An insulated boardroom is an ineffective boardroom
â€œThe level of ignorance seems staggering to the point of incredulity. Not only were you ignorant of what was going on, but you were out of your depth.â€
? Andrew Tyrie, MP, chairman of the Parliamentary Commission on Banking Standards (PCBS)
Last week senior executives of UBS testified before a British parliamentary panel about their part in the Libor-rigging scandal. What they said sent a discouraging signal that they, and others in the banking sector, are still operating as if they are out of touch and tone-deaf in a sound-proof room.
U.S. and British authorities have implicated UBS, Citibank, Deutsche Bank and Royal Bank of Scotland, among others, in fixing the Libor rate over several years. UK lawmakers, responding to a public outcry, set up the Parliamentary Commission on Banking Standards to look into the UK banking sectorâ€™s professional standards and culture; discover lessons to be learned about corporate governance, transparency and conflicts of interest; and clarify the implications for regulation and government policy.
Andrea Orcel, chief executive officer of UBSâ€™s investment bank, told the committee that â€œthe whole executive board and board are very focused at recovering the honor and the standing that the organization had in the past.â€ But thatâ€™s still putting the emphasis and focus on the wrong thing. What these institutions need to be thinking about is rebuilding trust and stability. Using phrases like â€œrecovering the honorâ€ sends the message that they are focused on themselves and not on the effect their actions have on those around them â€“ their clients, the employees and the global financial system.
The global financial system has depended on â€œtrust meâ€ and â€œweâ€™re the experts,â€ and an implication that the whole thing is too complicated for people outside the upper echelons of the financial services industry to understand. But now, with the Libor-rigging scandal, with JPMorganâ€™s London Whale and with the perceived collapse of the banking system and bank bailouts, the financial services industry has broken that trust. It has become clear that a lot of the people in the industry, â€“ indeed, a lot of people sitting around the industryâ€™s board tables ? donâ€™t understand what is happening there, either.
It is time for financial executives to think about the changes they can make to earn back peopleâ€™s trust and demonstrate that they are trustworthy and can bring stability back. A blueprint would look something like this:
Action: Enough talk. There have been plenty of mea culpas, including in last weekâ€™s PCBS hearing, and lots of talk about what the financial services industry should do and what it needs to do. UBSâ€™s Orcel talked about the need to â€œreform the governance, incentive structure and the overall supervisory approach right across the global financial industry.â€ People have lost trust, and no one is going to believe it until they do it. The focus is now on results.
Governance: Bank boards and senior management need more people who understand what the banks are doing, understand what they need to be doing, are unafraid to ask hard questions and are able to take swift, strong action. Barclays has a new chairman and a new chief executive, and they have set out clear ideas about re-examining what happens around the board table. They are saying all the right things, but theyâ€™ll have to demonstrate that they can bring about real change.
Transparency: If banks are taking action and making changes, people need to see it happening. JPMorganâ€™s board voted this week to make public an internal review on the failures that led to the loss of more than $6.2 billion. That is a step in the right direction. Any time there is a question of openness, the default answer has to be â€œyes.â€
Accountability and performance: It is earnings week for some of the biggest financial services firms. Itâ€™s being reported that Barclays and Deutsche Bank will cut investment banker pay up to 20 percent. Pay packages and bonuses need to reflect the down times as well as up. If they do not, people will know it is business as usual. Also, it was reported this week that Goldman Sachs toyed with the idea of delaying UK bonuses to take advantage of a fall in tax rates but decided against it. Even considering such a move rekindles mistrust and the feeling that banks are simply not getting the public mood.
Lastly, the public has a part to play in all this. It was taxpayer money that bailed out a number of these institutions around the world. We cannot be passive and hope that others will sort this out for us. We all need to be speaking up on this issue, asking the questions of the institutions that we have bailed out and holding lawmakers to account to ensure they continue to monitor the financial services industry.
People did trust the financial services sector, but it broke that trust, several times over, and it is going to be a long road back. The industry will need to prove it is willing to be action-oriented and bring about real change, have oversight that counts and be transparent and accountable. Most of all, they have to know that people are watching, and that the attention is not going away.