Can a human resources executive tackle a megabank's stress tests?
That was the query that lit up the phones at Bank of America and the finance crowd on Twitter after the Charlotte, N.C., bank announced a management overhaul on Wednesday.
Andrea Smith, B of A's head of human resources, will eventually take control of its submissions under the Federal Reserve's Comprehensive Capital Analysis and Review program.
Smith was given the newly created job of chief administrative officer and will be responsible for global corporate strategy in addition to other duties. Her elevation to the role overseeing B of A's stress tests has sparked comments about whether a human resources executive can handle a job normally reserved for a chief risk officer or chief financial officer.
@34bps to not have someone in your Finance dept own something so vital to the Bank's regulatory health seems odd to me.
— Ivan the K ?™ ? (@IvanTheK) July 23, 2015
@IvanTheK Agree odd to not have fin own. But they couldnt get it done. HR filled w compliance type crap already. So I don't think crazy ++
— Chuck (@34bps) July 23, 2015
@34bps they've had plenty of time to address this. Hard to believe the bench is as thin as this implies, IMO.
— Ivan the K ?™ ? (@IvanTheK) July 23, 2015
I don't even have words for this... Yes, I used to work there and on 14Q and I still don't even have words for this https://t.co/FxaNV2iZym
— Will Dearman (@wtd) July 23, 2015
"On the face of it, it's a head-scratcher to see an HR person put into that role," said Clifford Rossi, the chief economist at the mortgage insurer Radian, who has held senior risk management jobs at Citigroup, Washington Mutual and Countrywide Financial.
One argument in favor of an HR executive, Rossi said, is that turning the job over to a chief risk officer might be viewed as "pushing down" the risk function on all employees, which could backfire.
"If she's coming from HR, everybody has to own the risk culture," added Rossi, who is also professor-of-the-practice in the finance department at the Robert H. Smith School of Business at the University of Maryland.
Others say it's not such a leap.
Dave Ulrich, the Rensis Likert professor of business at the University of Michigan, said human resource executives are no longer just processing employee benefits or managing a company's 401(k). Rather, they excel at managing others, have broad insight into a firm's talent, and can lead large groups to achieve specific goals.
"People judge HR by what they did 25 years ago," Ulrich said. "HR executives today help leaders articulate goals and set the culture."
Ulrich conducted research with consulting firm Korn Ferry last year that found chief executives have far more in common with high-performing chief human resource officers than they do with chief financial or risk officers.
"If she's a good business person who knows finance, strategy, marketing and operations, and happens to work in HR, then it's a good move," Ulrich said.
B of A declined to weigh in on the debate over its decision. Its press release about the management shake-up Wednesday said Smith has a "deep understanding of the company" and ample management expertise.
Smith, a 27-year B of A veteran, has held many HR jobs including serving as senior human resources executive at the Bank of America Merrill Lynch and Merrill Lynch Wealth Management divisions. In her new role, she will be responsible for global corporate strategy, legacy assets and servicing, and the company's market president and community engagement organization. Smith also will retain some duties she added this year, including heading global corporate services, which manages $5 billion in corporate expenses, 100 million square feet of real estate in 46 countries and thousands of vendor relationships.
Smith was tapped to take over the stress test oversight job from Terry Laughlin, who will be responsible for the resubmission of its 2015 CCAR plan, which is due Sept. 30. Laughlin, who was appointed vice chairman and the new head of global wealth and investment management, will partner with Smith for the 2016 CCAR submission due next spring.
Still, the hullabaloo over an HR executive overseeing the stringent CCAR exam is not surprising given B of A's track record.
The bank received a conditional "nonobjection" to its capital plan in March after having to submit an "adjusted" capital plan a year earlier. Its 2014plan fell short of regulatory capital minimums and included a $4 billion accounting error.
The Federal Reserve, through CCAR, evaluates capital levels to determine if a bank can make dividend payments or stock repurchases while being able to absorb losses like those that occurred in the last financial crisis.
"They have never really gotten a complete full bill of health on CCAR," said Paul Miller, a managing director and head of financial institutions research at FBR Capital Markets.
Yet, with CCAR now in its sixth year, regulators' focus is expected to shift to a bank's risk culture.
Some CCAR experts point to a speech last month by Charles Evans, president and CEO of the Federal Reserve Bank of Chicago, as an encouragement for banks to create more cultural awareness around risk.
"The notion of risk culture is admittedly hard to describe," Evans said in the speech, titled "The Call for Proactive Risk Culture."
"It starts broadly with how all ranks of an organization's personnel — from entry-level staff to the CEO — identify and respond to risks and threats — even when they're not explicitly covered by specific rules and regulations," Evans said.
That is where Smith likely excels. As head of HR, Smith managed a budget of $35 billion with oversight over a work force of 220,000 people in 40 countries.
Deb Cohen, senior vice president of knowledge development at the Society for Human Resource Management, said data analysis has become a critical function of human resource executives.
"It's not about planning the company picnic," Cohen said. "Human resource executives are experts in relationship management and consultation inside an organization. They know a company's strengths and weaknesses especially in terms of hiring, compensation, engagement and turnover."
Risk experts concede that much of the modeling and estimating that has gone into the stress tests are now pretty much under control. So B of A tapping Smith to lead the effort may be part of broader cultural changes.
"If she's a really strong administrator who can get things done and bring things together on a large scale, then that may be the argument for why she was selected," Rossi said. "But at the end of the day, culture starts from the top, from the CEO and the board."