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Can non-execs cure banks' madness and badness?

Robert Peston | 06:51 UK time, Thursday, 16 July 2009

Sir David Walker, a former regulator and someone who in the past would have been described as a City grandee, will today publish his prescription for how the so-called governance of banks can be improved.

Governance is the sententious word for the structures and rules for institutions that are supposed to prevent them doing the wrong thing.

cityworkers595.jpg

And since banks all over the world in the years before the credit crunch did the wrong thing on a scale that was without any precedent, there must surely have been a collective failure of governance.

Or to put it another way, the owners and non-executive directors of banks from UBS in Switzerland to Merrill Lynch and Lehman in the US to Royal Bank of Scotland and HBOS in the UK were useless at preventing those banks borrowing and lending in a reckless and dangerous manner.

So presumably that means the owners and non-executives were either under-qualified nitwits, cowards or unhealthily close to greedy manic chief executives.

Which would mean - surely - that new codes of conduct for shareholders and initiatives to improve the quality of those who sit on bank boards would make a world of difference.

That may be so.

But it's worth reminding ourselves what actually happened at Royal Bank of Scotland, for example, before we conclude that accidents can always be prevented if only the right people are in the right jobs.

Because the non-executives at Royal Bank were an impressive bunch - on paper.

They included three former bankers, an erstwhile treasury official whose responsibilities included financial regulation, the one time boss of an insurance giant, and the titular head of Goldman Sachs in Europe.

At the time, these were not individuals who would have been described as either ignorant of finance, shrinking violets or nincompoops.

Some have alleged that the non executives were terrified of the steely chief executive of the time, Sir Fred Goodwin.

This, I have to say, is less than compelling. I know some of these non-execs. And I can tell you that they are materially tougher and less pliable than old boots.

Then there's the question of whether they knew as much as they should have done about what was going on.

That is is a moot point. Some non-execs say they didn't know all the relevant details about RBS's holdings of lower quality housing loans in the US.

But it wasn't non-executive ignorance of those risks - or perhaps of any risk - that led to its collapse into the arms of the state.

What really did for RBS was its record-breaking takeover of the rump of the Dutch bank ABN Amro in the autumn of 2007.

This was the wrong deal, at the wrong price and at the wrong time.

The non-executives were not ignorant of the risks RBS was running in buying ABN. However they thought these risks, which turned out to be suicidal, were worth taking.

All of which simply says that even smart, well-qualified people can be gripped by irrational exuberance - and that therefore we shouldn't get carried away with the idea that governance can be a perfect protection again catastrophe.

Comments

  • Comment number 1.

    This reminds me of TS Eliot's the Rock

    "They constantly try to escape
    From the darkness outside and within
    By dreaming of systems so perfect that no one will need to be good."

    On a less literary bent to quote the Eagles, I suggest that boards wholesale were unable to resist what appeared to be "the lure of easy money"

    As a member of the co-operative movement I remain incensed by how banking directors etc remained advocates of a free market and the invisible hand, right up until it slapped them in the face.

    Why are we and not them carrying the financial can?

  • Comment number 2.

    Non exec's on big companies including banks will always toe the line unless the annual fee is so small that they can have a non bias view. Small I mean £25000 pa.

  • Comment number 3.

    And there you have well and truly aimed the hammer at the nails head. Is it that pride in being so succesful in the past masks good sense, after all does not pride come before a fall?

  • Comment number 4.

    Give the non-execs their own supervisory board with power and responsibility.....

    Make it madatory for companies above a certain size....

    What's the problem ???!

  • Comment number 5.

    So the suggestion is to have active non-execs, shareholders who use their influence to cause change rather than just selling and moving on and tie management's rewards to the achievement of value growth, not cash bonuses. That sounds an awful lot like the private equity governance model to me; A model that has been under a hail of criticism, here amongst other places.

  • Comment number 6.

    Robert

    You miss the key point here which is clearly that non-execs can't do the full job of governance. It needs a completely external view as well of both the individual and systemic risk. This is supposed to be the tripartite arrangement i.e. one of the FSA, Bank of England or the Treasury (or whisper it quietly the European Central Bank) should have see this and blocked it.

    Barclays clearly got away with this one and so it's board must also be considered suspect.

  • Comment number 7.

    The non execs need to be the 'grit in the oyster' ie in the business of questioning and challenge and have independent access to expertise. For the publicly owned banks this must include representatives of the state (not UKFI who seem to be the undertakers of public ownership)and consumers/TU's. Better still if there was publication of socially sensitive aspects of procedings. The obligation for formal risk assessment must be back by a statutory provision - we are talking about other peoples money which they manage in 'loco parentis!

  • Comment number 8.

    Fiddling with the responsibilities or powers of non-execs won't really fix this. We had better hope that Walker comes up with something more radical - I will be watching carefully at 10am to see how many of the following ideas are incorporated:

    1. transparency of credit instruments
    2. direct measurement of investor risk attitude
    and most importantly:
    3. discipline by creditors and regulator, not shareholders and management

    http://www.knowingandmaking.com/2009/06/our-submission-to-walker-review.html

  • Comment number 9.

    So the non-execs didnt do their job correctly and were not fit for purpose.

    OK Share holders its time to sue ALL the non-execs for failure of duty and reclaim as much of the losses as possible from them.

    They were VERY well paid to govern the company and they failed.

  • Comment number 10.

    Formal training for bankers who become directors. Whatever next? Formal training for MPs who become ministers?

  • Comment number 11.

    "useless" ?

    Perhaps incompetence, complacency or even connivance in some cases ?

    In many cases, non-execs find it easier just to go with the ride and there is little personal incentives to get tough with the exec's.

    Regualations and rules are just empty words.


  • Comment number 12.

    I don't accept non execs were powerless to stop wrong decisions being made.If you are buying a business for 40/50 billion,surely in depth due diligence is critical.The issue with RBS and others was they were complacent and thought nothing could go wrong,after all they were one of the worlds biggest banks,in other words they believed there own b*llsh*t.
    As watriler (post 7)states non execs should be questioning every decision,asking for additional information until they are satisfied the right decisions are being made.Its a fact they did not do this and their reputations were built of spin and luck,certainly not talent.
    RBS screwed up because they bought a business to quickly and wanted to show Barclays how clever and savvy they were.Its was all about ego...

  • Comment number 13.

