Banks in the line of fire as Walker Review calls for greater scrutiny of pay structures

Once the government got the smell of ‘bank bashing’ up its nose, it was inevitable that sooner or later it would take steps to divert public attention from media attacks on Whitehall’s economic policies.

The banks are always a soft target for a government in trouble, so the populist and heavily bureaucratic proposals of Sir David Walker’s review of banking corporate governance, commissioned by Gordon Brown, came as no surprise. Ditto, the reaction.

Some sectors of the City equated the review’s proposals to the provisions of the Sarbanes-Oxley legislation in the US, which imposed strict new governance requirements on listed companies in the wake of the Enron scandal and the era of dotcom excess. “What purpose does this actually serve?” said the CEO of one investment bank. “It is fundamentally wrong to whip up this hatred of bankers.”

Pay scrutinised
Walker, former chairman of Morgan Stanley International, said that boards’ remuneration committees must take on far more work and should scrutinise the pay of anyone earning more than the average board-level executive.

He also wants financial groups to set up board-level risk committees, separate from the audit committee, to ensure executives are not allowed to run amok.

Bankers argue that the proposals, if put into effect, would place a millstone around the necks of managers, who should be managing risk on an hour-to-hour basis.

There is also a good deal of frustration over the way the report proposes to place executive pay under the microscope. Walker also wants financial institutions to disclose how many staff earn more than the boardroom average, grouping them into different pay bands. The attention lavished by the media on executive pay at banks that were forced to their knees by the credit crunch, notably the case of Sir Fred Goodwin at Royal Bank of Scotland, brought an outcry of public indignation.

There are two sides to every story and Angela Knight, chief executive of the British Bankers’ Association (BBA) cites the glaring truism of this country’s fixation with pay.

“If Walker hadn’t gone down this route of advocating general disclosures for senior executives’ pay, this report would rapidly have been ignored,” she said.

“That, in turn, would be the most dangerous option of all. If we don’t, as an industry, offer more openness about our pay structures voluntarily, we will get legislation. No one should underestimate just how much this industry will become even more of a political football over the next ten months as we enter one of the toughest political fights for two decades. There are no votes for being nice or even fair to the banks.”

Knight acknowledges that pay is the issue on which the banking industry will now principally be judged. “We must look at ourselves from the perspective of the judges and act accordingly,” she says. Knight also insists the report is not a replay of Sarbanes-Oxley: “It isn’t, as it carefully treads a path that is not new legislation, but which beefs up the existing Combined Code of corporate governance and the boards.”

However, it isn’t helpful for the government to fuel further hostility by suggesting the review should have been more radical over issues of pay and ownership. The Treasury’s financial services secretary, Lord Myners believes banks should be forced to disclose the pay of top-earning staff even if they do not sit on the board.

“I would like to see David Walker step further outside the box of thinking he is currently in and say, ‘What are the most radical solutions?” he said. Myners said there should be a system similar to that of the US where the top five earners, often not on the main board, are identified.

The proposals will be interpreted by some in the financial services industry as provocative and confrontational. But few would deny that decisive action is required to prevent a replay of the crash that brought about the global liquidity crisis.

One is reminded, however, of the sage words of Sir Nicholas Goodison, who shepherded the London Stock Exchange through the Big Bang in 1986.

Goodison later entered the banking world as chairman of TSB which, despite public perception to the contrary, was the dominant partner in the 1995 TSB-Lloyds merger. When Gordon Brown set up the Financial Services Authority (FSA) in 2000, Goodison’s reaction was blunt and candid: “Supervision is preferable to regulation.”

His view is that the financial services industry should be allowed to function with a “light touch” of bureaucracy, but with a close eye on day-to-day operations.

Alas, this does not seem to dovetail with government thinking. At least not this government’s thinking. The Conservative party, which is widely tipped to win the next general election, has vowed to do away with the FSA and return bank supervision to what it regards as the more capable hands of the Bank of England.