Bank governance heading for change – sometimes in wrong direction

Whatever are we going to do about the boards of banking corporations? Since the onset of the crisis in 2007, it's been apparent that directors of banks didn't have a clear view of where the risks and issues lay. Since then, regulatory moves have been set in train to alter remuneration practices and to give shareholders a greater influence over boards. Much of that work has yet to be made final, but according to a study of 25 European banks, Nestor Advisors reckons that much of the industry has already anticipated the changes in the pipeline by altering their own governance arrangements. They problem, however, is that not all of these moves seem likely to be helpful. Take one example: "The trend to promote shareholder alignment is also reflected in increasing participation of shareholders to have a say‐on‐pay," it writes. Only nine of the 25 top banks were required to involve shareholders in decisions on executive pay, by 2009 twelve of the banks did so. "Say‐on‐pay may actually be doing more harm than good," it continued. This type of shareholder engagement "undermines the role of the board to work in the broader company's interest" by focusing them on the narrower interest of shareholders. "For banks, it is more pernicious, as greater alignment of management with equity holders is associated with greater bank losses," it said.

Director turnover: The study also shows that directors of banks that did badly did lose their jobs, against the conventional wisdom that boards are not accountable to shareholders. But that raises another problem: "That shareholders were not in a position to raise red flags before the failings should not come as a surprise. As shareholders are not insiders, will they ever be able to do so?" the report states. The remedy for greater accountability promoted in the UK and now spreading to European is to have annual election of directors. To Nestor Advisors, that seems to be a medicine for an imaginary disease.

Source document: The report "Bank boards after the flood: The changing governance of the 25 largest European banks," by Catherine Lawton and Stilpon Nestor, is a 26-page pdf file.