Vol 7 (2010) - Issue 1

Article preview

Company Law, Corporate Governance and the Banking Crisis

Introduction

During late 2007 and 2008 five United Kingdom banks failed and had to be saved by HM Government. The banks were very large. Their assets in aggregate well exceeded the UK’s gross domestic product. The biggest, Royal Bank of Scotland, had 40 million customers, 225,000 employees and operated in over 50 countries. All of them to a greater or lesser extent participated in a global financial network and, as the Governor of the Bank of England put it, the problem was that ‘… global banking institutions are global in life, but national in death’. As a result, HM Government had to commit vast resources in order to save them. There was no alternative. The eventual cost to the taxpayer will not be known for many years.

Given that this is, very probably, the greatest financial catastrophe to inflict the United Kingdom, it is not surprising that much attention is being paid to the question of ‘what went wrong?’ So far, a unanimous view of the various general reports that have been published on the banking crisis is that boards of directors were at fault. However, the public enquiries that have been conducted into the causes of UK bank failures have been limited and general in nature. In particular, there has been no detailed investigation of the facts and circumstances of the failures of the five banks in question on an individual basis, by investigators with power to access every relevant document and to interview all of the key officers who were arguably responsible for corporate governance lapses within these institutions. Such officers include directors, senior managers, risk managers, external and internal auditors, and relevant external advisers.

Sir David Walker appears to share the view that there are questions to be answered in an investigation. At paragraph 1.16 of his second Report, Walker states that:

‘In the light of the scale and scope of the financial crisis, the key questions from a corporate governance perspective must be: could boards of failed entities have done more to prevent the collapse and, if so, what stood in their way? … [I]t is critically important to know how the boards of the entities that best survived the storm were different or “better” than the boards of entities that were effectively taken over by the state or lost their identity through forced merger.’

Yet the Walker Report, despite making 37 specific recommendations for improvement of corporate governance in banks and other financial institutions, did not provide the answers to these questions.

This article accordingly argues that there should be an investigation of the facts and circumstances surrounding at least two of the five UK banking failures, that it should be a Companies Act investigation, and that the reports from the investigation should be published. My focus throughout the following discussion is on ensuring the collective responsibility of the board.