Commentators argue in today’s papers that the situation in financial markets is the result of the lack of an effective governance framework. The current environment puts Penrose in mind of the William Golding novel, Lord of the Flies and its message that a lack of rules can lead to mayhem and disaster. This analogy leads us to Sir David Walker’s report on financial sector corporate governance, released yesterday, which has prompted a savage response from the banking community.
Closer scrutiny of remuneration was always going to be a key feature of the report, but some argue that the recommendations surrounding remuneration merely pander to populist outrage about bankers and their bonuses. Commenting in today’s FT, the chief executive of one investment bank said Sir David had caved into populist demands: ‘What purpose does this actually serve… it is fundamentally wrong to whip up this hatred of bankers?’
Sir David states that remuneration committees should worry less about whether levels of pay are too high in absolute terms, but rather whether employees are encouraged by bonus schemes to take actions that are not aligned to the long-term interests of shareholders. On the risk monitoring front, Sir David wants bank boards to set up a committee (separate from the audit committee) chaired by a non-executive director, to ensure that boards do not run amok. However one banker in today’s FT argues that this will not be effective: ‘Risks should be managed by non-executives hour to hour, not by non-executives month to month,’ he said. The British Bankers Association, the Association of British Insurers and the Institute of Directors welcomed the vast majority of Sir David’s recommendations, although the IMA said the regulator should not get involved in deciding the best way to manage money.
Arguably the main aim of Sir David’s report is to change the culture of governance rather than the rules; he summed it up as an attempt to make the board ‘a less cosy, comfortable place’. Indeed if these proposals eventually come into force it has been suggested that the UK is destined to have the toughest standards in the world…