Charles “Ed” Haldeman (left) and John Koskinen

Managing through the turmoil that engulfed the corporate world in 2008 and navigating the rapidly changing governance environment was—and remains—a complicated task. The first priority of the company’s new owners—the U.S. government—was finding leadership. It turned first to John Koskinen, a corporate reorganization specialist who had turned around several companies in his career, making him chairman of the board. CEO Charles “Ed” Haldeman joined the mortgage giant the following year. Together, the pair has identified a path from government life support to recovery.

Haldeman’s approach focuses heavily on people, understanding that a talented and ethical workforce is vital in achieving governance and performance goals. Since taking the helm, Haldeman has seen Freddie Mac bring home a slew of diversity and workplace awards, a fact he believes is a significant factor in the company’s recent success.

Political turmoil and uncertainty continue to exacerbate management’s task, but the board remains focused on fulfilling its obligation to U.S. taxpayers. Managing through the uncertainty while improving governance standards and boosting profitability is made more complicated by having the government as the majority shareholder. The board and management not only must work together, but they must answer to the company’s conservator and primary regulator—the Federal Housing Finance Agency— plus Congress, the U.S. Treasury Department and the Department of Housing and Urban Development.

In an interview with NACD Directorship, Haldeman and Koskinen shared their experiences on working in this unique environment, improving governance and managing in crisis.

Can you talk a little about managing through the economic crisis and the emerging recovery? What’s been your strategy for managing the board and the company during this period?
John Koskinen: The government took over on a weekend in September 2008, and I was asked to then put the board together. Our challenge was to find intelligent and capable people who would sign up for the board of a company in an interesting situation. Our goal was to get people who were knowledgeable about various aspects of Freddie Mac’s business—mortgages, housing, urban development— and people who understood the unique challenge and opportunity the company faced.

Freddie Mac and Fannie Mae were effectively the first companies to be impacted in that short crisis period, followed by Merrill Lynch being bought by Bank of America, Lehman Brothers folding, AIG getting government assistance—all of which happened in about 10 days.

It was a volatile period. What was the main concern of the regulator when it first stepped in?
Koskinen: I think the most significant challenge the regulator, the FHFA, was concerned about that weekend, in the middle of chaos and crisis, was how to create as stable a working environment for people as possible and to let people know that even with everything swirling around them there was a future. In the meantime, the important thing was to pay attention to the critical mission of the company to support the nation’s housing market. This continued to be the primary concern, I believe, for the two and a half years since then.

How well did that message resonate with the employees at the time, and did you have any challenges retaining and attracting talent?
Koskinen: We were concerned then— and continue to be—about employee retention. It was a problem during the crisis to some extent, although the economy was collapsing, so there weren’t as many options and alternatives for people then as we knew there would be as the economy recovered.

Throughout it all the goal has been to give people a sense of perspective about where the company fits vis-à-vis the major problems in the economy.

Did this also apply to the CEO position?
Koskinen: We faced unique challenges and had a new CEO who decided after six months that all of the government involvement and oversight and the complicated relationships were not what he had signed on for, and he departed. So I became the interim CEO for six months while we searched for a replacement.

We understood that the new CEO would have to see the situation and the government involvement as an interesting and exciting challenge rather than a burden. We were delighted and fortunate to find Ed, and it didn’t take too much convincing to have him join us. It was important to demonstrate that we could find an extremely qualified, experienced executive who was excited about coming here.

Ed, what was your initial focus when joining the company in 2009?
Haldeman: To John’s point about government involvement, this would not be the right place for a CEO who is an old-school autocratic person who makes a decision and then wants to get right on and implement it. The situation calls for a CEO who is accustomed to the notion of building consensus and realizes there is a gauntlet of approvals that one has to go through. I came in with my eyes open and accustomed to working with a board in a partnership way and knowing that my job is to suggest a course of action, but then the board has to agree to it and then we have to go to our regulator and get them to agree with it, and sometimes we even have to go to Treasury and get them to agree too.

To your other point about how we managed through this adversity, the whole focus has been to try to get the employees to focus on the present, as distinct from the past or the future.

Back then, and now, there were a huge amount of distractions. The political environment is such that there’s a lot of interest in the past. Many politicians spend their time trying to figure out the past, what went wrong, and how can we fix it. There could be a tendency for management and employees and maybe the board to spend a lot of time being defensive and trying to explain the past. Similarly, the future is quite interesting. There are a lot of people who want to spend a lot of time thinking about what the best business model is going forward, for Freddie Mac. The Treasury put out a position paper on February 11 that talks about the future. I think our challenge at the company has been to not let those distractions take us away from the focus on the present and the important mission of the present.

