It's time for the Federal Reserve Banks to replace the old boy networks with computer networks. Their boards are supposed to have representatives of the public and specifically of consumers and labor but they complain they can't find many. Crowd-sourcing can address this problem and you can help.
There have been many calls for various directors to resign from the Fed boards, including Kathryn Wylde and most recently Jamie Dimon, JPMorgan Chase CEO. Occasionally some actually do resign such as Jeffrey Immelt and Stephen Friedman. But rather than complaining about individual cases, we should fix the process that appointed Dimon and will appoint his successor and 35 other directors to 3-year terms starting January 2013. There are systemic problems with how the directors are selected. The Government Accountability Office studied the bank boards and found they were neither diverse nor representative of the public despite a mandate requiring it. If we work now, this process can be greatly improved.
There are twelve regional Federal Reserve Banks. Each of them has nine directors who are organized into three classes of three. Class A directors are bankers, elected by the Fed member banks. Class B directors are supposed to represent the public but, just like Class A, they are elected by the banks. This is troublesome but it would take Congress, not modern technology, to fix. Senators Bernie Sanders, Barbara Boxer and Mark Begich are on the case and I wish them well.
The bill would assign responsibility for picking all regional bank directors to the Governors of the Federal Reserve System. They are Presidential appointees so appear to be a good choice for the task. But the Governors already appoint the Class C directors. And they could use some help.
The NY Fed has special roles. It implements monetary policy. Its president is vice chair of the policy-making Federal Open Market Committee (FOMC) and, in that role, Tim Geithner was very involved in the decisions to bail out Bear Stearns and not bail out Lehman. The New York Federal Reserve Bank Class C directors are all presidents of Columbia University, the Metropolitan Museum of Art and The Partnership of New York City.All are non-profits that rely on New York financial companies or their executives for donations. Two of them have bank CEOs on the boards they report to including Jamie Dimon and Vikram Pandit of Citigroup.
Dodd-Frank commissioned a study of the bank boards of directors by the GAO. They found in 2010 of the 108 directors, only 5 represented consumers. Agriculture and food processing was better represented. Curiously, the GAO says that several reserve banks said it was "challenging" to find qualified consumer representatives who are interested in these positions. They attributed this to low pay (relative to corporate boards), restrictions on political activity and the requirement that they divest themselves of bank stock holdings. But I find it hard to believe that is the problem.
More likely it is the outdated methods that are used to recruit candidates. The GAO reports that the Governors delegate the recruitment process to the regional bank boards. The bank boards narrow the pool of candidates down to two and the Governors typically choose one of those. Those boards most prominent method to find candidates is networking. And they are referring to the old boy network, not to LinkedIn. Directors report recommending personal and business acquaintances and asking past directors to identify candidates.
This is unacceptable because, as the NY Fed itself says it is important for the boards to have "diverse backgrounds" and bring "various viewpoints" to bear on public matters. These goals are not being achieved right now but, with our help, I am confident that they can.
The Governors should take more control of the selection process instead of delegating it to the regional banks. And, they are likely to be more successful at finding diverse candidates if they issue a public call for nominations. But we don't need to wait for the Governors to take action. There are no restrictions on how candidates are put forward. The GAO reports that one bold Class C director nominated himself. We should follow his lead. Instead of complaining about the current composition of the boards, lets crowdsource to help them identify better, more diverse directors.
The qualifications are listed here. If you know of anyone qualified who would have fewer conflicts than Jamie Dimon or would be more representative of consumers than an elite museum director, please tweet with the hashtag #OpenFed. I will compile lists for each region and submit them to the Governors and the banks in time for consideration. You can also send their names directly to the Board of Governors and your regional bank board. They need good candidates for the incoming director class this January. This is also an effective way to let them know you care about Fed independence. The Fed banks have said they find it challenging to identify good directors. If we work together we can tackle this challenge.