Andreas Whittam Smith: The flaw at the top that's causing businesses to fail

Whom should we have blamed for the collapse of Northern Rock? Or whom should we criticise for the near collapse of Bradford & Bingley the other day, leaving it to be rescued by its largest shareholders? Fingers are pointed at the regulators, the Financial Services Authority (FSA) and the Bank of England. And this is fair enough so far as it goes. The FSA had ample warnings that Northern Rock's way of doing business, for instance, was coming apart at the seams.

Yet first of all, I believe, we should turn our attention to the board of directors. I have been using Alex Brummer's account of what he calls "the scandal of Northern Rock" published last week by Random House and entitled The Crunch as a means of seeing more deeply into the workings of the bank's senior management. For what happened at Northern Rock can stand for many other companies that have gone under in spite of the presence on the board of respectable, even distinguished directors.

The Northern Rock executives were led by Adam Applegarth. He joined the company straight from Durham University as a graduate trainee. He climbed up through the ranks and became chief executive at 38. He had no banking qualifications. Instead he was, writes Mr Brummer in his book, "a driven marketing man who dreamed of overtaking the high street banks".

As a matter of fact, I don't see the absence of banking qualifications as a problem, provided other senior managers had the necessary banking skills. An intelligent person cannot be ignorant of banking if he or she has spent 15 years working for something called a bank before becoming its chief executive. Moreover, marketing has its own valuable expertise, a deep knowledge of the needs and desires of the bank's customers.

It is when Mr Brummer begins to add more flesh to the bones that we begin to see the problem. "He [Applegarth] was an old-fashioned, hard-line martinet of a manager who was difficult to challenge ... He surrounded himself with yes men who worked their way up the company and were dependent on him."

This is a familiar type. I believe that their imperviousness to criticism is a serious flaw. When the storm broke, Mr Applegarth's deputy went home ill within a few days. And the executive who had been responsible for the bank's unwise borrowings declared himself unfit. Mr Applegarth was left on his own, dangerously isolated. Which raises the question: "Quis custodiet ipsos custodes?" Who watches the watchmen?

The answer has to be the chairman and non-executive directors. They have been blamed for allowing the bank to overtrade. That is too broad. Their main fault was not controlling Mr Applegarth, described as "powerful enough to ride roughshod over the bank's board of directors, which lacked the confidence or ability to call a halt to the imprudent expansion".

Mr Applegarth may have lacked banking skills, but his chairman, the Hon Matt Ridley, albeit distinguished, had no business experience at all. He is a brilliant science writer and former Economist journalist. He is also the scion of a old north-eastern aristocratic family. His appointment preserved a link with Northern Rock's past when it was a building society desirous of demonstrating that it had the backing of the local gentry.

By the early 21st century, however, Mr Ridley was an eccentric choice for a board of directors to make. There is one more curiosity to note. Mr Ridley was paid £315,000 a year, well above the going rate. You often find high pay in companies that are going wrong; it is designed to keep everybody's mouths shut.

If all else failed there was always Sir Derek Wanless, the non-executive director who headed Northern Rock's audit and risk committees, a position equivalent to sitting next to the driver, seeing the road ahead and able to note every gear change, every depression of the brake pedal and the speed round corners.

Who wouldn't have chosen Sir Derek for this task, the local grammar school boy who went up to King's College Cambridge and obtained a first in mathematics. He became a professional banker and rose to be the chief executive of NatWest before it was taken over. He was everything Mr Applegarth wasn't. If anybody could speak with authority to the chief executive, direct the chairman's attention to faults in the business model and honk the horn, it was Sir Derek.

I have no idea whether Sir Derek did any of these things. I do know that Northern Rock drove straight into a wall without a touch on the brakes. The non-executive directors seem to have been too polite to say anything to the driver. I hold them chiefly responsible for the collapse of Northern Rock.

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