Examination of Witnesses (Questions 300-319)|
POTTER CBE AND
8 MAY 2007
Q300 Chairman: Dr DeAnne Julius was
before the committee and when I asked her about the function of
the Court, she said, and you will be aware of this: "...the
Court is a rather grand body with very little to do, particularly
since the introduction of the new Bank of England Act and the
FSA regulatory side split away from the Bank." How do you
answer that, which was from someone who was a member of the court
and also a member of the Monetary Policy Committee?
Dr Potter: Indeed, I served with
DeAnne Julius. The members of the Court are experienced in matters
of organisation of larger organisations and how they are managed,
controlled and governed. Members of the MPC are in general economists
and expert in matters of economics, and that is the function of
the MPC. DeAnne Julius's comments I think rather underestimate
the importance of the role of a governing authority of an organisation.
I think the role of the Court is absolutely essential. Imagine
there was not a Court there, then who would be the governing authority,
particularly when issues arose? The role in regard to the MPC
is limited but it is concerned that members of the MPC have a
reference to ensure that they are well served in terms of their
research and the processes and procedures. In fact, I think it
is rather a critical role and, providing everything is working
well, it is in the background. When there are issues, of course,
it comes to the fore.
Ms Fawcett: May I add that from
my experience of sitting on other boards, both for instance a
university council as well as plc boards, that the Court has had
and increasingly has all the hallmarks of the kind of oversight
and responsibility you would expect an independent board to have.
Whether it is setting strategy, financial objectives, monitoring
the management of the Bank, it is very clear that that is what
court does do, and I think does very effectively.
Q301 Chairman: In terms of setting
strategy, that is interesting because there is a difference in
management style from Lord George to the present Governor, Mervyn
King; he has changed things quite fundamentally. How much were
you involved in that change of strategy and what type of advice
did you give the present Governor as to re-shaping the Bank?
Dr Potter: I joined the Court
at the same time or a month before the current Governor became
Governor, so I saw the transition immediately happen. It was the
Governor's suggestion that the roles of chairing the court should
be split from that of effectively the Chief Executive of the Bank,
and indeed that has been put into effect so that most of the activities
of the court are carried through the non-executive directors'
committee, which is then ratified by the court subsequently. In
this sense, we have split the roles. In terms of setting strategy,
the strategy concept, the vision, was laid out by the Governor
and that vision was supported strongly by the court as a whole,
and much discussed by the court at its various monthly meetings
subsequently. There then followed, during that year, 2003-04,
an examination of the nature of how that vision is turned into
strategy. I will give you an example. In the annual reports of
the Bank, you will see that the core purposes of the Bank are
defined under two remits: one is the setting of monetary policy,
or at least the achievement, should I say, of monetary stability
in the economy; and the second is to ensure financial stability
of the system as a whole. In previous years, there was a third
purpose, which was to represent in a sense, the interests of the
financial community or the City as a whole, and I paraphrase.
That purpose was removed in the new strategy and so the essential
remit of the Bank was concentrated on those two core purposes.
An example where that has had an effect is that the Bank is withdrawing
from providing bank services to customers other than the core
banks themselves; so no longer serving the Government itself,
as the bank to the Government. Those are examples of the change
of strategy. The Court is much involved in all of this.
Q302 Chairman: It is suggested that
the frequency of the meetings could be reducedI think the
meetings are monthlyand perhaps also the size of the Court
itself. What views do you have on that?
Ms Fawcett: I do not think anybody
feels particularly strongly about it. My personal view is that
smaller meetings, rather than, say, 16, are often more effective
in terms of facilitating debate and having a very interactive
discussion, although that does happen now. Do we need to meet
12 months of the year? Probably not. A traditional board would
meet anywhere between six and 10 times a year. I would favour
reducing the number somewhat and probably it would make more sense
to have slightly fewer members on the board, although it works
Dr Potter: I comment that by statute
we are required to have a meeting every month. In fact, in August
we have a very modest meeting, shall I put it like that. We have
a meeting but it is a small one. I think there is something to
be said for a regular routine. Of all my experiences of non-executive
roles both in the public sector and in publicly quoted private
companies, the demands on a non-executive director of the Bank
of England are greater than in most of those other roles by a
considerable way. There is a huge amount of work to do to ensure
that one is fully knowledgeable about the activities going on
in the Bank and the issues. The issues are complex. So, in fact,
I think it is quite a substantial job in terms of monitoring and
ensuring the quality of what is going on in the Bank, the processes
going on in the Bank. You could argue to take it down to, say,
nine; certainly 11 is appropriate with August free. In terms of
the numbers, yes, I think there is an argument to take it down
possibly to 12 or that kind of level.
Q303 Chairman: The annual reports
of the Bank state that you are about to undertake a review of
the remuneration of MPC members. Has that begun and why are you
undertaking this review?
