Curbing bankers’ bonuses is a messy affair

BANK Negara’s guidelines for financial institutions to improve their governance standards are something that is already taking off in developed markets.

In the United States and Britain, banks have been told to stagger the variable portion of the bonuses of executives over a period of four years. And they are also to claw back the bonuses if the actions of the executives result in the bank incurring financial losses.

The proposed claw-back period is for seven years. This means that banks can penalise the executives for a period of up to seven years.

The reason for such measures came about after the 2008 financial crisis when public funds were used to bail out banks in the US. The regulators then came up with the Dodd-Frank financial framework for banks to adhere to.

It is part of the Obama administration’s efforts to ensure that executives of banks are responsible for their actions.

It also came about when news filtered out that executives undertook risky deals in pursuit of fat bonuses, knowing fully well that it was risky for the financial institutions.

Bank Negara did not go into specifics on staggering the variable portion of executive remuneration nor did it outline the claw-back mechanism. Generally, the details are left to the management of banks to decide and must be endorsed by the board.

Hence, the banks’ boards have their work cut out in the next few years to prompt the management to come up with a structure.

The easy part of the whole proposal is to stagger the compensation package. In fact, most banks are already practising this when it comes to rewarding employees with share options.

The vesting of the shares is done over three to four years. If the executive had done a shoddy job in evaluating a loan or corporate deal, then it should turn sour within four years.

By this time, the bank’s profitability would be impacted and so will its share price. Hence, the share options awarded to the executives should be worthless.

But the trickier part of the whole proposition is clawing back the variable portion paid to the employees. This is something that even the financial institutions in the US are unable to address so far.

Also, some financial products are longer-term in tenure. For instance, a corporate bond can go up to 20 years. Assuming a period of seven years is used to claw back the remuneration earned by bank executives, it may not be sufficient.

Whichever way one looks at it, putting the brakes on the fat bonuses earned by bankers will be a tough proposition for banks to follow.

It would be easier to administer if the variable portion of the remuneration package is paid entirely in shares because the financial institution can always withdraw the entitlement.

However, if there is a cash element tied to it, then getting the money back is almost an exercise in futility.

This is because if the executive had failed in their duties to the extent that it caused the bank to incur financial losses, he or she would probably be out of a job.

So, how are they going to pay back the bank?

The other sticky proposal that Bank Negara has outlined is that substantial shareholders should not be holding executive positions in the financial institution. The definition of substantial shareholder is anybody holding more than a 5% equity stake.

This has already been practised in most banking groups. However, there are some instances where the relatives of substantial shareholders are employed in some parts of the banking group.

Not many are known to hold executive positions, but they are in highly placed jobs. Should the rule be applied to the relatives of the substantial shareholders as well?

This is something that is out for debate because generally, everybody should be employed based on merit and not who they are related to. If banks cannot make a decision on employment by merit, then they should just take a look at Robert Kuok (pic) and how he handles his business empire.

Among his children, only three are employed in the group. The rest have been told to stay out of the business. And among the three, none have been identified as a successor.

This is something banks can learn when it comes to employing relatives of substantial shareholders.

It should be done on merit. Good talent should be recognised and it is only good management practice to discard the less-talented ones.

Lastly, Bank Negara has stated that the chairman of the bank should not be an executive and must not have served as chief executive in the past five years.

Effectively, there should be a five-year cooling-off period before the chief executive of the bank can go on to take the role of chairman.

In the past, it was a given that the chief executives, especially when he or she is the face of the bank, went on to assume the chairmanship. Tan Sri Teh Hong Piow of Public Bank Bhd, AmBank’s Tan Sri Azman Hashim and the latest, Datuk Seri Nazir Razak of CIMB Group Holdings Bhd, have taken this path.

There are several reasons for it. Amongst them is to ensure that there is some continuity in the way the business is managed. What the new governance standards say is that they can be appointed to the board but not as the chairman.

Whether a former chief executive is chairman or not should not be the issue. The key question to consider is how much the person can contribute to the bank, its shareholders and the financial system.

This is especially so for deciding on the remuneration packages of top executives.

Sources: The Star

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