Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 300-319)


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 reduced—I think the meetings are monthly—and 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 effectively now.

  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 process—the lack of transparency, the delay in making timely appointments, the balance of membership and so on—except 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 the case.

  Q318  Mr Fallon: Would you favour it or not? I know what might be the case. I want to know your view.

  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.

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