Banks in the line of fire as Walker Review calls for greater scrutiny of pay structures

Once the government got the smell of ‘bank bashing’ up its
nose, it was inevitable that sooner or later it would take steps to divert
public attention from media attacks on Whitehall’s economic policies.

The banks are always a soft target for a government in trouble, so the
populist and heavily bureaucratic proposals of Sir David Walker’s review of
banking corporate governance, commissioned by Gordon Brown, came as no surprise.
Ditto, the reaction.

Some sectors of the City equated the review’s proposals to the provisions of
the Sarbanes-Oxley legislation in the US, which imposed strict new governance
requirements on listed companies in the wake of the Enron scandal and the era of
dotcom excess. “What purpose does this actually serve?” said the CEO of one
investment bank. “It is fundamentally wrong to whip up this hatred of bankers.”

Pay scrutinised
Walker, former chairman of Morgan Stanley International, said that boards’
remuneration committees must take on far more work and should scrutinise the pay
of anyone earning more than the average board-level executive.

He also wants financial groups to set up board-level risk committees,
separate from the audit committee, to ensure executives are not allowed to run
amok.

Bankers argue that the proposals, if put into effect, would place a millstone
around the necks of managers, who should be managing risk on an hour-to-hour
basis.

There is also a good deal of frustration over the way the report proposes to
place executive pay under the microscope. Walker also wants financial
institutions to disclose how many staff earn more than the boardroom average,
grouping them into different pay bands. The attention lavished by the media on
executive pay at banks that were forced to their knees by the credit crunch,
notably the case of Sir Fred Goodwin at Royal Bank of Scotland, brought an
outcry of public indignation.

There are two sides to every story and Angela Knight, chief executive of the
British Bankers’ Association (BBA) cites the glaring truism of this country’s
fixation with pay.

“If Walker hadn’t gone down this route of advocating general disclosures for
senior executives’ pay, this report would rapidly have been ignored,” she said.

“That, in turn, would be the most dangerous option of all. If we don’t, as an
industry, offer more openness about our pay structures voluntarily, we will get
legislation. No one should underestimate just how much this industry will become
even more of a political football over the next ten months as we enter one of
the toughest political fights for two decades. There are no votes for being nice
or even fair to the banks.”

Knight acknowledges that pay is the issue on which the banking industry will
now principally be judged. “We must look at ourselves from the perspective of
the judges and act accordingly,” she says. Knight also insists the report is not
a replay of Sarbanes-Oxley: “It isn’t, as it carefully treads a path that is not
new legislation, but which beefs up the existing Combined Code of corporate
governance and the boards.”

However, it isn’t helpful for the government to fuel further hostility by
suggesting the review should have been more radical over issues of pay and
ownership. The Treasury’s financial services secretary, Lord Myners believes
banks should be forced to disclose the pay of top-earning staff even if they do
not sit on the board.

“I would like to see David Walker step further outside the box of thinking he
is currently in and say, ‘What are the most radical solutions?” he said. Myners
said there should be a system similar to that of the US where the top five
earners, often not on the main board, are identified.

The proposals will be interpreted by some in the financial services industry
as provocative and confrontational. But few would deny that decisive action is
required to prevent a replay of the crash that brought about the global
liquidity crisis.

One is reminded, however, of the sage words of Sir Nicholas Goodison, who
shepherded the London Stock Exchange through the Big Bang in 1986.

Goodison later entered the banking world as chairman of TSB which, despite
public perception to the contrary, was the dominant partner in the 1995
TSB-Lloyds merger. When Gordon Brown set up the Financial Services Authority
(FSA) in 2000, Goodison’s reaction was blunt and candid: “Supervision is
preferable to regulation.”

His view is that the financial services industry should be allowed to
function with a “light touch” of bureaucracy, but with a close eye on day-to-day
operations.

Alas, this does not seem to dovetail with government thinking. At least not
this government’s thinking. The Conservative party, which is widely tipped to
win the next general election, has vowed to do away with the FSA and return bank
supervision to what it regards as the more capable hands of the Bank of England.