By Eleanor Bloxham
July 1, 2013

FORTUNE — If a company paid bonuses to its employees precisely because those staff members took specific actions to harm its customers, would you:

  • (a) Assume it was just a mistake – and anyone can make those
  • (b) Praise them for paying their employees well
  • (c) Figure the board of directors had responsibility but dropped the ball

In signed declarations, former employees of Bank of America (BAC) have alleged that the bank paid cash bonuses and gift cards to employees as a reward for taking actions that caused families to lose their homes, ProPublica and others reported. These families were desperately making payments and filing paperwork with the bank to keep their homes but, these former employees say, Bank of America management rewarded staff for effecting delays, denials, and outright lies to homeowner customers. Routinely, employees requested updates to information that had languished in the bank’s offices, these former employees say.

The bank known for liar loans now finds itself on the hot seat for liar bonuses. Bank of America did not return a call seeking comment for this article.

“Bank of America’s practice is to string homeowners along with no apparent intention to provide homeowners with the permanent loan modifications it promises…. I saw well over one hundred cases” in which a loan modification was cancelled with non-payment as the reason “when it was apparent from the computer system that the homeowner had actually made all the required payments,” one former employee wrote in a declaration.

MORE: Only the wealthy feel economic recovery

“During a blitz, a single team would decline between 600 and 1,500 modification files at a time for no reason other than the documents were more than 60 days old…. Employees who challenged or questioned the ethics of Bank of America’s practice of declining modifications for false and fraudulent reasons were often fired,” another employee said.

The statements by former employees are not farfetched. Just last week, a report from a court-appointed monitor said that banks have been violating the terms of their mortgage settlements with the government. The monitor cited Bank of America, JP Morgan (jpm), Citigroup (C), and Wells Fargo (wfc), claiming the banks have “dragged their feet” on homeowner modifications, according to the Washington Post. The report 1supports complaints by state attorneys general that banks have not fixed their foreclosure processes.

The use of bonuses and threats puts boards of directors at these companies in the spotlight. Directors are responsible for reviewing not just executive but also employee incentive and performance plans to assess the risks of those programs and to make disclosures about the risks of those plans. One former employee wrote that Bank of America gave bonuses for the number of calls held and the shortness of their duration. Certainly, that is not a practice that engenders customer care.

Another former employee wrote, “a Collector who placed ten or more accounts into foreclosure in a given month received a $500 bonus. Bank of America also gave employees gift cards to retail stores like Target or Bed Bath and Beyond as rewards for placing accounts into foreclosure.”

So what about the Bank of America board? Did they inform investors of this risky scheme?

In its 2010 disclosures, the bank board did not report any compensation programs that drove “inappropriate risk.” And since then, in its 2011 – 2013 proxies, with Robert Scully, a former Lehman Brothers and Morgan Stanley (ms) executive as chair of the compensation committee, disclosure has been legalistic. “We believe that our compensation policies and practices appropriately balance risks and rewards in a way that does not encourage imprudent risk-taking and does not create risks that are reasonably likely to have a material adverse effect on our company,” these proxies say.

According to the proxies, the board relied on assertions from management and an elaborate certification scheme. Whether or not the alleged bonuses and gift cards have a material adverse effect on the bank — they would, in fact — represent both serious control issues and ethical concerns.

Has the board undertaken an investigation into false statements they may have received? So far, the board has been mum.

But the situation raises an issue for all boards. It is not reasonable to rely simply on what management and risk officers say in order to make determinations about the riskiness of employee incentive programs. Most are not experts in pay plans and many more will not risk their jobs by implicating their bosses.

To approach the problem adequately, a board must study the pay programs themselves and ask their own intelligent questions about them. On a broader basis, directors must be students of the real culture of the company, regardless of what those they regularly meet with tell them.

MORE: New evidence emerges in Corzine case

This review goes to the heart of the board’s role in overseeing any corporation well. In a 2006 letter to the SEC, I recommended that the SEC require boards disclose to investors how the company’s compensation programs might contribute to business risk and how their pay plans addressed the risks inherent in their compensation programs. In 2009, after the crisis, the SEC implemented a watered down version of my suggestion, legally requiring only disclosure of material risks.

Since then, too many boards have been blasé about the rule and their responsibility. When I spoke at a directors’ forum shortly after the SEC announced the new requirement, board members told me that their companies would never have pay programs that contributed to risk. It would “never happen here” was the consensus.

The directors’ confidence is exactly the opposite of the healthy skepticism required of good board members. It demonstrated the lack of understanding many board members possess about the construction of compensation plans and their real-life effects. This mindset, combined with the SEC’s weakening of my original suggestion, has resulted in nearly meaningless disclosure by boards.

Despite SEC commissioner Luis Aguilar’s entreaty early this year that boards take these risks seriously and disclose them more fully (beyond a strict reading of the rules), many boards have abdicated and the SEC and financial regulators have been giving them a pass.

The Bank of America case should be a wake-up call to all boards and regulators that it can happen anywhere, even (and maybe especially) at companies that have taken elaborate compliance-oriented, check-the-box approaches to risk management. In any event, the case shows that relying on management — including conversations with risk officers — is unreliable.

In the Bank of America case, it appears real people have been hurt. The Bank of America board was responsible and they dropped the ball.  It’s time for the bank’s board – and others like them – to step up.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance, a board education and advisory firm.

You May Like