I’ve been doing a bit of thinking about one of the conditions being imposed by Brian Lenihan as part of his bank bail-out package. This is the one where he will be putting a person of his own choosing onto the board of each of the banks.
In order to promote the public interest, a covered institution shall, at the direction of the Minister, take all reasonable steps to appoint at least one but no more than two non-executive directors to its board from a panel approved by the Minister during the period of the guarantee. The covered institution shall remunerate those non-executive directors.
While I’m sure he has very noble intentions with this particular aspect of the deal, it is completely and utterly useless as a means to keeping an eye on the banks.
When you become a director of a company, your primary “fiduciary duty” is to the company itself – not to the shareholders, not to your fellow directors, and definitely not to any outsider third parties (like the Government or the Irish people).
Therefore, the board nominees of Brian Lenihan will definitely be on the inside, but they won’t be able to report any information back. They’ll very likely see what’s going on in the banks boardrooms, but they won’t be able to tell anyone.
But, I hear you say; they’ll have a vote on the board and they will therefore be able to influence things. And if they can’t influence things, they will be able to record their dissention on the minutes of the board meetings – which can be viewed by the shareholders (should they ever decide to do so).
Again, this all very noble in aspiration and theory but none of this is ever going to happen when it comes to day to day practice.
The government nominee is going to be in a minority of 1 at every meeting. They will be ignored and sidelined (completely legitimately, by the way) and they will not be able to do a single thing about this or about anything that they see happening within the confines of the boardroom.
My point pretty much ends there – it’s an unworkable idea that won’t achieve the results that we’re being told that it will – but you can read on for extra detail if you want to see a hypothetical example of how all this exclusion and isolation of the government nominee could be achieved by any unscrupulous banks.
Take as an example a theoretical bank, ABC Bank Limited. This theoretical financial institution has a board of 8 people – made up of 7 bank representatives and the single outsider nominee as part of this brave new “post bail-out” world.
Let’s see what could happen at the very first board meeting following the government nominee appointment:
- The board votes for a Chairman and Deputy-Chairman. Custom and practice dictated that person x and person y were going to get these positions this year, because it’s their turn. The government nominee is aware that person y would probably be unacceptable to the share-holders and the government because of past indiscretions, but is outvoted 7-1.
- The board then votes to create a finance sub-committee that will be responsible for determining pay, conditions, and looking after the accounts prior to presentation to the full board. Despite standing for one of the positions, our government nominee doesn’t get onto the sub-committee because he’s in a minority of one.
- Concerned about what might be happening out of sight, tThe nominee asks about seeing minutes from finance sub-committee meetings, but is told that they’re never circulated to the full board “because it’s always been that way”. The nominee asks for a vote to be taken that would allow finance sub-committee meeting minutes to be shown to the full board, but is voted down 7-1.
- The nominee, having tried to do his job for Minister Lenihan, but still within his directorial responsibilities, asks that this vote and decision be recorded in the meeting minutes, and that his dissatisfaction with the result be also recorded.
- As the meeting continues, in an effort to become familiar with what’s going on within the company, the government nominee asks a series of questions about different items that are being discussed, or tries to find out the background to some items. He’s variously told that:
o We’ll have that information for you at the next meeting
o You don’t need to concern yourself with that particular item – we’ve always done things that way
o That’s confidential so we can’t give you any further details on that
o That’s a Freedom of Information issue, so we can’t give you that information
o That’s a day to day banking issue – you don’t need to micro-manage issues – the board is only responsible for high-level matters
o That’s a matter for the auditors – they’re happy with things so you don’t need to worry about it
And there we have it – the government nominee is sidelined and ignored at his very first meeting. This is all done completely legitimately and the board has operated within the bounds of all company law requirements – they’ve done nothing wrong except to reduce the government nominee to a mere sock-puppet at the boardroom table.
But hang on, what about the minutes from the meeting? Won’t they include all of the discussions and items from above? Well, let’s have a look at the next board meeting activities:
- The minutes of the last meeting are circulated, and a vote is proposed for their approval. The government nominee notices that specifically:
o There is no record of his request that finance sub-committee minutes be submitted to the board – nor is there any mention of the vote that was taken.
o There is no note recorded in the minutes, despite his specific request for its inclusion, of his stated dissatisfaction with the fact that the main board doesn’t get sight of finance sub-committee minutes
o There is no record of the fact that he was supposed to be provided with information as a result of questions raised at the last meeting.
o Nor is there any record of his other requests for information which were dismissed, and obviously no record of the reasons for dismissing the requests.
- The government nominee raises these issues, but the chairman ignores the protestations because the rest of the board as indicating that they’re happy with the minutes.
- At a vote, the minutes are approved by a 7-1 majority as being a fair representation of the previous meeting. To the government nominee, it’s now like as if the previous meeting, and their complete contribution, didn’t happen at all.
- The government, unhappy with the way minutes are taken, proposes a vote that minutes be recorded and subsequently be transcribed, rather than having a bank secretarial staff member taking them. However, that vote is also defeated – and as the government nominee slowly begins to realise the pointlessness of it all – doesn’t even bother any more to ask to have the vote and subsequent decision recorded on the minutes.
So, we now have a government nominee that can do absolutely nothing within the confines of the boardroom and who can do nothing outside of it either, since company law has not been broken.
It is entirely likely that if they were to try to reveal the true substance behind what’s going on at boardroom level in the bank, they are the ones who could potentially be in trouble.
In such a no-win situation, what is the government nominee to do? Be in a minority of 1 for the whole time on the board, or gradually toe the boardroom line and take advantage of their position as a board member of a major financial institution? Remember, the government nominee is going to be paid by the bank themselves rather than by the government – “whoever pays the piper calls the tunes?”
It’ll take government nominees of very strong standing and moral fortitude to stand apart in such a situation and not sell out completely and “become one of the boys”.