Remaining in the present is important, but a board must look to the future. What does the short term hold for Freddie?
Koskinen: From the start, it seemed clear to me that the greater risk to the economy, not just to the company, was that out of swirling debate, finger pointing and an attempt to figure out who to blame for the economic downturn, you got a knee-jerk reaction to “fixing” the government-sponsored entities that would be to the detriment of the housing market, the mortgage market and the economy.

Having spent a lot of time in Washington, it seemed to me that our best strategy, and the best contribution we could make to the public good, would be to never have an answer to the question of “What should the future look like?” This is kind of counterintuitive, because the natural inclination of anybody with an interest in these subjects is to try to figure out what the right answer is, to the business model, to the structure, to the political equation. But the problem with having an answer is your views on any other options are automatically discounted.

What we have of great value here is a tremendous amount of experience and data from the past 40 years on how the housing and mortgage markets work. A minimum threshold of success would be to provide data and information to people so that whatever structure the Congress ultimately choses, the system would actually be able to be managed. It’s a complicated business, and it’s pretty easy to get it wrong.

Will the current political wrangling over the budget have an impact on the way Freddie Mac does business?
Koskinen: So we have spent a lot of time and it’s worked reasonably successfully, at the board level and at the management level, being open, trying to become the honest broker of information and analysis. We have spent a lot of time with the Administration and are beginning to have conversations with people on the Hill analyzing the implications of various options.

I think there’s a growing comfort level on the part of decision makers that we don’t have an axe to grind. That if they want to talk about totally privatizing the market, we can tell them what that looks like. If they want to get rid of retained portfolios, if they want to get rid of the government guarantee, for securities, we’ll give you our best judgment based on 40 years of experience as to what the market would look like, what the business would look like, what the housing industry would look like.

So we continue to have a dialogue of our own every once in a while at the board level, “Is it time for us to say, in the middle of the political dialogue, here’s what we really think you ought to do?” But in a lot of ways, as I’ve said to the board, we’re kind of at half time. The game is now being played up on the Hill, but there’s a ways to go. There are a lot of options being bounced around Congress but it’s probably unlikely that any final conclusion will be reached before the Presidential election, which means that over the next year and a half or two, we’re going to have the continued challenge of managing in a time of uncertainty in terms of what the future brings.

It sounds like what you’re talking about is basic risk management. How would you describe your risk management processes at Freddie Mac? Have you created a specific risk committee like many other companies have done?
Koskinen: In the last two and a half years, everyone has become much more sensitive to risk. There is a debate in boardrooms about how best to address risk—at the audit committee, forming a risk committee or as a full-board responsibility. To some extent, the answer depends on the nature of your business and the nature of the risk you face. We’ve decided that it’s a full-board responsibility because risk is inherent across our business. Our setup is that we have a business and risk committee, and we have an audit committee, and the way it’s turned out is all of the board members are on one or the other.

In addition to regular two-day board and committee meetings, we hold a joint meeting of the audit and business and risk committee, which is, in effect, a meeting of the whole board. But we treat it as a joint meeting of audit and business and risk, to continually remind everyone that the risks include things you would normally think of in the audit committee; things you would normally consider in the business and risk area, and they cross over and overlap in a lot of ways. Ed’s made a significant number of changes as to how the company analyzes and manages against those risks at the management level.

Haldeman: Our structure right now has a chief risk officer and a chief credit officer, both of whom report directly to me. Actually, it was my predecessor who split them out as direct reports, and I like that model. I’m not sure you have to have that in all financial companies, but I think it highlights that we have this one risk—being credit—that is ever present, and then we have a number of other risks under the chief risk officer that would include market risk and operational risk. We also have a credit oversight team within our risk function, so in a sense we have credit there as well in an oversight capacity. Part of the answer to managing risk is the structure, but it’s also cultural and how much stature the chief risk officer has in the company.

There are some companies where the risk job is kind of a check-the-box job, a necessary evil to go through. We’ve tried hard here for the culture to feel different and to have risk officers be a real part of the team, part of the process. We’ve tried to embed the senior risk people in transactions and processes, so that any concerns can be raised early on and mitigated as we’re going through the process.

