Bad governance makes banks perilous investments
BBVA and Wells Fargo have responded to regulators’ pressure to change how they are governed
As governance changes go, BBVA’s tweak at the end of last year to give its new chief executive a bit more power and its executive chairman a bit less was hardly hold-the-front-page news. All the more so because it coincided with far more interesting rumours — ultimately confirmed in January — that Spanish rival Banco Santander was dramatically ditching plans to hire star banker Andrea Orcel as its new CEO.
That abortive idea continues to haunt Santander. It was conceived — and then killed — by chairman Ana Botín, as the bank took fright at paying the €50m price tag and her senior managers grew nervous about the Italian’s assertive style. Mr Orcel has set in train a legal case against the bank. And Ms Botín has reinstated as chief executive the man who Mr Orcel was due to replace: that hardly looks ideal — or permanent.
By comparison the BBVA changes seem pedestrian. Chairman Carlos Torres — who took over from his longtime predecessor Francisco González last autumn — has had his mandate shrunk from master of everything to chairing the board and overseeing strategy. Chief executive Onur Genç has been upgraded to head the day-to-day running of the business and client relationships. And he now reports to the board rather than to the chairman. Why should anyone care?
Well, for a couple of reasons.
First, good governance really matters. As with many aspects of business, bad practice in governance is easier to prove than good practice — especially when examined with hindsight. Fred Goodwin’s egomaniacal behaviour at the helm of RBS was wrongly tolerated when the bank was riding high. Once it collapsed in the 2008 crisis, the governance shortcomings — a weak chairman, an ineffectual board — were quickly identified as obvious red flags.
Second, regulators really care about this stuff. In the US, banks that have got into trouble — most recently Wells Fargo with its fake accounts scandal — have been forced to bring in robust non-executive chairmen. That has been a big, and welcome, break with the US norm of combining chairman and chief executive in one person. But it may not last. Bank of America recombined the roles under Brian Moynihan. Likewise at Morgan Stanley, under James Gorman. And JPMorgan has long had a chairman-cum-CEO. Late last year, in a rare exception, Citigroup’s chief executive, Mike Corbat, did not apply for the chairman’s role, leaving the jobs split.
In Europe, norms differ drastically — with no obvious fail-safe structure. Certainly the British tradition of having a single board chaired by a non-executive has not been an obviously better guard against disaster than the US combined model. RBS, HBOS and Northern Rock proved as vulnerable as Lehman Brothers, Bear Stearns and Citi.
In France, Société Générale was forced by the terms of the EU’s CRD4 regulations to split its chairman and chief executive position five years ago. But the arrival of Lorenzo Bini Smaghi to chair the board has done little to rattle CEO Frédéric Oudéa, despite growing shareholder criticism and a stock price that is nudging record lows.
The German two-tier model — comprising a non-executive supervisory board and a separate executive team — is no less open to criticism. Just look at the mess Deutsche Bank has found itself in: for at least 15 years the chairman and the broader supervisory board have been guilty of either failing to hold executives to account or becoming so bound up in the strategic direction of the bank that they have stifled the chief executive. Deutsche’s supervisory board chairman, Paul Achleitner, faces a no-confidence vote at next week’s AGM.
Spain offers a different approach again. The tradition of executive chairmen was seen to be so at odds with the spirit, if not the letter, of the EU’s CRD4 regulations that BBVA felt it was sensible to tweak its governance. Spanish banks generally have come under pressure from the European Central Bank to move away from an all-powerful chairman role. If that explains BBVA’s tweaks, it may also be one reason behind Ms Botín’s initial plan to appoint Mr Orcel as a robust chief executive. With that decision upended, she will now have a fine line to tread to keep everyone, including shareholders, happy.
And it is they, of course, who must be the ultimate arbiters of governance. Sensible investors will want banks to be run by driven CEOs kept in check by effective boards to ensure sustainable long-term returns. The unfortunate truth is that sound rules on the subject might guard against disaster. But there is no magic formula for a good honest banker.