Dr Potter: I am the chairman of
the Remuneration Committee, so I will answer that question. The
Court is charged, and that is delegated to a Remuneration Committee
of the Court which reports back to the Court, with setting the
remuneration of external members of the MPC, for setting the remuneration
of the Governors (that is the Governor and the Deputy Governors),
for setting the remuneration of the executive directors who are
not members of Court but they are the executive team, and also
the key advisers to the Court. This is done annually and in the
nine years since the MPC was formed, there has been an increment
annually of 2.5% in parallel with the RPIX and similar increases
for Governors and Deputy Govenors to which I referred. This is
increased annually every year and is reviewed by the Remuneration
Committee each time. Last year, the Remuneration Committee examined
the situation of MPC members with regard to pensions. In the previous
annual report in 2006, the Bank had carried out a study of the
cost of pensions in changing circumstances to the Bank. This was
calculated at 41% of salaries. The Bank set a target, as it articulated
in that year, of 30% and gradually over a period of years to reduce
the 41% to that target, and it is the aim of the Bank's executive
to achieve that. In the light of that, when MPC members had been
appointed, an allowance was set for cash in lieu of pensions of
15% of what members were paid, and because of the change in longevity
and the reduction in the long bond, the cost of pensions had increased
considerably. Accordingly, in the annual report which will be
published shortly, members of the MPC have had their pensions
increased to the target, not the level of the Bank which is higher,
but to 30% of salaries in lieu of pensions.
Q304 Mr Fallon: If we turn to the
appointments process, you have referred to the Court being the
governing authority and you are involved in everything. Why do
we not hear from you on the appointments process?
Dr Potter: The appointments to
the MPC and the appointments to the roles of Governor and Deputy
Governors as well as non-executive directors are all in the hands
of the Treasury, the shareholder if you like. We do agree that
we should have some input into that and there are issues associated
with that. The Court does have a view, which is articulated through
the Chairman normally.
Q305 Mr Fallon: You speak about input.
I am interested in your output. The MPC is your Committee. Everybody
else has made criticism of the appointments processthe
lack of transparency, the delay in making timely appointments,
the balance of membership and so onexcept for you who is
supposed to be supervising it.
Dr Potter: We are supervising
the process. We are not supervising the Committee itself. As I
said, it is a matter for the Chancellor.
Q306 Mr Fallon: In 10 years, you
have not made a public comment about the glaring weaknesses of
the appointments process to one of your own Committees. What is
the point of the Court if you cannot comment on that?
Dr Potter: We have not done that
publicly, no. We have expressed that clearly to the Treasury.
Q307 Mr Fallon: Why have you not
done it publicly?
Dr Potter: The court has not,
nor has the executive of the court.
Q308 Mr Fallon: Why have you not?
Dr Potter: Because I do not think
that it is the function of the court to express that publicly.
We can express it directly to the Treasury that is the shareholder.
Q309 Mr Fallon: But the Committee
is your Committee; surely it is up to you to make sure that its
appointments process is proper? If there are weaknesses, you should
be addressing them and commenting on them in your annual report,
should you not?
Dr Potter: We do have some comment
in the coming annual report. I think these weaknesses have come
to the fore in the last 12 months.
Q310 Mr Fallon: That is nonsense.
We have had criticism from the Governor himself about delays in
appointments well before the last 12 months.
Dr Potter: The Governor is a member
of the Court.
Q311 Mr Fallon: Absolutely but the
Court is the governing authority of the Bank. What is not clear
to me is why the Court has never commented publicly in 10 years
on some of the well-known weaknesses in the appointments process.
Why are you not prepared to stand up occasionally?
Dr Potter: I think we are prepared
to stand up and we do so very clearly through the normal channels
that you would expect. The Chairman of the Court itself is in
fact the Governor and the Governor has spoken, and indeed those
views are supported strongly by the Court.
Q312 Mr Fallon: The Governor is not
here this morning. You are here. I would like to hear from you.
Are you satisfied that appointments to the MPC have been made
in each case in time?
Dr Potter: No, we are not satisfied
with that. We have expressed that.
Q313 Mr Fallon: Are you not satisfied?
Dr Potter: Correct.
Q314 Mr Fallon: How have you made
that criticism known?
Dr Potter: Through the Governor.
Q315 Mr Fallon: You have complained
to the Governor?
Dr Potter: It has been discussed
in Court and in turn the Governor, as Chairman of the Court, has
articulated that publicly.
Q316 Mr Fallon: Are you happy with
the transparency with which appointments appear to be made?
Dr Potter: No, personally speaking,
and I speak on my behalf not representing the Court as a whole
necessarily, I am not satisfied. I would say that in general the
Court itself is not satisfied and it has expressed that in its
minutes and at its meetings in Court and again that has been articulated
through the Chairman of the Court, the Governor. As for how that
should be more transparent, these issues have been rehearsed in
this Committee I believe, but I think there is merit in having
a panel, for example, perhaps a privately-held panel, and secondly
that there might or might not be merit in appointments being discussed
for example in your Committee.
Q317 Mr Fallon: I am trying to get
your particular views. You yourself were appointed after open
advertisement for non-executive directors of the court. Why should
that same advertisement and transparency not apply to members
of the MPC?
Dr Potter: Indeed that might be
Q318 Mr Fallon: Would you favour
it or not? I know what might be the case. I want to know your
Dr Potter: I think I would favour
it but I am going to qualify that by the following point. There
is a difference between membership of the MPC and a non-executive
director of the Court in the following sense; they are experts
in their field and we need to draw the people of the highest calibre
into that Committee who are appropriate for that Committee; they
are experts. If I were to take the role, for example, of being
on the board of Rolls-Royce, and if we had an engineering Committee
to deal with the latest design of the next engines, we would need
experts in that of the highest calibre. Therefore, in a sense,
we should be looking towards the peer group of those experts.
Q319 Mr Fallon: You would not appoint
the chairman of your engineering Committee, which I find a rather
shocking parallel, without ensuring as a director that you had
made the best possible search.
Dr Potter: Definitely.