With the government—and, by extension, taxpayers—being your major shareholder, what is your approach to investor relations?
Haldeman: I think of the taxpayer as having a stake in the company, and as such they are a constituency to which we owe a fair amount of openness. We have many constituencies to whom we owe some responsibility, but the taxpayer probably takes precedence. That influences us in lots of different ways. A lot of judgments we are making have to do with what we can do to reduce the draw from the Treasury and make sure the taxpayer is getting a good deal.

Koskinen: We’re an interesting hybrid of sorts. We’re in a private-sector business, with the government as a major shareholder. But ultimately, as the regulator continues to remind everyone, including the Congress and us, it’s a conservatorship, so by definition, we’re trying to conserve and protect the assets for the shareholders and the taxpayers.

It is an unusual business model. What is the main focus of the board, and how is the company doing lately?
Koskinen: One challenge with communications is that there is a misunderstanding of the situation, which can make it hard to tell the company story. There’s some concern on occasion on the Hill that we’re doing things that are non-productive or spending taxpayer funds in a way that would be different if they had a say in it. The real measure of our success is how much of a draw do we take from the government, which is really about how profitable we are. In other words, what the net equity in the company is. So when you get done with it all we are focused on making money, within the context of conservatorship and or mission.

What is often ignored when people assess our performance is that, because we were one of the first out of the box in terms of getting government support, we ended up with a 10 percent dividend against the government’s preferred stock. Most other companies that followed us saw the dividend reduced to five percent because they realized that 10 percent makes it very difficult to pay off the obligation.

The government has not dropped our rate to five percent. However, for the past few quarters the amount of our draw has been less than the amount of our dividend.

If you look forward, barring another major downturn in the next couple of years, it’s possible that with virtually all of the draw we have, we will be able to pay the dividend. There will be some quarters where we make enough money and have enough equity to pay the dividend without any draw at all. We’ve moved from fairly significant draws in 2008, 2009, and the first quarter of 2010, to more modest draws since then, so I think that by the end of this year the discussion on the Hill is going to be more focused on whether the model of the government giving Freddie money [through the draw] just for them to give it back, makes sense.

Haldeman: So, to put numbers on John’s point, in the second half of 2010, we paid a preferred dividend to the federal government of $3.2 billion—that’s half of the $6.4 billion annual payment. In order to do that in the third quarter we had a draw of $100 million, and then in the fourth quarter, $500 million, so that for the two quarters combined, our draw was only $600 million compared to that $3.2 billion check that we wrote for dividends. In the first quarter of 2011 we actually had no draw despite paying another $1.6 billion in preferred dividends to the Treasury.

How do you deal with media relations, especially the reputational risk of things being written about you, at the board level?
Koskinen: Ultimately, managing media relations is a responsibility of the management, but with the working relationship that the board has with management, there have been numerous discussions. We’re constrained by the conservatorship about how much we can do: We certainly are not allowed to do any lobbying or presentations on our behalf with the Congress. But we’re also working with the regulator to make sure we’re within their comfort zones in terms of what outside media relations we’re doing.

The discussion at the board level has been, almost from the start, how to appropriately communicate information that will give people the correct picture of what’s actually happening here. And so we have some discussion and debate back and forth among various members of the board.

The board has, over the past couple years, seen us get to the point where the facts begin to explain themselves, and we could, in our disclosures and conversations, focus on what we are really achieving. That story is that, recently, we are not drawing as much money and the company is starting to do better. The board does not define media policy, but it does consider the question: “How do we get the message out?”

So what is your feeling about the portrayal of Freddie Mac in the media, and how do you think the public views the company?
Haldeman: I would say our board has been equally as frustrated as management on our seeming inability to get an accurate portrayal of the company in the public’s mind. We would both like to be more aggressive in getting the message out but sometimes are constrained by our regulator with regard to not advocating, not lobbying, not advertising. You know, we wish the story we just told you about our draw over the past nine months could get out there, but the way journalists write that is, “Freddie has another draw, Freddie goes to the Treasury again,” right? That is simply not a realistic reflection of what is actually happening.

On the compensation front, the journalists are right that I get paid a lot of money. There’s no denying that $5 or $6 million is a lot of money. The context one would put around that, I think, would be that if we take a look at our top-15 highest-paid executives here, compensation is down about 35 or 40 percent from peak levels, and at the same level almost precisely, that it was 10-12 years ago. I think another contextual point we would make is that last year, that is, 2010, we reduced our overall G&A [general and administrative expenses] spending by about $88 million, so we took five percent of the cost out in one year. We further reduced G&A spending by another 10 percent in the first quarter of 2011. This indicates that we do focus a lot on doing the right thing for the taxpayer and trying to keep our expenses down.

