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]
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.