Strategy & Operations » Governance » Cultural change in the City

Corporate governance standards are under the regulatory spotlight with the Financial Conduct Authority (FCA) calling on independent voices to drive cultural change in the City to boost consumer protections.

Last month FCA chief executive Andrew Bailey told a London conference that consumers must be better served by financial institutions. There needs to be people involved at a senior level, he said, “who can ask the difficult or challenging question”.

The watchdog is looking to independent non executive directors (iNeds) to become more prominent in the boardroom, on hand to represent the views of all stakeholders and raise the red flag when necessary.

It is a significant change in how the FCA perceives the allocated roles and responsibilities of individual board members, with the onus on iNeds to be more visible so that independent voices are heard at a senior level.

Asset managers

Already asset managers have been told that from September next year they must have in post at least two iNeds. The move follows a lengthy investigation into the sector, which concluded that rules to “prevent undue costs being charged” were simply not working.

For asset managers, finding an appropriate candidate will get tougher as the deadline moves closer and the talent pool shrinks.

To ensure independence, candidates cannot have been paid by the fund manager for five years before their appointment, nor have had any business relationship with the fund within the previous three years. Existing non-executives who don’t meet the criteria can stay, but they won’t count towards the quota of independents.

This increased focus on the iNed is unlikely to be confined to asset management circles for long.  There is a growing sentiment that greater independence is desperately needed across all financial sectors to prevent further embarrassing episodes such as that enveloping Patisserie Valerie right now.

Let’s not forget the questions surrounding Patisserie Valerie are not dissimilar to those raised when construction giant Carillion collapsed earlier this year.

Independent thinking

Grant Thornton’s audit of the crisis stricken café chain is under investigation from the Financial Reporting Council (FRC) after it emerged the company has a £30m black hole in its accounts.

Former finance director Chris Marsh, who was suspended and subsequently arrested and released on bail, is also under investigation by the FRC.
Meanwhile, company chairman Luke Johnson has been forced to pump £20m into the business, £15m in new shares have been issued (£10m to repay Johnson), and chief executive Paul May has resigned.

Johnson professes not to have been aware of the near £10m debt lurking in “secret” bank overdrafts that has left the company on the brink of collapse. Back in May he had been talking about a profit hike to £11.1m for 2017/18.

It will be left to the FRC to decide whether Grant Thornton acted appropriately, but what is clear is that there was a complete lack of oversight, control and communication at the most senior level within Patisserie Valerie.

There is no excuse for the events to have spiralled so far out of control.
We live in an age when information flow, and the ability to communicate, are both ubiquitous and profoundly simple.

Claiming ignorance over financial matters is unacceptable. What kind of culture was fostered at board level if no one felt comfortable speaking up?

Professional standards

The FCA is putting the onus on the iNed to speak up before things go awry and for this to be embedded into the company culture.

Rather than being seen as another regulatory burden, an effective iNed should be welcomed by the board as someone who can provide an extra layer of corporate oversight and, used properly, drive up governance standards. They also reduce risks facing the business that stem from problems going unchallenged at a senior level.

To ensure that you have the right person in place, someone who has the confidence of their boardroom peers, as well as the skills and experience to act when necessary, a board effectiveness review would surely be a worthwhile investment.

This could reveal gaps in the corporate armoury, showing you where the iNed input could be most effectively utilised and to enhance corporate governance.

It could well be advantageous to have an appropriate iNed, or external facilitator, lead a parallel review so that governance structures are also examined from a stakeholder perspective.

With the added focus on the iNed role, the time has come for financial services to recognise and invest in the professional standards needed to support the post holder.

Only by improving the standards for all iNeds can boardroom executives be confident that they are fulfilling regulatory obligations and acting in the interests of all stakeholders.

Make no mistake, consumer protections are the direction of travel for the FCA, who govern most of the financial services marketplace. It is likely that the iNed regime will be rolled out to most regulated firms within the next five years. Now is the time to act. Prevention is better than cure and the impact on non-regulated sectors could subsequently become profound.