The Sunday Times July 19, 2009 - The Impossible Job
Boardrooms’ cosiness must give way to a culture of challenge Jenny Davey and James Ashton
Locked away in his country pile, the Honourable Matt Ridley has been pondering the topic of progress.
The former £300,000-a-year chairman of Northern Rock has had a rotten time of it.
Vilified for his lack of experience when the bank became the first to collapse and be nationalised in 2007, Ridley retreated to Blagdon Hall, his family’s estate in the heart of the Northumberland countryside.
There, at least the Oxford-educated zoologist and science writer could concentrate on his writing, although breaking his collarbone in a riding accident has hindered his work rate.
Progress is the subject of his next book, following up tomes on human virtue and genes and the environment.
Some 300 miles south, in the hurly-burly of London’s Canary Wharf, Sir David Walker is hoping to make some progress of his own.
Walker, a City grandee and adviser to US bank Morgan Stanley, unveiled last Thursday the first draft of a report designed to “bombproof” Britain’s banks – including the nationalised Royal Bank of Scotland and Lloyds Banking Group – and prevent men such as Ridley, with little financial experience, from taking on such a key directorship again.
For his own part, Ridley, 51, the third generation of his family to have chaired Northern Rock, has spent plenty of time mulling over what went wrong. Was he asleep at the wheel? – a charge levelled at many of the directors who graced banking boardrooms.
Speaking for the first time since the bank’s collapse, Ridley told The Sunday Times: “Frankly it [being a non-executive director] is an impossible job, whether you are an insider or an outsider in the banking industry.
“Not being a natural non-executive director, I have concluded that it is an impossible position and you are running huge risk with very little control. With no real detailed knowledge of the operations of the financial business, it isn’t an easy job on two days a week.”
Walker knows that only too well. His recommendations – 39 in all – suggest that bank non-executives must work harder and longer, be better qualified for the job and fundamentally more prepared to challenge the executives running the company on whose boards they sit.
He also says that chairmen should spend at least two thirds of their time on the job and face annual reelection and there should be separate board level audit, remuneration and risk committees, the last of which should seek external advice when considering strategic acquisition or disposal plans.
Walker does not hide the scale of his ambition for the report. While he may have been tasked by government ministers with finding a recipe to safeguard the banks, he believes that most of his recommendations could be applied to all big companies.
“There is nothing in my report, with the exception perhaps of some recommendations about risk control, which could not be applied to the rest of the FTSE,” he said.
As Sir Christopher Hogg, the chairman of the Financial Reporting Council finalises a review of the Combined Code on corporate governance this autumn, Walker may have his wish granted.
For non-executives – even those that are better equipped than Ridley – mission impossible might be about to become even harder.
WHEN John Edwards (not his real name) first became a non-executive director 15 years ago, boardrooms were far sleepier places.
“I think that people felt that becoming a non-executive was a nice way to slow down; something they could slot in between a round of golf and a holiday,” he said. “Now it has completely changed.”
Edwards juggled eight directorships when he was at his busiest. As regulation tightened when Sir Derek Higgs’s Combined Code was introduced in 2003, and the volume of board papers intensified, he cut back to no more than five. “I think that five is comfortable, but hard work,” he said. “It is manageable, as long as people don’t mind board meetings over the telephone. I wouldn’t want to do any more than that now.”
Even for people that chose to take on fewer posts than Edwards, the role of non-executive has intensified, particularly for those that choose to juggle it with a full-time position. “When there is a crisis, it is an immensely difficult and time-consuming job,” said Sir Nigel Rudd, the former deputy chairman of Barclays and chairman of BAA, the airports owner. “I was working most weekends and going home with paperwork two fingers thick.”
It is a far cry from ITV chairman Michael Grade’s jibe that non-executives are like bidets: no one’s quite sure what they’re there for, but they add a bit of class.
“The job just gets tougher and tougher,” admits Sir Bill Castell, the chairman of the Wellcome Trust who is also a non-executive at BP and General Electric.
If Walker’s recommendations gain traction outside the financial sector, then people such as Edwards holding five posts at a time may become a thing of the past. Walker suggests that nonexecutives should be prepared to give up 36 days a year to gain a deeper understanding of the companies they are meant to police – in some cases, double their current commitment.
That could be a positive development. The Corporate Library, an independent US research firm, identified the problem of “overboarding” in a recent piece of work. It raised fears that companies whose directors sit on too many boards contributed to poor corporate governance and increased the chance of decline.
It found that directors at publisher McGraw-Hill, Citigroup, and Merrill Lynch scored big disapproval ratings with investors, including Sir Win Bischoff, who was Citi’s chairman until recently and also sat on the McGraw-Hill board. He is in the frame to become the next chairman of Lloyds.
Castell thinks he already exceeds 30 days a year at BP. Still, his view is that for senior business people, taking on at least one extra role must be expected. “If you have been lucky enough to survive the executive piece, I think it is your duty to pass on your experiences to others,” he said.
However, a senior financial executive disagreed. He fears that Walker suggesting all banking non-executive directors need banking experience would only reinforce a cosy club, not break it open.
