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Home > Blogs > Ian Fraser > Banking’s new age of experience

Banking’s new age of experience

Banking’s new age of experience | Risk Management |Boards of Directors Ian Fraser

The weaknesses of bank boards and particularly the lack of financial industry experience of nonexecutive (or external) directors at banks, is seen as one of the reasons why so many such banks and financial institutions came within a whisker of going bust during the crisis.

According to new research from Moody’s Investor Service, this is one area that US and European banks have been striving to address in recent months by replacing departing directors with people with relevant financial experience.

Moody’s surveyed 20 global banks and found that 46% of their nonexecutive directors now have financial backgrounds. That compares to about one-third of external directors when the crisis struck in July 2007.

Christian Plath, the Moody’s analyst who authored the report, said: “Since July 2007, there has roughly been a one-third turnover of members at many big US and European banks.” He said this had opened the door to infusions of financial expertise on bank boards.

“There’s now a much greater focus on ensuring that boards are composed of a sufficient number of outside directors with relevant financial industry experience.” The report, “Bank boards in the aftermath of the financial crisis: Board of director composition at 20 large banks,” said such people are more likely to challenge and seek accountability from their executive directors on important matters including risk management and strategy.

Banks that have been rescued by government have made the biggest steps in enhancing levels of financial experience to their boards. These include Bank of America, Citigroup, Lloyds Banking Group, Royal Bank of Scotland, and UBS.

But banks that required less in the way of government support, including BNP Paribas, Deutsche Bank, JPMorgan Chase, KBC, and Wells Fargo, have done less to boost financial experience on their boards. Only 20% or less of the nonexecutive directors at these banks have relevant financial experience and none of the external directors at JP Morgan Chase have any.

Moody’s said there remains plenty of room for improvement. Boards are more likely to be independent if the chairman and CEO are not one and the same, for example. But the report found that five of the banks surveyed (25%) still do not split the chairman and CEO roles and that nine (45%) lack independent board leadership. Banco Santander, led by chairman Emilio Botin, had the least independent board of all the banks surveyed.

The findings echo the conclusions of the dean of IMD business school, Professor Stewart Hamilton. In his QFINANCE viewpoint, Prof. Hamilton said: “The people who became nonexecutive directors of banks had very little knowledge, experience, or understanding of banking and finance … which meant they were incapable of doing a proper risk assessment.”

Plath said Moody’s will continue to agitate for change. He said the ratings agency takes board competence into account when allocating investment ratings. “For those banks whose ratings were most affected by the crisis we will want to see improvements in their practices, including board composition, risk governance, and executive compensation before significant upgrades can to take place.”

However the Wall Street Journal’s David Reilly has warned that board composition and experience is no panacea. Writing in the Journal's Heard on the Street column, Reilly said: “After all, going into the crisis Citigroup’s board included former Treasury secretary and Goldman Sachs executive Bob Rubin, and that didn’t do the bank much good.”

Further reading for boards of directors

Tags: banking , boards of directors , corporate governance , risk management
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