OPINION:We have lost sight of what is essential to good governance, writes a former senior executive with Irish Life Permanent. Public trust in our banking system is shattered beyond repair, writes DONAL CASEY
THE UNFOLDING scandals within our banking sector have been a thoroughly dispiriting spectacle. They have done enormous damage to Ireland’s international reputation and trustworthiness. Accountability is vital but the much more important long-term issue is to diagnose the root causes of what is fundamentally a total system failure.
A systems view of this crisis is therefore required. Many individuals have not lived up to their responsibilities but it is the entire financial services governance system that has failed us as a nation. I have more than two decades of experience within that system and have consistently argued that the ever-increasing focus on short-term results was misaligned with long-term value.
The foundation of the financial services sector is trust. It is an extraordinary act of faith to hand over one’s hard-earned money to a financial institution for years at a time, receiving nothing in return other than a paper-based promise. Such trust is built on the belief that the non-executive directors
and senior executives of that institution are there to protect the long-term interests of all the stakeholders. Indeed, this invisible commodity of trust represents the true bricks and mortar of our banks.
The immediate priority is to accept the brutal fact that public trust in our banking system is shattered beyond repair. The time has come to start again. The system needs to be rebuilt from the ground up with new DNA. The existing genetic code has mutated into an utterly dysfunctional system. Some of those entrusted with the stewardship of our financial institutions are living in a parallel universe where right and wrong are no longer distinctive entities.
The same applies to remuneration which remains grossly inflated. A publicly acceptable remuneration cap for all senior executives and non-executive directors is just one step that would start the rebuilding process.
Time is not our friend on this journey. We have a full-blown national emergency on our hands and action rather than talking is needed. There is no shortage of intelligent and insightful commentary on the subject and for my part I would like to offer three insights into the system failure.
Firstly, it is clear that excessive power has been invested in individual and largely autocratic chief executives. The line between the “strong” chief executive and the autocrat is virtually impossible to delineate. The complex architecture of corporate governance is predicated on transparency and a separation of powers. The strategy decisions in today’s complex economy should be the outcomes of intense debate between intelligent and experienced people. I don’t believe this is the way our banks have operated.
Instead, the views of the chief executive have been allowed disproportionately to influence the entire direction of the organisation. No one person should be capable of exercising such power in a complex enterprise that impacts on so many lives. Absolute power is never healthy and inevitably leads to negative outcomes. It is easy to be critical of senior staff, but opposing an autocratic chief executive is an extraordinarily difficult proposition. The unspoken pressure to conform is intense and the consequences of opposition will be career limiting or even career ending.
Over time, the chief executive’s decisions increasingly pass unchallenged; worse still, they become strengthened by this false consensus. These internal power dynamics increase the responsibility on non-executive directors to express and debate the contrary view. It is a responsibility they have failed to live up to.
Secondly, the non-executive director club has become too cosy. Non-executives are drawn from a shallow gene pool and public perceptions of a golden circle are well founded. The key success factor for a non-executive has been to retain one’s club membership and so remain available for other lucrative appointments. Tenure for a difficult and argumentative non-executive is short. Few of the non-executives appear to have had the emotional resilience to stand outside the crowd and challenge the consensus view that took hold in Celtic Tiger banking. None of the 50 or so non-executive directors in our main banks succeeded in reining in the reckless lending at the top of our property bubble.
The film Twelve Angry Men, made in 1957, should be mandatory viewing for our new breed of non-executive directors. It may have been made in black and white but it highlights in Technicolor the power of the lone voice, who relentlessly questions the evidence presented.
Thirdly, it is clear that the non-executive director community knows very little about what is really going on in their organisations. Ignorance is far too frequently used as a defence. This shouldn’t come as a surprise. How can the multiple directorship model accommodate anything other than a scratching of the surface of the real culture? Worse still, the non-execs are forced to rely on a diet of stage-managed presentations and sanitised written reports.
In a rebuilt governance model, the non-execs need to spend much more time immersed in the real culture of their organisations. A committed non-executive director who had spent just one week in a busy bank branch during the lending spree would surely have questioned its sustainability. Unfortunately, this critically important issue of corporate governance has been over-complicated by the so-called experts. The various codes are dense documents, inaccessible to all but a tiny minority of lawyers, academics and governance practitioners.
We have lost sight of the essence of good governance. It starts with that old-fashioned word – caring. Good governance happens automatically when non-executive directors care about the companies over which they have been given stewardship. They will care enough to disagree with the management and care enough to find out what is really going on in the company.
Being a director is a privilege, an opportunity to give back to a society in which one has succeeded and prospered. It was always meant to be an act of service rather than one of enrichment or entitlement. We need to start over with a return to these ideas. Non-executive director roles should be accepted sparingly and they should never be about the money. The fees should be no more than a third of current levels.
The non-executive directors have clearly failed in their core duty to protect shareholder value. This governance failure has wreaked untold havoc across the wider economy and it has also returned the social blight of mass unemployment to Ireland.
The deep public anger and outrage are fully justified. Pardon the pun, but we are within a stone’s throw of civil disorder. The need for change is that urgent.
There are so many innocent victims of irresponsible lending. I think of the tens of thousands of young couples waking up this morning in commuter-belt negative equity, saddled with 30-year-plus mortgages, without the scope to absorb the inevitable childcare costs, let alone a job loss. Trapping the young, creative energy in a society under a mountain of debt is a long-term disaster.
I think also about the tens of thousands of committed and talented staff within our financial institutions. They have been betrayed by their leaders and face insecure futures just as their slowly accumulated savings have vaporised.
Our new generation of non-executive directors would do well to remember an old Chinese proverb:
Loss of money – nothing lost.
Loss of health – much lost.
Loss of honour – all lost.
* Donal Casey is a former chief executive of corporate business at Irish Life & Permanent. He left the company in 2007. He was one of four candidates for the job of chief executive in 2006 when it was awarded to Denis Casey, whose resignation was announced last week.