management structure and control framework throughout the business which ought to identify aberrant behaviour or at least prevent it going unchecked for any length of time.
...[R]egulators must focus attention on the top level of management in the firm. For the major firms...our supervisors [must] have direct access to the board and...present to the board their own unvarnished view of the risks the firm is running and of how good the control systems are by comparison with the best of breed in their sector....
...Boards should take more interest in the nature of the incentive structure within their organisation. I am talking aboutensuring that the incentives with the firm, and pay is a very powerful one, are aligned with its risk appetite...
...[There must be] engagement on the part of the share-holders...if those shareholders are not prepared to vote and show little interest in business strategy, then that accountability is somewhat notional and unlikely to be effective...Regulators cannot hope to substitute for concerned and challenging shareholders, though in some senses they may complement them.
Looking at these points of governance in the context of what has arisen over the past several years in the Irish financial sector can highlight where our system may have failed.
On this subject it is worth differentiating between the roles and responsibilities of the executive and nonexecutive directors. The executive directors who are on the boards of Irish banks are given the mandate to manage the performance of their bank, including the protection of the bankâs balance sheet. These directors are paid to ensure that the strategy of the bank is pursued in a positive way that will yield returns to the shareholders in line with market expectations. This group is ultimately responsible for the bankâs survival. The non-executive directors, on the other hand, provide a strong governance framework that ensures that shareholdersâ interests are not put at risk. Failure by either of these groups with regard to their responsibilities requires an overhaul of the whole board. Unfortunately, the price of putting the bankâs reputation ahead of oneâs personal reputation is often deemed to be too high. Those directors who believe they have done theirbest under the circumstances, and are unlikely to feel they have been paid enough fees in their career to warrant personal reputational damage, will act accordingly.
It is highly likely that at the beginning of the downturn the opinions of many non-executive directors in the banks differed from those of the executive directors who provided the financial forecasts. Discussions may well have taken place on the value of property, the loan-to-value ratios and ultimately the size of the haircut NAMA was going to demand. Experience, knowledge and judgment, all qualities meant to be demonstrated by the executives, were not in evidence. The executives, largely in a state of denial, unintentionally misled the boards with optimistic forecasts. This optimism of the executive directors did not increase the size of the write-offs and provisions, it merely deferred the judgment day. It may, however, have misled some shareholders who might otherwise have sold their shares. Whether or not this denial was a symptom of the culture of silent dissent, one has to believe that many of the directors believed differently but kept quiet because of the sensitivity of the share price and the market to valuations and provisions. Such denial led to announcements that the debts were less than they actually were, which must have contributed to the public shock when finally the extent of the recapitalisation of the banks emerged.
Common sense is required in these difficult times and it could be said that those who oversaw the destruction of the balance sheets of the banks are definitely not those whoshould be entrusted with their recovery. Appropriate sanctions have not been exercised in the banking
...[R]egulators must focus attention on the top level of management in the firm. For the major firms...our supervisors [must] have direct access to the board and...present to the board their own unvarnished view of the risks the firm is running and of how good the control systems are by comparison with the best of breed in their sector....
...Boards should take more interest in the nature of the incentive structure within their organisation. I am talking aboutensuring that the incentives with the firm, and pay is a very powerful one, are aligned with its risk appetite...
...[There must be] engagement on the part of the share-holders...if those shareholders are not prepared to vote and show little interest in business strategy, then that accountability is somewhat notional and unlikely to be effective...Regulators cannot hope to substitute for concerned and challenging shareholders, though in some senses they may complement them.
Looking at these points of governance in the context of what has arisen over the past several years in the Irish financial sector can highlight where our system may have failed.
On this subject it is worth differentiating between the roles and responsibilities of the executive and nonexecutive directors. The executive directors who are on the boards of Irish banks are given the mandate to manage the performance of their bank, including the protection of the bankâs balance sheet. These directors are paid to ensure that the strategy of the bank is pursued in a positive way that will yield returns to the shareholders in line with market expectations. This group is ultimately responsible for the bankâs survival. The non-executive directors, on the other hand, provide a strong governance framework that ensures that shareholdersâ interests are not put at risk. Failure by either of these groups with regard to their responsibilities requires an overhaul of the whole board. Unfortunately, the price of putting the bankâs reputation ahead of oneâs personal reputation is often deemed to be too high. Those directors who believe they have done theirbest under the circumstances, and are unlikely to feel they have been paid enough fees in their career to warrant personal reputational damage, will act accordingly.
It is highly likely that at the beginning of the downturn the opinions of many non-executive directors in the banks differed from those of the executive directors who provided the financial forecasts. Discussions may well have taken place on the value of property, the loan-to-value ratios and ultimately the size of the haircut NAMA was going to demand. Experience, knowledge and judgment, all qualities meant to be demonstrated by the executives, were not in evidence. The executives, largely in a state of denial, unintentionally misled the boards with optimistic forecasts. This optimism of the executive directors did not increase the size of the write-offs and provisions, it merely deferred the judgment day. It may, however, have misled some shareholders who might otherwise have sold their shares. Whether or not this denial was a symptom of the culture of silent dissent, one has to believe that many of the directors believed differently but kept quiet because of the sensitivity of the share price and the market to valuations and provisions. Such denial led to announcements that the debts were less than they actually were, which must have contributed to the public shock when finally the extent of the recapitalisation of the banks emerged.
Common sense is required in these difficult times and it could be said that those who oversaw the destruction of the balance sheets of the banks are definitely not those whoshould be entrusted with their recovery. Appropriate sanctions have not been exercised in the banking
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