Should Jenny Shipley be on the board (actually chairing it) of the local arm of China Construction Bank? A question primarily, you might have thought, for the owners (CCB in China), perhaps taking account of the views and behaviour of the bank’s customers and investors. I’d be pretty hesitant about putting my money in a bank (or any other company) that had as the Board chair someone against whom there was the sort of civil judgement that was delivered yesterday by the High Court in the Mainzeal case. But I’m not, so I don’t really have a strong view on the matter. And I might be as worried about having a former primary school teacher with no particular expertise in banking, and no reputation for being willing to ask awkward questions and follow through, as chair of the Board of any bank I had money in.
The Reserve Bank doesn’t have the luxury.
And here I’m going to rerun much of an old post on the matter of “fit and proper” rules.
Under Reserve Bank rules (outlined here):
no appointment of any director, chief executive officer, or executive who reports to, or is accountable directly to, the chief executive officer, may be made in respect of the registered bank, and no person may be appointed as chairperson of the board of the bank, unless the Reserve Bank has been supplied with a copy of the curriculum vitae of the proposed appointee and has advised that it has no objection to that appointment.
“Fit and proper” requirements are pretty common internationally. But citizens should reasonably ask “to what end, and with what evidence that the requirements make a useful difference?”
The Reserve Bank’s prudential regulatory powers have to be used to promote the soundness and efficiency of the financial system (sec 68 of the Act). The focus of the suitability (“fit and proper”) tests is presumably on the soundness limb of that provision. Prior Reserve Bank “non-approval” must be expected to reduce the threat to the soundness of the financial system (not just the individual institution, but the system itself). How might it do that? The Reserve Bank says it focuses on integrity, skills and experience.
At the (deliberately absurd) extreme, if the Reserve Bank were blessed with the divine quality of omniscience, they could see into the soul of each potential appointee, and discern accurately how those individuals would respond to the sorts of threats, risks, shocks ,and opportunities they would face while serving with a New Zealand registered bank. No one prone to deceive under stress, to breach internal risk limits, or to take “excessive” risk would get appointed. That sort of insight would be very helpful. But it isn’t on offer.
Instead, the Reserve Bank’s document suggests a backward-looking focus – checking out past appointments, past criminal convictions, and the like. All of which is fine, but all of that information is known (or knowable) to those at registered bank concerned who are making the appointment. And most of the stuff that is really interesting, and telling, is likely to be about character. That isn’t knowable in advance, and certainly not by Reserve Bank officials. What expertise do Bank economists and lawyers – many very able people – have in second-guessing the judgement of the banks themselves in making such appointments? And what incentive do they have to get it right? The model looks like one that favours the appointment of grey colourless accountants and lawyers, who have not yet blotted their copybooks – perhaps never having taken any risk – with a bias against anyone who has learned banking, and what it is to lose shareholders’ money, the hard way.
Banking regulators worry about the risks to depositors and taxpayers if widespread or large banking failures occur. But the first people to lose money as a result of mistakes, misjudgements, or worse are usually the shareholders in the bank concerned. They might reasonably be assumed to have more at stake from bad appointments of directors or senior managers than central bank regulatory officials do. New Zealand has in place pretty demanding bank capital requirements.
No doubt there will be people (and perhaps there already have been) who were employed by failed finance companies coming up for Reserve Bank approval in the next few years. In some cases, those people will have had no responsibility for the failure, and in others there may have been some culpability. But business failures happen, and they aren’t always a bad thing (indeed, unlike some systems, our banking regulatory system is explicitly designed not to avoid all failures). Why is the Reserve Bank better placed than the registered bank concerned to reach a judgement on whether any previous involvement with a failed finance company should disqualify someone from a future senior position in a bank (or other regulated financial institution)?
