Examination of Witnesses (Questions 320-339)
DR DAVID
POTTER CBE AND
MS AMELIA
FAWCETT CBE
8 MAY 2007
Q320 Mr Fallon: Why has not the Court
then promulgated the idea of open advertisements for memberships
of the MPC? Why has not the Court in 10 years expressed any kind
of view on anything to do with the appointments process?
Ms Fawcett: I think there are
several ways this has happened and we can address personal views
on whether it should be more public or more enhanced. First, there
have been discussions between Court through the senior non-executive—Sir
John Parker—with Treasury on this very issue. Second, the
Governor has come to this Committee and has explained the view
of the Court on this issue and that it lacks some transparency
and is opaque. Third, this year in our annual report, which is
a public document, we will make that very same statement that
the appointments process could indeed be improved.
Q321 Mr Fallon: That is after 10
years, Ms Fawcett?
Ms Fawcett: I cannot speak for
seven of those last 10 years.
Q322 Mr Fallon: There was silence
for 10 years. There has not been anything in the annual reports
making any comment at all about the appointments process to your
major Committee.
Ms Fawcett: I do not know the
reason for that lack of a comment. I will say that the issue has
become more acute, particularly in the last year, and Court has
dealt with it.
Q323 Mr Fallon: Has the Court ever
communicated with the Treasury about the appropriateness, costs
or background of any particular appointment to the MPC in your
knowledge, Dr Potter?
Dr Potter: Not to my knowledge,
no. There have been private conversations but not officially formally.
Q324 Mr Fallon: Has there been a
private complaint?
Dr Potter: No. There are obviously
private discussions that go on. There are personal discussions
that go on and these matters are discussed in a broad sense, but,
no, the Court has not specifically tasked a formal complaint to
the Treasury. I would make the comment, Mr Fallon, that rigorously
and strictly speaking, the appointment to the MPC is in the hands
of the Treasury according to the Act. We can comment about the
nature of those appointments, and we have publicly through the
Governor and, secondly, through Sir John Parker, our Chairman,
and through the Governor to the Chancellor and the Treasury. That
has been expressed both publicly and to the Chancellor. This has
only occurred in the last 18 months or two years. I am not aware
that there was a general complaint of the process in the preceding
seven or eight years.
Q325 Mr Fallon: I do not think, with
respect, that references in some of the Governor's speeches or
private communications to the Treasury exonerate you from your
duty over 10 years, even though the Chancellor makes the appointment,
from commenting on the appointments' process when there has been
widespread criticism of the lack of transparency, the delay in
making timely appointments, the balance of membership, all of
these things, and in 10 years we have not had a word of commentary,
let alone criticism, in the annual report of the Court whose principal
Committee this is.
Dr Potter: I think we have commented
in the non-executive directors' section of the annual report,
but then there is also the annual report as a whole, and in that
there is comment.
Q326 Mr Love: This question arises
from the discussion so far. In your opinion, what makes a "good"
MPC member, Dr Potter?
Dr Potter: Firstly, I think that
the role clearly requires expert knowledge as an economist, although
I would not eliminate people with huge experience, such as Richard
Lambert, in economic matters as a whole. In general, it does require
the great majority to be expert economists.
Q327 Mr Love: In relation to Richard
Lambert, his replacement was a professional economist? He was
not a professional economist. Is there a role for somebody like
Richard Lambert in the future?
Dr Potter: I believe so. That
is my personal belief as a non-expert, not in the Committee. I
believe that there are people who can give value, like Richard
Lambert, and there are business people, people from the financial
world, who have spent most of their careers in that world and
understand the workings of the economy, even though they do not
have a PhD in economics, if you like. To answer your question
about what the skills are: obviously people with a particular
emphasis in macro-economics, but clearly drawn from different
fields in the economy, such as we have seen; people who are experts
in labour; experts in macro-economics or econometrics or whatever.
The second thing I think that is essential and fundamental for
the Committee is that "they do not do consensus" and
that they each have their own independent vote. I think that changes
the whole culture of the workings of that Committee. As part of
that, I think it is essential to have a diversity of backgrounds,
personalities and experiences. There are five members appointed
from the executive of the Bank itself, and there are four externals.
The four externals should be drawn broadly and I think there is
merit sometimes in one of them in general having a City economics
background. I would generally believe that is necessary in the
complex world we have.
