“Lethal” risk-taking caused downfall

14 May 2009

Banking bosses are as much to blame for the downfall of some of the UK’s biggest financial institutions as the bonus culture that fuelled a “lethal combination of reckless and excessive risk-taking”.
That is the conclusion of the third damning report into the financial crisis from the influential Treasury Select Committee. The latest report also heaps fresh criticism on City minister Lord Myners over his handling of former Royal Bank of Scotland boss Sir Fred Goodwin’s massive pension.
The report, entitled ‘Banking Crisis: reforming corporate governance and pay in the City’, blasts the boards of HBOS and RBS for both their poor management and their refusal to take responsibility for the disastrous consequences of their actions.
John McFall, chairman of the Committee, says: “The banks that have failed did so because those leading and managing them failed.”
The Committee dismisses the “self-pitying” apologies delivered by former RBS chiefs, Sir Fred Godwin and Sir Tom McKillop, and former HBOS bosses Andy Hornby and Lord Stevenson - instead slamming these banking bosses for regardling themselves as the “unlucky victims of external circumstances.”

“Prior to their public fall from grace, the former bankers from whom we extracted apologies were regarded as among the most able and competent leaders in British industry,” McFall adds. “This makes the charge of management failure impossible to resist.”

Vince Cable, the shadow chancellor for the Liberal Democrats, says the report offers more evidence of widespread management failure throughout the banking sector.

"Many senior executives acted deeply irresponsibly with little scrutiny or oversight,” he explains. “A reckless bonus culture led to major banks putting short-term reward ahead of long-term stability, which in turn contributed to the financial crisis.

"There must be a radical change in both the culture and regulation of the banking system. Never again should greed be allowed to bring down economies."
The blame game

Non-executive directors with insufficient experience of the sector juggling their responsibilities with other roles or even full-time senior positions also came in for heavy fire in the report. The Committee says this created a “cosy club” environment that prevented non-executive directors from acting as an effective check on, and challenge to, executive managers.
Institutional investors and auditors cannot escape their own share of the blame, the report adds, having failed to pay sufficient heed to the activities of the banks during the good times.
Special criticism was reserved for the pay packages on offer in the banking sector and particularly in investment banking where huge bonuses rewarded short-term gain. 
“The design of bonus schemes was not aligned with the interests of shareholders and the long-term sustainability of the banks and has proved to be fundamentally flawed,” McFall says.
However, the Committee’s report does acknowledge that, although there is a strong case for curbing or stopping bonus payments for senior staff in part-nationalised banks, their position would be worsened if they could not make bonus payments.
It warns that a cull on bonuses could result in the banks struggling to retain and recruit the staff they need - to the detriment of the taxpayer as a major shareholder in both institutions.
Instead, it calls for more transparency and accountability regarding pay structures and how they relate to performance.
McFall says: “Rewards for failure must not be repeated. This applies not just to Lloyds and RBS, but across the board."

He added that the City watchdog, the Financial Services Authority, also needs to take a tighter line on monitoring pay within the banking sector.

Pension row rumbles on

In the case of Lord Myners, the report states that the City minister’s precept to the RBS Board – that there should be no reward for failure – did not represent “an adequate oversight of the remuneration of outgoing senior bank staff”.
Instead, it questions whether Lord Myners was given enough direction from the government over how to address the issue of remuneration for the former boss of the bailed-out bank.

“It would, in the Committee's view, have been open to Lord Myners to insist that Sir Fred should have been dismissed,” McFall adds.

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