Speaking of the regulator, how much influence does it have on setting compensation, and for that matter, on board-level decisions?
Koskinen: When I started, one of the questions was what would be the delegation of authority to the board from the regulator, who as conservator basically had total authority. We had a very good but somewhat lengthy discussion for a couple of months, and ultimately, with a handful of exceptions, compensation being one of them, the board was delegated authority and therefore the management had authority over the normal, run-of-the-mill issues. A significant percentage of what we do, 80 or 90 percent of it, is run as if it were a normal corporation.

The compensation committee and the board approved our compensation program, and the regulators had the final say. So all of these figures, all of these programs, short-term and long-term compensation, were approved by the regulator and by the Treasury and by Ken Feinberg, special master for executive compensation under the Troubled Asset Relief Program, when he was there.

What is the day-to-day level of interaction between the regulator and yourselves? Do you talk to them on a weekly basis, daily basis?
Haldeman: I visit with the director [of FHFA] weekly and he’s totally available by phone if we need to talk something over. But I think you should have a sense that the regulator is very connected throughout all levels of the company, and there are many, many people from the regulator here today and every day. I would suspect that there could be 20 to 50 people from the regulator here today in various functional areas of the company. There are some finance people, accounting people and lawyers who supervise us closely.

If you work to develop a cooperative relationship, it turns out that that can work. It can take a little longer sometimes to get decisions made, but I think the board meets with the FHFA director twice a year, once in his capacity as regulator and once in his capacity as conservator. I think the board feels that there is a workable relationship; I don’t think that we have anybody that thinks that it’s dysfunctional or a major problem.

What does the future hold for Freddie Mac?
Koskinen: I think one of the ways to conclude the discussion is that when we started out, it was a very positive signal for the members of the management team and the employees that there was going to be a board, because they wanted the company to continue to function as much as it could, even under conservatorship, as if it were a corporation, not a government agency. The board was seen as a real board, with real authority: We wouldn’t have been able to sign up the people we have if it didn’t have that authority.

The employees derive great comfort and satisfaction from the fact that, on a day-in and day-out basis, the company really runs like a normal corporation— there’s a board, there’s a chairman, there’s a CEO. The other side of that coin, to Ed’s point, is that it’s clear that we haven’t been turned into a government agency. The company still is really being run as a competitive private-sector enterprise. It’s just that the major shareholder happens to be the federal government and the American public.

In fact, flattery and knee-jerk agreeability from staffers, senior or otherwise, minimize opportunities for corporate improvement at every level. Worse, in a crisis, when the integrity and future of the company are on the line, it’s death to stifle honest feedback from everyone around you. Creating an environment of candor – however difficult it may be to do so in the short term – is the ideal alternative that can provide the early warning systems needed to master every variety of crisis under the sun.

Richard S. Levick

In recent years, the importance of candor within an organization has escalated as work becomes less rote and more creative. Indeed, as a salutary and emerging force in corporate life, candor needs to be seen in a larger socio-economic context.

This commentary is excerpted from the book, The Communicators: Leadership in the Age of Crisis, by Richard S. Levick and Charles Slack (Watershed Press, 2010).

In past decades, when employees were seen as more or less interchangeable, popular wisdom held that the best corporate managers were those with the best systems. Because machines could manufacture products and process information faster and more accurately than any human, the primary challenge was to organize and regiment the fallible and largely interchangeable humans needed to keep the machines running.

“It was all about getting people within hierarchies to do relatively simple things more efficiently because of great systems,” says Stratford Sherman, a partner with Accompli, a change advisory group serving senior corporate leaders, and co-author of the best-selling Control Your Destiny or Someone Else Will.

But a funny thing happened on the way to the Orwellian future. Technology has not enshrined hierarchical, impersonal management systems as the holy grail of corporate process. It has destroyed them.

“Companies don’t need so many workers and managers performing rote tasks,” Sherman says. “What’s left are leaner, flatter organizations with fewer people in them. As the number of players is reduced, the work they do becomes less mechanistic. Here’s what we’ve learned: people are able to add value only to the degree that they can actually think and speak openly.”

