An overhaul in the way banks and big financial institutions are governed will have repercussions for other sectors and should enhance the role of HR. Guy Sheppard looks at the implications.
With billions of pounds of taxpayers’ money now propping up big banks, it is no surprise that they are facing far-reaching changes to the way they are run.
The government-commissioned review by Sir David Walker of corporate governance in the financial sector was published on 26 November.
Walker recommends strengthening the role of non executive directors and remuneration committees, using long-term incentive schemes to set bonuses and, in big banks, making public how many employees earn more than £1m.
Walker believes the most critical need is for boards to be able to challenge executives more effectively, and says: “This requires non-executives able to devote sufficient time to the role in order to assess risk and ask tough questions about strategy.”
Although regulatory issues need to be addressed, he says improved bank governance will help to instil greater confidence.
More time
He recommends that most non executive directors spend substantially more time on the task and that bank committees dealing with major risk issues should be chaired by non-executives.
On the boards of big banks and life assurance companies, this would mean several non executive directors having to dedicate at least 30 days a year to the role.
Walker also wants more emphasis on achieving the right board mix of financial expertise and high-level experience gained in other sectors.
Enforcement
The review has repercussions beyond the financial sector, with many of the recommendations likely to be enforced through the Combined Code on Corporate Governance, which is applicable to all listed companies. The Financial Reporting Council (FRC), which polices the code, published a list of proposed amendments on 1 December.
Several of the proposals are closely connected to the review, including the definition of roles and time commitment expected of non executive directors, and the need for performance-related pay to be aligned with the long-term interests of the company. A revised code should come into force in June, following consultation.
Mission creep
Matthew Fell, director of company affairs at employers’ organisation the CBI, warns that if the time commitment of both chairmen and non executive directors is increased, both will become more closely involved in executive decision-making. As a result, he says, non executive directors’ monitoring role will become more difficult.
He argues that what applies to banks, with their unique role in the economy, should not be extended elsewhere.
“We think it is mission creep,” he says.
A number of high-profile businesses have echoed this view in representations to the FRC during its initial consultation process.
Sir Christopher Hogg, chairman of BAE Systems, warns that there is a danger that the pool from which non executive directors are drawn will shrink because, in order to be balanced, boards must include individuals who hold senior executive positions in other companies.
“I fear that stipulating an expected minimum time commitment would simply mean that this will not be possible,” he says.
Knee-jerk reaction
John Maxted, chief executive at HR recruitment specialist Digby Morgan, describes Walker’s recommendations on non executive directors as a knee-jerk reaction to the banking crisis.
“There is a prevailing sense of over-engineering and gold-plating everything that’s going. This all contributes to the fact that it’s becoming less and less attractive for people to take on more responsible and better-paid positions.”
A London-based board appointment specialist, who asked to remain anonymous, agrees. “In a way, Walker’s report is just part of a trend. The job of the non-executive is becoming more demanding and taking more time, irrespective of whether a company is financial or not and irrespective of what happens in the regulatory environment.”
He predicts that personnel professionals will need to work much harder at promoting the benefits of the non executive director experience in terms of its management development benefits. “People come back with a useful additional perspective and with more breadth,” he says.
Enhanced HR role
Jon Terry, leader of remuneration practice at PricewaterhouseCooper, foresees an enhanced role for HR because the increased scope and remit of remuneration committees is likely to be one of the main areas that affect non-financial sectors. Indeed the review emphasises that HR’s advice “will be of key importance for the remuneration committee in exercising its enlarged role”.
Terry says: “I think HR has an enormous role to play in getting the right governance structures there. It’s a good thing for remuneration committees to have oversight throughout the organisation, ensuring that policies and processes are fit for purpose and that management are applying these policies appropriately. HR is the interface between the remuneration committee, management and the board.”
Although he says non executive directors have historically been good at asking the right sort of questions, he believes they have little grasp of the links between strategic decision-making and how incentives can encourage the right behaviours among employees. HR’s job will therefore be to provide unbiased and authoritative information at the right time.
Opportunities for psychologists and social scientists
Ali Gill, chief executive of people change business Crelos, was consulted by Walker about the review. She says his recommendation about the mix of experience on boards will create opportunities for psychologists and social scientists, as well as HR professionals. “He is acknowledging that diversity in the boardroom is important.” At present, she says that appointments still tend to depend on ‘the old-boy network’ rather than the qualities and experience best suited to the job.
But Gill argues that to interact and make decisions effectively, close attention will need to be paid to the behaviour and skills of each non executive director as well as the board chairman’s capability as a leader.
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“Progression to the non executive role should not be taken lightly, particularly in these large, complex financial services organisations. They are pretty full-time appointments and I don’t think they have been treated as that up until now.”
Despite the implications of the review, Gill is not convinced that HR is geared up to meet the predicted challenges, remarking that the profession’s involvement during the consultation process was conspicuously absent. “The contributors have been mainly bankers and professional services – they haven’t been HR teams. It worries me a lot.”