Q328 Mr Love: To what extent do you
believe that the non-executives should mirror the executives in
a sense in order to hold them to account or to what extent do
you believe that they should have a wider range of economic expertise
to bolster the Monetary Policy Committee as a whole? Is there
a tension or a challenge between the two of those?
Dr Potter: No. Within the membership
of the Court, the non-executive directors are not expert economists
in general. There are some that might be. There are quite a number
who are experts or are hugely experienced in the financial world.
In general, they are characterised by wide experience in running
or managing businesses or organisations, public or private. No,
I do not think they can mirror it. Remember that the MPC is one
of the functions; there is also the issue of how interest rates
are transmitted through to the system. There are many functions
in the Bank. Because of the importance of the MPC and the high
profile that it has had in the 10 years, these other functions
are less considered but they are critically important and that
is part of the role.
Q329 Mr Love: Perhaps I can draw
Ms Fawcett into this question as well. To what extent do you think
they have concentrated too much on academics for the non-executive
directors rather than practitioners? Do you think that is something
they need to correct?
Ms Fawcett: Coming back to Dr
Potter's earlier point, it is critical that we have a diversity
and a balance of views on the Committee. That would include academia,
financial sector experience and business experience and the externals
in particular bring a very broad array of background to that Committee
and should continue to do so. I would think it would be unwise
for them all to be academics but I do not think that is how the
Committee is currently structured.
Dr Potter: May I add one rider
to what you suggest, Mr Love? The five members from inside the
Bank often in the past would have had different experiences. I
think in general, without making any comment on the particular
current membership that include the highest calibre of people
in my view, nevertheless it is extremely important that the appointment
of governors and deputy governors looking out in the long run—10
or 20 years out—should not be drawn from purely the Civil
Service or the public sector. If one looks at some of the history
of the Bank and the appointments from outside, that is an important
factor too because that will define the MPC as well. That is a
very important factor.
Q330 John Thurso: Could I clarify
one point on remuneration? I fully understood the point you were
making about the review and the pension side of things. In terms
of the base salary, is that dealt with by the Remuneration Committee
or is that set by the Treasury?
Dr Potter: That is set by the
Remuneration Committee.
Q331 John Thurso: In that instance,
how do you go about benchmarking that salary? What factors do
you use to decide the basic remuneration?
Dr Potter: In the case that Mr
McFall previously mentioned where he understood there was a review
going on, that is correct, there has been. To answer your question,
we retained an organisation that is expert to carry out a review
of the pay of economists in general at that level. That is a complex
matter because economists work in many different fields. There
are academic economists; there are economists working for large
corporations; there are economists working in the City of London
who are hugely paid. So there is a wide diversity of pay and roles
for the potential candidates who could be members. Nevertheless,
we commissioned that report and in reviewing and discussing the
balance of the report as a whole, that is how we defined it, benchmarked
it, if you like. I might comment that the Committee came to the
conclusion that the general level of remuneration for members
of the MPC is broadly compatible with the review.
Q332 John Thurso: Can I move on to
the Non-executive Directors' Committee and ask Ms Fawcett: how
does the non-executive directors' Committee monitor the performance
of the members of the MPC?
Ms Fawcett: There is a process
that is both a regular process and an annual process. The annual
process, first, is through an annual questionnaire, individual
one-on-one meetings that the Chairman of the non-executive directors,
Sir John Parker, has with each member of the Monetary Policy Committee,
external and internal. The results of that questionnaire and those
specific meetings and any issues are discussed privately with
the non-executives. In addition, throughout the year, we have
informal meetings with MPC members—we had an excellent working
lunch with them not too long ago—where we are able to discuss
with them their issues, both in a macro context but also in the
context of the Committee. We have regular reports, a monthly report
from Charlie Bean on how the process is working and any particular
issues that are emerging, internally and externally. It is an
iterative, continuous process anchored each year in an annual
process.
Q333 John Thurso: Are there any particular
concerns that they express to you that come up regularly?
Ms Fawcett: Nothing urgent or
compelling at this stage has come out. In the past, there was
a big issue about support, which has been addressed; some concern
about the forecasting round, which has also been addressed; some
concern about data, ONS data on services for example, which they
addressed directly with the ONS. Again, all of this has been what
I would consider part of the process—refining it and making
it better but nothing particularly acute or damaging to the process
of the MPC at this stage.