Companies that insist on strict hierarchies and prefabricated approaches to problems are just like the British commanders who sent exposed and rigidly deployed lines of Redcoats into battle against flexible and well-hidden Colonials. They are fighting the last war instead of the current one.

To migrate from the old industrial and pre-industrial systems to leadership models that can succeed in the 21^st century, managers must transform their relationships with those they manage. And the key to that is fostering cultures that encourage or even mandate candor. “Great decisions require great information,” Sherman says, “If you don’t have candor and teams working together, you can’t have great decisions. It’s just not possible. Getting better decisions requires developing a culture of candor.”

Sherman spent years studying the management methods and philosophies of Jack Welch, the legendary GE chief executive. What impressed him most was the sincere value Welch placed on the opinions of others – the more directly and freely expressed, the better.

Once per quarter, Welch would gather managers from GE’s far-flung business operations for meetings of the company’s corporate executive council. Specific discussions of budgets and revenues were off the table. Instead, Welch wanted to hear candid thoughts on where the future was headed and what GE needed to do, even (especially!) if those thoughts ran counter to his personal preconceptions.

“Because of the scope of GE’s businesses, the folks in that room were unbelievably well informed about a lot of stuff,” says Sherman. “The effect of getting them all in one room was that they made the CEO a hell of a lot smarter, but only because they were free to be candid. Welch had a very powerful and ultimately humble recognition that the brilliance that was attributed to him was due in very large part to being part of a community where candor was intensely valued.”

To that end the CEO must overcome the infallibility complex – the idea that being the leader means you must by definition know more than everyone and necessarily be correct.

“Mature leaders over time become more rather than less open to the idea that they might be wrong and could improve,” Sherman says. “The really great leaders aren’t threatened by their own imperfections. On the contrary, they are hungry for improvement. Those are the really strong, grounded, inspiring people that other people love to follow. They’re the ones who are comfortable saying, ‘I was wrong’ or ‘I don’t know.’”

Communicate impatience or sensitivity about views contradicting your own and every subordinate, from the receptionist in the lobby downstairs to your CFO, will clam up. Only you can guarantee candor.

Give people in your organization a useful glimpse into your decision making and thought processes. Sherman cites one company where the managers were becoming extremely frustrated because the CEO seemed to reverse course without warning. As a result, they were reluctant to stick their necks out with new ideas or suggestions that might be approved one minute, then summarily rejected the next.

“It turned out that this executive was getting important financial updates every two weeks,” Sherman says. “So, he might say something in Week One, then make a course correction in Week Three when revised data came out.” But he hadn’t advised his staff accordingly, so his people thought he was simply capricious. Once they knew what was going on, they were more willing to change course with him.

To see how lack of candor makes bad situations far worse, look no farther than Merrill Lynch in 2007 under then-CEO Stan O’Neal, Sherman suggests. In October of that year, when Merrill announced a record quarterly loss of $8.4 billion related to the subprime meltdown, nobody seemed more surprised than the company itself. As the website MoneyMorning.com reported when O’Neal was fired later that month, “What really stunned Wall Street…was the fact that Merrill clearly didn’t have a clue about the depth of its problems.”

O’Neal, as CEO, had a reputation not just as a risk-taker, but as an aloof executive who surrounded himself with a small number of hand-picked advisors. It’s hard to say to what extent, if any, these people insulated O’Neal from bad news, but, clearly, if anyone had the nerve or foresight to warn O’Neal about the dangers of the company’s exposure to massive amounts of shaky mortgage securities, the message never got through. According to news coverage, O’Neal had his own problems with candor, discussing a possible merger with Wachovia without first informing the board. The Wachovia deal fell through, O’Neal was out, and a legendary company, unable to recover on its own, is now a Bank of America vassal.

Sherman contrasts Merrill and Stan O’Neal with JP Morgan and its fiery, blunt leader, Jamie Dimon, proclaimed “The Toughest Guy on Wall Street” by Fortune magazine. Crucially, that toughness does not entail browbeating underlings who happen to disagree with him. On the contrary, Sherman points out that Dimon intentionally surrounds himself with people tough enough to tell him when he’s wrong. That internal heat helped Dimon and JP Morgan navigate the financial crisis with their finances and reputation intact.

One way to foster open environments is to simply come right out and affirm that candor is important. “Declare that it’s something you are going to demand,” Sherman suggests. “Move off the agenda at your next meeting and say, ‘Let’s spend the next hour talking about candor; what’s promoting it and what’s inhibiting it.’”

