Do we need a radical shake-up of boards?

The whole issue of bank governance will now be reviewed by two independent inquiries: the first headed up by that old regulatory standby, Sir David Walker, a former chairman of the Securities & Investment Board (SIB);  the second by the Financial Reporting Council, which is rethinking best practice guidelines for boards.

It is increasingly apparent that directors of major bulge bracket banks are falling down in their ability to ensure shareholder influence over corporate strategy and control. Part of the problem is that non executive directors appeared not to understand what banks were getting up to, particularly when it came to trading such complex financial instruments as a CDO cubed. Indeed, it would be fascinating to know whether they could provide a definition of any of the many credit derivatives traded by the banks. Economists are fond of referring to this dilemma as an asymmetry of information problem, in other words the full time employees of the bank may know about things, but the non executive part-time directors sure don’t.

Lord Myners, the City minister and former chairman of Marks & Spencer and Gartmore, the fund manager, has urged both independent inquiries into board governance to “go outside the conventional framework" by testing unorthodox models. He suggests that non executive directors might attend classes on corporate governance (Myners himself might fail the test on ensuring proper accountability for retirement packages granted to outgoing CEOs). He also raises the important issue of whether non-executive directors should have their own full time secretariats.

The non-executive directors at both RBS and HBOS appear to have ducked asking awkward but pertinent questions of their CEOs.  This is puzzling since the boards included some highly intelligent and successful people – no one who has ever met Sir Steve Robson, the former Treasury mandarin who served on the RBS board for over eight years would describe him as a shrinking violet. It is also rumoured that some non-executive directors threatened to resign after arguments with Sir Fred ‘the shred’ Godwin. However, the record shows that no one ever did.

It is disturbing to discover that some leading institutional shareholders, notably Legal & General, have criticised the boards of major banks for ignoring their views. When Legal & General sought to dismiss the chairman and chief executive of RBS following the rights issue held in 2008, their expressed opinion was overruled by the board. This led Peter Chambers, Legal & General’s CEO to tell the Treasury select committee that, “One would have to conclude that non executive directors were not effective in controlling the actions of the executive directors ". Legal & General was one of the three largest shareholders in RBS.

The wide ranging issues centering on non executive directors’ proper role in the banking sector is one that will be discussed at our next REG roundtable and the debate will be led by Mark Austen,  who sits on the board of Standard Bank and was previously global head of banking & finance at PWC. We will return to this issue as the debate hots up.

Keith Boyfield is the chairman of REG, the ASI's regulatory evaluation group.

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Testament to the inability of non-executive directors to maintain a rigorous oversight over the activities of banks’ executive team is reflected in the mounting losses reported by those two ugly sisters of Scottish banking, RBS and HBOS. Cross-examined by the Treasury select committee earlier this year, it was clear that the non executive members of the board had failed to rein in their CEO’s meglomania. What is more, it was revealing to learn that neither the chairmen nor the CEOs of the two banks had any banking qualifications. Nor had Adam Applegarth, the CEO of Northern Trust, or Matt Ridley, the chairman, ever sat a banking exam. [Cont'd]

Gibbon and Waugh had it about right

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Decline and fall.

Do we need a radical shake-up of boards?

Testament to the inability of non-executive directors to maintain a rigorous oversight over the activities of banks’ executive team is reflected in the mounting losses reported by those two ugly sisters of Scottish banking, RBS and HBOS. Cross-examined by the Treasury select committee earlier this year, it was clear that the non executive members of the board had failed to rein in their CEO’s megalomania. What is more, it was revealing to learn that neither the chairmen nor the CEOs of the two banks had any banking qualifications. Nor had Adam Applegarth, the CEO of Northern Trust, or Matt Ridley, the chairman, ever sat a banking exam.

The whole issue of bank governance will now be reviewed by two independent inquiries: the first headed up by that old regulatory standby, Sir David Walker, a former chairman of the Securities & Investment Board (SIB);  the second by the Financial Reporting Council, which is rethinking best practice guidelines for boards.

