UK: Individual And Collective Responsibility | Rewriting Agatha Christie

Last Updated: 15 June 2015
Article by Natasha De Soysa, David Strachan, James Beasley and Suchitra Nair

Most Read Contributor in UK, August 2017

When it comes to talking about the new Senior Managers Regime (SMR) for banks, both Andrew Bailey and Martin Wheatley have taken to referring to Agatha Christie's "Murder on the Orient Express", characterising the SMR as putting an end to the "safety in numbers" defence. Fans of the novel and film will recall that 12 people enter the victim's darkened train compartment and take it in turns to stab him. As Poirot observes "They themselves would never know which blow actually killed him". This may strike readers as rather an extreme example. More prosaically, however, the regulators want to remove ambiguity - for perfectly understandable reasons - and to be able to hold individual Senior Managers to account when things go wrong on their watch. It should always be clear "whodunnit".

But what happens to the collective responsibility of the Board in a world of sharpened individual accountability - what (if any) is the role for collective decision-making when individual Senior Managers are presumed responsible if something goes wrong in an area for which they are personally accountable? The answer, at least as far as the PRA is concerned, is set out in a recently published draft supervisory statement ("paper") which outlines its expectations of boards and highlights some key aspects of good governance. The PRA regards the collective responsibilities of the Board and the individual accountabilities of Senior Managers as complementary.

There is clearly a role for both individual and collective responsibility. But at the same time there seems little doubt that the introduction of the SMR, and to some extent the Senior Insurance Managers Regime (SIMR), will affect the balance between them and the dynamics of the Board and of Board Committees. When considering a matter which falls within the remit of an individual Senior Manager, what would happen if that individual and a separate majority of the Board pushed for different decisions? Does the Senior Manager acquiesce in the collective decision or does the rest of the Board "back off" because they recognise that, at the end of the day, the individual Senior Manager is likely to bear responsibility for that decision? Similar situations could arise between non-executive directors (NEDs) on, say, the Audit Committee. Does the Chair of the Audit Committee - a specific Senior Management Function (SMF) - accept the view of the rest of the Committee, even though they may disagree with it, or impose their individual view? None of these situations is new - the premise of diversity within a Board is to encourage different views and perspectives on the firm's strategy and risks. But the introduction of the SMR and SIMR will raise the stakes in these debates, which of course may well be an outcome the regulators are seeking. It will inevitably take time for Boards and Board Committees to find a new equilibrium and, initially, no-one should be surprised if behaviours change and Board minutes and personal note-taking become lengthier and more prevalent.

Perhaps prompted by the question of collective versus individual responsibility (though not directly addressed in the paper) there are market concerns about the prospect of the PRA and FCA changing their expectations of the role of the Board relative to its Committees. There is a growing view that the regulators are expecting more activities to be undertaken by the Board itself rather than being delegated to a Committee – for example, that key decisions on risks cannot be delegated by the Board to a Risk Committee.

The PRA's paper does, however, progress far beyond the question of individual and collective responsibility for PRA firms. Some of the other themes in the paper have been expressed before in various PRA, FCA, FRC and Basel papers. Our key observations on these wider themes and their potential implications are set out below.

By codifying supervisory expectations, and more importantly the types of evidence of good governance that the supervisors will be looking for, weaknesses in the governance framework will become much harder to explain away. Risk appetite and Management Information (MI) are traditionally challenging areas. The Chairman and NEDs are expected to manage the nature, content and frequency of MI actively. The limitations of "executive MI" for NEDs – information presented for an audience who are deeply involved in the business and therefore assumes significant contextual knowledge - and the explicit expectations in this paper may give the necessary push for the extra IT investment or process redesign that "NED-relevant MI" would require. The SMR, SIMR and focus on conduct risk will also necessitate changes in the content and frequency of MI.

According to the paper, even (non-listed) "smaller firms" are expected to have at least two Independent NEDs on their Board. Whilst many firms appear to conform with this already, it is nonetheless an important codification of the PRA's supervisory practice and expectations. However, an arguably more disruptive clarification present in the paper concerns subsidiary boards. The expectation is that executive board members from other entities in the group should not occupy key positions on the subsidiary Board which could compromise its independence. This may represent a bigger change for some firms.

Succession planning remains high on the PRA's list of concerns in relation to Board governance. The paper outlines expectations for the succession plan for all Board members and obliges firms to draw two important conclusions: first that succession planning is not only concerned with the CEO, other Executive Directors or even other members of senior management, but that all members of the Board should be considered; and second that succession planning is a collective responsibility for the Board rather than something that rests exclusively with the Chairman. Whilst in practice the Chairman is likely to take the lead in succession planning activity at the Board level, the latter distinction is still an important one to make. And as if to reinforce this approach, the PRA and FCA recently proposed that firms should consider succession planning when developing Statements of Responsibilities for their NEDs – even though it is not a "prescribed responsibility" under SMR or SIMR. The FRC's recent focus on succession planning at Board and middle management level also lends weight to this topic.

The paper also contains an important reference to Board composition in groups which contain both ring-fenced banks (RFB) and non-ring-fenced banks (NRFB). Until now the focus has been on the independence of the RFB from the rest of the group, but the PRA is now indicating that cross-directorships between the NRFB and the ultimate holding company also need examination, in order to prevent the interests of the NRFB dominating at group level to the detriment of the RFB. At one level this is not surprising and is consistent with the PRA's objectives regarding the independence of the RFB, but it does introduce a new angle for groups to consider when looking at their overall governance arrangements.

The paper also highlights (but doesn't provide further detail) that some resolution strategies may require the Boards of material subsidiaries to be "capable of independent action". Although not explicit in the statement, this may be particularly true for banks subject to 'multiple points of entry' (MPE) strategies, whereby subsidiaries may be completely separated from the rest of the group, in preparation for which they would presumably need to have a more 'complete' Board ready to run the subsidiary on a stand-alone basis. It is unclear what this will mean in practice – whether, for instance, the subsidiary Board would need to be capable of independent action at all times, or whether a contingency plan to create that capability in the run-up to a resolution would be sufficient. Engagement with the Bank of England will be important in order to understand how the resolution strategy may augment the PRA's "going concern" supervisory expectations.

Andrew Bailey, PRA CEO, summed up his view on governance in a speech which coincided with the release of the draft statement - it is "uncommon and rare to find a problem in the capital or funding or business model of a firm which cannot be traced back to a failure of governance". The PRA's paper is an important contribution to what good looks like in terms of governance and what its supervisors will expect to find. It also represents a prime opportunity for the industry to make its own views known on these key topics, including the balance between individual and collective responsibility. The consultation runs until 14 September.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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