The reforms recommended by Sir David Walker for the governance of banks would, if implemented, impose a huge moral responsibility on executive and non-executive banking directors alike. The will to exercise independent judgment without regard to personal advantage – whether money, power or status – is a rare commodity in commercial life, and it cannot simply be wrought through character transformation.
Candidates for sainthood are rarely interested in running banks
The proven and enduring integrity required by Sir David for our boardrooms is a quality imbibed through mothers’ milk and the benign influence of good company in formative years. Candidates for sainthood are rarely interested in running banks, but Sir David is firm in his stance that directorial independence of mind would have prevented Royal Bank of Scotland and HBOS from imploding last year. Optimistic stuff indeed, in contrast to my less sanguine but more practical solution: six years’ hard labour for the chumps who believed their own lies and mired the nation in debt-laden ordure for years to come.
Given the Scottish provenance of the worst-hit banks, it is apt to recount the tale of sinners consigned to the fiery flames, crying to the good Lord for mercy “Lord, Lord, we dinna ken!” And the good Lord looked down on them and in his infinite wisdom spake “Och weel, ye ken the noo…”
Muddling roles is dangerous
The proposed reforms would also serve to muddle all the key demarcation zones. Increasing by 50 % the time devoted by non-executives to company affairs would transform the nature of their roles. Such a substantial increase in their involvement would make it more difficult for them to act as an independent sounding board for management or to distance themselves when assessing its strategy. Almost every proposal for non-executives (for example, challenging more management decisions) is already within their scope, if they have the guts to exercise it.
Nor would it make sense to emasculate the audit committee by transferring its key function of risk assessment to yet another committee, as Sir David recommends, leaving the audit committee to do…..what? Approving the accounts preparation timetable and external audit fees? Finally, dragging fund managers into a new compliance minefield will lead to disaffection with no gains. Can you imagine fund managers’ response to insistence that they signify on their websites their commitment to the principles of stewardship?
Blindness to causes
We are all acutely aware of the background to this programme of retaliation against the culture of excess that banking exemplified. But none of these proposals addresses its causes. Of course it would be nice if integrity replaced greed, but since that will never happen the sanctions route should apply with far greater rigour.
Blindness to causes is hardly limited to banking reformers. There is still an astonishing refusal by some in the accounting establishment’s upper echelons to acknowledge the attritional impact of crazy accounting on financial statements, as happened in the pre-crunch glory days. The chief executive of the Financial Reporting Council is reported as saying:
“It is not surprising that banks report substantial profits when the economy is doing well and reduced profits, or even losses, when the economy is doing badly. This is accounting reflecting the economic cycle, which is a good characteristic of a financial measurement system. It may well be appropriate to attempt to reduce the volatility of economic cycles, but there are more appropriate tools than accounting to achieve this.” Discuss.
Where has he been? Accounting was actually driving that volatility. Informed opinion now knows that the economy was not doing well. The substantial profits reported by the banks, which made the economy appear to be doing well were, in fact, substantial losses. But the banks’ happy little frolic with pseudo-market asset-pricing, as demanded by FRC-backed reporting standards, hid them from view.
Och weel, ye ken the noo.