It is increasingly apparent that directors of major bulge bracket banks are falling down in their ability to ensure shareholder influence over corporate strategy and control. Part of the problem is that non executive directors appeared not to understand what banks were getting up to, particularly when it came to trading such complex financial instruments as a CDO cubed. Indeed, it would be fascinating to know whether they could provide a definition of any of the many credit derivatives traded by the banks. Economists are fond of referring to this dilemma as an asymmetry of information problem, in other words the full time employees of the bank may know about things, but the non executive part-time directors sure don’t.

Lord Myners, the City minister and former chairman of Marks & Spencer and Gartmore, the fund manager, has urged both independent inquiries into board governance to “go outside the conventional framework” by testing unorthodox models. He suggests that non executive directors might attend classes on corporate governance (Myners himself might fail the test on ensuring proper accountability for retirement packages granted to outgoing CEOs). He also raises the important issue of whether non-executive directors should have their own full time secretariats.

The non-executive directors at both RBS and HBOS appear to have ducked asking awkward but pertinent questions of their CEOs.  This is puzzling since the boards included some highly intelligent and successful people – no one who has ever met Sir Steve Robson, the former Treasury mandarin who served on the RBS board for over eight years would describe him as a shrinking violet. It is also rumoured that some non-executive directors threatened to resign after arguments with Sir Fred ‘the shred’ Godwin. However, the record shows that no one ever did.

It is disturbing to discover that some leading institutional shareholders, notably Legal & General, have criticised the boards of major banks for ignoring their views. When Legal & General sought to dismiss the chairman and chief executive of RBS following the rights issue held in 2008, their expressed opinion was overruled by the board. This led Peter Chambers, Legal & General’s CEO to tell the Treasury select committee that, “One would have to conclude that non executive directors were not effective in controlling the actions of the executive directors ”. Legal & General was one of the three largest shareholders in RBS.

The wide ranging issues centering on non executive directors’ proper role in the banking sector is one that will be discussed at our next REG roundtable and the debate will be led by Mark Austen,  who sits on the board of Standard Bank and was previously global head of banking & finance at PWC. We will return to this issue as the debate hots up.

Keith Boyfield is the chairman of REG, the ASI’s regulatory evaluation group.

Blog Review 929

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Yes, the big story today, Guido. Didn't the boy do well? There's not a political blog in the country without a post on this subject so Netsmith will forbear from pointing to all of them.

But just what was Labour doing? Appointing a man with this sort of background to lead their online efforts?

He does seem to have, umm, varied interests, to be sure.

This isn't the only email scandal of course: although there is a certain joy at a columnist and leader writer on a major national newspaper complaining that a story isn't being covered by the, umm, major national newspapers.

An elegant and concise description of what is wrong with politics: politicians.

A few years back, income volatility amongst the poor was the polite thing to worry about. Now that income volaility amongst the rich has increased is it still polite to worry about income volatility?

And finally, when the internet comes for you.

Government by technocrats

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I realise it'll not be all that fashionable to say so around here but there is indeed an argument in favour of rule by technocrats. Allow the wise and well informed experts to get on with those difficult things and we can enter the land of milk and honey and the Easter Bunny will frolic in the meadows.

Unfortunately, while it is an argument it's not one that quite works. For what always happens is that the technocrats stop being technocrats. Take this little argument about the way that traffic lights were sequenced.

It was because the Government feared motorists who were travelling smoothly, rather than stopping and starting, would use less fuel and pay less to the Treasury in duty as a result.

Yes, congestion and frustration were deliberately increased so as to make sure that we all paid more tax. So far, so technocratic, for a certain perverted meaning of technocratic of course. But then look at this:

Vanderbilt University economist Kip Viscusi studied the net costs of smoking-related spending and savings and found that for every pack of cigarettes smoked, the country reaps a net cost savings of 32 cents.

"It looks unpleasant or ghoulish to look at the cost savings as well as the cost increases and it's not a good thing that smoking kills people," Viscusi said in an interview. "But if you're going to follow this health-cost train all the way, you have to take into account all the effects, not just the ones you like in terms of getting your bill passed."

So therefore restrictions upon smoking are being opposed by those same technocrats are they? For clearly, if increasing the income and wealth of the State are the way we judge things then more smoking should take place, no?

Ah, but of course, that's not the way it works. Smoking has already been declared to be bad, naughty, (as in how dare you proles do what we technocrats disapprove of) and thus the financial arguments are thrown out of the window.

