POLICY & FORUMS
BANKING REFORM AND EXECUTIVE
ACCOUNTABILITY
Keith Corkan
Forum Head
BritishAmerican Business HR &
Employment Forum
Partner, National Employment Team
Laytons Solicitors
Tel: +44 (0)20 7842 8000
Email: keith.corkan@laytons.com
Website: www.laytons.com
T
he Independent Commission on Banking, led by Sir John Vickers, calls for
UK retail banking operations to be ringfenced, giving depositors preference over other
investors in a failed bank and higher capital
requirements across the board for UK banking operations. The government has given a
qualified endorsement of the main proposals
and has hinted that a bank’s overseas operations could be exempted from higher capital
requirements if the bank can show that there
is no threat to its UK operation. This includes a
regulatory right to close down certain operations
in the event of a crisis. It is important that UK
tax payers are not exposed as a result of the
exemption of overseas operations.
The regulatory details are likely to take years
to finalise with the legislation implemented following a long consultation period even though
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reformers are urging the banks to grasp the
initiative and implement sooner rather than
later so as to minimise capital requirements and
weaken the case for any financial transactions
tax during a period which may amount to a
second recession. Crucially, the reforms are
expected to increase lending to SMEs in the
UK from ring-fenced assets with flexibility for
the Treasury to offer guarantees particularly
loans to non-financial UK businesses, and to
boost competition in the retail banking market.
In its response to the Vickers commission
the government has not lost the opportunity
to criticise extensive bonuses flowing to the
bankers and has called for smaller bonus pools,
a limit of £2,000 in cash bonuses and a higher
portion of bonuses to be paid in deferred shares
for senior managers. The government has
promised to use its controlling stake at RBS
and Lloyds to ensure restraint. The report of
the independent pay commission in the last
quarter of last year highlighted very high pay
levels of senior executives and board directors
of listed companies with multiples against the
lowest paid in their organisations considerably
higher than recommended levels.
Recent US research demonstrates that the
highest paid directors at listed companies have
strong connections with fellow directors at
similar companies, suggesting a widespread
materialistic and consumerist culture prevalent at leading companies and not just those
in the US. This contrasts with the laudable
exception of Gerard Arpey, Chief Financial
Officer of American Airlines who shortly before
Christmas resigned with no severance pay in
protest at the company filing for bankruptcy
protection from creditors. This can be viewed
as a welcome and a much needed principled
example of executive restraint or possibly
naïve idealism depending on your viewpoint.
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the report of the parliamentary joint committee
on the financial services bill which called for
UK bank executives to be held strictly liable for
poor or risky decisions and be subject to mandatory bonus deferrals. The recent FSA report
into the failure of the Royal Bank of Scotland
recommends an automatic ban on executives
working in the financial sector if their bank
goes bust or set penalties depending on their
role in any collapse. This represents reform of
directors’ and executives’ legal liability with
any detailed implementation and enforcement
of standards and duties of care possibly subject
to litigation. If so then this is perhaps a price
worth paying for greater accountability of
boards for their decisions in the banking sector.
In the meantime, the government’s review
of executive pay is scheduled to report at the
end of January 2012. Proposals relating to
simplified reporting, a single figure for chief
executives’ remuneration and a comparison
with average workers’ salaries are seen as noncontroversial. The proposal to have a worker
representative on remuneration committees
is however controversial particularly at FTSE
companies. This is seen to be an interference
with the board’s power and discretion and
although this may be seen as unacceptably self
serving, it is a proposal which may founder on
the simple legal fact that members of board
committees must be board members.
This attempts to address the key issue that
remuneration committees consist largely of
current and retired directors who have little
incentive to curb wage inflation. The government proposes that current executives should
not chair committees at other companies but
does not go so far as to suggest that shareholders should sit on the committees. It appears as
though the government will agree to a binding vote on remuneration packages. Some
shareholder groups have expressed concern
that this amounts to micro-management by
shareholders who of course already have a
non-binding vote in pay policy and in practice
it is unusual for that vote to be lost. ■
BritishAmerican Business NETWORK 2012, VOL. I