With Killinger out as chairman, board scrutiny of WaMu CEO will increase

There's a new sheriff in town at Washington Mutual.

The venerable Seattle banking giant, staggering under billions of dollars' worth of soured home loans, said Monday that Kerry Killinger's 17-year reign as board chairman will end next month.

Replacing Killinger in the chairman's seat will be Stephen Frank, the former head of utility company Southern California Edison, a WaMu director since 1997 and the board's lead independent director. Killinger will retain the chief executive's job and a seat on the 12-person board.

The changes mean Killinger will no longer dominate WaMu's board in the way he has for most of the past two decades -- a period during which the company grew into one of the nation's leading retail banks but also lowered lending standards and took on massive amounts of troubled mortgages.

Analysts said the removal of Killinger as chairman doesn't mean he's any closer to losing the CEO's job than he was last week.

It does, however, signal that WaMu's board -- including a representative of the investment group that bought a major stake in the company two months ago -- will take a more hands-on role. In essence, Killinger will now have someone watching over his shoulder.

"This board has gotten governance religion," said Scott Fenn, managing director for policy at the Virginia-based advisory firm Proxy Governance. "Any time a separation like this happens, it's a signal the board is going to play a stronger, independent role."

WaMu sought to cast the move, and related measures also announced Monday, as an effort to strengthen board oversight and respond to shareholders' concerns.

Along with separating the chairman and CEO jobs -- a recommendation narrowly approved by shareholders at the company's raucous annual meeting in mid-April -- WaMu will now require that unopposed board candidates receive a majority of votes cast to win or retain their seats.

Killinger still bears the chief responsibility for turning WaMu around. The company is writing down billions in bad loans, sharply scaling back its mortgage business and reorienting itself around its nationwide chain of retail bank branches.

"Kerry Killinger has been in the hot seat for several months now, but I think his job still is questionable," said Jaime Peters, a banking analyst with Morningstar in Chicago. "People are still calling for his head because of [WaMu's] poor performance."

That speculation was coincidentally enhanced by the dismissal Monday of Ken Thompson, CEO at Charlotte, N.C.-based bank Wachovia. Less than a month ago, Thompson was stripped of his chairman's title -- a move purportedly meant to "free ... me to focus 100 percent of my time and attention on guiding the company through the current environment," as he said in a statement at the time.

Peters said WaMu's board might have been trying to placate restless shareholders, who have driven down the stock 23.5 percent over the past two months and nearly 80 percent over the past year.

But rather than taking some pressure off Killinger, she said, losing the chairman's role "makes it easier to oust him, because half of his job is already gone."

In an interview with Bloomberg Television, Friedman Billings Ramsey analyst Paul Miller noted the Wachovia events and asked "Could Kerry be gone by the end of the month? He could be, but I think he'll last at least a year."

But, Miller continued, "Kerry's going to continue to come under a lot of scrutiny, and with him now not being the chairman of the board, you're going to have that board being separated from Kerry, and as we continue to get bad news you could see him asked to leave also."

Removing Killinger as chairman but leaving him as CEO probably means no change in WaMu's turnaround strategy, at least for the time being, analysts said.

Traders seemed to agree, shaving just two cents off WaMu's stock in Monday's trading; the shares closed at $9.

In a sense, however, the move ratifies the reality that WaMu is under new ownership, if not quite new management.

In April, a group of institutions led by private-equity firm TPG pumped $7.2 billion into WaMu, in exchange for a stake potentially equal to just over half the company's stock.

David Bonderman, TPG's managing director, joined the board as part of the deal. Monday, he was named vice chairman of the finance committee, whose responsibilities include managing credit risk.

Former Starbucks CEO Orin Smith will head the finance committee. Smith replaces Mary Pugh, who quit just before the April 15 shareholders' meeting after facing intense criticism from labor groups, activist investors and shareholder-advisory firms.

The company also said it was seeking to "further fortify" its board by adding "individuals with extensive financial services and strong leadership experience ... as new independent directors."

A CEO who also is board chairman can limit the board's ability to effectively keep tabs on him or her, said Nell Minow, co-founder of The Corporate Library, a research firm focusing on issues of corporate governance, executive pay and board performance.

The chairman "controls the board's agenda and the quantity, quality and timing of information given to the directors," Minow said.

While the structural changes are promising, she said, the proof will be in the decisions WaMu's revamped board makes: "If the pay for performance is better, if they don't make any stupid acquisitions, if they don't go overboard in terms of antitakeover protection, if they don't blow off shareholder votes -- those are the things that tell us whether the accountability is real."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com