Now I'm not arguing that the impact upon tax revenues should or should not be used as a measure of the desirability of either smoking or traffic light sequencing. Only that if it is in one case then it should be in the other: both or neither.

And given that this is clearly not the case we can see that the case for technocratic rule fails. For technocrats never remain technocrats, they always fall foul of their own prejudices. And being ruled by the prejudices of others is not what it is all supposed to be about: better, by far, to have the maximal possible amount of liberty and freedom so that we can all run our own lives by the inclinations of our own prejudices rather than those of others.

It's Carry on Printing

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The Bank of England not only kept interest rates on hold at its Thursday meeting, it also reaffirmed its commitment to quantitative easing, creating £75bn of new money to be spent largely on government bonds.  The policy is unsound, as I wrote last Tuesday, in that it will misallocate resources in response to the false signals it sends out. 

The error has been compounded by buying government bonds.  This drives up the price and lowers the return on them.  Pension funds, which move deeper into bonds as their members approach retirement, thus achieve lower returns on their investments, and pay reduced pensions in consequence.  If the £75bn bung were used to buy corporate paper, it would still be wrong, but would at least have raised company shares, their asset base and their credit-worthiness.

The minor piece of good news is that the Bank may hold back on the second wave of its printing until its May or June meeting, giving it time to assess what effect the April 22nd Budget might have.  It also gives it time to see if the dreaded deflation is indeed rearing its head, or if it must instead start looking to counter all the inflation pumped in.

The fishing police

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The government is trying to give us handy ways in which we can save money and firms can increase efficiency. For example, their ‘Business Link’ website tells us that fixing a dripping tap could save 90 litres of water a week, greatly reducing costs. If we were to extend the analogy of a dripping tap on to the governments waste of public money, we would no longer be talking in terms of taps and drips, but pressure-washers and lakes. Perhaps the government should sort out its own spending and efficiency before preaching to individuals and firms.
 
We all know examples of government waste, ranging from the immoral MP expense scandals to the absurd overpayment of civil servant pensions. The latest example of government waste I have seen from the government is a flashy advertising campaign telling people that they could face £50 fines if they are caught freshwater fishing without a licence. When we are so badly in debt, people are dying in hospital beds and children are leaving schools with no qualifications, is this really the best use of taxpayer money?
 
It is not only the cost of these adverts that is scary. They are sinister and oppressive, saying we could be hauled up in front of judge and fathers could be banned from spending time fishing with their sons if they do not comply with the rules. I know this government has tried to sap the fun and enjoyment from life, but now they are even targeting a very British past time.

The 'fishing police' have already begun to claim victims. Last year this school headmaster was caught without a licence, after paying his fine of £50 he found that he found that he now had a criminal record which could have potentially prevented him from working with children, meaning he would lose his job and the students their headmaster.

Of course, the most efficient way to encourage responsible and sustainable fishing would be to extend greater property rights over fishing lakes, allowing owners to charge a market rate for fishing. This would also provide greater incentives for river owners to promote fish stocks and maintain clean, healthy rivers.

The tax poem

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The Tax Poem

Tax his land, Tax his bed, Tax the table at which he's fed. 

Tax his tractor, Tax his mule, Teach him taxes are the rule.

Tax his work, Tax his pay, He works for peanuts anyway!

Tax his cow, Tax his goat, Tax his pants, Tax his coat. Tax his ties, Tax his shirt, Tax his work, Tax his dirt.

Tax his tobacco, Tax his drink, Tax him if he tries to think.

Tax his cigars, Tax his beers, If he cries tax his tears.

Tax his car, Tax his gas, Find other ways to tax his ass.

Tax all he has, Then let him know, That you won't be done till he has no dough.

When he screams and hollers, Then tax him some more, Tax him till he's good and sore.

Then tax his coffin, Tax his grave, Tax the sod in which he's laid.

Put these words Upon his tomb, 'Taxes drove me to my doom...'

When he's gone, Do not relax, Its time to apply the inheritance tax.

Save the tax havens – we need them

Dr Eamonn Butler argues the case for tax havens. He investigates why the G20 leaders would be so against tax havens and the people who use them.

