The Walker Report: A Minimalist Response Professor Andrew Kakabadse The Sir David Walker Report on Governance in Financial Institutions in the UK makes most interesting reading. Unfortunately, it does seem to be a minimalist response. Strengthening the board, strengthening the non executive directors, strengthening the governance processes and particularly having board directors know much more about the organisation on whose board they sit are wonderful recommendations. What is not in the Report is how we are going to achieve that. Understanding Board Dynamics: The Role of Non‐Execs and the Chair Non executive directors already have the power; they have had the power and they continue to have the power. The critical issue is will that power be exercised? Now if you have a weak chairman, if you have dysfunctional board dynamics, no more governance protocols or legislation is going to help that. The board has to sort itself out. The chairman has to be given sharp feedback; more sackings, more people removed from board positions who do not perform has to take place. I see no appetite for that at all. I see no mechanisms in the Sir David Walker Report for making that happen at all. What we need are devoted non execs, adequately remunerated, who will give their attention to two or three companies and that is their portfolio. – possibly with banks and the way they are now, only two banks and that is their portfolio. I do not see that bald statement being made; I do not see the penalties for not performing being made; I really do not see the sharpness in this Report that says culture and practice is going to change in banks. How Bank Boards Need to Change My survey of boards on a global basis suggests that unless you limit the number of non executive directorships of each non executive director, they will not spend more time in the company. They will not get to know the organisation and they will end up addressing governance protocols only. I have just finished, together with colleagues, a risk management survey on a global basis and two or three interesting facts emerged. The first is everyone in the survey – which was about 600 respondents – from the US, UK, Asia and the rest of Europe – knew that the financial crisis was coming before 2007. Most of those responded to this said that they had told their non executive directors, they had told their board, they had told their top managers and nothing happened. Most also said that it was not the global financial crisis that was the problem; they and their bank could have done something about it. What they were doing was they were operating in a global financial system, but their bank could have prevented the crisis for their bank. Knowledge Interchange Online© Cranfield University October 2009 1 Professor Andrew Kakabadse
So the Sir David Walker Report is minimalist. We need to know how boards in the future will work. We need to understand whether boards in the future are the answer, and we need to have a rapid overhaul of the financial system in this country. The splitting of retail banks from investment banks; having retail banks provide the wealth for other businesses to create even more wealth rather than the retail banks generating all the wealth for themselves, is absolutely primary. How Banks Perceive the Need for Change What is so interesting with our global financial survey is that those involved with banks, whether they are risk managers, controllers, general managers, direct line bankers or top managers of banks believe that there is no problem. We should go back to the way we were before. We should actually have the same bonuses as before and the likelihood is high resistance to any government involvement, any Sir David Walker recommendations will be the reality. So finding out who is earning more than £1million in a bank is not going to do much because the bonus culture is here to stay unless we change the structure of banks. So what is likely to happen is that bonuses will just simply not be paid in this country; you may find a bonus being paid in Europe, in Barbados, on the Channel Islands – but definitely at some low tax haven location. So what we have is little change; what we have is much the same system; and what we have is the political process unwilling to change our financial structures, so what we will definitely have is another financial crisis of an even bigger nature four to five years from now. © Cranfield University November 2009 2