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.
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.
Save the tax havens – we need 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