Yes there can, by the reimposition of the correlation between credentials, rewards and risks.
It requires a decapitation of the upper levels of banks where the individuals are themselves rooted in this rogue culture. This is not a uniquely banking problem, but we have in banking a crass manifestation of the degree to which power has become concentrated in the hands of an uncredentialised, self-certifying and mutually endorsing club.
Banking has great rewards for the individual but the risks go against the P&L of the employer and its shareholders. Banking has become a business with upside risk only and no entry ticket – bound to attract alchemists and moonshine salesmen.
The absence of a competent professional body to set and maintain standards has opened the door for almost anyone to “practice” in a bank. The Institute of Bankers exams have fallen woefully behind the scope and detail of the banking business as it is now. Formal internal training has now largely been cut off. Instead the upper levels have a preponderance of ‘parachutists’.
The trend towards value-destroying, content-free bankers began with the appointment of Martin Taylor from Courtaulds as CEO of Barclays. This same Martin Taylor was a prominent contributor to the Vickers report.
The trend accelerated in the late 1990s in three ways:
- Banking became ‘High street’ allowing Fast-Moving Consumer Goods executives like Andy Hornby of Asda to directly transition to CEO of HBOS;
- The internet fostered a culture whereby legacy knowledge was an impediment to involvement in the new world: the eVolveBank disaster hatched between Lloyds TSB and PwC was in no small measure attributable to their excluding from the project anyone who had worked in international banking before;
- The trend to emphasize transferable soft skills in the boardroom (communication, team-building…) over hard skills related to a specific industry vertical. This has permitted the emergence of a group of ‘super execs’ who parachute from industry to industry, their pay-and-rations certified as ‘on-market’ by their peers and auditors (E&Y, Deloittes, etc) on one another’s Remuneration Committees, using as their reference work the auditors’ own Shareholder Value methodologies.
The alchemists landed, expanded, and rewrote the rulebooks to suit themselves and let more of their own kind in. What is to be done? It isn’t that difficult.
Firstly, to eradicate the source of the current orthodoxy on what is the proper relationship between credentials, rewards and risks (and not just in banking), the removal of the Global Audit Firms from all activities except auditing.
Post-Enron, these firms have rebuilt their consulting arms as ‘Global Risk Management’ practices. Their ‘Best Practice’ methodologies legitimise the practices of the Super-Executive class, and create a false, but lucrative, market for their own services.
Secondly, regarding rewards, controls are required on Shareholder Value methodologies. A Shareholder Value Creation template can just as easily be used to identify Shareholder Value Destruction in the form of excess remuneration, and such excess:
- should not be tax-deductible for the company;
- should attract a tax rate in the hands of the recipient of 200%…
- applied against the emoluments of the highest earners first (a CEO and highest-paid staff member might then find their entire earnings taxed at 200%).
This would have a shock effect of giving management a major incentive to ensure they are not paid out of historical reserves, future projections or questionable mark-to-market values, but out of current cash profits.
Thirdly, regarding credentials, the eradication of the culture of the Super Exec on top, and call-centre below. The investment in a Super-Exec costing £5mil per annum is an alternative choice to investing £5,000 each in 1,000 employees: a wrong choice, connected with dumbing down, ‘High Street’, call centres, offshoring etc ~ i.e. with cost-cutting at the lower levels and with filling senior positions from outside. Building back the skills from the bottom up requires a professional body and a training programme and certificates. Grandfathering of those who have demonstrated competence in role would not be extended to senior-level ‘parachutists’.
Lastly, regarding risks, the industry needs to see some senior careers ended. This would be widely supported within the industry at the lower and medium levels. If an executive resigns for involvement in manipulating LIBOR, it’s no pay-off, and no future in the industry. Their salary and bonuses up to the point of resignation can be regarded as over-remuneration considering the damage they did to the industry, and to wider society.
Executives at a bank recently fined over USD300 million on a capital base of USD37 billion have lost more than their lifetime value to their employer, and they should go. That means those directly involved, those that knew and did nothing, and those in the line of management up to and including the CEO and Chairman. Instead the CEO pays over USD300 million of money belonging to his shareholders and carries on with full salary. The CEO in question is a Super-Exec parachutist, who came directly from his previous occupation as a partner of McKinsey’s.
The alternative treatment of banishment is what is needed to shock the industry into a change of culture, and reimpose a correlation between credentials, rewards and risks.
Bob Lyddon, Managing Director, IBOS Association