Boards of banks

It is news to me that UK's Financial Services Authority actively monitors the effectiveness of bank boards and also interviews candidates proposed by financial firms for their boards. I got to know this when I read a speech delivered by Hector Sants, the outgoing chief of FSA, to which my attention had been drawn by a blog in the FT.

Here's what Sants had to say about how the FSA judges the effectiveness of bank boards:

The regulator assesses this effectiveness on a continuous basis.  It does this through many tools such as board effectiveness reviews, regular supervisory discussions with the Chair, senior independent director, and key executives.  Enforcement will also be used when absolutely necessary.  However, the principal and earliest intervention the regulator can make is through the SIF authorisation process and it is this I would like to turn to now.

Sants has some caustic remarks to make about candidates proposed for boards:

Too frequently we still see applicants who:

• don't understand what the job entails and have no job description;
• have done no due diligence into the firm they are proposing to join;
• are unable to discuss the risks/ issues facing the sector in a proportionate way to the role they are applying for; and
• often significantly underestimate the commitment required to perform the role effectively.

 Of the 653 applicants interviewed by the FSA, 43 were withdrawn.

What Sants says about bank directors would apply equally to directors at non-financial firms. Most directors would not bother to brush up on basic facts before getting on to a board- and they would not bother to know the basics even while serving on the boards. Here's a suggestion: let the RBI and SEBI run a surprise quiz for directors. They should be asked just two numbers: the sales and profit of the boards they sit on. I would be surprised if even 50% got it right. If you want to really fox the directors, ask them a third question: how much is the CEO paid?