Q334 John Thurso: The Bank of England
Act also gives you the duty to deal with MPC members that you
are not satisfied with and you can remove them at the end of the
day. Have you ever had a case where there is an MPC member that
you are not satisfied with or considered in any way?
Ms Fawcett: Not in my time in
Court, which is the last three years.
Q335 John Thurso: I did not think
so somehow but I thought I would ask the question anyway! Are
you satisfied with the current terms of appointment of the external
MPC members, which is three years with the possibility of a three-year
reappointment, or whether you would prefer to see a longer term
that was fixed or some other variant?
Ms Fawcett: The main thing here
is to attract the very best people we can, picking up Mr Love's
point, from the broadest possible base with the broadest possible
experience. When you are an academic, you will have different
constraints on your time in terms of how much time you can be
away compared with someone in the City. The key here is to be
flexible and not necessarily set in our ways. I have not seen
or heard in my time in Court that the three-year term "with
the possibility to renew for three years" has been an issue
for any member of the MPC, and I am not aware that it has prevented
us from attracting the right people to the MPC.
Dr Potter: I believe there is
an argument to appoint members for, say, six years. Professor
Nickell suggested six years or five years with a cut-out at three;
in other words, of their choice. The reason I say that is that
I think that there is great merit in being completely independent
of the appointment. There is huge merit in that.
Q336 John Thurso: The point would
be that by not being up for reappointment, you would say that
that gives a greater degree of independence?
Dr Potter: Yes, to the individual,
not that the values and ethics of individuals currently are not
independent but, nevertheless, it is better not to have any thought
like that in one's head.
Q337 John Thurso: Following on from
that, in the evidence we had from Stephen Nickell, he suggested
that there had been full-time external members in the past but
there were now only three day per week members and that this might
create some difficult. Is there actually a formal policy at the
moment to hire new external members only on a part-time basis?
Dr Potter: The question is: what
is the amount of work involved in that activity and also whether
there is merit in other activities beyond the Bank? It is the
view of non-executive directors that the period of three days
a week every week, apart from holidays, is an appropriate time
to do the job, if you like, and there should be time spent in
broader matters to keep abreast of things as a whole through their
other activities, and so we believe that three days a week is
the appropriate level, and that is the current position formally.
In the past, during my time, there were members who were there
for four days and paid for four days out of five. I cannot recall
prior to my time, which is since 2003, whether there were five
days but perhaps there were.
Q338 John Thurso: The point that
I am looking at here is that we have talked earlier about remuneration
and getting the highest possible quality of people. If you had
a candidate who was working for a major financial institution
and therefore on a large City salary, clearly to do a job on the
MPC at three days a week, they would almost inevitably have to
resign that other job. They are faced with the choice of three-fifths
of the salary that you decide upon, probably giving up several
times that to take the job and many people will say, "No,
thank you, I will keep the well-paid job". Are you not therefore
then unnecessarily restricting the pool of applicants by making
it three days regardless?
Dr Potter: I think if you made
it five days times the amount that we have been talking about
here it still would not impact hugely on the scale of the City
salaries that are involved and therefore I think the point is
moot. In addition to that, if they were employed on the MPC and
coming from a City institution, they would undoubtedly have to
leave their position because of conflicts of interest or possible
conflicts of interests that could occur. I am afraid it is a serious
problem that the remuneration that can occur in the City is of
such a different order, if you like, compared to the general level
of economists in the academic world for example, or in the business
world more generally. My only answer to that is that people take
on the role because it is eminent and it is status-enhancing at
the peak of their career to be appointed to the MPC. That is why
they will join.
Q339 John Thurso: It comes back to
the point that Mr Fallon was making about the appointment process.
Because you are disjointed from that, you do not really know how
much this impacts because that is being dealt with by the Treasury.
If you had a Nomination Committee and were dealing with it as
a plc would do, you would be more aware and alive to these issues.
Dr Potter: I totally agree with
that. I think there is an argument, as I think has been discussed
in the Committee, that the process of appointment could partly
occur through a consultation internally in the Court, which would
go towards this panel. It has been suggested the Chancellor could
ultimately set it but I do think there is great merit in that.
Peter Viggers: Chairman, could I say
that we regard this inquiry as important and when a significant
witness is due to appear and then fails to appear, that is a disappointment.
Chairman: There has been a communication
that there are legitimate reasons why Sir John Parker is not here.
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