A tightening of U.K. regulations as a result of the credit
crunch is set to make the job of board members at banks operating
in London's financial center increasingly onerous.
Extra scrutiny of these roles, and the resulting higher risk of
failure, means it will be harder to find suitable people to fill
them, say London-based consultants and executive search firms.
As a result, banks and other financial firms will need to cast
their nets wider for executives and pay higher salaries for
independent directors and some senior managers, they say.
"There has been a dramatic toughening of (U.K.) supervisors'
approach to a review of governance and controls," said John
Tattersall, chairman of the financial services regulatory practice
at PricewaterhouseCoopers LLP.
"We're seeing...greater scrutiny of the quality of governance,
not only the main board but also executive committees and risk
committees, to see they are working properly," said Tattersall.
The increased pressure on company board members comes as
regulators ratchet up financial rules in a bid to make sure banks
have enough liquid assets to weather future financial storms.
The Bank for International Settlements, which draws up global
banking standards, and the U.K.'s Financial Services Authority,
which regulates Europe's largest financial center, have both
signaled board members need to bear greater responsibility in this
area.
The FSA's rules already stated that a bank's senior management
is responsible for its business models, but as part of an internal
overhaul of its supervision there is now a much stronger focus on
making sure executives can show they understand those models.
This follows the regulator's internal report into its handling
of the collapse of Northern Rock PLC and a report from the U.K.
parliament's treasury committee last year, which both found senior
management at the lender hadn't understood the risks in its
business model.
The FSA also plans to toughen its scrutiny of new hires to
positions of "significant influence" at banks. The regulator has
the power to veto company appointments if it doesn't feel they are
suitable, as well as to remove existing executives.
"It's about having appropriate regulations and it's fair to say
there has been a reemphasis on the responsibilities of senior
management and board members," said FSA spokeswoman Heidi
Ashley.
On top of these regulations, board members in banks that have
taken capital injections from the U.K. government in return for
shareholdings will face scrutiny by government officials. The three
banks currently in this position are Royal Bank of Scotland Group
PLC (RBS), Lloyds TSB Group PLC (LYG) and HBOS PLC (HBOOY).
"There's going to be very real pressure for senior executives to
have demonstrated they have really got inside the gut of
stress-testing and risk management in future," said Jonathan
McMahon, a director at Promontory Financial Group, a financial
services consulting company.
"They will want to find out from non-executive directors that
they've looked at the work of executives and have asked some
challenging questions about whether they've used rigorous-enough
assumptions," said McMahon.
These heightened requirements mean banks will increasingly need
to staff their boards with people who have financial expertise. At
present, 45% of non-executive directors on the boards of the U.K.'s
top 10 listed financial institutions have no financial experience,
according to research by Promontory.
"Most boards of financial services companies will have to look
at themselves extremely critically and there have been a lot of
voluntary and involuntary refreshments of boards," said Jonathan
Baines, chairman of executive search firm Whitehead Mann LLP.
Search companies in London are currently tasked with finding new
board members for a range of banks, including Royal Bank of
Scotland and Lloyds TSB.
The pool of people who can fill these roles is already small and
set to shrink further as a result of the new regulatory
environment, say headhunters.
"There's a tighter pool with a lot more specificity, which will
mean boards and their headhunters are going to have to be more
creative in determining where they find these people," said Peter
Breen, a partner in the board practice at search firm Heidrick and
Struggles.
Breen says search firms will increasingly look to persuade
recently retired senior bankers back into roles as board members.
They will also look at senior figures in previously overlooked
back-office roles for board positions, he says.
Salaries have already been rising for non-executive directors at
U.K. companies over the past five years as tougher rules governing
their responsibilities have been introduced. The tighter financial
rules should push them further, say headhunters.
"I think there is inevitably going to be upward pressure on
non-executive director compensation as a consequence of the lack of
supply and hesitation of putting yourself in the firing line for
something that is reputationally quite high-risk," said Baines.
-By Adam Bradbery, Dow Jones Newswires; 44 20 7842 9305;
adam.bradbery@dowjones.com
Click here to go to Dow Jones NewsPlus, a web front
page of today's most important business and market news, analysis
and commentary. You can use this link on the day this article is
published and the following day.
Hbos (LSE:HBOS)
Historical Stock Chart
From Mar 2024 to Apr 2024
Hbos (LSE:HBOS)
Historical Stock Chart
From Apr 2023 to Apr 2024