    Robert wrote:
    "This, I have to say, is less than compelling. I know some of these non-execs. And I can tell you that they are materially tougher and less pliable than old boots."

    This is the problem: execs and non-execs all believing in mad, short-term models of profit maximisation with no concern for the long term impact on wider society, 'less pliable than old boots' and not listening to anyone. They did not listen to anyone, because they don't have to. They are not listening to dissenting view points from politicians, religious leaders, scholars, NGOs, union leaders, etc. We need bank governance that represents the many stakeholders that hold a legitimate interest in the well-being of banks and society at large.
    Banks are a 'public utility' and should be treated as one.
    Please read more about the tragic consequences of bad bank governance and the dire need for strict supervision and regulation:

    http://globalinsights.wordpress.com/

  • Comment number 14.

    Exactly right Robert.

    Sir David Walker is a fully paid up member of the cosy club of banking executives whose main interest in this whole thing is "not to rock the boat too much old chap".

    Frankly, we should not expect anything other than some very timid suggestions and largely a whitewash from any member of this cosy club.

    Banking execs are patently all still in denial about this whole episode and there is nothing for it but for people outside this group to be the ones to come up with a plan - and Mervyn King would be a good start.

  • Comment number 15.

    Mr.Preston just read your report 'The New Capitalism 8/12/08 again. Some 7 months have gone by since then. Any differing observations?. Your comments please. Many thanks

  • Comment number 16.

    ONE DOESN'T EMPLOY NUNS TO RUN WHOREHOUSES

    "So presumably that means the owners and non-executives were either under-qualified nitwits, cowards or unhealthily close to greedy manic chief executives."

    All the reports, Green, White and even legislation will only serve to milify an agitated public which will pay in the end as the banks all know. The behaviour of Goldman-Sachs and recent results, sums the true situation up.

    All that practically matters is a) legislation and b) the means to enforce that legislation. The liberal-democracies ('anarchies'?) have been eroding both for at least a decade or so.

    One very serious, sobering, question: if recent events had happened in China, what would have happened to the CEOs etc?

  • Comment number 17.

    Robert, heard you on Today programme stating that 'bankers will always be paid large amounts for taking risks'.... have they suckered you into this fallacy ? Non of them take any risks with their own personal capital, only that of their employers or clients, yet are rewarded like entrepreneurs ( the only industry that follows this practise). It is not as if banking is any more intellecutally demanding than other industries so let's not perpetuate this myth any more ...

  • Comment number 18.


    And don't forget the auditors. I can't be sure of more recent times, but I think you'll find it hard to find a qualified audit report for a public company that has, in the following year for which the audited financial reports were prepared, gone bust.

    There's a few truths in the corporate governance debate:

    1. Companies are at a higher risk of failure of the role of Chairman and CEO are combined;

    2. In companies that have failed, there tends to be a lower proportion of NEDs on the Board

    3. The presence of an Audit Committee, Nominations Committee and Compensation Committee are found in nearly all public companies - failed and successful. Which probably speaks for itself.

    One of the best reports on this subject was prepared by the (then) DTI into the failure of Transtec plc (the company where Geoffrey Robinson, the former Postmaster General was a major shareholder). In the grip of a forceful CEO, board meetings were reduced to being soclai affairs.

    At the end it was a series of strategic errors which runied that company, accompanied by the presence of an autocratic CEO who indulged in high leverage, a major project that went badly wrong and poorly managed acquisitions.

    So what's the answer? Not sure yet. Let me think on that for a moment or two longer.

  • Comment number 19.

    One of the problems with non execs is that they are usualy in the twilight of their careers. O.K. this means they have experience and possibly good judgement but in the fast moving world of finance they are often ill equiped to even understand what is really going onand often don't even know the right questions to ask.

    Perhaps the boards of these institutions need to co-opt a few of the so called rocket scientists. "It takes a thief to catch a thief".

  • Comment number 20.

    5 rjmghome

    Well said

    Although according to Peston there is no difference between PE and hedge funds...go figure!

  • Comment number 21.

    Tough as old boots they may be, but that doesn't mean they are not self-serving. As you say, they might not have been afraid of Sir Fred (in fact, together, they may have been able to force him out) but too close to him. A beloved pet that gives back. Don't forget who their chairman was as well, Sir Tom McKillop, who signed off Fred's pension...

  • Comment number 22.

    The takeover of ABN Amro was the disaster that brought them down. True. The whole board was at fault. So were the institutional shareholders who rubber stamped the disaster at the EGM.

    Can you not say exactly the same thing about Lloyds with HBOS? A penny a share would have been too much to pay, yet they paid, I think, 61p.

    Then who did RBS outbid for ABN? Wasn't it Barclays whose skin was saved by Goodwin and his merry men? Without RBS' suicidal bid, we would now be looking at Goodwin as a master banker and Barclays as a basket case bank mainly owned by the government. If both of them had done their due diligence correctly, it would be the Dutch economy brought to its knees by the collapse of ABN.

    Corporate governance matters, but the City culture in which the actions of the sitting board are always endorsed by institutional shareholders is just as insidious and not addressed.

  • Comment number 23.

    *16 couldnt agree more. Tough legislation is needed as is the sight of Banking wrongdoers being led down their own steps in cuffs. I know this Govt likes to try to rule in the main by concensus but sometimes you just have to say "this is hows gonna be boys and girls, now suck it up or get out". Unfortunately whenever they do use this tactic its invariably against the wrong targets. For example how can you keep going on about benefit fraudsters when there are a few hundred who sit at Westminster? My advice would start to come down heavily on greedy institutions, the public mood is there and there will never be a better time to do it. Banks, energy companies, water companies train companies, make em cry-I dare you!

  • Comment number 24.

    It sounds to me the entire RBS were in it together.If as Robert say all the non executives of RBS are ex senior executive in the finance sector they must have known what was going on.Those who claim they didn't are simply covering up their failure to do their job properly as a non-exec of a major bank.
    So actually you can dream up all the rules and regulations you like and shout them from the roof tops but if the current clique of city slickers remain as Directors nothing will change

  • Comment number 25.

    Robert

    There is one bank that did not do the wrong thing before the credit crunch, and that was Lloyds TSB. Described by the white-hatted CEO Eric Daniels and Chairman Sir Victor Blank in 2008 as a prudent bank that had avoided all the excesses that were afflicting other banks in the UK, Lloyds TSB was undoubtedly in a good position to go forward. The outlook was decidedly rosy. People like me went to sleep at night knowing that our money was in safe hands.