“When I go to an interview for a non-executive post it is almost like an interview for the golf club,” he said. “It feels like they are sitting there wondering whether I am someone who is going to rock the boat.”
Sir John Parker, chairman of National Grid and, recently, Anglo American, thinks that opening up the club is a job for the chairman.
“A lot depends on him creating an open society, so directors can ask questions and come to board meetings well equipped to provide the professional challenge. It is not about trying to put ants in their pants; it is a much more mature dialogue than that.”
Edwards’s recipe for being a successful serial non-executive is simple. “The only thing you have to keep saying to yourself is ‘I am not retired’. If you start thinking that, you’re dead.”
WALKER is no stranger to reviews. After looking at the reinsurance industry and the private equity industry, he has a clear idea of the legacy he wants his work on banking corporate governance to leave behind. If he can reinject tension to the boardroom, he reckons he has done a good job.
“I believe the chief executive should have just a touch of apprehension when he walks into the boardroom. That is a good thing,” he said, narrowing his eyes for dramatic effect.
“Many boards are not tolerant enough of challenge and if someone asks too many questions they get branded part of the awkward squad.” Two current bank chairmen do not exactly agree with him. Marcus Agius at Barclays likens the role of a non-executive to a critical friend. “You know that you are on the same team, but you have different roles to occupy. The discussion should be tough, testing and stretching but conducted in an adult, grown-up way. Challenge needs to be focused and informed not aggressive or hostile – the whole board needs to come together or it risks dysfunctionality.”
Sir Victor Blank, the outgoing chairman of Lloyds Banking Group concurs. “You want to have people who will challenge and ask questions, but to have six prima donnas is not helpful or constructive. You want them to work together in a way so you don’t get people who say ‘I can’t live with that’.”
The increased pressure on non-executives is already having a knock-on effect on recruitment. For some, the kudos of sitting on a blue-chip board is being outweighed by the potential downside.
For those in Westminster, that would be a small price to pay if it prevents future financial crises. The fact that Walker’s proposals will be voluntary incensed the opposition. “Solid citizens will sign up and spivs will cock-a-snook. Sir David’s city nickname years ago was “Walker the talker”– now we see why,” said Matthew Oake-shott, the Liberal Democrat Treasury spokesman.
Walker disagrees. “Which part of my report would you make statutory . . . the duty for nonexecutives to challenge?” he said. “I suppose you could say that disclosure on pay should be mandatory . . . but there is pressure for big companies to comply with corporate governance codes if they want to be taken seriously.”
One senior banker said that much of Walker was already in the Combined Code. “You could almost issue this report on note-paper that says ‘Do Your Job’.”
Back in Northumberland, Ridley will stick to his writing in future. Walker’s report at least marks progress in the march against corporate collapse. Whether the measures he proposes are adequate, only time will tell.
Welcome to the High-End club
IT is likely to become the ultimate badge of exclusivity and will create a new guessing game in the City: Are you in the High-End Club?
Sir David Walker’s proposal to shine a light on the pay and perks of the big earners below board level at UK-based banks will affect about 1,000 people, he estimates.
Adorned with Hermès ties and the flashiest Swiss watches, bankers love their trappings of power. Becoming an official “High-End” earner is likely to become just another ambition and many more than 1,000 will claim to be part of the club.
Many of the High-Enders earn more than their chief executives. John Varley at Barclays, for example, takes home less than a clutch of investment bankers from Barclays Capital.
Walker wants to spell out how many top staff earn a salary within a certain range, as well as details of their bonuses, long-term incentives and pension contributions.
The idea is to increase transparency among the banks’ biggest risk-takers, but Walker stopped short of naming them individually.
It means bankers will enjoy some of the kudos without the irritation of personal disclosure.
However, experts questioned whether what Walker proposed would make a difference.
“Everyone is calling for transparency, which clearly could be a good result,” said Jonathan Exten-Wright at DLA Piper, the law firm, “but you have to ask how will transparency improve risk management? The key must be understanding the influence of any remuneration’s design structure on behaviour.”
Walker also proposes the same level of pay disclosure for the UK arms of global investment banks such as Goldman Sachs. This would have to be included in their filings to Companies House.
HSBC already complies with similar rules in Hong Kong, where it has a listing. It must reveal the remuneration, though not the names, of its five best-paid staff below board level, even if they are not based in Hong Kong.
More controversially, Walker recommended that at least half of all long-term bonuses should be deferred for three years with some not paid for five years – the sort of measures the G20 signed up for at the London summit this year.
Senior bankers worry that this is bureaucracy gone mad – the sort of knee-jerk reaction that led to the Sarbanes-Oxley rules that hit Wall Street’s competitiveness after Enron collapsed. The fear is that top earners will quit the City for Geneva or Dubai.
“There are risks,” said Angela Knight at the British Bankers' Association. “It is quite right that Britain shows the way, but there needs to be careful implementation of any proposals. Britain is part of the international arena, but there are consequences in making changes too early, which are clearly adverse.”
Understandably, Walker is less concerned. “If we are driving people away from London with the types of standards I am proposing, you have to question whether we would want to keep them anyway,” he said.