CITY GIVES ITS VERDICT ON MPS’ FINDINGS
CREDIT RATING AGENCIES
“We remain deeply concerned by the conflict of interests faced by credit rating agencies and have seen little evidence of the industry tackling this problem with any sense of urgency. It is worrying that markets appear to have used credit rating agencies for more than they were designed to do.”
AUDITORS
“We note that the auditing process failed to highlight developing problems in the banking sector, leading us to question how useful audit currently is. We argue that investor confidence and trust in audit would be enhanced by a prohibition on audit firms conducting non-audit work on the same company.”
ACCOUNTING STANDARDS
“We regret the power of the European Commission to pick and choose which international accounting standards should be implemented in the EU and call on the Treasury to consider the impact of the Commission’s powers on the objective of establishing a single global set of accounting standards.”
THE TURNER REVIEW
“We express concern that the Turner Review downplays the role that remuneration played in causing the banking crisis and question whether the Financial Services Authority has attached sufficient priority to tackling remuneration in the City. The FSA must provide regular reports on what action it has taken on remuneration policy.”
LORD MYNERS AND RBS
“We conclude that Lord Myners’ assertion that his 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. It would, we believe, have been open to Lord Myners to insist that Sir Fred Goodwin should have been dismissed.”
NON-EXECUTIVE DIRECTORS
“Too often, eminent and highly regarded individuals failed to act as an effective check on, and challenge to, executive managers, instead operating as a ‘cosy club’. We pinpoint three problems: the lack of time many non-executives commit to their role; in many instances a lack of expertise; and a lack of diversity.”
SHAREHOLDER KNOWLEDGE
“In some cases they encouraged the risk-taking that has proved the downfall of some of the great banks. We are particularly concerned that fragmented and dispersed ownership combined with the costs of detailed engagement with firms has resulted in the phenomenon of ‘ownerless corporations’ described to us by Lord Myners.”
REMUNERATION
“On remuneration we conclude that the banking crisis has exposed serious flaws and shortcomings in remuneration practices in the banking sector and, in particular, within investment banking. We found that bonus-driven remuneration structures encouraged reckless and excessive risk taking.”
ANGELA KNIGHT – BBA
“The committee was right to pick up on this. They operate outside the regulatory framework and certainly have potential conflicts of interest. Downgrades can have a huge destabilising effect, so they bear a lot of responsibility.”
“There are already rules in place which state that if you use auditors for non-audit work, it can only be to a certain degree and most banks use more than one accounting firm as a result. But there is a case for going further then where we are at the moment.”
“The problem here is that the ‘I’ of International Accounting Standards is not international enough. Many of the European Union countries have not applied the same standards as we have in the United Kingdom so there are all sorts of discrepancies.”
“The Turner report, as an analysis of the cause of the crisis, has been considered internationally as one of the best. The specific area of remuneration has already been addressed by the FSA and remuneration is due to come under regulatory supervision. “
DAVID BUIK – BGC
“I doubt very much that Sir Fred could have been fired. Had he been dismissed, Sir Fred would have probably sued the rest of the board. The government would not have wanted to be involved in that sort of spat.”
“Lack of time is not a valid excuse. The remuneration was sufficiently attractive for these non-execs to make time. Lack of expertise and diversity is like looking for excuses for failure. Lack of power sounds rather nearer the mark. Also the selection process is not transparent.”
PETER MONTAGNON – ABI
“We need to broaden the community of shareholders committed to dialogue. We must also acknowledge that shareholders could not have prevented the crisis, nor are shortcomings of corporate governance the major cause.”
NIC CLARKE – Charles Stanley
“It’s sensible that individuals are tied in to the longer-term performance of the institution that they work for. This would potentially lessen the extent of risk taking for short-term gain which has been a major cause of the credit crisis.”