    Roll the clock on to October 2008, and a black-hatted bank called HBOS was plunging to extinction. It was their own fault, for unlike Lloyds TSB and the white hatted Daniels and Blank they had not been prudent. There was a big iceberg called toxic debt that had struck HBOS in the night. They had been rumbled, and the stock market, which rarely gets it wrong, saw the inceberg and the shares went down with all hands.

    This was a big problem for Freddy from the scary movies, who had recently moved from running the money to running everything. Two other icebergs had hit Northern Rock and Bradford and Bingley, and the ordinary people (us) were facing a third massive injection of our money to raise HBOS from the bottom of the Atlantic. It is said there was a meeting between Freddie and the white hats (probably similar to one that had taken place between Pinocchio and Freddie before the 1997 election). The white hats were told that if they took over the derelict and toxic-stuffed HBOS Freddie would forego his right to invoke competition rules. What a nice fat juicy slug HBOS must have have seemed to the white hats. The deal of the century was the way someone described it.

    Despite all the evidence to the contrary the prudent and safe bank with a big black horse as its logo took over HBOS at the beginning of this year. Some blame the shareholders who voted for the deal. The same shareholders of whom a number had shares in both Lloyds and HBOS.

    This is one of the worst of all corporate deals in the history of this country, mainly because it was allowed to go ahead when the main players should have been able to see what state HBOS was really in. They are all still in their jobs. The toxic debts are apparently likely to be greater than the market value of the combined company. It makes a mockery of prudence and due diligence of which there can only have been the most cursory inspection. In the end it will always make a mockery of competition, which has not escaped the European Commission, although strangely it did escape her while the bid was going ahead.

  • Comment number 26.

  • Comment number 27.

    a stable hand on the tiller but will it succeed who knows, banks may be totaly in the wrong for their actions but government has to accept the blame for inept regulation.
    money may be a fast paced industry but recent events have shown that they loose control whilst under poor regulation and every one suffers.
    sadly until there is an honest change in governmental thinking things will never get better (punning the spin cycle theme under this government).

  • Comment number 28.

    Surely this is all about various parties doing their jobs properly. Non-excutives should have enough commercial nous to ask searching questions an challenge executive management. Shareholders, especially the large institutional investors should engage with management. Then the auditors should have a new as should the regulators.

    The lesson of the credit crunch is that if all of these do a bad job at the same time then when the tide goes out you see the garbage.

    I think Nick Clegg was right to tackle the PM yesterday about bonuses being back in fashion. No-one has found a way to curb greed and I still maintain that we would have a healthier financial services industry if hedge funds and their over-rewarded management were removed from the landscape.

  • Comment number 29.

    I would suggest a fair proportion of non execs just like a nice lunch in the city and would probably never bite the hand that feeds them.

  • Comment number 30.

    These feeble attempts at regulation are wholly inadequate and designed to protect the criminals who perpetrated this crisis in the first place. Not a single CEO or banker has been punished for wreaking havoc on our economy (and that includes Goodman and Hornby). What message does that send out to the banking community - CARRY ON LADS MORAL HAZARD IS JUST SWELL. This would not be tolerated in any other profession. The only way to regulate against excessive risk taking is to introduce stern penalties for CEO's of banks. Quite simply if they bring a bank down or require a future bail-out they should be unable to sit on a board ever again. That would quickly sober them up. Instead we here from the CEO of HSBC that banking is a special industry that needs to be treated differently. In one sense he is right - it is different in the sense that wanton acts of greed and negligence go unpunished. Regulation needn't be complicated, in fact the solution is simple and needs to be implemented TODAY!

  • Comment number 31.

    This focus on non-execs is pointless. Why only look at Banks? Corporate history is littered with failed acquisitions, suicidal expansions, catastrophic investments in new markets/products, etc. etc. in ALL sectors. No doubt they had plenty of 'talent' in their non-exec boards as well. The way CEO pay has gone out of hand in recent years in all sectors, particularly in the US shows just how 'impartial' these 'snouts in the trough' people are.

    Fresh thinking please! Non exec oversight will not work. What is needed is for the shareholders to whom these boards are allegedly responsible to, to acquire some of the round things and make their voices heard. These shareholders are alas represented by a rotten pension industry. This is the first thing that needs to change. Had the 'owners' of the banks queried the reckless risks that were obvious to so many, the bumper bonuses followed by the bumper crash would not have occured.

    Though bank shareholders have not been wiped out, their holdings have been slaughtered nevertheless, and this crash shouldbe a good lesson to the investor community to demand a much higher return for holding these casino stocks, i.e. much lower share prices for banks = much less remuneration for bankers, who should be paid their bonus (if any) ONLY in long-term stock that gradually vests over years. Let's see if we get there.

  • Comment number 32.

    As usual, the debate focuses on an irrelevence, so that every one can return to business as usual in a few years. The banking problems are predominanently due to one cause; booking unrealised profits. Dealers and managers are paid bonuses on profits that may not be realised for years to come, and possibly never. (If a counterparty to a deal goes out of business (eg Lehman Bros), apparently locked in profits evaporate but the dealer may have walked away with massive bonuses years before.) This culture permeates banking, even down to hire purchase contracts. It is normal practice for a bank to book the whole profit of an HP deal upfront. The simple expedient of changing the law so that all bank profits are realised profits(ie money in the bank!) not notional profits to be taken in years to come will change the culture forever, however good or bad the non-execs may be.

  • Comment number 33.

    Robert

    Interesting obvervations but there is no reference made to the FSA and Treasury. We all agree that the non exec failed in their duty but surely the whole point of our regulated markets is that there is a back up legal structure to bring these people and others to account.

    I cannot help but feel that the FSA has gone on a pursuit of influence/ power rather than focusing on its core duties (ie Consumer protection). As a quango that is dangerous in our complex society and I am sure likely to come back and bite us again if they are not brought into a proper government structure and control.

  • Comment number 34.

    Very interesting article Robert, as ever, but I think this is not just a matter of changing the rules on corporate governance, it is also a matter of how strongly those rules are implemented, policed and acted upon when they are broken.
    As far as I can see, not only were the RBS Board carried away when they took the decision to buy ABN Amro but, more importantly, when that decision was clearly going wrong, they issued two falsely worded prospectuses to their shareholders asking for additional funds to bail them out. As I understand it, that is a criminal offence under existing law, yet no action appears to have been taken by the authorities on this issue.
    There needs to be a far greater culture change where these arrogant individuals are made to realise that they are not risk takers, like small company owners who often risk their houses and life savings to keep their businesses running and their staff paid. They are hired guardians of their shareholders' and customers' funds. As such they should not be above the law and they should not be paid risk takers' wages for taking no real personal risk.

