Firstly, happy New Year in this first post of 2015!
An important part of Denning's argument strikes at the heart of the issue of CEO ands shareholder engagement when he raises a key issue present in the executive suite and the boardroom today. The key shortcoming in Denning's eyes is the failed corporate aim to maximize shareholder value as a function of share price combined with incentivising CEOs with shares. Arguments like these strikes at the heart of the role of boards which under agency theory is meant to monitor management's actions. Denning feels that boards, and other actors, look the other way however.
During the new year ahead, some firms are likely to want to come to terms with potential accounting and governance questions they are facing - I have just read Jeremy Warner's piece in the Telegraph that noted that Tesco Plc's Board of Directors, which previously included nine members with retail experience, shrank to only one experienced director following the departure of its Finance Director in April, and now faces both accounting and governance issues.
Other firms will seek to begin the process of re-building thier governance structures in 2015 and also begin to re-establish credibility with the broader investment community, the City, and its clients, such as the Co-op Bank.
Beyond the UK, the financial services sector at large will continue to face serious governance challenges in 2015 as it considers new guidelines focused on roles of the board and risk governance (Basel and also CRD IV, for example) but also fathom major organisational changes such as individual responsibility for Senior Persons Regime. "May you live in interesting times..." so the saying goes.
Changing gears, last week Forbes published an interesting article raising a series of governance issues which I might disect one issue at a time. The article, penned by Steve Denning, the organisational and leadership expert, is entitled "Reward Directors' Poor Performance with a Hefty Pay Raise?". There is a lot to tease out of this piece for students of governance. But for now, let's focus on one aspect only.
An important part of Denning's argument strikes at the heart of the issue of CEO ands shareholder engagement when he raises a key issue present in the executive suite and the boardroom today. The key shortcoming in Denning's eyes is the failed corporate aim to maximize shareholder value as a function of share price combined with incentivising CEOs with shares. Arguments like these strikes at the heart of the role of boards which under agency theory is meant to monitor management's actions. Denning feels that boards, and other actors, look the other way however.
In the specific area of banking, Denning strikes a painful cord for the sector by arguing such goals and incentive systems have contributed to a series of recent banking abuses:
- JP Morgan's London Whale espisode,
- LIBOR rigging,
- Home forclosure iregularities,
- Money laundering,
- Faciliatation of tax evasion,
- Mis-marketing of securities,
- A casino atmosphere in derivatives trading,
- High frequency trading abuses, and now
- Dark pool trading scandals.
For now, let's just say this laundry list presented in this fashion reflects what many bank clients and stakeholders already think about the sector and underscores the breadth of issues (fair or not) facing bank boards today.
Check out Denning's piece at http://www.forbes.com/sites/stevedenning/2014/12/24/reward-directors-poor-performance-with-a-hefty-raise/.
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