'An accident waiting to happen': The failure of HBOS - Parliamentary Commission on Banking Standards Contents


6  'The best board I ever sat on'

The qualities and experience of the Board

87. Sir Ronald Garrick was a non-executive director of BoS from March 2000, joined the HBOS Board when it was formed and served as Deputy Chairman from December 2003 and Senior Independent Director from 2004. He had this to say on his experience on the Board of HBOS:

    I have no doubt that the HBOS Board was by far and away the best board I ever sat on. My recollection of the culture and characteristics of the Board was one of openness, transparency, high intellect, integrity, good working relationships between the Chairman and Chief Executive, and a suitable diversity of backgrounds, mix of experience and expertise to maximise effectiveness [...] If with the benefit of hindsight I was asked if I wanted to sit on this board again I would be saying yes.[135]

Sir James Crosby said that a "lot of consideration" was given to the make-up of the HBOS Board to ensure an appropriate balance of skills.[136] He considered that the non-executive directors had the right range of skills to reflect their responsibility for a diverse financial services group:

    Overall, I believe the Non-Executives were individually and in aggregate well-qualified to oversee the Group's activities [...] It was [...] always unlikely to have the concentration of banking expertise among its Non-Executives as might for example be possible for a business concentrating entirely on banking.[137]

He noted the engagement of non-executive directors with the business at board meetings and outside, and recollected that the Board had "lively debates":

    I think our chairman was good at encouraging the board to focus on the substantive issues before them, so that we could, within an acceptable time frame of the meeting, have good discussions on the substantive issues.[138]

88. Andy Hornby felt that "the HBOS Board always had very extensive banking experience". He observed that Anthony Hobson, Chairman of the Audit Committee "had very considerable relevant experience in the financial services industry, including having been Finance Director of Legal & General for approximately ten years".[139] Anthony Hobson himself stressed the diverse experience of board members and considered that the qualifications of the Board were "at least as good as those found on the Board of other UK financial institutions at the time".[140] Sir James Crosby felt that the Board had possessed adequate experience among its executives and non-executives to challenge the Group's corporate banking activities.[141] Andy Hornby never considered that the non-executive directors "felt restrained from challenging the executive team in whatever way was most appropriate".[142]

89. Lord Stevenson did not accept that the board he chaired failed in its challenge to the executive.[143] He said that much thought was given to ensuring that "there was a lot of challenge and different ways of challenging".[144] There was

    an atmosphere where people were able to be very direct and blunt. There were one or two occasions when great offence was caused, but we had a very open society. There was constant challenge, not just of corporate, but of the other divisions.[145]

In conclusion, he told us:

    I think the governance was rather good. That does not mean to say it was perfect. I am open to any suggestions how it could have been. The board meetings were functional and gave huge opportunity for challenge.[146]

90. The positive self-assessment of the abilities of the HBOS Board was echoed by the views of the FSA. According to Clive Briault:

    The risk assessments during the relevant period indicate that corporate governance was thought to be effective at HBOS. There was some banking experience among the non-executive directors and a considerable amount of wider corporate experience.[147]

Conclusions

91. The corporate governance of HBOS at board level serves as a model for the future, but not in the way in which Lord Stevenson and other former Board members appear to see it. It represents a model of self-delusion, of the triumph of process over purpose.

92. Peter Hickman said that the expectation was that the Board would approve the executive business plans; challenge would be expected to come from the executives, rather than the non-executives or the full Board. He could not recall any significant change made by the Board, if any.[148] As with other boards, the Board of HBOS on occasions had an opportunity to assess its own performance. On 24 February 2004, the minutes record it being told the following:

    The Board made effective but supportive challenges, as necessary, and would not seek to second guess executive management's formulation of strategy.[149]

The Board, in its own words, had abrogated and remitted to the executive management the formulation of strategy, a matter for which the Board should properly have been responsible.

93. The executive leadership represented on the Board came predominantly from a retail and insurance background. Sir James Crosby had an insurance background and Andy Hornby came to HBOS from the retailing industry. Its successive financial directors came from predominantly insurance or retail banking backgrounds. As Sir James Crosby conceded, this led to too much faith being placed in the senior executives with corporate banking experience, Colin Matthew and, in succession, George Mitchell and Peter Cummings.[150] Andy Hornby also agreed that, in retrospect, insufficient attention was paid at the highest level to corporate lending compared with retail exposures.[151] There was insufficient banking expertise among HBOS's top management. In consequence, they were incapable of even understanding the risks that some elements of the business were running, let alone managing them.

94. The non-executives on the Board lacked the experience or expertise to identify many of the core risks that the bank was running. In Sir James Crosby's revealing phrase, it was not composed in a manner that would be appropriate for "a business concentrating entirely on banking". The board was composed in a manner which appeared suitable for a retail-oriented financial services company, but that board lacked the necessary banking experience among its non-executives, particularly in relation to higher risk activities, for a bank whose strategy and business model was posited on asset-led growth led by non-retail divisions of the bank.

95. Judging by the comments of some former Board members, membership of the Board of HBOS appears to have been a positive experience for many participants. We are shocked and surprised that, even after the ship has run aground, so many of those who were on the bridge still seem so keen to congratulate themselves on their collective navigational skills.


135   B Ev w 215 Back

136   Qq 1371-1372 Back

137   B Ev w 183 - 184 Back

138   Q 1374 Back

139   B Ev w 237 Back

140   B Ev w 226 Back

141   Q 1378 Back

142   B Ev w 235 Back

143   Q 1625 Back

144   Q 1627 Back

145   Q 1625 Back

146   Q 1627 Back

147   B Ev w 180 Back

148   BQq 503-504 Back

149   B Ev w 371 Back

150   Q 1301 Back

151   Q 1446 Back


 
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Prepared 5 April 2013