The commission's report highlighted a flaw in bank management that meant that a bank's basic functions were not the individual responsibility of people at board level. Risk management, for instance, was often diffused among different departments and individuals, many of whom did not have the authority to stand up to over-dominant board members. The commission recommends that named individuals are given unambiguous authority over a bank's separate functions. Making individual people responsible prevents any attempt at shifting responsibility if a bank goes wrong, allowing regulators to bring the full set of civil actions to bear. Bonuses should also be deferred for 10 years and should be recoverable, the commission said.
The issue on which everyone seemed to agree is that the nature of banks, with shareholders funding only a small proportion of a bank's balance sheet, meant that allowing the market to police abuses and excesses at banks is entirely unrealistic. The point is strong enough to quote in full: "The primary responsibility of institutional investors is to earn returns for their clients, with engagement with company managements only likely to be undertaken by firms that regard it as contributing to that responsibility. The nature of the asset management industry and the financial incentives for key decision makers in that industry incentivises short term investment performance, rather than engagement to promote the longer term success of companies, even though the latter may be better aligned with the long-term interests of the ultimate beneficial owners of the shares."
The government has to decide whether to accept all of the report's conclusions, and it is likely that many proposals will be incorporated into existing regulatory changes. For investors, the report recommended that the financial stability and safety of an institution should come ahead of directors' duty to shareholders, which would represent a very big change in the traditional structure of corporate governance. In short, banks will cost more to run, will be safer and as a result might return to paying decent dividends.