Note that authentic discussion does not require CEOs to be anything less than human and fallible. You will have emotional reactions and you may even get angry. The key is in being able to differentiate emotion from fact and to draw a distinct line between the two. “What usually happens is a leader gets totally frustrated and, out of that emotional state, they make some angry statement and they throw some facts in and they think they are making a factual statement. But all they’re really doing is expressing anger,” Sherman says.

When facts are abused to support anger, subordinates have no choice but to go along with you or face the consequences. Openness is destroyed. But getting angry shows you’re only human, Sherman says. Tell your staff what made you angry. Then return to the factual discussions after everyone has calmed down. In that way, people can accommodate the human factor – they can forgive the chief executive’s outburst – without ever having to sacrifice the right to openly share their thoughts and expertise.

As Sherman puts it, “Now that you’ve faced, not just business reality, but human reality, your company is a place where value is created by people and not by machines.”

Richard S. Levick, Esq., is the president and chief executive officer of Levick Strategic Communications, a crisis and public affairs communications firm. He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” which is compiled by NACD Directorship Magazine. Reach him at rlevick@levick.com.

But in the days and months ahead, this lingering disconnect between those suffering financial hardship and those many blame for bringing it about is likely to be leveraged by activist investors who are newly-empowered by the Dodd-Frank law. While strictures requiring U.S. corporations to hold non-binding “say on pay” votes and disclose the ratio between CEO pay and that of their employees don’t mandate action on executive compensation issues, they may very well have the same effect by intensifying the reputational hazards faced by companies whose pay policies do not align with results.

At such a time, the symbolic power of sacrifice looms large
Most people know the score. Employees, investors, and the public understand that economies rise and fall and they expect companies to have good years and bad. They will grant more latitude than you might expect to companies struggling with financial challenges, provided that top managers are open and honest with the numbers and are willing to share in the sacrifice.

This commentary is excerpted from the book, The Communicators: Leadership in the Age of Crisis, by Richard S. Levick and Charles Slack (Watershed Press, 2010).

But they will never understand or forgive corporate executives who prosper or appear to prosper while the balance sheet bleeds red, the stock price tumbles, and the company takes bailout money from taxpayers.

Consider John Thain, one of the more brilliant financial minds of our time. The son of a small town doctor in the Midwest, Thain enrolled at MIT with plans to become an engineer. He turned instead to Wall Street, where hard work and innovative decisions hoisted him up the ladder at Goldman Sachs and on to the top spot at the New York Stock Exchange. His appointment in late 2007 to lead Merrill Lynch out of the financial mess left by previous Merrill CEO Stan O’Neal was almost universally hailed as a major step toward a turnaround.

And then came the $1,400 wastebasket.

When it surfaced that Thain, hired specifically to bring financial discipline to the ailing brokerage, had spent $1.22 million of company money to decorate his office, critics of corporate greed went into overdrive. The tab included $87,000 for an area rug, $68,000 for an antique credenza, and $25,000 for a pedestal table. But nothing quite hit home like that wastebasket. Thain quickly apologized and refunded the company for the entire renovation out of his own pocket. Unfortunately, the damage was done.

Later, when reports surfaced that Thain had approved sizable bonuses to his executives (though not to himself) just before a distressed Merrill was sold to Bank of America, the public didn’t need to hear specifics in order pass judgment. They had already heard all the specifics they needed.

Thain did not cause the financial catastrophe that brought down Merrill Lynch, but the saga will most likely follow him for the rest of his life. Why? Because a man who’d even consider buying a $1,400 wastebasket cannot by definition be a man capable of sharing in sacrifice.

Sadly, Thain’s story is hardly unique. This financial crisis has abounded in tales of executives flying private jets to beg for bailouts, partying at exclusive spas or reaping bonuses while shareholders suffer. In virtually every case, the amount of money involved is negligible compared with the symbolism and the damage to the reputations of the individuals and companies involved.

Less well-known, and too few in number, are stories such as that of Boston’s Beth Israel Deaconess Medical Center and its former CEO Paul Levy.

In early 2009, the downward economy left the Beth Israel Deaconess, a legendary Harvard teaching hospital, with a $20 million budget gap and the prospective layoff of 600 of its 6,300 employees. They were mainly lower-paid workers in food services, transportation, and other departments.

