March 22, 2012 / 2:21 PM / 7 years ago

UK bank watchdog's board meddling could backfire

* Shareholders should retain final say over board roles

* Regulators could end up with blame if things go wrong

* Banks already taking action to improve governance

By Sinead Cruise and Anjuli Davies

LONDON, March 22 (Reuters) - Chastened by their failure to foresee the financial crisis, it’s little wonder that UK regulators might think a plasterer, among others, unfit to supervise a bank.

Britain’s Financial Services Authority has halted the 1.5 billion pound sale of 630 Lloyds Bank branches to the Co-Operative Group, a move one FSA insider said was due to worries the eclectic board of the food-to-funerals giant lacked the nous to manage one of the UK’s biggest retail banking networks.

A nurse, a horticulturalist and a Methodist minister keep the plasterer company at the Co-Op, along with a farmer, an ex-teacher and a retired publisher, all elected by members, with various responsibilities on subsidiary or regional Co-Op boards.

After the high-profile failures at some of Europe’s biggest banks during the 2007 financial crisis and beyond, regulators looking to beef up oversight of bank boards are unlikely to appreciate the value of that breadth of experience.

But industry experts warn regulators could live to regret heavy-handed interference in the make-up of UK bank boards, as one-off interventions risk evolving into a burden of day-to-day supervision they could struggle to handle.

“We think it is important that financial regulators realise there is a danger to taking away some of the duties that belong to shareholders when it comes to banks, specifically about remuneration and board approval,” said Carl Rosén, Executive Director of the International Corporate Governance Network (ICGN).

“We understand the financial regulatory response to the financial crisis, but now is the time to see what the implications are ... It’s not the right signal to shareholders to be more responsible,” he added.

The ICGN is backing a campaign to build competence within the investor community about bank corporate governance. At its annual conference this week, it told delegates it wanted to see the creation of an independent body to help bank non-executives understand what was required of them and how to perform.

“I hear from board members that it is extremely hard to persuade people to chair or take a place on the audit committee. People just see it as not worth the trouble,” said Simon Wong, a partner at industry watchdog Governance for Owners.

Until education improves, it could become harder for banks to find motivated and skilled individuals to fill board roles, putting more pressure on overstretched regulators to keep watch.

Daniela Barone Soares, CEO of Impetus Trust and board member at Halma, told Reuters she was happy to sit on the board of an electronics and environmental technology firm, even though she’s not an engineer, but she wouldn’t go near a bank board.

“I would be uncomfortable on a bank board, even though I worked in banking for many years. I don’t feel I understand enough the kind of transactions that take place and wouldn’t want to take that risk on myself to scrutinise them all.”


Some investors say market watchdogs are overstepping the mark between discharging the expected duties of a risk-aware regulator and demanding undue influence on how bank boards are manned, especially when banks are making changes independently.

Barclays, for instance, has already implemented a policy stipulating that at least half of its non-executive directors must have financial sector experience, with a view to improving the supervision and accountability of the executive.

The role of a chief risk officer to track risks and implement compliance procedures has also triggered clashes between regulators and companies.

Germany’s financial markets regulator Bafin last week refused to approve William Broeksmit’s appointment as chief risk officer of Deutsche Bank as it did not feel he had a sufficient leadership track record at the bank.

But experts caution that if regulators lay claim to ultimate control over the structure of and appointments to a bank’s executive, they must also be prepared to monitor those boards regularly and accept liability if things later go awry.

The FSA has vetted appointments to bank boards since 2008 under its Significant Influence Controlled Functions (SIFs) regime, under which nominations for positions of power at banks and other financial institutions must be approved by the regulator.

It also decides whether an individual is ‘fit and proper’ to hold directorships on public company boards.

But while these efforts reflect laudable efforts to rid UK plc of incapable, ineffective executives, the system is not foolproof in preventing mistakes.

“In the UK, the oversight and appointment of bank directors is at a stage that once you are appointed by a nominations committee of a bank you’re sent on a two-to-three-week training course so that when you meet the FSA, you pass,” said David Pitt-Watson, chair of activist investor Hermes Focus Asset Management.

“If we have too much regulation that treats the banking system and financial system like a high-security prison, the danger is we will end up with an industry populated with the sort of people who are high security-prisoners,” he added.

Britain is scrapping the FSA from early 2013, replacing it with a standalone Financial Conduct Authority (FCA), overseeing 25,000 firms, with powers to issue warnings and ban products and bad selling practices.

A new prudential regulation authority at the Bank of England will supervise banks and insurers.


But would handpicking a board in any case provide adequate defence against broader market risks, or could it provide a false sense of security?

On the eve of the financial crisis that led to its eventual merger with Lloyds Banking Group, the HBOS board brimmed with corporate talent, but many had full-time careers or other demanding board positions elsewhere.

There is also growing recognition among investors and governance analysts that in order for directors to make meaningful contributions to a bank’s operations, they must possess a broad range of skills, not just specific industry knowledge.

“There is value is in having diversity of experience. If you had served in a different industry that had also undergone very rapid change, consolidation or innovation, that could also be very beneficial to a bank board,” Wong said.

Wong recently delivered a presentation on board effectiveness to a group of Canadian bank directors who agreed unanimously that a board stuffed only with risk management experts was not desirable.

“You do need to have a range of types of people just so you avoid the dangers of ‘groupthink’ at least,” said Newton Investment Management CEO Helena Morrissey, a champion of gender diversity on UK boards.

“It’s not just one issue. It’s likeability, independence, tenure, diversity. Investors only in the last year have really started to focus on this.”

Whilst regulatory oversight is still seen as crucial, authorities are now having to strike a balance between new regulation and giving companies the necessary space to develop their own governance strategies.

“Everything about regulation is about navigating the thin line of appropriate regulation that neither suffocates nor distorts things,” Soares said. “But it would be scary if someone on a board doesn’t know what they were talking about.” (Reporting by Sinead Cruise and Anjuli Davies, additional reporting by Steve Slater; Editing by Will Waterman)

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