Banking Reform: Ring-Fence Needs Electrification Says Commission

The Parliamentary Commission on Banking Standards (“the Commission”) published its first report on 21 December 2012. I would like to thank Michael Jacobs of Herbert Smith for bringing it to my attention via his Linkedin comment. Moreover, I would also like to thank Professor Bainbridge for encouraging me to delve deeper into the idea that the Libor problem is best analysed through the lens of enterprise liability versus agents’ civil and criminal liability. Quite rightly, the Professor prefers the latter deterrent. Why should shareholders and other innocents pay for the inadequacies of governance in the corporate sphere? Surely, instead, the bankers and traders who fixed and manipulated Libor should be criminally punished.

Although regulators were aware of Libor being manipulated as early as 2007 ( for example in 2008, Mervyn King himself told Parliament that Libor “is in many ways the rate at which banks do not lend to each other, … it is not a rate at which anyone is actually borrowing”), no action was taken to punish wrongdoing until this year. And when something was finally done, rather than the real culprits being held accountable, massive fines were imposed. Inevitably, shareholders were punished and equity was destroyed. Not a great solution by any stretch of the imagination.

Libor Scandal: Are Fines Alone Enough?

Corruption in the financial sphere is as old as capitalism itself. Historically, the British East India Company is credited with shaping the modern corporation: it was a wholly unethical business structure which, in its quest for profit, amputated the hands of Bengali muslin weavers, made the Chinese peasantry addicted to opium, facilitated slavery and, in the interests of its ownership and directors, imposed astronomical taxes on the people living under its writ. UBS does not have a lot to do with the Company in that way. But through its rigging of global financial benchmarks such as Libor and Euribor, the bank’s corruption matches the historic treachery and corrupt practices adopted by the most venal of capitalists – such as Robert Clive and his friends.

Adam Smith, Karl Marx and Edmund Burke, albeit for their different reasons, will have the last laugh on this. But this post is not about them. As indicated in the title, it is about the fines imposed on UBS for eviscerating any residual trust which common people had left in the world financial system. Is our trust in the banks worth nothing at all?

Describing the abuse as “widespread”, the Financial Services Authority (FSA) said that “UBS’s breaches of the FSA’s requirements encompassed a number of issues, involved a significant number of employees and occurred over a period of years in a number of countries.” The FSA went on to explain that “between 1 January 2005 to 31 December 2010 the misconduct included”: 

Rock Center: Ten Myths of Say on Pay

This post summarises the findings of an interesting paper called Ten Myths of Say on Pay (Larker et al) published by the Rock Center for Corporate Governance. The executive remuneration debate is hard to balance and at times even harder to conceptualise. Other academics such as Professor Cheffins and Randall Thomas argue that sudden increases in pay can be controlled through say on pay but in the long run executive pay would continue to increase. It seems that there is truth in both approaches and the Rock Centre’s paper is worth reading to get insight on the remuneration debate in a US-UK perspective. In any event, the “ten myths” are:

(1) There is only one approach to say on pay: it is argued that given the views that are out there, no one can agree on how to solve the problems of compensation.

(2) All shareholders want the right to vote on executive compensation: it is said thatPrior to Dodd-Frank, shareholder support for proxy proposals requiring say on pay routinely failed to garner majority support. Among the 38 companies where shareholders were asked to vote whether they wanted the right to vote on executive compensation in 2007, only two received majority approval.

Directors’ remuneration: proposed amendment regulations

Lucian Bebchuck and Jesse Fried’s seminal study Pay without Performance: The Unfulfilled Promise of Executive Compensation and similar critiques have killed stone-cold the argument that arm’s-length contracting works: the argument has not been resurrected and it is widely accepted that in the corporate sector pay remains decoupled from performance. For Bebchuck and Fried – both professors of corporate law at Harvard University – management can easily manipulate directors and, rather than creating value for the company, everyone is more interested in personal gain at the cost of the company.

From this perspective “market forces are neither sufficiently finely tuned nor sufficiently powerful to compel” the conventional view of corporate governance which assumes that executives will be rewarded for performance and not failure. It is therefore not surprising that in order to win voters’ support, governments everywhere in Europe are making promises to reform the dynamics of the pay and power equation.

The Secretary of State for Business Innovation and Skills (Mr Vince Cable, “the business secretary”) is keen to be seen as a promoter change in the business world and is hence proposing reform which strengthens shareholder democracy and promote the public interest.

Shareholder Democracy, Corporate Governance and Future Reform

Writing on the corporate governance blog earlier this month, Bob Tricker observed that “serious”  interest in corporate governance is a recent phenomenon which only came to the fore following Sir Alan Cadbury’s 1992 Report. The dichotomy is that despite the existence of regulatory bodies such as the US Securities and Exchange Commission since the mid-1930s, it was not until problems such as the Enron scandal, the sub-prime crisis and more recent Libor scandal – that “corporate governance” became a buzzword in the business sphere, company law and regulation.

For Tricker, corporate governance  – to which constructs such as marketing, production, finance, operations research, and management information systems have only recently ceded ground – is quickly becoming the focus of a company’s organisational chart. Themes such as the board of directors, executive directors’ remuneration and their relationship with management are all now very much at the apex of the debate about issues such as shareholder democracy, accountability and transparency in the corporate sphere. It is often said that good corporate governance is about promises kept: Macey, Corporate Governance: Promises Kept, Promises Broken (2010). Conversely, bad corporate governance is considered “promise breaking behaviour”.