David Prosser: How to hold the bankers to account

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The Independent Online

Outlook It is difficult to find much to disagree with in the recommendations made today by Sir David Walker for reform of the way banks are run. Yet those who hoped Sir David's report, commissioned in the wake of the worst financial crisis in living memory, would be a watershed in banking accountability and disclosure will be disappointed. There's plenty of worthy stuff in there, but not much drama.

Why, for example, has Sir David resisted calls to require banks to identify their high earners? To his credit, the disclosure requirements he suggests on pay are not limited only to the board, but extend to all "high-end" bank employees. Yet the banks will only have to provide details of how many staff fall into the highest pay bands, with anonymity preserved. Nor will they have to identify where these staff are employed, other than in vague terms.

It isn't prurience that demands greater individual identification of highly-paid bankers. In the case of Lloyds and Royal Bank of Scotland, the taxpayer owns large chunks of the banks. Why should they be any different from, say, the BBC, which now publishes data on staff pay? That argument extends to other banks, which have also benefited from less direct taxpayer support.

Similarly, rather than proposing outright restrictions on the posts non-executive directors should be allowed to hold in addition to their bank board seats, including the chairman, Sir David has chosen to make suggestions about how much time these people should spend on the job. A more spirited recommendation might, for example, have prevented the row earlier this month over RBS chairman Sir Philip Hampton taking a seat on the board of Anglo American.

The greatest criticism of all, however, of Sir David's report is that most suggestions will be added to the combined code of corporate governance, rather than having any statutory backing. Other than on pay, banks will then be able to sidestep many of these rules, providing they explain why they have done so.

Sir David shares the City's concern that there is a danger of the credit crunch prompting a regulatory backlash that goes too far. Clearly, a balance must be struck, but danger also lies in giving the banking industry too much room to police itself. And while Sir David hopes shareholders will play a much greater role in holding banks and their boards to account – he has much to say about how greater engagement might be encouraged – it is not so easy to have confidence in the abilities of institutional investors to make the right moves.

In fact, we are already seeing some improvements in this area. For example, since the banking crisis, there has been a big increase in the number of shareholder revolts over remuneration policies – and not just at banks or other financial services businesses.

A good thing too, but staging a revolt on pay is a straightforward matter compared to challenging the board over corporate strategy, even assuming the challenge is right for the company. One of the demands made most regularly by large shareholders in recent times has been that companies make their balance sheets sweat, gearing up to enhance returns. We all know how that ended.

These concerns are not to say there isn't much in Sir David's report that is commendable. His insistence on a board-level risk committee, for example, is crucial. In hindsight, it is remarkable that our banks have audit committees to scrutinise what has gone before, but no equivalent to examine the risks lying ahead.

Similarly, the slimming down of boards (and the beefing up of the calibre of those on them) should mean an autocratic chief executive with a big ego can no longer ride roughshod over colleagues.

And yet, one cannot help feeling that this response to such a seismic shock to the financial system is too timid – a worthy first stab at change from within that somehow falls short of making the big calls.

Finally, one other thought. This report addresses the banking sector, where last year's crisis was played out. Yet there is little in it that one wouldn't wish to see applied to the corporate governance standards of every large company. Why not implement these recommendations across the private sector, rather than focusing only on banking?

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