  • Comment number 35.

    We must stop the City being this "multi-millionaires club" that it has become. (A club of about 50,000 people).
    It must be of more benefit to the general public.
    I'm in favour of an additional special tax levy on all City operators "profits", plus much stronger regulation, including pay.
    "But they'll all run off to Frankfurt"?
    Well Frankfurt could do with special tax levies and more regulation....it hasn't done wonders for the German public lately.
    And Angela Merkel has made her views on financials well known.
    Are the British public being "held to ransom" by the City...."pay us millions or we'll quit"?
    I say let them quit....they're not the "experts" that they insist they are....there are a lot of fools in there.
    Bring in a new, young set of City workers, who will work for sensible pay and incentives.
    They can't do any worse than this lot, and will probably do a lot better.
    Sweep all aside....the City has become corrupted by its' own greed.
    And the UK public still don't have any real protection from the antics of this "multi-millionaires club".
    And "trickle down"?.....Rubbish, garbage....unless you live in Jersey or the Cayman Islands.
    "A sophisticated system of removing wealth from the public" sounds more accurate to me.

  • Comment number 36.

    The RBS shareholders approved the ABN Amro deal. They had a choice which they made.

  • Comment number 37.

    It seems entirely obvious the problem with NonExecs.
    They simply do not work long enough hours in these businesses to do a proper job of it.
    How the titular head of Goldman Sachs Europe could spend enough time away from the day job to properly understand another huge business in enough detail to provide more than rubber stamping no matter how clever he is, is frankly risible. At times of particualr stress which job gets the most attention? The day job or the part-time one?

    One day a month or even one day a week is insufficient to fully understand such large complex business'. It is enough to read a set of management dashboards and a set of monthly reports and accounts and do a little surface investigation but not to appreciate the detail.
    When these were small local players with simple operations then it was probably enough , the size of RBS, Lloyds etc it just simply isn't.

    The other consequence of these people not spending enough time on the job is that they never asked the right questions. If they did not know the relevant details of the subprime exposures then one of two possibilities arises.
    Either the executives and employees of the banks deliberately hid these details from the board - so actionable.
    Or they simply didn't ask for the detail of the management pack they were handed, for the head of GS asking how much subprime have you got would seem a sensible question to have asked (if they were told porkies then the board has its reason for action against the execs) - GS double insured their exposures to risky CDOs so doing that for a business you are a board director of would seem entirely proper to suggest or enquire about as a director.

    The only way to get better governance into big business' is to stop the merry go round of directorships. Non-Execs should be forced to work a minimum time at the job - relative to size of businesss, 2/3 days a week for something the size of RBS or Lloyds.

    Whilst ABN sank RBS, the direcotrs recommended the deal knowing(?)the risks, obviously they were wrong and so should have resigned as a matter of honour if nothing else. What usually happens to employees who make such a scale of error of judgement is a P45. For these they seem to just move on to another set of boards.

    No director should be able to hold more nominal days work as a director than there are days in the month. So if they have a day job contracted fulltime then they have no time for directorships. If the day job is 4 days a week then they have 1 day spare to play golf or be a director, if the size of business they want to be director of is a 2 day a week non-exec job then they can't do it.
    Having to rely on far fewer nest feathering directorships may force them to take more care of the ones they have and perhaps perform a bit better on behalf of the shareholders who they are in principle employed to represent/protect. Ask more of the right questions.

  • Comment number 38.

    In every facet of life, the problem is Power and Money - Church, Business, Politics, its all the same - human beings will always be corrupted. There is no solution, because we have one predominant trait - Greed.

  • Comment number 39.

    ...beware alpha males in positions of power without formal qualifications for that industry.

  • Comment number 40.

    One thing that has got lost in the story is how the Board of Barclays, still intact by the way, also supported a bid for ABN-Amro. Didn't their shareholders have to cough up quite a bit as a result of their scrap with RBS over this? If Fred Goodwin is now known as the worse banker in the world, does not this make John Varley, second worse banker in the world?

  • Comment number 41.

    Robert, forget about the non execs, the problems are: we have a government that is enthralled with the banking elite, a banking elite that have effectively been given the go ahead to 'manage' the global economy in their interests. We have a state sponsored oligopoly which evidently cannot (and will not) be subject to the dictates of the 'free market'. I heard this morning that these recommendations are, again, all about 'self regulation', this'll be a disaster for our democracy and undermine completely whatever semblance of belief there is out there in the market deciding winners and losers.

    Many thousands are losing their jobs, their homes and their relationships, some have likely committed suicide. Once viable manufacturing and service companies are going down the tubes and we're likely to be bouncing along at the bottom for well on a decade before things change for the better. But yeah, there are 'green shoots' aren't there? Well, maybe there are for some parts of high finance which is gorging itself on cheap public money while at the same time ripping consumers off with high interest charges on mortgages and low interest on deposit accounts. This is the world we live in. Let's not be under any illusion about the solution: tough punitive regulation. These banks etc. are effectively a part of the state, they have no reasons to act 'prudently' so regulate them till they squeal, until it hurts, until they get the message that this is not their country to do with as they wish.

  • Comment number 42.

    Unless certain reckless actions are made criminal offences regulation will always fail. Securitisation should be top of the list as a criminal offence. Buying institutions without thorough due diligence checks should be second. Authorising toxic loans should be third.
    Regarding no-execs, these creeps set the execs salaries. They set them high so that the grateful execs then recommend a big increase in NED remuneration. I think it is called back scratching. One thing is for sure, huge paypackets attract huge sharks. Concerning utilities, most folk wrongly think that regulators are consumer organisations. Regulators only approve proposed increases in consumer prices, when wholesale prices drop, regulators ignore the consumer.

  • Comment number 43.

