Banks were ownerless corporations whose shareholders gave their governance role a low priority. That’s just one of the damning conclusions from the UK’s Treasury Committee which has released its third report on the Banking Crisis. The report entitled “Banking Crisis: reforming corporate governance and pay in the City” has a wide brief looking not just at City pay but also the wider network of players involved in the crisis: non-executive directors; institutional shareholders; auditors and credit rating agencies, all of whom, the report states, “failed to act as a check on, and balance to, senior managers and the executive boards of banks.”
On Non-executive Directors
Although it will come as no surprise to governance veterans, John McFall, Chairman of the Committee has expressed his “shock” at finding that non-executive directors are holding down multiple senior roles saying “This simply cannot have given them the time to conduct proper oversight. Too often seemingly eminent and highly-regarded individuals failed to act as an effective check on, and challenge to, executive managers, instead operating as members of a ‘cosy club.’ Such incestuous and frankly ineffective behaviour must come to an end.”
The report highlights three problems: the lack of time many non-executives commit to their role, with many combining a senior full-time position with multiple non-executive directorships; in many instances a lack of expertise; and a lack of diversity. It calls for a broadening of the talent pool from which the banks draw upon, possible restrictions on the number of directorships an individual can hold, dedicated support or a secretariat to help non-executives carry out their responsibilities effectively, reforms to ensure greater banking expertise amongst non-executives directors, as well as stronger links between non-executive directors and institutional shareholders.
On Shareholders
The Committee has called into question the commitment of institutional investors to governance concluding that fragmented and dispersed ownership, combined with the costs of detailed engagement with firms by shareholders, resulted in the phenomenon of ‘ownerless corporations’.
Commenting on the role of shareholders McFall said: “The failure of institutional investors has been another sobering lesson to emerge from the banking crisis. Their engagement with the banks prior to the crisis was often too weak or non-existent, allowing bank executives to operate in a vacuum. Policymakers need to focus on how we can promote more effective shareholder engagement. There is a degree to which seemingly ownerless corporations were allowed to operate outside the bounds of accountability; this must end.”
On Remuneration Consultants
While not concluding that the auditors failed shareholder completely, the Report suggests that the audit process failed to highlight the banks problems. The Committee is now questioning the value and usefulness of the audit in its current forms and has called on the FSA to consult on ways financial reporting can be improved. Auditor independence comes under the spotlight highlighting the long-held concerns of many investors and argues that investor confidence and trust in audit may be enhanced by a prohibition on audit firms conducting non-audit work for the same company.