Ring-fencing gives banks the chance to appoint a whole new set of directors. The time for diversity is now
The UK’s retail banks face both a challenge and an opportunity. Ring-fencing legislation due to be implemented by 2019 requires banks with more than £25bn in deposits to separate consumer and business finance from higher-risk investment banking. This means entirely new boards need to be created for each separate entity.
Currently, ring-fencing covers Barclays, Santander, Lloyds, RBS, the Co-op and HSBC. Some estimate this means an extra 20 to 30 new non-executive directors (NEDs) will have to be appointed across the separated banks.
Meanwhile, plans published by the Financial Conduct Authority and the Prudential Regulation Authority in February propose that senior NEDs (including the chairman and the heads of the risk, audit, remuneration and nominations committees), will come under the Senior Managers Regime. This is designed to improve the accountability and behaviour of leadership teams, via a new set of standards and rules of conduct. But it’s likely to shrink the pool of suitable candidates even more – just at the time when there will be more posts to be filled.
Since the global financial crisis, there has been a lot of change on the boards of the UK’s major retail banks in the UK. But while the people are different, their profile remains pretty much the same. For example, the average age of board members at the six largest British retail banks is 58, compared to 57 in 2008. Only 28% are women, up from a far worse 9% in 2008. And their background remains predominantly from within the sector. There has been some progress on the diversity front, but it’s generally been painfully slow.
You’d expect banks to appoint new NEDs much like the ones that have gone before. But even people who fit are now arguably too few and far between. Many of the old hands are tainted by the crisis, but being a bank director is simply less appealing than it used to be. The once sought-after prestige of joining a bank board is now outweighed by the considerable personal risk and exposure associated with the role. To this will soon be added the not inconsiderable burden of the Senior Managers Regime.
So much for the challenge. Now for the opportunity
Banks shouldn’t despair. The new requirements present them with an ideal opportunity to widen their search beyond the usual suspects. Assembling more diverse teams will put banks in a good position to succeed commercially and also win back the respect of society at large.
Of course, merely seeking out different sorts of people for their boards won’t bring an end to all the banks’ troubles. The problems are, in many cases, too complex and wide-ranging for that. However, bringing in individuals with different experiences could play a vital role in creating the culture change at the top that is generally seen as essential if banks are to repair their damaged reputations.
In picking the new NEDs, we recommend that banks consider two key factors.
Why would any self-respecting entrepreneur agree to join a bank’s board? After all, the industry is still toxic to many and NEDs are likely to be held much more accountable than their predecessors were.
We believe that if you pitch it right, enough people will find it hard to resist. This is a once-in-a-generation opportunity to fix our banking system, which is still a fundamental part of society.
David Troman is head of financial services at PA Consulting Group