    PM before the Select Committee this morning, giving the same old patter, this time about Walker's recommendations. The fact is, as any Systems Analyst knows, one can produce excellent systems on paper, even in software/hardware, but if your client doesn't have the effective means to input reliable data and use the results effectively too, i.e, sadly, they don't have the right people in the riht jobs with the right powers, it's all Wizard of Oz stuff. Good Systems Analysts make this very clear to their clients, bad ones (and they are the rule not exception when it comes to serving the the Public Sector, which teh FSA etc is part of) appear to make sure that all of that 'guff' is left out of the system specification, or, egregiously pitch it as being all the client's responsibility.

    This is what it comes down to. Don't be distracted by fine rhetoric, however smart you delude yourself as being...you're not.

  • Comment number 44.

    I don't agree with John's conclusions about the reasons for the banking sector collapse. Most people will agree that all our major banks invested heavily in US 'securities' founded on very risky property loans. When the world economy turned, these loans became bad debts and landed many institutions in deep faecal matter. It was pure management greed and incompetence, along with government paralysis and regulatory inertia that triggered this, and many are still fuming that those responsible are still sitting their jobs getting inflated salaries, huge bonuses and obscene pensions. The codes of conduct, the 'old boy' network, nods & winks have be replaced with solid rules and expendable-sized banks so that they can go to the wall if they fail to muster.

  • Comment number 45.

    I usually agree with most of your comments but I am amazed at the way you rationalise and excuse the Boards/Executives/Non Exec Directors absolute failure to understand their own business of Banking and Finance.
    Buying Amro was a doomsday event which everyone but RBS understood.Similarly trading in CDO's and Credit Swaps [otherwise known as Betting Slips]is a route to failure.Why are these people not being prosecuted for malfeasance??

  • Comment number 46.

    It has been known for years the NEDs are largley ineffective and mostly do a "rubberstamp" job on boards- largely due to the many crossovers and swaps of directorships. There is a very strange belief that only directors of large plcs can do the NED jobs on other plcs- it really is time for this cosy club to be broken up- you do not necessarily have to haave relevant sector experience- a strong independant & questioning mind is the main talent required. Also I think it is probably true to say that almost no large corporate merger results in a true increase in shareholder value, the main beneficiaries are the lawyers, accountants and- strangley enough -the merchants banks that are involved! Who are the directors of these? also mostly non-execuitve directors of banks. now I am not saying there are vested interests in mergers- but???

  • Comment number 47.

    "The codes of conduct, the 'old boy' network, nods & winks have be replaced with solid rules and expendable-sized banks so that they can go to the wall if they fail to muster."

    It went around the time the 'word-is-my-bond' went, i.e around the time of The Big Bang when what was done became more remote because of computerization and the speed of transaction. This works rather like distancing pilots from the people they're bombing from 40,000 feet I suggest. Those in The City making the bonuses, are largely just dealing with numbers, there being no ethics in programs. Those selling products are not really people-people, just sales-persons, programmed to make sales where caveat emptor is the only cardinal rule, and 'all people are equals' and have 'everyone has a choice' are the pernicious PC mantras/lies. Political Correctness serves the interests of the right, not the left, i.e free-marketeers/libertarians not socialists.

  • Comment number 48.

    I wonder if this Govt knows the game is up and doesnt want to upset the banks and their own future employment possibilities! I mean how many MPs are NEDS, must be loads of them.

  • Comment number 49.

    This focus on non-execs is doomed to fail as they are just an 'old boys' network, scrtaching each others backs.

    I like simple solutions to problems and, in the case of excessive risk-taking, which is what this is about, so I'd like to see legislation specific to 'risk management'. This would include:
    1) a single director having mandatory responsibility for reporting.
    2) the contents of the report having defined requirements,
    3) the presentation of such report to the entire board,
    4) a requirement for the report to be a board meeting agenda item,
    5) Board discussions and decisions to be compulsory minuted.
    6) Like 'Health & Safety', all directors and managers to have joint and several liability for 'risk management'.

    Until & unless directors are unquestionably, personally accountable for there actions (or lack of them), there will be no improvement in corporate governance, especially in financial organisations.

    If I, as a taxpayer, am expected to take the ultimate risk bailing-out an organisation, then I want to make sure I have the right to dictate the governace of these organisations. The idea that they stand alone and should not have any outside interference is dead and buried. We seem to have a financial crisis each generation - we need to stop it.

  • Comment number 50.

  • Comment number 51.

    The role of non executive director should be abolished because it is one of those theoretically good ideas which simply doesn't work in practice. Non executive directors are not computer programmes designed to evaluate risk and implement good business practice. They are a relatively small group of city magnificos who sit on each others' boards - and remuneration committees - as non execs. None would work in their executive positions for less than a million in pay and benefits. What more natural when the board meeting is over than for all to go for a good lunch. And as some of them will meet socially, perhaps their wives go shopping together from time to time.
    There is a recommendation that non execs should be appointed for a term of three years after which they should be up for re election, but this is seldom observed in practice. Otherwise it would rock the boat. There is no recommendation as to how much time they should put in for their fees and as many of them hold multiple executive and non executive appointments, the conclusion is that they are unable to put in as much effort as their responsibilities and fees demand.
    One anonymous non exec summed up his position by saying that if he were to object, for example, to proposals for blatantly unjustified pay increases for the executive directors, it would be akin to farting at the dinner table.
    By abolishing non execs, the duty of controlling board excess, whether it be risk or pay, would be passed to the shareholders where it belongs.

  • Comment number 52.

    All banks are gambling houses and they are out to make money they are not charities and have no morals all Government's are put in place by bankers and they give them power by inventing laws without votes about how the banks work try reading one of these manuals you loose the will to live very quickly because the man in the street does not know what rubbish they are talking its about this making sure that the man who pays his salary into the bank trusts and believes that that company is doing its best for him and kissing up to his covert greed and snobbery.

    When I was younger in the 60s I would never have gotten a house I would never have had the money know the no how to own a house also I did not come from a background of house ownership, but I did know those who did. There was something about owning a home than they thought was better than renting and they looked down on those who were not in debt owning this over priced bit of brick and mortar. By the time I married to a man whose parents were into this owning of a home renting was not good enough for their children. It was all the rage buying a house and having a salary instead of a wage then having little cash but loads of plastic so you never really knew what you had to spend. Then came the Thatcher greed is good, you could have what ever was for sale because it was on plastic all bank encouraged and still encouraged people thought their Christmases all came at once.

