On 3 November 2015, the PRA issued a speech given by Andrew Bailey, PRA Chief Executive and Bank of England (BoE) Deputy Governor for Prudential Regulation, on governance and the role of boards in banks, insurers and major investment firms.
http://www.bankofengland.co.uk/publications/Documents/speeches/2015/speech858.pdf
In his speech, Mr Bailey considers the role of boards in the broader setting of firms’ executive senior management, boards with non-executive directors (NEDs) in the majority, and supervisors. Points of interest include:
- There is no strong consensus on how to set boards’ expectations so that they can perform the role of setting firms’ strategy and risk appetite and overseeing implementation.
- The PRA “may at times have gone too far in the direction of individual technical knowledge”.
- As a supervisor, the PRA expects boards to exercise good judgement in overseeing the running of the firm and to do so on a forward-looking basis.
- A firm’s culture should promote discussion, debate and honest challenge.
- The PRA depends on NEDs, under the leadership of the chair, to challenge executives in all aspects of the firm’s strategy, including the viability and sustainability of the business model and the establishment, maintenance and use of the risk appetite and management framework.
- It also relies on NEDs to mentor and coach executives.
- It is the job of executives to be able to explain complex matters to NEDs in simple and transparent terms, provide good management information (MI) and enable challenge from NEDs (which will in turn result in executive accountability).
- If NEDs do not feel they can meet these expectations, they should demand the necessary time and support from executives to enable them to do so.
- NEDs should not be left to find the answers for themselves.
- The PRA is sympathetic to the view that the demands on NEDs “have risen to the point where it is time to stand back and take stock and find ways to improve the approach”. Currently, the PRA is carrying out work to overhaul its approach to the supervision of governance in firms as it relates to the PRA’s statutory objectives.
- The PRA “will always be cautious” of executives who seem to perceive NEDs as some form of threat.
- It believes that the really effective executives are those who see NEDs’ experience and knowledge as a means of improving the effectiveness of the board’s judgement through constructive support and challenge.
In May 2015, the PRA issued a consultation paper on corporate governance, focusing on board responsibilities, in which it proposed a supervisory statement seeking to identify some key aspects of good board governance to which the PRA attaches particular importance in the conduct of its supervision (CP18/15).
CP18/15 closed to responses in September 2015 and the PRA intends to publish a final version of the supervisory statement at a later date.
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