Credit Suisse’s EXCLUSIVE overhaul catches the eye of some investors, governance voting adviser

LONDON/ZURICH, November 11 (Reuters) – Credit Suisse (CSGN.S) The recent decision to exit some investment banking business draws the attention of at least two investors and a proxy adviser who told Reuters they were concerned about the Swiss bank’s handling of disputes potential interests of two directors.

The decision to break up the lender and spin off the investment banking business was seen by analysts as a way for Credit Suisse to focus on its more profitable wealth management franchise. But investors wonder how certain decisions were made.

Board member Michael Klein began working on the turnaround with Chairman Axel Lehmann and other Credit Suisse officials in early February, according to a person familiar with the matter.

In late October, Klein left the board to work on the division which will be spun off and renamed CS First Boston. He is expected to become CEO of the unit in 2023, pending regulatory approvals. The company will be a long-term preferred partner for Credit Suisse, the bank said.

The Ethos Foundation, which represents Swiss pension funds that own more than 3% of Credit Suisse, told Reuters the bank had to show it had carried out thorough research when choosing the board member. Klein to lead the investment banking unit.

“We question whether the board has conducted an adequate recruitment process” for the investment banking boss, Ethos CEO Vincent Kaufmann said Monday by email.

In addition, Roger Said, of proxy advisor Actares, which works for individual investors, including Credit Suisse shareholders, told Reuters there was a risk that Klein and Blythe Masters, another board member of The bank’s administration, which also advised the reorganization, “could benefit Credit Suisse. costs.”

Klein pulled out of board discussions and voting after being informally offered the job of CEO on Oct. 21, just six days before the reorganization was announced, the source familiar with the matter said. situation.

Credit Suisse declined to comment beyond Lehmann’s remarks on Oct. 27 when the bank unveiled the restructuring. “It goes without saying (we are) very, very sensitive to conflicts of interest,” Lehmann said of Klein and Masters.

Since 2021, Masters has also served as a consultant for Apollo, the US buyout fund that Credit Suisse has chosen as the preferred buyer for one of the bank’s trading businesses. Apollo invested in Motive Partners, a New York-based investment firm co-founded by Masters to invest in companies in North America and Europe.

Spokespersons for Klein, Masters and Apollo declined to comment.

The bank’s two main backers – shareholder Harris Associates and Saudi National Bank, which is investing in the upcoming capital raise – told Reuters they support Credit Suisse in the way it handles governance in response to investor criticism.

The question is whether Klein and Masters — both members of the board’s committee on the bank’s strategic overhaul — were able to influence key decisions in favor of their own interests.

“In both cases, there is a possibility of conflicts of interest,” Actares chief executive Said told Reuters by email.

“The bank needs to show how it manages that risk and communicate transparently,” even though both directors abstained in the vote on the reorganization, he said.

In Lehmann’s October remarks, he said both directors “must abstain from voting and were only allowed to potentially contribute from a more technical standpoint, helping to create the factual basis for decision-making. It’s all very well documented.”

Harris Associates, which said it has a roughly 10% stake, supported the bank’s handling of any potential conflicts of interest.

“We believe they handled situations where there were conflicts well,” Vice Chairman David Herro said in an emailed comment.

Shares of Credit Suisse closed up 4.35% on Friday to their highest level since Nov. 1.

Harnessing the expertise of in-house talent is not unusual among companies in Europe, according to Luca Enriques, professor of company law at the University of Oxford. Companies in Europe tend to accept that the board can benefit from bringing a conflicted director into the discussion, Enriques said.

AT END OF ARMS

Battered by a series of scandals and mounting losses, Credit Suisse launched a recovery plan last month that will see the bank raise 4 billion Swiss francs ($4.16 billion) in capital from investors and cut thousands of jobs.

The spin-off of investment banking and the sale of the securitized products unit to Apollo are key elements of the reorganization.

At the offsite annual board meeting in Bad Ragaz, Switzerland, in June, the plan was discussed and won the support of the board and management, the source said.

Klein, a 59-year-old former Citigroup rainmaker who runs consultancy boutique Mr. Klein & Co, has been a member of Credit Suisse’s board of directors since 2018. Over the years, he’s become a go-to adviser to Saudi Arabia using its own boutique to help the country’s sovereign wealth fund craft deals to diversify the kingdom’s economy away from oil and gas.

To help fund its turnaround, Credit Suisse will raise funds from Saudi National Bank (SNB), part-owned by the kingdom, which is investing 1.5 billion Swiss francs in exchange for a stake of up to 9.9 %. The SNB could also invest directly in CS First Boston, the Saudi bank said.

The SNB told Reuters in an emailed statement on Friday that during its recent decision to invest in the capital of Credit Suisse, it had not found any information that could raise concerns about the governance of the bank and supported the transformation plan. announced by Credit Suisse on October 27.

SNB also said it could not comment on CS First Boston’s future plans “at this early stage.”

Klein and Credit Suisse also discussed Mr. Klein & Co’s merger with CS First Boston, according to a source familiar with the discussions.

Andreas Thomae, corporate governance specialist at Deka Investment in Germany, which manages about 360 billion euros ($369.5 billion) in assets and has a small stake in Credit Suisse, said Klein leads CS First Boston and the perspective that Klein brings his own boutique to CS First Boston “sounds the alarm.”

“There is a massive conflict of interest. In our view, this is a violation of corporate governance principles,” Thomae said.

A senior official familiar with the matter said any deal for CS First Boston to take over Klein’s store would be done at arm’s length and would be subject to strict regulatory scrutiny.

German Bank (DBKGn.DE) provides an independent assessment of a potential combination, according to someone with knowledge of the discussions. In addition, the German lender is working as an underwriter for the capital increase of Credit Suisse.

In his email, Kaufmann of Ethos said the governance around the restructuring “should be very clean and not raise any potential conflict of interest issues, even if only ‘on the surface’. CS must restore confidence and such doubts will not help solve this problem.”

Klein’s rise to CEO of CS First Boston – a company that could have annual revenue of $2.5 billion – has taken some bank insiders by surprise, two sources close to them told Reuters. the restructuring of the bank.

Until early October, as reorganization talks became more advanced, David Miller, head of investment banking and capital markets at Credit Suisse, was still in contention for the top job at CS First. Boston, those sources said.

Miller, contacted through a spokesperson, declined to comment.

($1 = 0.9606 Swiss francs)

($1 = 0.9744 euros)

Additional reporting by Saaed Azhar, David French, Greg Roumeliotis, Hadeel Al Sayegh; written by Elisa Martinuzzi; edited by Edward Tobin, David Evans, Kirsten Donovan

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