    Loads of ticky tacky houses to buy the mortgages you could get all rubbish it was to keep you in the loop till the bubble burst then the owners ask for the house back because the true owners are the people who LET you have a mortgage not the payer. Many people re mortgage to buy more houses as they had once played a board game and won. Then moving up became the thing and having as many house as possible all encourage by the banks after all the house is never going to loose.

    The rich put their money of shore in to tax havens set up for them and the banks and Governments allow it we forget that bank rules are made up by other humans without conscience to make money for them and their share holder the top of this clique are ex Govenment PMs or MPs as with Blair and Major what do they know about banking? nothing but they can lobby for the banks in exchange for being a non executive.

    Banks can never be the new word transparent because they are deceitful by nature the whole concept of the animal is such. Look at those who rule the banks and how many dare I say it are kosher run. In 17 something an man called Rothschild said give me control of the banks and you can make any law you want and to this day they set the gold standard twice a day every day that is power not owning a house.

    We have bailed the banks out and have what for doing this? nothing because there is no credit crunch its a Ponzi scam we had Bering s and Enron and Maxwell which were test case of how to fleece the masses by the few now we will see the new currency come in this is why we will have no small change then we will have no cash at all it will be a card that you will have to all your life information on or you will not get any service of any kind, But again different cards for different people. The Queen does not carry money so does not need one which will be interesting, Brown will become an non executive just like he became a PM he is not MP as he was not voted in see how democratic this country is not.

    We have benefit frauds being arrested and named and shamed and sent to prison for stealing little but we have bankers and Govenment stealing huge amounts and in our faces they are excused allow to leave their jobs to take up other posts in companies were many are non execs because they when MPs lobbied for these companies so they owe them so this selling of non execs as sticking plaster forget it they are all in the same bed, Govenment is not for the people well not the masses anyway that is why there are poor in very rich countries and all media in this country is owned the dysfunctional to be honest. the world is changing like nature and as humans can not control that no matter what some say it is all about controlling the masses and taxing them for breathing. banks own water rights in other country so who owns what comes from the sky, banks fund wars Hitler need money so he could dress up guess who gave him the money and how many non execs kissed up to him and were they come from, nothing has changed really the fact is money is power and the more you have the more power you have the very rich make sure they stay at the top and will us any thing to stay there,. Know any non execs that had real jobs no few know any because they are not named or shamed.

  • Comment number 53.

    Executive remuneration is the real and true issue.
    They claim that they are being paid motivational wages and bonuses, and yet this has been seen not to be the case.
    Pay a man 20K a year and he will do his job.
    Pay him 20K a year and a 10K performance bonus and he will work hard to earn his much needed and wanted additional 10K.
    Pay him 50K a year and offer him 10K bonus and he will work alot less vigorously as the margin of impact to his well being is less.
    Pay him 2 million a year and offer him 1 million as a bonus and again, it makes little difference. The point of relevance has been passed. It matters nought to earn 2 million or 3 million against your life style.
    Such is the system that is failing where employees (just higher up the corporate structure) are payed so much that they need not worry about their welfare. This loses them the real World link of their actions on real money, after all, pay them monopoly money and they will play with it with the same respect as monopoly money.
    Now if all execs were capped at 200K with the capacity to earn 1 million per year as a bonus based on sustained performance paid 5 years in arrears weighted to long term benefit to shareholders and corporate valuation, and you then have someone that will look out for the long term interests of all stake holders in the corporation.
    Just as a final thought ... If there is a legal requirement and framework for legislating for minimum wages, then why is there none for maximum wages. Surely from a society viewpoint it is against the human rights charter that one group of people should have legislation directed at them that is not appropriate to another group, even though the law is a legal protection. In principle society should have limits.
    Please note I exclude shareholdings which should not be given away as cheap incentives to employees. This is a dilution of shareholder value and should be illegal.

  • Comment number 54.

    Robert, my view is if you want strict governance and to avoid risk then it is pointless to rely on NED's unless they become financially and legally liable for everything they are employed to examine. Things won't be solved with a ceremonial quick fix that has a recent track record of failure.

    For any organisation I have worked for you can usually see within a few minutes which people make them tick. These are always people close enough to the day to day business and with the necessary detail to enable them to make quick decisions. But with the skills and ability to make others trust in their view. For the most part there are some truly talented people in our companies up and down the land. Who care about what they do and their organisations.

    By their very nature, these people are so integral to their organisations at the time that they are unlikely to find themselves in the world of the 'NED' while they can still be driving a businesses forward. Companies rarely let their best people go. Or indeed promote them to ceremonial duties. In fact organisations will often use promotion to NED, or similar ceremonial function, as a way to move people on and allow fresh blood to circulate in to an organisation or those who are seen to be on a wave of success a free ride.(an opinion of course).

    There are, of course, many very capable individuals out there in 'NED' roles. But the problem here is that they don't have the detail to do any more than scratch the surface on their 2 or 3 days a month and why would they want to bite the hand that feeds them. Unless they have something to lose. I know I struggle to do one job properly so trying to be an MP and an NED or a multiple NED is something I would never consider if I stood to lose everything if I was negligent.

    Without 'REALWORLD' detail they can be as competent as any man or indeed woman yet will find it hard to win an argument with a strong willed, operational, Senior Manager or Director who is seen to be performing well. Their experiences of the past are invaluable. But the further they are from the operational front line & the longer they spend away from it the greater they will rely on past experience as a barometer rather than questioning the detail of what is around them. A paradigm therefore forms and their power is as an advisor.

    There is a similar issue with audit. Even the finest auditors I have come across can only apply quick comparisons to the industry standard and the current norms or past experience. Time, normally, is their enemy and providing they tick the boxes they need to cover their firms 'behind' then they will struggle to find the time and resource on the audit to really understand a business sufficiently to challenge the business direction.

    In order to begin to find a solution I think it is important that we agree that the current system is fundamentally flawed.

    We also agree that those who were responsible failed and that asking them the same questions in a different way is unlikely to yield the necessary results.

    Once we have established this then you can begin to consider possible solutions which will be a complete and total change rather than the usual re-hash of old ideas.



    The blogs from so many on this forum agree that the culture, morality amongst so many areas need to change. This includes the political, financial systems amongst so many others. But this takes people with time, energy and the stomach for the fight. Do you think Britain is ready for this Robert? Are you ready to write the articles necessary to do this Robert? Drop me an email when you are..........

    But in the meantime let's lay off the city a little as there are some good guys there! Let's also focus this forum on the ways we can make this work and it won't just involve those who stand to get a big stack of cash for ticking a box.





