Anglo-Irish Bank: Non-Executive Directors’ fees were a bit rich

16 March, 2011

I read in the newspaper that the “Nyberg” report  has found that while Anglo-Irish Bank had strong internal risk controls, these controls were ignored as the bank increased its loan book.  I also read that the bank’s non-executive directors (NEDs) have been criticised for relying too heavily on the views of management and for not having sufficient banking experience to question the policies at the bank.

One is entitled to ask why the non-executive directors, who were exceedingly well paid, did not do their job properly and act to protect the interests of shareholders.  Instead they seem to have acquiesced in the most disastrous failure of any management team in the history of Irish business, a failure that has impoverished the whole country.

Perhaps this is the wrong question.  Maybe the question should be: at what point does the level of fees paid to a NED become excessive, to the extent that his/her independence and judgement are compromised by an unwillingness to resign or “rock the boat” and thus lose out on the easy money? 

As far back as 1992, the seminal Cadbury Report on Financial Aspects of Corporate Governance advised that NED fees should “recognise their contribution without undermining their independence”. 

I don’t for a moment question the need for directors’ fees to be sufficient to compensate them for the time and commitment involved (not to mention the potential liabilities).  I subscribe to the view that a NED cannot in good faith be involved on the board of more than a handful of significant companies if he/she is to discharge his/her duties properly. So the fees involved need to be significant.

However, I believe that non-executive directors’ fees in many public companies rose to excessive levels in recent years, and Anglo was a particularly egregious example. Turn, for instance, to page 128 of the 2007 Anglo Annual Report.  You will see that total remuneration for the 7 NEDs who served for the full year was €962,000 – made up of €431,000 for the Chairman (a crazy figure in itself) and an average of €88,500 for 6 others.

Can somebody who is getting such fees be considered independent at all?  To quote Fortune magazine from last year: “High pay for outside directors of corporations guts the whole idea of these representatives of the shareholders making independent judgments. How does a board member challenge a CEO when the director is being paid oversize amounts likely to be important to his or her lifestyle?”

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