Fixing Our Banks: Part Three – the Shareholder’s View

Last week, I introduced a discussion about Fixing Our Banks.  This is based upon a distinguished panel who each
gave a perspective covering bank, shareholder, employee, customer and auditor’s
views of how to fix the banking system.

Yesterday, I gave you the banks view from Charles Middleton,
Managing Director of Triodos Bank and a career banker previously with BZW (later Barclays
Capital).

Today, it’s the turn of the shareholder with the views of
Seamus Gillen, Policy Director with the Institute of Chartered Secretaries and
Administrators (ICSA).

Seamus made the point that it would be impossible for a
Board to know everything about their business activities at every level.

However, that’s no excuse.

It’s like the horsemeat dilemma with Tesco and co: if you
don’t know your supply chain intimately, who does?

Only the banks’ Board could possibly know their internal
structure well enough to track the convolutions and nuances of all of the
processes and operations.

It reminded me of a conversation when the crisis hit and one
senior bank person said to me that their test of bank operations was to have
any member of staff explain their products to the management team.

If they could not explain the product, then they either stopped
selling it or had one more chance to try to explain it before they were
removed.

Unfortunately, during the credit derivatives explosion,
every bank felt they had to be in that space and so the rule was dropped.

In fact, it got to the stage that even the sale
representatives of the banks no longer knew what they were selling or could explain
it.

It was bad.

When management and staff cannot explain their products, or
understand them, what went wrong?

The profit focus.

The focus is purely upon profit and not upon risk and loss.

And that focus is reinforced by  the bonus system, which focuses the minds of management
to overlook the foibles of their traders.

It leads to the Jerome Kerviel’s and the Kweku  Adoboli ‘s of this world, who get into a spiral
of loss and can only continue to try to hide those losses by being covert in disguising
trades and orders.

So the real question is whether the processes, systems and
policies are adequate to avoid risk, deliver good governance and ensure ethical
behaviour.  That is they key for
boardroom effectiveness and where their radar should focus.

Only after the hygiene factors of effective processes and
systems can the cultures, values and behaviours be addressed.

I’m not sure myself if that is true, but it is certainly the
case that banks can only perform properly if they have the right basics.

What are the right basics?

Well, here’s one: make sure the person responsible for risk
is responsible for risk.

This is one that I encountered a while ago, and it intrigued
me.

In Royal Bank of Scotland, Fred Goodwin had a very different
approach to Rijkman Groenink, the CEO of ABN AMRO which it acquired in 2007.

Fred had several hundred of risk managers with a risk
committee chaired by the Chief Risk Officer (CRO).

Rijkman had a similar structure.

The key difference is that the final decision on a risk was
made by the CRO in ABN AMRO but by Fred Goodwin in RBS.

Something in that somewhere.

Meanwhile, when looking at how banks should be run, Seamus
pointed to various reports including one from the Financial Reporting Council in
2011: Guidance on Board Effectiveness, March 2011.

Maybe there’s something in there too.

An effective board
develops and promotes its collective vision of the company’s purpose, its culture,
its values and the behaviours it wishes to promote in conducting its business.
In particular, it:

• provides
  direction for management;
• demonstrates
  ethical leadership, displaying – and promoting throughout the company – behaviours
  consistent with the culture and values it has defined for the organisation;
• creates a performance culture that drives
  value creation without exposing the company to excessive risk of value
  destruction;
• makes
  well‐informed and high‐quality decisions based on a clearline of sight into the
  business; 
• creates
  the right framework for helping directors meet their statutory duties under the
  Companies Act 2006, and/or other relevant statutory and regulatory regimes; 
• is accountable, particularly to those that
  provide the company’s capital; and 
• thinks
  carefully about its governance arrangements and embraces evaluation of their effectiveness.

Tomorrow, I’ll give you the employees view.

We have a repeat evening of this debate at the Financial Services Club on 14^th May with:

• Charles Middleton, Managing Director of Triodos Bank;
• Dominic Hook, National Officer for Finance and Legal with the Unite union; and
• James Daley, Head of Money Content with the Which? Consumer’s Association

If you would like to attend, click here.

This was part three of a series:

• Fixing Our Banks: Part One
• Fixing Our Banks: Part Two - the Bank View
• Fixing Our Banks: Part Three - the Shareholder's View
• Fixing Our Banks: Part Four - the Employee's View