Board Practices Hurt Banco Popular, Experts Say
The problems at the Spanish lender went beyond the bank run that forced a European Central Bank rescue
When Europe’s central bank orchestrated an overnight rescue of Banco Popular Español SA in June, the immediate spark was a bank run that left the Spanish lender close to collapse.
But Banco Popular’s problems ran deeper, touching an area that has been devilishly difficult for European regulators to address: poor governance.
The bank’s problems, governance experts say, included board members who weren’t independent enough from management and deals with companies that had ties to the board.
Corporate governance shortcomings are more common in European banks compared with the U.S., experts say. Some attribute the difference to a fragmented continent where countries’ capital markets are in varied stages of development and have different rules and regulations.
“In Europe, you have 28 different banking systems, which were created nationally under different mandates,” said Tom Kirchmaier, deputy director of corporate governance at the London School of Economics.
Since the European Central Bank assumed supervision of major eurozone banks in November 2014, it has stepped up the focus on corporate governance, pressing lenders, for instance, to ensure boards include a sufficient number of independent directors. Since then, the ECB conducted 94 on-site visits to examine governance issues, the second-highest number of inspections after loan risk.
When the ECB began to regulate Banco Popular, Spain’s No. 6 lender by assets, it inherited a bank that analysts say was riddled with governance problems.
In its 2016 annual report, the bank said seven of 15 board members were independent. However, four had longstanding links to Banco Popular, ties that governance experts say undermined their ability to challenge executives’ decisions.
One had served as finance director and chief executive at the bank immediately before becoming a board member. Governance experts say there should be at least a few-years’ “cooling off” period for a director in that situation to be considered independent.
Another member sat on the board for nearly 10 years, a duration governance experts consider too long to be deemed independent.
A third filled in for her father when he stepped down from the board after serving for more than two decades.
A fourth previously had been a nonindependent director representing an investor who remained a significant shareholder.
A Banco Popular spokeswoman said Spain’s securities regulator reviewed and had no objection to the bank’s designation of the board members as independent. A board member can be considered independent for up to 12 years under Spanish law, she noted.
Analysts say that coziness between the board and management contributed to the board’s slowness to remove Ángel Ron as executive chairman, despite investor concern the bank wasn’t doing enough to shed roughly €37 billion in sour loans. Mr. Ron was replaced in December after 12 years at the helm and more than a 90% drop in the bank’s share price.
The bank spokeswoman declined to comment on Mr. Ron’s departure.
Mr. Ron has said the liquidity problems that ultimately triggered Banco Popular’s takeover began after he stepped down, according to people familiar with his reasoning.
“Truly independent board members are key to avoid conflicts of interest that end up impacting stakeholders,” said Carlos García, an analyst with financial services firm Kepler Cheuvreux SA. ”Popular is an example of why governance matters.”
Another issue for Banco Popular was its relationships with firms that had representation on its board.
For example, on June 2 French lender Banque Fédérative du Crédit Mutuel SA, which had one seat on the board, nearly doubled to 100% its stake in a retail bank it managed with Banco Popular. The same day, the French lender’s representative stepped down from the board of the bank. Five days later, Banco Popular was rescued and sold to Spain’s Banco Santander SA for a token €1.
Mr. Kirchmaier said unless the purchase of the stake was ordered by regulators amid the resolution process—which remains unclear—the move raises questions about whether Crédit Mutuel used information garnered in its board capacity to do the deal.
Representatives for Crédit Mutuel declined to comment.
A spokesman for Spain’s market regulator said the ties between Crédit Mutuel and Banco Popular were disclosed and detailed to investors in the bank’s annual reports.
A Banco Popular spokeswoman declined to comment on corporate governance issues. The ECB declined to comment on specific cases.
Banco Popular’s board members also approved deals that made it appear the bank was on sounder financial footing than it was, according to analysts.
In mid-2014, as Banco Popular was struggling to recover from Spain’s financial crisis, the bank sold the rights to the future profits generated by some of its insurance and pension products. The buyer was a newly created firm managed by a sole administrator who was also an employee of Banco Popular, according to the bank’s 2014 and 2015 annual reports.
Banco Popular booked a €97 million profit from the sale.
The bank had also financed 48% of the deal, according to its annual reports. That means Banco Popular was financing its own profits.
That approach can mask the true value of a transaction and is often done when a company is in financial trouble, said James Shein, a professor and corporate governance expert at Northwestern University’s Kellogg School of Management.
“Almost 100% of time there are bank failures, first there was a governance problem,” Mr. Shein said.
Banco Popular said in its annual reports that the deal was done at arm’s length and evaluated by an independent expert.
The bank’s spokeswoman declined to comment.
