During the past two decades, the Bank of England has been transformed. While it still occupies a cavernous 18th century building in the City of London, designed by Sir John Soane, its functions and responsibilities are barely recognisable from those it discharged as recently as 15 years ago.
Most significantly, it has set interest rates free from political interference.
The financial crisis that began in 2007 and which wiped out so much of the UK’s financial sector forced a hard look at how that sector is policed. It also forced recognition that the stability of the economy and that of its banking system are inextricably linked.
But as the Bank takes on vastly expanded powers, greater scrutiny is being applied to what would be described as its “corporate governance” were it a publicly traded company.
The court of directors of the Bank of England, the equivalent of a corporate board, is now composed of nine non-executives – down from an unwieldy 16 – along with the Bank’s top three executives.
Historically, it has operated more as “a gentlemen’s club”, as one former member of court puts it, or “as a sounding board”, according to another.
The question is whether the court, as it is currently composed, can adequately monitor the effectiveness of the Bank and pose hard questions to executives where necessary. According to the Bank, the court’s duties include: “determining the Bank’s objectives and strategy, ensuring the effective discharge of the Bank’s functions, ensuring the most efficient use of the Bank’s resources and to review the Bank’s strategy in relation to the financial stability objective.”
In addition to chairing the monetary policy committee, which sets interest rates, the governor will chair the financial policy committee and an operationally independent body, the Prudential Regulatory Authority. The two latter bodies answer to the court. “And the same man – the governor – is going to be at the epicentre of all these,” said one official.
Bob Garratt, a professor at Cass Business School and an expert on corporate governance, said good corporate governance was increasingly viewed as a necessary element in creating a healthy civil society. To achieve that, boards must decide the most important objectives for executives and decide how these should be measured.
“What you need is a very good ‘dashboard’,” said Mr Garratt whose book, The Fish Rots From the Head, is considered a classic.
“This is where you have indicators that are updated monthly – often ratios or trendlines – that are the key indicators of performance.” Ideally, he said, these were updated in real time as they changed and were reviewed monthly by the board. “This drives chief executives mad but that is what a board is supposed to do,” he said.
The questions about governance are particularly acute since the Bank’s “chief executive” – Mervyn King, governor – is known inside and outside the Bank for his robust approach. While unchallenged as a monetary economist and widely regarded for his intellect, former economists at the Bank say he is often forcefully dismissive of ideas with which he disagrees. As a result, they say, economists have been reluctant to put forward research that contradicts conventional wisdom within the Bank, reinforcing a “groupthink” mentality. Several former staff members say the Bank’s chief economist, Spencer Dale, has gone some way towards fighting back against groupthink since his appointment in 2009, encouraging alternative views to be aired.
Groupthink, Mr Garratt noted, is so widely understood to be potentially dangerous for companies that a requirement for “independent thinking” is part of a board’s responsibilities under the Companies Act of 2006. But robust debate requires a form of interaction, former members of court say. That, in turn, requires a cultural transformation and it is unclear whether the body is ready or able to make it. Advisers to the Treasury have hinted that governance is one area that is likely to be re-examined after Mr King’s term ends in 2013.
However, another former member of court said that Mr King had already shown much more flexibility than many had thought possible.
In the run-up to the financial crisis, he had appeared to avoid contact with the banking community, declining, for example, to call executives together to warn about excessive leverage building up on bank balance sheets. But since the crisis, Mr King has seemed eager to engage with the banking community, joining in the debate about regulation. Moreover, the one-time insider said, there were limits to what even the best corporate governance could achieve given the legal framework in which the Bank was required to operate. Even the strongest board would always be constrained by the legislation, he argued.
Source: http://www.ft.com
Most significantly, it has set interest rates free from political interference.
The financial crisis that began in 2007 and which wiped out so much of the UK’s financial sector forced a hard look at how that sector is policed. It also forced recognition that the stability of the economy and that of its banking system are inextricably linked.
But as the Bank takes on vastly expanded powers, greater scrutiny is being applied to what would be described as its “corporate governance” were it a publicly traded company.
The court of directors of the Bank of England, the equivalent of a corporate board, is now composed of nine non-executives – down from an unwieldy 16 – along with the Bank’s top three executives.
Historically, it has operated more as “a gentlemen’s club”, as one former member of court puts it, or “as a sounding board”, according to another.
The question is whether the court, as it is currently composed, can adequately monitor the effectiveness of the Bank and pose hard questions to executives where necessary. According to the Bank, the court’s duties include: “determining the Bank’s objectives and strategy, ensuring the effective discharge of the Bank’s functions, ensuring the most efficient use of the Bank’s resources and to review the Bank’s strategy in relation to the financial stability objective.”
In addition to chairing the monetary policy committee, which sets interest rates, the governor will chair the financial policy committee and an operationally independent body, the Prudential Regulatory Authority. The two latter bodies answer to the court. “And the same man – the governor – is going to be at the epicentre of all these,” said one official.
Bob Garratt, a professor at Cass Business School and an expert on corporate governance, said good corporate governance was increasingly viewed as a necessary element in creating a healthy civil society. To achieve that, boards must decide the most important objectives for executives and decide how these should be measured.
“What you need is a very good ‘dashboard’,” said Mr Garratt whose book, The Fish Rots From the Head, is considered a classic.
“This is where you have indicators that are updated monthly – often ratios or trendlines – that are the key indicators of performance.” Ideally, he said, these were updated in real time as they changed and were reviewed monthly by the board. “This drives chief executives mad but that is what a board is supposed to do,” he said.
The questions about governance are particularly acute since the Bank’s “chief executive” – Mervyn King, governor – is known inside and outside the Bank for his robust approach. While unchallenged as a monetary economist and widely regarded for his intellect, former economists at the Bank say he is often forcefully dismissive of ideas with which he disagrees. As a result, they say, economists have been reluctant to put forward research that contradicts conventional wisdom within the Bank, reinforcing a “groupthink” mentality. Several former staff members say the Bank’s chief economist, Spencer Dale, has gone some way towards fighting back against groupthink since his appointment in 2009, encouraging alternative views to be aired.
Groupthink, Mr Garratt noted, is so widely understood to be potentially dangerous for companies that a requirement for “independent thinking” is part of a board’s responsibilities under the Companies Act of 2006. But robust debate requires a form of interaction, former members of court say. That, in turn, requires a cultural transformation and it is unclear whether the body is ready or able to make it. Advisers to the Treasury have hinted that governance is one area that is likely to be re-examined after Mr King’s term ends in 2013.
However, another former member of court said that Mr King had already shown much more flexibility than many had thought possible.
In the run-up to the financial crisis, he had appeared to avoid contact with the banking community, declining, for example, to call executives together to warn about excessive leverage building up on bank balance sheets. But since the crisis, Mr King has seemed eager to engage with the banking community, joining in the debate about regulation. Moreover, the one-time insider said, there were limits to what even the best corporate governance could achieve given the legal framework in which the Bank was required to operate. Even the strongest board would always be constrained by the legislation, he argued.
Source: http://www.ft.com
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