A UK Treasury-sponsored review has recommended substantial reforms to the structure and behaviour of banks’ and financial institutions’ boards, restricting the freedom and the incentives for senior executives to take reckless risks.
Smart Taxes has discussed the concept of moral hazard and how a lack of it was one of the main causes of the crisis so the findings of the report and the subsequent recommendations will come as no surprise to commentators or indeed anyone with just a modicum of common sense. What is disappointing is that the report’s author, former Bank of England Director, Sir David Walker does want these recommendations enshrined in law rather implemented via a voluntary code of code of conduct. Further, although the review was sponsored by the UK Treasury, the author was acting independently and the Treasury has no obligation to listen to any of it.
While it is positive that the reasons for the crisis are recognised a hard line approach needs to be taken both in the UK and Ireland.
After five months of analysis, he has concluded that:
1) the boards of big banks didn’t understand the scale of the risks their organisations were running;
2) that non-executives of big banks did too little to rein in the excesses of the executive directors;
3) that shareholders in banks also failed to curb reckless gambling by financial institutions, that the owners didn’t “exercise proper stewardship”,
4) and that bankers were paid in a dangerous way which encouraged them to speculate imprudently.
Recommendations include:
a) new risk committees should be set up on boards, separate from the audit committees, which would be chaired by a non-executive;
b) these risk committee would overseas all substantial transactions and would have the power to block those deemed too dangerous;
c) non-executives would devote 30 to 36 days each year to the affairs of a bank or financial institution, up from 20 to 25 days at present (many of you probably won’t believe they earn their fees of £100,000 or so a year for four to five weeks of work);
d) non-executives would be better trained, they would be scrutinised more rigorously by the FSA and they would be encouraged to hold the executives to account, in a way that would probably end the “collegial” nature of bank boards;
e) the chairmen of banks or other financial institutions would commit no less than two-thirds of their time to the business, they would have significant and relevant “financial industry experience”, and they would face re-election by shareholders every year;
f) boards would monitor more closely whether their big shareholders were selling shares and would take steps to learn why these shareholders had lost confidence in their businesses;
g) the FSA would also “be ready to contact major selling shareholders to understand their movitation”;
h) institutional shareholders would sign up for a new set of “principles of best practice in stewardship”, to encourage them to be more actively engaged in the affairs of companies, which would be overseen by the Financial Reporting Council.
Read the report in full here.
