Wield a Twin-Stick to Deter Culture of Profit over Propriety

Last week I argued that regulators need to get proactive if they are to reduce situations similar to that which engulfed Standard Chartered and those that are now threatening other major banks; in practice, something that is much easier said than done. In fairness to the banks, they are faced with huge compliance demands due to thousands of country-specific regulations; in some cases, fulfilling regulations in one jurisdiction can put them in breach of another. On the face of it, it is entirely the bank’s responsibility to ensure these are adhered to, but without the fear of ‘real’ recrimination, what is the motivation of the Board to go the extra mile and ensure this is the case?

Such complex issues require detailed analysis, focus and pressure from the guys at the top. Given director’s remuneration is largely based on share price (either annually, deferred, or a combination thereof) the transient impact of a fine from the regulators on the share price ultimately doesn’t affect them. Alongside the longer-term desire to have regulators sanity check the information they are being fed, what is needed is more of a ‘stick’ to prevent the practice of profit over propriety in the first place. Such a stick would be there to ensure directors take their regulatory obligations seriously, not just to pay them lip-service. Having spoken with many people about what form this ‘magic’ stick should take (from the pub to the board room), I’ve chiselled it into two branches:

• Branch A stipulates that if a regulatory fine is received, the entire board shall immediately surrender the right to any annual or deferred bonus to which they were entitled. This should promote a sense of shared responsibility for their actions.
• Branch B goes one step further and mandates a lifetime ban from working within the UK Financial Services sector if it can be demonstrated that any of the directors had knowledge of unscrupulous behaviours, or were simply turning a blind eye.

One final addition to the use of the magic two-branched stick would be an attaché provided to the bank by the country’s financial regulator. The attaché would be there to act as a passive board member, who wouldn’t contribute to the meetings, but would observe and report back to the regulator on a frequent basis. This should have the added benefit of identifying practices that aren’t necessarily contravening the laws as defined, but are seen to be discouraged. Addressing such problems early on would avoid the cost and reputational damage attached to some of the recent scandals, and help protect the UK’s standing as a global centre of excellence. Ultimately, more stick and less forgiveness is needed to sort these problems out, but it’s also going to require buy-in from the banks themselves which might not be so forthcoming….