David Prosser: The long struggle to make non-executive directors really earn their wages
It seems only fitting that the Financial Services Authority has chosen this week, when HSBC was fined a record sum forripping off elderly savers, to resurrect plans to give non-executive directors greater responsibility for looking out for customers at banks and other financial institutions. If executives are failing in that duty, it is the job of non-executives to hold them to account.
One might consider that a relatively uncontroversial statement. If so, one might also wonder why the FSA has left it three years to set out its expectations of non-executives since the last time it tried (but failed) to introduce a new code of conduct.
The answer is that there is a delicate balance to strike. Everyone agrees that non-executives should work for their generous fees, and that it is their job to provide independent scrutiny of executive directors. But make their duties too arduous or the penalties for failing in them too severe and no one will want to serve as a non-executive, or at least no one of sufficient calibre.
The FSA's first stab at codifying the non-executive's duties three years ago did not get that balance quite right. Produced in the aftermath of the creditcrisis – who could forget the lack of banking expertise of former pharmaceuticals boss Sir Tom McKillop, chairman of Royal Bank of Scotland – even dispassionate observers suggested the FSA was hoping for so much from non-executives that it wouldn't be able to find any.
Has it done better this time around? Well, the first point to make is that the latest FSA guidance is no more than a consultation. Nor do its demands seem unreasonable: that non-executives should be able to show they bring balance and expertise to the board, for example, and that they should satisfy themselves that systems are in place to manage risk and ensure that customers are being treated fairly.
What isn't clear yet is the sort of sanctions non-executives might face in the event of a failure. The implication of the FSA setting out their duties is that non-executives should expect the regulator to go after them if they do not fulfill them. What that might mean in practice, though, isn't spelled out.
Certainly, there are already rumblings of discontent in the non-executive community – partly about the way in which this guidance has been sprung upon people, but also about some of thedetail. It sets out seven distinct areas of retail banking where non-executive directors should be challenging practice, for example.
Still, while there is room for negotiation about the final detail of the new rules, there is no getting away from the fact that non-executives have had it too easy for too long. Those who are not prepared to assert their independence should not be taking money for the job.
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