In a similar vein, I wonder if the Reserve Bank has done a retrospective exercise and asked itself how likely it is that, with the information available at the time, it would have rejected any (or any reasonable number) of those responsible for the 1980s failures of the DFC and the BNZ. Done in a suitably sceptical way, it would be an interesting exercise
I’m not suggesting there be no rules at all. Perhaps conviction for an offence involving dishonesty in the previous  years should be an automatic basis for disqualification from such senior positions? It wouldn’t be a perfect test, but it is certain and predictable, and probably better than a “we don’t like the cut of your jib” sort of discretionary judgement exercised by regulatory officials. It doesn’t hold the false promise of regulators being able to sift out in advance people who might, in the wrong circumstances, later be partly responsible for a bank failure.
Perhaps too there might be a requirement that a summary CV for each director and key officer be shown on the registered bank’s website. Those summary CVs might be required to list all previous employers or directorships.
But the current fit and proper tests seem to be an additional compliance cost, for no obvious public policy benefit. It has the feel of something they feel the need to be seen to be doing, to be a “proper supervisor”, and get ticks in the right boxes when the next IMF FSAP comes through, rather than something where there is evidence that the rules have advanced financial system soundness in New Zealand.
Provisions of this sort cost money, both to banks to comply with and to taxpayers to administer the provisions, and impede business flexibility. Individually, the amounts involved and the degrees of inconvenience, are probably not large, but the old line remains true “take care of the pennies and the pounds will take care of themselves”. There should be a general presumption against regulatory burdens – particularly where they impinge directly on the lives and professional careers of individuals – and an onus on the regulators to show that their provisions are making a material net difference to worthwhile public policy objectives.
2019 here again:
I can’t see that the Reserve Bank will have any choice but to indicate to CCB that they would object to the contined presence of Jenny Shipley on the Board. The Mainzeal case involved the failure of a substantial institution while Shipley was chair of that Board, and not because of some unforeseeable shocks out of the blue, but because of actions and choices that the Board had control over. The record suggests, apparently, that Shipley had expressed some unease on the Board. That’s good, but of little or no value to anyone if it changed nothing, and she then did nothing further.
Of course, there is almost no chance the local CCB is going to collapse – any problems are much more likely to be group ones, over which the local board will have no control. But rules are rules, and how could the Bank’s fit and proper regime have any residual credibility if Shipley remains chair of the New Zealand registered, Reserve Bank supervised, bank’s board? And this isn’t a time for pleasantries. Whether or not she stands aside voluntarily, or the owners remove her, the Reserve Bank should make clear that her continued presence on the Board (let alone chairing it) would not be acceptable to the Reserve Bank.
One could, of course, argue that no CCB New Zealand problems have become apparent on Shipley’s watch. I presume that is true, but it is also irrelevant. Since (see above) the regime has no way of knowing who will turn out to be a dud as a director, it can really only exercise condign discipline after the event. And I don’t think there is really a case for waiting for any appeals either. The judgement has been delivered. Perhaps a higher court will interpret the law differently, but there seems to be less dispute about the facts than about the legal implications, and frankly whether or not the directors are finally held financially liable, if a fit and proper regime is to mean anything it has to mean holding people to a higher standard, as bank directors, than is evident in the record at Mainzeal.
As I say, it shouldn’t be a matter for the Reserve Bank. There is so much high profile coverage of this case that no one can seriously claim to be unaware, and if Shipley’s presence bothered them, they can bank elsewhere. If enough people are bothered enough, the self-interest of the owners will resolve the situation. It shouldn’t be the Reserve Bank’s business, but it is. They need to be seen to act pretty quickly.
As for Shipley’s membership of the executive board of the China Council……surely that tawdry taxpayer-funded body that sticks up for Beijing at every turn, has Jian Yang on its advisory board, defends Huawei, and won’t stick up for Anne-Marie Brady is just the place for her? Then again, if the government doesn’t want the last vestiges of any credibility its propaganda body still has to be in shreds, they should probably remove her too. But that was probably so anyway after all those pro-Beijing words she gave to the People’s Daily in December. Effective propaganda can’t be too overt.