Curbing bank executives' enthusiasm
A Treasury-sponsored review has today recommended substantial reforms to the structure and behaviour of banks' and financial institutions' boards, to restrict the freedom and the incentives for senior executives to take reckless risks.
Sir David Walker, who is a senior adviser to the US investment bank Morgan Stanley and is a former director of the Bank of England, believes that last year's financial crisis, which helped to precipitate the worst global recession since the 1930s, was in part a consequence of "failures in governance in banks and other financial institutions".
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.
One recommendation which is likely to alarm some banks is that boards' remuneration committees would set the pay not only of executive directors but also of executives below board level whose "total remuneration" might be "expected to exceed the median compensation of executive board members".
In the case of Barclays, for example, which owns a substantial investment bank, this would lead to the board setting the pay of hundreds of bankers paid as many millions each year as those on the Barclays board.
The pay of these so-called "high end" executives would also be disclosed "in bands" in the banks' annual reports, although the executives' names would not be published.
In an interview with me, Sir David said he was fully prepared for protests about this degree of disclosure on pay from the big banks, who are likely to complain that they would be revealing commercially sensitive information that could put them at a competitive disadvantage.
Like the Financial Services Authority, the City watchdog, Sir David also wants a significant element of bonuses or performance pay to be handed to relevant bankers only after several years have elapsed, up to five years, or enough time to verify that the deals triggering the bonuses aren't toxic.
Other proposals are:
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.
When I spoke to Sir David he stressed that he was acting in an independent capacity when making these recommendations and that the Treasury was under no obligation to implement them.
Some may feel that his reforms would lack teeth, because he does not want them enshrined in legislation. Instead he wants them enforced through the Combined Code, the voluntary code on UK boardroom practices that is overseen by the Financial Reporting Council.
Update, 15:35: Barclays has told me two interesting things: first that its board already approves all group pay packages worth more than £500,000 a year; second that it's not worried about disclosing in its annual report how many of its staff receive pay of that magnitude and greater.