  • Comment number 55.

    Brown-nosers to save the banking world from themselves ??

    Senior management (still) make the final decisions.

    Non-executives will be after-the-event,in hindsight ''noisers'' of shareholder's interests at best.

    Men and women of less persuasion,paid well for their appointment by executive and shareholder alike.

    How are ''whistle-blowers'' treated these days ??

  • Comment number 56.

    WHAT MOST FOLK DON'T KNOW, AND DON'T REALLY WANT TO BELIEVE:

    I repeat, most of the population doesn't understand that a) legality is all that matters in banking and 'morality' and 'ethics' is mere ritual subservence to legality and, b) if there is not the means to enforce the law, to all intents and purposes, for many it simply doesn't exist, as the benefits way outweigh the risks. Outside of white collar venality in The City (and eslewhere) one just has to look at the detection rate of non violent, i.e merely acquisitive, crimes. These are generally in single figures. That means that the prosecution rate is tiny and the conviction rate lower still. of over 12 million crimes a year, only about 600,000 result in prosecutions, and about half to two-thirds of those result in convictions, the majority of which result in non custodial sentences, and even those which do, 80% will be under a year inside working out at about 13 weeks. No amputations, no flogings, or other nasty penalties here, most reconvcit too. So, at one end of the spectrum the risk of getting caught means that crime often does pay, and at the other (the white collar end), whilst this is also true, laws are often passed through lobbying, specifically to decriminalise certain corporate behaviours, except, that's referred to as 'deregulation'. The crime rate has been steadily rising since teh end of WWII.

    That's liberal-democracy, aka anarchism.

  • Comment number 57.

    I think that we are losing the plot here a bit. If I remember correctly, the banking crisis was triggered by the American sub-prime mortgage fiasco. OK, the over-priced purchase of ABN Amro was a bad board decision but the fact that small businesses can't access loans, first-time buyers can't get mortgages and the world is in the deepest recession in decades is all down to unscrupulous sales people selling mortgages to folk who had no chance of keeping up with their payments once the interest rate on their loan was ratcheted up to make the mortgage viable for their lenders. Executive or non-executive directors had little to do with this. Immoral sales people, probably freelance agents, earned fat commission cheques by selling mortgages to householders who were not best-placed to repay them. In turn these bad debts were re-packaged and sold on to greedy bankers and a few naive building societies (e.g. Northern Rock) who could see only upward movements in property prices. When the housing market turned, as it inevitably would, these organisations were left holding a bunch of worthless paper. Bank regulation is all very well but essentially there is an ethical dimension to this whole sorry saga which must be addressed to avoid history repeating itself. The whole while that the profit motive is the sole motor in the banking industry, then we are, as Corporal Jones would say "doomed". Sticking with that analogy, what we are missing is the Colonel Mainwarings of this world. No old fashioned bank or building society manager would ever have entered in to this sort of lending when transacting business face to face. Forget about what non-execs. can do; encourage our financial institutions to follow a moral compass and not be obsessed with an ever improving bottom line.

  • Comment number 58.

    Why are city bankers and finaciers so concerned that tightening up the regulations in the finacial markets would necessarily restrict their ability to trade and that in turn would be bad for our economy.

    So the question can non-executives stop bankers madness and badness is emphatically NO, not unless some radical changes are carried out to the customs and practices that go on in the city and finacial institutions.

    History shows that city bankers and finacial traders cannot be trusted to conduct their business affairs in an appropriate manner and when things wrong because of their reckless behaviour, it is the rest of the population and other sectors of the economy that suffers the most.

    Against that background whenever the banks or finacial insitutions declare results that are too good to be true the first premise that the regulatory bodies and governing boddies should make is to assume that the bank has not been conducting it's affairs in a fit and proper manner.

    In future any large bank etc that declares it can afford to reward it's star performers with mega buck bonus payments should have it's accounts closely scrutinised before any payments are made and the banks should not be in too big a hurry to make these payments. Not for at least six months and to hell with the city's customs and practices on such matters. In other words welcome to the real world city boys.

    This is because we know that city banks and institutions use sophisticated finacial engineering techniques (or to the likes of everyone else finacial accounting scams) to somehow keep on generating the collosal profits they keep declaring. As we now know some of the people working in these institutions are extreemly clever at moving money around to create the illusion that the results are better than they actually are. In fact we now all know that it would take rocket scientist to properly understand how some of these techniques are supposed to work and as far as I know there aren't too many of those operating as non-executives in the banking boardrooms.

    So it is in the banking regulator's and governing bodies best interests (and for all our sakes) to see that the largest investment banks and finacial insitutions are broken down (not broken up) into smaller and more easily managed accounting units. That would make it easier for everyone (directors, regulatory and auditors) to invesigate and confirm that our finacial insititutions and the traders working there are behaving in a proper manner. More importantly how best to deal with persistant offenders.

  • Comment number 59.

    Banking and investment will always involve risk. It will never be possible, with regulation alone, to prevent another banking crisis in the future. However, I suggest it should be part of international banking law that for any bank to operate it must pay a certain fraction of its annual profits into an international insurance fund. Within just a few years, the fund would be in the trillions of dollars. This would be more than enough to pay the depositors and creditors of any failed bank without calling upon the taxpayer. Thus, failing banks should be allowed to fail, like any other failing business, thereby avoiding the very serious problem of moral hazard. In this way the banks would pay for their mistakes, not the taxpayer.

  • Comment number 60.

    The ultimate aim of governance is to ensure officers are running the organisation in such in such a way that meets shareholders objectives. I agree with Robert Peston that governance is not the perfect protection against catastrophes. But I believe its a dam good start

    The real problem with governance lies in companys culture towards governance. Some companys I feel, adopt a tick box approach towards governance. Effective corporate governance is not just a matter of prescribing particular corporate structure and complying with a number of rules. There is a need to apply and consider principles broadly and apply commonsense approach good corporate governance

    Non executives directors key role is to provide a balancing influence.as soon as they become gripped by irrational exuberance they become a waste of spaceThe term Yes man springs to mind

    Fred seemed to be so hell bend on growth that I feel the whole governance system broke down because one man I feel had too much influence. Now is this just another opinion you askLets see I can give readers a little evidence of this conclusionIf anyone has a spare minute read the Governance report in the RBS Annual Report December 2008. It states RBS basically conformed to all governance requirementsso all boxes ticked then...except when it came to directors remunerationThe UK combined code of corporate governance states that the remuneration committee needs to be independent...so having the chairman of the board on the remuneration committee, they were not complying with the prescribed best practise. In the case of RBS there were ridiculous sums of remuneration be paid to directors who were underperforming to say the least! Hmm thanks Mr Chairman

    I could go on and on.but a final word...The UK principles based approach to governance is by no means perfect but in theory it does make senseNon exes are not solely the answerGovernance is a balancing act, non execs as their name suggest have no real involvement in the day to day activities of a business. So how can they solely be the answer.Where RBS I feel really failed was when the objectives of there shareholders became a secondary concern, surely the shareholders risk appetite didnt extend as far as the risk associated to ABN.