At many companies, the CEO might have squirreled away in a conference room with the CFO and a few other top executives, crunching numbers and preparing the layoff announcement. Determined to save as many jobs as possible, Levy took the opposite approach. First, he sent out mass emails to employees offering full, clear details on the problems the hospital faced.

Every employee, at every level, was given full access to the numbers. Levy subsequently posted the figures on his blog, “Running a Hospital.”

Why such candor? Levy explains, “To me, it is so commonsensical. People need to understand the dimensions of the problem to help solve the problem. If you’re going to ask them for advice and actions, they have to know the real story.”

Once all the numbers were on the table, Levy turned to the employees and asked if they’d be willing to accept lower pay in return for saving the jobs of their co-workers. Crucially, Levy and other top managers led the way by talking voluntary cuts in their own pay. “Absent that, people would have felt they were being taken advantage of, that they were saps,” Levy says. “If you’re asking people to make sacrifices, and they think you’re not doing the same, then they’re going to say, ‘Well, there goes top management again, taking advantage of us.’”

The response, from celebrated physicians and department heads on behalf of clerical and maintenance workers, was overwhelming. Employees took pay cuts, accepted a freeze on 401(k) contributions, scaled back vacation days, and returned recent raises. Many employees dug into their personal bank accounts and mailed checks. “I wasn’t surprised by the nature of their response,” Levy says. “But I was surprised by the intensity. It was very, very sweet.”

Most of the 600 jobs were saved. As an ancillary (but hardly inconsiderable) benefit, the story generated positive publicity and goodwill for the hospital and for Levy himself. A CBS News report captured the sentiment: “The staff at Beth Israel Deaconess Medical Center in Boston made its name by caring for its patients,” the segment began, “but these days, they’re caring for each other.”

Now that the hospital has overcome its financial troubles, one lesson seems inescapably clear: let your constituents suffer alone and you may carry a black mark forever. Take the lead in sacrificing, and they’ll follow you proudly.

Richard S. Levick, Esq., is the president and chief executive officer of Levick Strategic Communications, a crisis and public affairs communications firm. He is the co-author of The Communicators: Leadership in the Age of Crisis and Stop the Presses: The Crisis & Litigation PR Desk Reference, and writes for Bulletproofblog. Levick is on the prestigious list of “The 100 Most Influential People in the Boardroom,” which is compiled by NACD Directorship Magazine. Reach him at rlevick@levick.com.

“It was not uncommon, particularly before the agreement to buy Merrill Lynch, for one or two of the older BofA directors to doze off during board meetings,” writes Financial Times U.S. business correspondent Greg Farrell in his new book Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America (Crown Business, 2010), which examines the events leading to Merrill Lynch’s downfall and how the purchase of the firm by Bank of America almost brought down the country’s biggest bank with it.

“The Bank of America board in 2008 was too much of a rubber stamp for the CEO,” said Farrell in a recent interview, referencing the board’s quick approvals of former CEO Ken Lewis’ purchase of LaSalle Bank and the “decision to buy Merrill at a price that turned out to be unrealistic.” Crash of the Titans recreates many of the scenes where Merrill Lynch and BofA’s executives, directors, employees and shareholders realized the firms’ grievous strategic and financial failures.

“[Former Merrill Lynch CEO Stan] O’Neal picked most of the members of that board, and most were not sophisticated enough to understand what was going on in the subprime market,” said Farrell. “I’m not sure if the blame can be laid on the CEO or the board in that situation. “Either management didn’t inform the board or the board should have been trying to negotiate based on Merrill’s losses. There is fault with the Bank of America board for not pushing back and questioning the CEO,” explained Farrell, noting that those on the board who asked the tough questions were too easily satisfied with simple answers.

Bethany McLean and Joe Nocera’s All the Devils Are Here: The Hidden History of the Financial Crisis (Portfolio/Penguin, 2010) also takes a hard line with boards and CEOs. McLean, who co-authored The Smartest Guys in the Room: the Amazing Rise and Scandalous Fall of Enron, and New York Times business columnist Nocera specifically implicate the 2007 Merrill Lynch board in their chapter “The Dumb Guys,” accusing the directors of being unable to make informed decisions for the company. McLean and Nocera look at the financial crisis from a broad perspective, discussing “devils” of the downfall who include, among others, three of Fannie Mae’s CEOs.

