It all started at one of the Prime Minister’s monthly press conferences. Suddenly, in answer to a question, Gordon Brown named Sir Fred Goodwin, the now notorious former chief executive of Royal Bank of Scotland, as the man who broke the bank. After the conference the press machine of Number 10 must have gone into action, for the next morning’s papers were full of pictures and stories of Fred, naming and shaming him as the father of the credit crunch. The publicity machine continued remorselessly day after day, as time went by and he and the other hapless chairmen and chief executives of failed banks were hauled before Commons committees to make abject apologies. It was a circus not seen since the days of the Soviet show trials.
The coup was worthy of Peter Mandelson, and perhaps it was actually his. At a stroke, all attention went from the government, whose primary responsibility the economy was, to a few individuals who ran banks. As for Fred, people forgot that he had also been the chairman who transformed the Prince’s Trust, and was a hero of the banking world until he entered into a deal too far. Of course he must take a large part of the blame for the ABN-Amro takeover, made after the market peaked, that brought down the Belgian banking giant Fortis as well as RBS. But do he and his fellow chairmen and chief executives deserve the entirety of the blame? There are two parties who have kept very silent over the last few weeks, but whom we should not forget.
The first, obviously, is the man who was Chancellor of the Exchequer for the decade before he became Prime Minister. Forget his boasting that he had ended boom and bust; forget his flirtation with Prudence in the early years; but remember that this was the man who was responsible for bank regulation ‘with a light touch’. He presided over levels of personal debt never before seen and allowed our banks to make trillions of pounds of overseas loans. When I was a banker in the 1970s, the Bank of England kept an eagle eye on levels of debt and we were summoned to monthly meetings to ensure that all was well. Unfortunately, the Bank of England was stripped of its supervisory powers in favour of a ‘tripartite’ system that failed. A touch on the brakes three or four years ago might well have reduced the severity of the present crunch.
But an equally responsible party is the Department of Business, Enterprise and Regulatory Reform that, in happier days — including my own tenure — was the DTI. Seven years ago, the Chancellor and Patricia Hewitt, the then secretary of state at the DTI, asked the late Derek Higgs to prepare a report on the role and responsibility of the non-executive director. It was published in January 2003 and when I first saw it I thought it read more like one of those just-too-clever drafts that used to be submitted to me as a minister.
This report, which was subsequently adopted as the Combined Code, created a balance between executives and non-executives, and between the chairman and the senior non-executive, that bore little resemblance to the real world. It ensured that independent non-execs should — in order to be independent — have little knowledge of the business of the company, yet at the same time gave them responsibility for the strategy of the board. The report ignored the experience at Marconi (formerly GEC) only a short time before, when the non-execs allowed the management to adopt strategies that destroyed the company.
The Code, amended since, still provides for a remuneration committee to approve the pay and bonuses of senior employees (in the case of RBS, it was this committee that should have agreed Sir Fred’s pension) and an audit committee that had oversight of the accounts, including the work of the risk committee. Both committees were the responsibility of the non-execs.
At that fateful board meeting when Fred put forward the prospect of buying ABN-Amro, it was up to the non-execs to question his strategy. Likewise when my friend Sir Victor Blank, chairman of Lloyds TSB, was tempted, possibly by the government, with the prospect of HBOS, his board should have asked many more questions. The boards of these companies, indeed of all the failed banks, cannot evade their personal responsibilities.
It might be said in their defence that the respective chief execs so dominated discussions that the boards were unable to influence strategy. Even if this were so, the Code has failed. As well as creating a new system of bank regulation we have to rethink board regulation. The shareholders of all those listed companies whose boards went along with excessive gearing during the days of boom and are now faced with bust should ask their non-execs just what they were doing. The job of non-exec, at least of a FTSE-100 company, is far too important to leave to retired businessmen who wish to build up a portfolio of interests that won’t interfere too much with their golf.
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