What is it about tax havens that makes the G20 leaders so keen to crack down on them? Outrage against all those Russian mafia bosses secretly laundering their prostitution and protection racket money through Luxembourg or disgust at Third World dictators being able to siphon millions of their people’s money into numbered Swiss bank accounts in case they need to make a quick exit one day?

Or is it just envy – the feeling of unfairness that billionaires can sip cocktails on their yachts off Bermuda, paying nothing in tax, while poorer mortals like us have to work and slave?

It’s probably a combination of all three, because G20 politicians have hated tax havens for so long that they’ve started to believe their own spin on the subject. But the business of tax havens is actually far more prosaic than any of these rather exotic images. And the real reason why our leaders hate them is that they simply can’t stand the competition.

If you want to pay less tax – as about five billion of the world’s population doubtless do – you have two options. You can evade taxes, concealing your income from the authorities, which is, of course, illegal. Or you can avoid taxes, which is perfectly legal. You might simply claim the full deductions allowed by the tax authorities or maybe move your money into a place where taxes are lower.

It’s avoiders, not evaders, who are the tax havens’ staple customers. The image of drug money being washed through the Cayman Islands is the stuff of thrillers rather than reality. Criminals generally launder money at home because it’s far riskier to move it across borders. The bread and butter of tax havens is people like you or me, who put their modest life savings into a respected investment company in the Isle of Man. And we do it because that way our savings don’t get clobbered for capital gains tax every time our account manager decides to sell one batch of shares and buy another.

Few honest people have qualms against clamping down on criminals. But despite all the Godfather-style spin, it’s actually the rest of us whom the politicians want to clamp down on. They figure – correctly – that if we remain at liberty to put our money in the Virgin Islands or some other place where taxes are lower, we are likely to do just that. And our ability to escape puts limits on just how much they can tax us.

This explains why even Gordon Brown is calling for curbs on tax havens, despite the fact that many of them, including the Channel Islands, are British dependencies. Other countries want even tougher sanctions.

It’s pure financial protectionism. The G20 leaders signed a communiqué praising free trade and deploring anticompetitive barriers in goods and services. That’s because leaders don’t make goods and services. But they do make taxes and are really keen to keep out the competition in that sector. They don’t mind us shopping around the world for the cheapest goods, but they certainly do mind us shopping around for the cheapest taxes.

They have only themselves to blame. It’s not just that governments seem unable to rein in their bureaucracies and keep their costs under control. It’s that they have made taxes so complicated. The last time I looked, the UK tax code ran to 9,973 pages, and that was back in 2007. Complexity inevitably creates loopholes – which lean, nimble tax havens are delighted to help people exploit.

Many countries have lower taxes on foreigners who invest there. That’s because they figure their own residents are largely captive. But they know that international investors can put their money anywhere in the world, so countries have to make themselves attractive in order to pull them in. When you have two different tax rates for the same thing, however, you must expect trouble. And you get it. What happens is that domestic investors simply send their money to a tax haven, then send it back again as if it were “foreign” investment and pocket the difference in the rates.

You can’t blame the tax havens for this kind of wheeze. The root cause is high and complicated taxes. The surest way for the G20 to get rid of tax havens would be to cut and simplify their own taxes – to take on the competition directly.

Until they do, that competition serves a useful purpose for the public. It does make politicians think twice about adding to tax rates or complexity. In particular it limits the burden they can put on savings and investment – the engine of economic growth.

If tax havens boast some of the highest living standards on the planet, that’s got very little to do with money laundering. It’s because low taxes encourage enterprise, stimulate growth and promote personal freedom, too. Rather than trying to kill tax havens, wouldn’t the world be better if our politicians instead sought to beat them at their own game?

Published in the Sunday Times here

Blog Review 928

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Architects, their clients, politicians, the civil servants and us.

Yes, our public sector pension funds are in just as much of a mess as this. For the same reason: politicians can promise big pensions knowing that someone else will have to raise the taxes to pay them.

So who gains from deregulation? From supply side reforms? Yes, correct, the consumer.

Speaking of consumers, this might not be the best way to reduce press interest in your consumables.

The damage that the target culture creates.

It appears that tax dodging trusts are not exactly new.

And finally, another classic as if written on Twitter.