Non-executive directors contributed to the financial crisis by failing to challenge the management of many top banks according to Lord Paul Myners in a meeting organised by Independent Audit last November. The Daily Telegraph on Monday 2 February referred in 'The worth of non-executives comes under scrutiny' to evidence given to the Treasury Select Committee on 27 January when Peter Chambers, chief executive of Legal & General Investment Management, said of banking non-execs: "one would have to conclude that non-executive directors were not effective in controlling the activities of the executive directors otherwise we would not be where we are now." I can certainly sympathise with this view but the problem is more complicated.
Money Marketing reported comments made by Vince Cable on 2 December as he recounted a discussion 2 years previously with the chief executive of one of the now part-nationalised banks when speaking at the Council of Mortgage Lenders annual conference in London last December. Cable said that the executive accepted that his bank's lending was 'foolish and dangerous', but he would have been sacked by his board if he didn't lend these mortgages. Why might the board do this? Presumably because the board would expect markets to take a dim view of such a change in strategy. Some long term investors may realise the wisdom of such an action but others would sell and the stock would plummet.
How would the non-executives of Northern Rock, now a fully nationalised bank, have reacted if its chief executive, Adam Applegarth, had said 2 years ago that he was nervous about the economy and wanted to reduce the amount of lending? The non-executives may well have responded that Northern Rock was rated as a growth stock and that the share price would collapse if the bank stopped or slowed lending.
The problem is not only about non-executives holding management to account, it is also about how investors hold boards to account and about investors' expectations and executives' and boards' perceptions of those expectations. Short-termism is a major part of the problem. The executive and investor communities have grappled for years with it but no one has found an answer, it seems to be a fact of life in capital markets. It is time now to try again to get markets more focussed on long term and remember that corporate governance is about ensuring that companies work in the long term interests of their owners.
Paul Myners urged institutional investors to take a bigger role in training and empowering corporate board members. I agree and I support Keith Skeoch, chief executive of Standard Life Investments, when he took up the challenge in his article in the Financial Times on 25 February, by announcing his intention to initiate discussions with senior non-executive directors on how to make the relationship between shareholders and boards more productive.
ACCA’s Corporate Governance and Risk Management Agenda lists 10 best practice principles of corporate governance. Principle 8 says that boards account to shareholders for their stewardship and Principle 9 that shareholders hold boards to account. ACCA’s discussion paper Corporate Governance and the Credit Crunch recognises the challenges and discusses reasons why non-executive directors did not provide enough challenge to management. It encourages shareholders to take a more active role in holding boards to account. The current banking problems demonstrate that greater attention to these principles is needed. Market based solutions are preferably to regulation when dealing with capital market problems but time may be running out for the market to find an answer. ACCA aims to play its part to facilitate debate to bring about a suitable market based solution.
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