€4.9 billion was the amount that SocGen’s rogue trader Jérôme Kerviel was ordered to pay his former employers in October 2010. He was also sent to prison for three years. Société Générale itself, France’s second-largest bank, was blasted by its regulators for its wholly inadequate controls, and was punished by a €4 million fine. Although the chairman and chief executive resigned as a result of the scandal, other board members – even the audit committee (which is delegated the board’s responsibility for the oversight of internal controls and compliance) – remained in place, with no question of criminal proceedings hanging over them.
What has happened to the responsibility owed by the directors of companies that have either failed, or come near to it? Coincidentally, as Kerviel’s sentence was
being read out in Paris’s ancient and magnificent palais de justice, at the other end of the Channel Tunnel Hector Sants of Britain’s FSA regulators was addressing a gathering in the Lord Mayor of London’s rather less ancient but even more magnificent official residence, on the topic of moral standards in his financial world. Culture and ethics, he said, were a prime responsibility of the board of directors, who needed to play a greater role. Boards should have a structured process for reviewing culture, identifying its drivers, and the behaviours and outcomes. And if needed, regulators would force them to comply, even ordering changes to the membership of management or the board.
“Better late than never,” you say, but where was the FSA when the directors allowed most of the UK banking industry to slide beneath the waves – or indeed where were regulators in other countries? And have the criminal prosecutors, or the civil trial lawyers, been busy? Well no, not quite. And yet…
The notorious 25-year Enron and WorldCom prison sentences are as excessive as Kerviel’s ‘fine’, and may not be repeated, but clearly in at least some countries executives are at risk. In July last year, the CEO of the failed German bank IKB received a prison sentence (suspended) and large fine – a remarkable change in European attitudes to ‘white collar’ crime. But prosecutions, at least from the latest financial crisis, are few and (hitherto) far from successful. Perhaps, because the crisis is still continuing, the time for settling scores has yet to arrive.
But what of non-executive directors? Reports on the financial crisis indicate that non-execs played little role in taming the overweening egos, the disastrous ambitions, and the recklessness of their executive colleagues. Perhaps they felt they owed their places to them (they often did), or simply felt unempowered or inadequately experienced to disagree with highly paid management and to dissent from the status quo and the group-think in the boardroom. But most likely, in my experience, the problem is that non-execs on many boards genuinely do not understand, or even fully accept, that they have a role in providing an independent counterbalance to the management, to (in the words of the now-venerable Higgs Report) “both support executives in their leadership of the business, and to monitor and supervise their conduct”. Non-executive directors share with executive directors the responsibility for managing the company, and both “have the same general legal duties to the company”, or at least they do in theory. For in practice it seems only the executives are held to account.
Will this change? Lawsuits against non-executive directors are rarely very profitable given their often limited means, though at the public policy margin they form a useful deterrent against the negligent or reckless. Perhaps – to be more positive for a moment – we must remember what motivates non-execs in the first place: their desire (at the upside) to contribute to society’s greater good and the building and development of successful enterprises, and – on the downside – the preservation of their hard-won reputations.
Working on that, we might see that better disclosure and reporting, and analysis, of boardroom deficiencies and delinquencies becomes especially valuable. Public exposure of folly is a powerful deterrent. More effective committees (a forum where non-execs can best contribute to the work of the board) are essential. But we must also advise and (respectfully) educate non-execs on their vital role and responsibility, and here boards and their declared corporate governance principles, and actual corporate governance practices, come in. The vast majority of non-execs in my view do want to do what is right, and most can – sometimes with a little help.
So as the rewards for a job well done differ for executives versus non-execs, so the penalties for failure need to differ. Though non-execs do not need to join Kerviel in the prison cell, a few lost reputations among the great and the good in major boardrooms after a major scandal or failure are a good thing, if only, as Voltaire said, “to encourage the others.”
Photo Flickr: User Dave from Tokyo