was awarded the top prize of the evening: a $170,000 yellow Lamborghini Gallardo sports car.
Though the Gallardo is easily Lamborghini’s most popular model, fewer than 2,000 Gallardos are made each year. It was, in short, the perfect prize for a man who already had everything, including, it is said, a gold Rolls Royce.
Angelo Mozillo is a man with the Midas touch. He built Countrywide Financial Corporation into the nation’s largest and most successful mortgage company, and himself into one of the nation’s most successful and widely-respected CEO/Chairmen. His story, and the story of the company he founded, is the American Dream writ large. It is also an American Tragedy, with tragic flaws to spare and with Countrywide’s former directors acting more like stage sets than a mindful chorus.
Now reduced mainly to a significant liability on the Bank of America balance sheet, the last traces of the Countrywide trademark are being steadily wiped clean, and Mozilo himself appears likely to face charges of fraud and other civil violations by the US Securities and Exchange Commission.
The irony of this tale is that it might never have gone sour for Mozilo personally had he only retired as planned, back in December, 2006, when Countrywide was still the very essence of success and vitality. According to testimony by the then-chair of the Countrywide Compensation Committee and the company’s most recent Lead Director, Harley Snyder, "It turned out that during that year, the individual we thought would succeed Mr. Mozilo as CEO had left the company,” which then led the board to retain Mr. Mozilo "as CEO for an additional three-year term."
In negotiating a new contract with Mozilo, however, the Committee appears to have ignored the advice of two prior Countrywide comp consultants, Pearl Meyer and Ross Zimmerman of Exequity, in favor of the recommendations of John England of Towers Perrin, tapped originally by Mozilo himself. In England’s own words, from an email directed at Mozilo, the final terms of the new contract represented a “significant enhancement from what Zimmerman had the first time around.”
Mozilo’s response, almost certainly reflective of the attitude of many other top American CEOs of that period, made clear his belief that boards were unwisely limiting CEO compensation due to political pressures. As he rather vividly put it, “Boards have been placed under enormous pressure by the left-wing anti-business press and the envious leaders of unions and other so-called CEO Comp Watchers, and therefore Boards are being forced to protect themselves irrespective of the potential negative long-term impact on public companies.”
The Corporate Library downgraded its rating on Countrywide from an overall C to an overall D on January 2, 2005, in direct reaction to the Countrywide board’s capitulation to Mozilo’s new contractual demands. We further downgraded Countrywide to an overall F on August 19, 2005, based on the board’s inability to bring the company’s internal controls into compliance with Section 404 of Sarbanes Oxley.
We reviewed these downgrades and the compensation factors we found to be most problematic in a previous Analyst Alert issued in September, 2007: Download Analyst Alert. But in general our reasons were exactly the opposite of those cited by Mr. Mozilo: we felt that the Countrywide board had failed to provide proper oversight for Mr. Mozilo’s compensation and other terms of employment, demonstrating a short-term focus at the expense of the company’s long-term prospects. We saw these actions as clear indicator of governance risk.
The story of Countrywide’s subsequent decline and ultimate demise is well known, but what of the individual directors who served on the Countrywide board in those last two or three critical years? How have they fared since the company’s acquisition by Bank of America?
One place you won’t find them is on the board of Bank of America, unlike several of the directors of other past BofA acquisitions such as MBNA and FleetBoston.
But four remain in active service on the boards of one or more public corporations, and two now serve together on the same board. These four individuals are:
• Michael E. Dougherty, who joined the Countrywide board in 1998. In 2006-07 he served as Lead Director, Chairman of the Corporate Governance & Nominating Committee, and as a member of the Compensation Committee. Mr. Dougherty is the founder and Chairman of Dougherty Financial Group LLC, which was formed in 1977. Mr. Dougherty currently sits on the board of directors at the Forestar Group, a real estate and other asset management company, where he is a member of the Corporate Governance and Nominating Committee.
• Kathleen Brown, who joined the Countrywide board in 2005, and departed in 2007. In 2006-07 she served as a member of the Credit and Finance Committees. Ms. Brown currently sits on the board of directors at the Forestar Group, a real estate and other asset management company, where she is a member of the Audit and Management Development & Executive Compensation Committees.
• Robert T. Parry, who joined the Countrywide board in 2004. In 2006-07 he served as Chairman of the Operations & Public Policy Committee and as a member of the Audit & Ethics and Credit Committees. Mr. Parry is the retired President and Chief Executive Officer, effective May 2004, of the Federal Reserve Bank of San Francisco. He had served in such capacity since February 1986. Mr. Parry is a director and member of the Executive Committee of the San Francisco Bay Area Council of the Boy Scouts of America. He has also served on the board of directors of the National Bureau of Economic Research and Countrywide Bank, FSB. Mr. Parry is currently serving on the boards of directors of Janus Capital Group, Inc., where he is Chairman of the Corporate Governance & Nominating Committee and a member and designated financial expert of the Audit Committee, and also the board of directors of PACCAR, Inc., where he is a member of the Compensation Committee.
• Keith P. Russell, who joined the Countrywide board in 2003. In 2006-07 he served as Chairman of the Credit Committee and as a member of the Audit & Ethics and Finance Committees. Mr. Russell currently serves on the board of directors of Nationwide Health Properties, where he is the Chairman and designated financial expert of the Audit Committee and a member of the Corporate Governance & Nominating Committee, and Sunstone Hotel Investors, Inc., where he is a member and designated financial expert of the Audit Committee and a member of the Compensation Committee.
The remaining former members of the Countrywide board have all retired from active service on the boards of public corporations, though most continue to serve on various private and non-profit boards.
The circumstances of Countrywide’s precipitous decline are also by now well documented, but a few key questions will always remain for those who try to understand the role of boards and corporate governance in such situations. How could such a talented and experienced board have failed so badly? Would things have turned out differently had the board either decided not to re-hire Mozilo in the first place, or at the very least refused to meet his new contractual demands? The forced departure of Hank Greenberg at AIG doesn’t appear to have made any difference with regard to the ultimate outcome for AIG – would things have been different at Countrywide absent Mr. Mozilo?
We may never know the answers to all these questions, but we can say with certainty that key signs of significantly increased governance risk were clearly visible at Countrywide as early as 2005, when we first downgraded the company, and that investors and D&O insurers who followed The Corporate Library’s governance risk ratings would have avoided altogether the tremendous losses that were to come.
Ric Marshall — Chief Analyst
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