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Boardroom Conversations: Converse with an Acknowledged Expert and take the Benefit of Their Experience Back to Your Board
1 October 2012
“A Boardroom Conversation with Sir David Walker”
Facilitated by Alison Gill director of Bvalco Ltd
ABOUT SIR DAVID WALKER: Sir David walker is former Chairman, now Senior Adviser to Morgan Stanley International. He joined the British Treasury in 1961 and held several key posts at the Bank of England over a fifteen year period, as well as holding numerous other prestigious positions. In February 2009, Sir David was asked by the Prime Minister to review corporate governance in UK banks and financial institutions in light of the experience of critical loss in the financial system, the Walker Report. Bvalco was borne in response to this report, to which Bvalco director Alison Gill contributed an Annex focussing on behaviour. Sir David joined us on 1 October to share his vision of the corporate governance world of the future.
Bvalco hosted the conversation with Sir David Walker as part of the ‘Boardroom Conversations’ series of targeted discussions with experienced Chairmen enabling them to share their insights and learning experiences of boards and corporate governance.
The following paper is a summary of the conversation including questions from the floor.
1. DAVID, I THINK IT’S FAIR TO SAY THAT BEING A BOARD DIRECTOR IN FINANCIAL SERVICES RIGHT NOW IS NOT EASY. I WAS WITH ANOTHER FTSE 100 BANK CHAIR RECENTLY AND HE, WITH A CERTAIN AMOUNT OF STOICISM, IDENTIFIED THAT THE PURPOSE UNITING HIS BOARD AT THE MOMENT WAS THE DESIRE TO SEE BANKS AND BANKERS RESPECTED AGAIN. HE CONCLUDED THAT ‘TOLERATED’ WOULD BE A POSITIVE START, ‘RESPECTED’ – A REASONABLE GOAL TO AIM FOR AND ‘LOVED’ A DREAM THAT GAVE HIM AND HIS BOARD AMBITION. AS SOMEONE WHO HAS ALWAYS BEEN PREPARED TO BE CANDID ABOUT THE SHORTCOMINGS OF BOARDS AND THE BANKING INDUSTRY, I WONDER WHAT YOUR VIEWS ARE ABOUT WHAT BOARDS MUST DO TO RECREATE RESPECT.
There was a ten year phase when the Financial Services industry was on the crest of a rising wave, which was an agreeable experience for everyone: politicians, oppositions, boards, banks, shareholders, etc. The decline in credit standards is lamentable. Take the example of the Acromas merger of AA and Saga in 2007 to 2008. This wanted huge financing, £750 million. The bank gave this amount of money out without going to the data room before it. I would identify this as a low point. It was shocking. Standards fell because people thought financial services could achieve levitations. If you drive for market share and price without factoring in risk you can easily achieve market share – look at the retail sector, housing etc…but the catastrophe of doing this is huge.
All areas of the industry, including regulators, were part of the plot. Life companies are all in a very similar position of needing to achieve a change in culture. There was a proposition that BBA and ABI would merge. Then, the proposition was rejected by banks who didn’t want to be part of mis-selling during the ‘blacking’ of the life services’ reputation. Now, the tables have turned and the banks are the ones on the receiving end of this negative reputation.
Now, financial services organisations need to focus on their culture and their systems of remuneration. Mistrust and the perception of inadequate standards have led to a crisis of confidence – and it is severe. However, cultures can be changed and that is what the industry must focus on now. We must not recoil from the shock waves, rather embrace the currently reality and deliver the cultural change.
2. YOU EMPHASISE THE NEED FOR BOARDS TO FOCUS NOW ON COMPENSATION AND CULTURE. THE TWO ARE OF COURSE INEXTRICABLY LINKED BUT LET’S TAKE THEM ONE AT A TIME. WHY IN YOUR MIND HAS A FOCUS ON CULTURE BECOME SO PREVALENT NOW?
The crisis of 2007, 8 and 9 led to a problem about the survival of banks – staying out of tax payers’ support and in some cases just survival per se. So in 2009 we were focussed on market, credit and liquidity risk. Now that these problems are being comprehensively addressed the issues of reputation, conduct and culture have emerged. I did not think about these issues in 2009, they were frankly overshadowed by the more pressing issues of financial stability.
3. I’VE HEARD YOU SAY THAT IN THE PAST CULTURE HASN’T BEEN A FOCUS OF THE BOARD. HOW DO YOU ENVISAGE THE ROLE OF THE BOARD NEEDS TO CHANGE TO ADDRESS THESE EMERGING ISSUES?
In financial services, as in other service sectors, it is not difficult to devise the principles and the values by which we should do business, rather the problem is how to implement and embed them from the top to the bottom of the organisation. An organisation doesn’t have a culture until those values are embedded from the top to the bottom - it’s a matter not just for the boardroom but for the whole organisation.
There are other industries where there are different kinds of standards, for example mining or oil where physical safety is paramount, but in financial services, finance is the concern: remuneration is very important – not just how much you pay people but the way you pay them. Are people incentivised by bonuses? At the retail end of the sector, boards have to drive remuneration to create a broadly based system which does not give employees leverage to do badly by the customer. You can do other socially useful things. If you put lots of weight of the decisions about bonuses on revenue, you’ll get a lot of revenue. People will focus on the targets you set and what you reward them for.
4. RESEARCH INTO MOTIVATION HIGHLIGHTS THAT EXTRINSIC AND CONTINGENT REWARDS SUCH AS BONUSES AND VARIABLE PAY ARE DAMAGING TO BUSINESS PERFORMANCE. THEY DULL THINKING AND CREATIVITY. YET THIS RESEARCH SEEMS TO BE LARGELY IGNORED PARTICULARLY IN FINANCIAL SERVICES. IS THERE ENOUGH RADICAL THINKING? WHAT WILL IT TAKE FOR BOARDS TO TAKE HEED AND EXPERIMENT WITH MORE INTRINSICALLY MOTIVATING PAY STRUCTURES?
No – it’s not right. The problem is that bonuses are short term reward focussed. There are all sorts of reasons for this. You get branch staff focussing on the short term and this has to change. It is difficult to be radical enough, especially to change bonus structures at the lower end, but there are things you can do like giving bonuses but not paying them all at once. It is difficult not to have some form of bonus system, but the higher up you get, you need to relate pay not to individual performance but to company performance, and utilise more variable long-term incentive structures. I think there should be the ability to have mal-uses as well as bonuses. If you can reward good performance why shouldn’t you be symmetric on negative performance? For example, with the Libor crisis, something had gone wrong with the whole entity which you could not tell at the time. You need to be able to claw back on this.
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Howard Davies is Chair of the British Government's Airport Policy Review and of Phoenix insurance group. He also is a Professor of Practice at the French School of Political Science in Paris (Sciences Po).
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