Although All the Devils Are Here has a wider focus than Crash of the Titans, it does analyze Merrill Lynch and Bank of America’s problems at length, even allocating the prologue to a recreation of the discussion between O’Neal and Merrill risk manager John Breit when he explained his theory that the firm could face over $6 billion in losses, even though leaders of the mortgage desk told O’Neal losses would be under $100 million.

Despite Breit being “a midlevel employee utterly out of the loop” the situation illustrated the dismaying fact that Breit was better informed than the company’s directors. When O’Neal delivered this news, the authors write, “the directors were startled. Previously, they had always been told that Merrill’s subprime risks were minimal.” Shareholders shared the board’s shock and anger, and the subsequent crash in stock price opened the doors to a Bank of America buyout.

Gambale, a former CIO with Merrill Lynch and Bankers Trust, shared the story at NACD’s Director Professionalism®—The Master Class, held this week in Clearwater, FL. She was one of a number of dedicated NACD members honing her board leadership skills and using peer expertise to identify and explore innovative solutions to persistent and emerging challenges.

To register for future Director Professionalism classes, please click here.

Gambale urged her peers with non-IT backgrounds to become more involved in oversight of the company’s technology strategy. “Ask questions,” she said. “If people tell you that deadlines are being missed, that delivery of services isn’t possible, or that it’s just too complicated to get something done, then you don’t have the right strategy and you may need to change your CIO. Ask the CIO to talk about allocation of resources and find out how the dollars are spent between maintenance and innovation. You can make the same judgments as you would on any other area of the business.

“Ask ‘What is our model for technology leadership?’” advises Gambale, and ask to be walked through the governance model and strategy for partners and communications with customers. “Read the company culture: Is IT a partner or service provider? How closely integrated is it with your lines of business? What, why and where are you outsourcing, and what effect is that having on your risk? Virtual roads and highways need to be maintained, but you can outsource a lot of this and pay only for what you use,” she said.

Gambale urges boards to make sure they have at least one person charged with asking these and other questions. “It can be helpful to have a technology and operations sub-committee sitting under audit or risk,” she recommends, especially if the company needs to find a new CIO. Failing this, the board should consider hiring an outside consultant.

“Security breaches, brand tarnish, information leaks or, at worst, a death can do your company real harm,” said the director who joined the Jet Blue board around the time of the Valentine’s Day “Ice Incident.” And, she added, “You can’t risk disintermediation—the business boneyard is filled with companies where the strategists at board and C-suite level failed to ask the right questions and fooled themselves for too long.

“Today, every man, woman and child has access to instant information,” she reminded the group. “Use social media intelligently—it can supply you with useful information about what your customers think. And remember, if a mind created it, a mind can break it. Be mindful of the need for ongoing vigilance and sound practice in information security.”

Other directors sharing their expertise with peers attending NACD’s Master Class included Office Depot Compensation Rear Admiral (Retired) Chairman Marty Evans, Winn Dixie Director Charlie Garcia, who discussed the implications of America’s growing Hispanic population for board composition, and Major General (Retired) Hawthorne “Peet” Proctor, who spoke about the characteristics of exemplary board leadership.

To learn more about NACD’s Director Professionalism-The Master Class in 2011, click here. Already attended the Master Class? Contact fellowships@NACDonline.org to find out how you can become a 2011 NACD Board Leadership Fellow.

Krawcheck,  the former head of Citigroup’s Smith Barney wealth-management division, joined Bank of America in August. Chief Executive Officer Kenneth Lewis announced last week that he would step down at the end of this year, fueling much speculation on who will replace him.

According to Reuters, Merrill Lynch’s name and long-time bull logo will be reinstated, the company known as Merrill Lynch Wealth Management. The new unit will be one of the two primary units in Bank of America’s Global Wealth and Investment Management division, according to Krawcheck.

During a CNBC interview, Krawshack , said that she would “smash U.S. Trust and Merrill Lynch together.” As to whether Krawcheck plans to replace Kenneth Lewis as Bank of America’s CEO, “I’m very much focused on the job I’m doing.”

U.S. District Judge Jed Rakoff has faulted the SEC for appearing to let the bank off too easily, and dismissed as nonsensical why the bank would agree to pay anything without admitting it had done anything wrong.

Governance experts said the case will strengthen the SEC’s hand in future settlements, as the agency tightens oversight and tries to rebuild a reputation for aggressiveness after a slow year for enforcement. It may also prompt more transparency by companies, even without formal acknowledgment of wrongdoing.