Addressing the challenges of the global economy

Our guest blogger is Adrian Berendt, chair of ACCA's Financial Services Network panel

ACCA members are calling for a major shake-up of regulation, the way non-executive directors are appointed and operate, and a new approach to corporate governance in the financial sector.

A debate by members on the challenges of the global economy concluded that non-executive directors (NEDS) in large banks have proven to be ineffective and there needs to be a new structure to ensure that they have the independence, skills and resources to exert supervision over the executive in future.

While recognising mitigating factors such as reliance on information from within the company exposing independent NEDs to being misled or the complexity of company issues making it hard for NEDs to exercise effective governance – the lack of understanding was not acceptable as an excuse.

Accountants at a recent conference in London entitled Addressing the Challenges of the Global Economy called for a new structure for NEDs, with a way to prevent dominant chief executives from steering Board decisions and over-ruling NED impartiality. They felt that there could be potential solutions by changing remuneration to target and focus the right individuals, by increasing accountability of NEDs, by regular evaluations of boards and a refreshing of boards.

The meeting also called for co-ordinated national systems of regulation, with delegates agreeing that while there are advantages to global regulation to deal with global issues, such regulations have to be enforced at a national level.

With commercial banking critical to national interest, the meeting agreed on the need for national regulation. Regulations need to recognise uniqueness of individual countries and markets, and the different attitudes nations have to enforcement of regulations.

Any such regulation must consider politics, ethics and cultures, and also needs to understand that people will shop around for the regulation they prefer. Thus, a need to recognise diversity – something not currently undertaken by national regulatory systems – was also identified at the meeting.

Accountants identified a need to take more responsibility – by being tougher on how they recognise profit. They would also need to look at what impact this might have on bonuses.
ACCA members also called for connectivity and transparency between banking systems.

A new approach to effectively monitor and control behaviour within the financial sector, rather than modifying the corporate governance combined code, was also called for at the meeting.

Delegates said that the current combined code appears to be ineffective and that there is a real need and potential for a radical new approach, though achieving this would be difficult.

ACCA members made a number of suggestions about what that new approach should include:

• it should ensure executive directors do not choose their own non-executive directors
• it should ensure stronger consequences for not following the code
• there should be a change to reporting lines, which are currently too narrow
• it should not focus solely on backward looking narrow financial data or only on short-term profit making, monitor indicators of the well-being of the company
• it should reduce rewards for short-term success, which puts the business at risk, use incentives to create a long-term mindset
• it should introduce 'ethical committees' into organisations
• it should educate young people, so that they can make wise decisions and hold financial sector organisations more accountable should they ever become investors.

Delegates also agreed that regulators should continue with principles-based regulation. While not proposing the dismemberment or other limitations on their size, those banks that were seen as too big to fail, too big to rescue or too complex to regulate need to be subject to much closer supervision.

Comments

[Sean]

An interesting series of observations. I think that long-term incentives are important but banks have been using that for a long time with share options being part of remuneration packages. Many of those share options are virtually worthless.

Stronger boards of directors are needed and the only way that this can happen is for shareholders to be more active in demanding long-term sustainable growth. In the end of the day, the shareholder takes the risk and it is their responsibility to manage the board appropriate to that risk.