  • Comment number 61.

    Robert

    40 Cregyn

    No. The worst two bankers in the world are not Goodwin and Varley as you suggest. In my opinion the worst two are Eric Daniels and Sir Victor Blank.

    They went ahead with a merger with a dead duck THIS YEAR! Not last year or the year before, when we were still learning all about the credit crunch, sub prime and toxic assets and ABN Amro was in the frame. They bought a bank (HBOS) stuff filled with all the worst kind of assets only six months ago. It is said they were prodded into the deal, possibly by the PM but also by institutional shareholders who owned shares in both banks and were trying to save their HBOS bacon.

    In the end they all killed the fatted calf and stuck the British tax payer with a loser for which their 43% stake included shares bought at 1.73 which nobody else wanted. They are now 70p. Some vision on the part of the people who run our country?

    On the BBC Daily Politics Show they give away a mug for answering their daily question. I wonder when they will get around to designing one to commemorate these people?

  • Comment number 62.

    Further to my comment on Lloyds. In the Times today it is reported that Graham Brady MP sought information under the Freedom of Information Act requesting details of meetings where Treasury officials were present and the proposed merger (of LLoyds TSB and HBOS) was discussed. He asked for the minutes of any such meetings and the details of any reassurances given by Ministers over the application of competition law to the proposed merger.

    MY BRADY WAS TOLD THAT WHILE SUCH INFORMATION WAS HELD, IT WOULD COST MORE THAN £600 TO PROVIDE IT, AND IT WOULD THEREFORE NOT BE PROVIDED.

    I have been posting about this for months now, and while it may be a bore to some people the latest twist shows that there is probably something to hide. If Mr Brown did have a meeting with Sir Victor Blank of Lloyds TSB to discuss a possible bid for HBOS:

    1. We need to know if and how such a meeting took place, and at whose instigation
    2. If so, what was discussed and was anyone else present?
    3. Did the PM offer any guarantees about waiving competition?
    4. If not, who did agree that a bid giving Lloyds over 30% of the mortgage and savings market should go ahead?
    5. Who spoke about it in the Treasury, and were Lloyds and HBOS managers present? What was said at those meetings?
    6. Were any guarantees given about the funding of the January rights issue, which was allowed to take place at a time when it was abundantly clear that the public would be stuck with the billions for the rights which the government had underwritten at £1.73 per share? This was BEFORE the bid was finalised.
    7. Were any guarantees given about the Government taking toxic assets off Lloyds Banking Group?

    There are lots more questioons, but the above are just a few for now. I hope Mr Brady perseveres with what is another scandal if the £600 figure is correct.

  • Comment number 63.

    The Non-Exec circuit has become an old-boys and their wives club in much the same way as the mutual back-scratching remuneration committees. Some individuals have a dozen or more non-exec positions in industries and institutions of which they have no expertise or even knowledge. When boards get up to skullduggery, executive and non-exec directors should share culpability and responsibility. The non-execs should serve no longer than two years on any board.

  • Comment number 64.

    Non-executives will continue to be too feeble as regulators of Banks.
    Investigating why regulators usually fail, researchers in the 1960s concluded that they failed because they became too close to the regulated body, and because they relied too much on information supplied by that body's executives. That 'regulatory capture' was found to apply to both businesses and to public institutions and was, the researchers concluded, inevitable.

    Moreover, it takes considerable courage to challenge the consensus judgement of a Board of Directors that appears to be so well-informed and thoughtful. All of these reasons and more are why regulators and non-executives usually fail to curb managers' excesses. One way of aligning managers self-interests with those of their employer-shareholder is through carefully constructed bonus schemes. But that only works with truly long-term payouts where the full implications of actions and strategies are captured in the time it takes for those bonus payments to unfold. But that means holding back someone's pay for years and years, which is hardly satisfactory or motivating.

    So NO! Non-executives will not be able to curb excesses by themselves. They need an industry wide and international code that they MUST enforce and which allows for regular independent audits of bank's liabilities and their forecasting models. It's worth a try.

  • Comment number 65.

    In my humblest opinion Health is much more important than Wealth

  • Comment number 66.


    The Tories now want to give the Bank of England the power to regulate!
    Is this real?
    A Bank regulating banks?

  • Comment number 67.

    Non-execs are not in place to prevent execs from taking catastrophic decisions. They are impartial, balancing voices in board meetings, and in such areas as risk and remuneration committees. It is foolish to suppose that these part-timers, experts though they be, could singly or collectively overrule executive directors on a course that they are determined to steer.

    If non-execs were to take on such a role, this valuable source of experienced guidance would effectively be closed to companies. Let us remember that NEDs are not agents of the regulator, nor the taxpayer, and they should not be expected to stand in their stead.

  • Comment number 68.

    The problem seems to be who really appoints non-execs?

    Often they're there to rubber stamp what the exec directors have already decided to do, especially given the time they put in and the limited access to detailed information.

    They're not independent and therefore objectivity is questionable,especially when the execs can practically remove them if they're in the way or if they're part of one of the remuneration circles where exec directors of 1 company are non-execs in another and vice versa.

  • Comment number 69.

    We seem to miss the point again and again.

    The reason I am so angry is because I work hard and have to weather these financial storms. I am not talking about the most recent recession, but the one at the end of the 90's and before that the 80's and so on.

    These people are trying to pull the wool over our eyes and at the end of the year they will all be able to justify their excessive bonuses.

    That money is our money and is part of the wealth of Britain, a wealth that is being sucked dry by these leaches. These people will escape these islands at any time they like. It is our job to stop them!

    First, we should stop the bonus culture, how about a new 90% tax against bonuses of more than £2000 in any financial year.

 

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