Sunday, 29 January 2012

Boards of Directors need a Devil's Advocate

In 1587 the Promoter of the Faith was established by the Vatican:

His duty requires him to prepare in writing all possible arguments, even at times seemingly slight, against the raising of any one to the honours of the altar. The interest and honour of the Church are concerned in preventing any one from receiving those honours whose death is not juridically proved to have been "precious in the sight of God"

The post quickly became known as Avocatus Diaboli – the Devil’s Advocate – and continued until John Paul II abolished the requirement in canonisation and beatification. Nevertheless, the idea of formal challenge to reward seems to me a good one – it doesn’t eliminate error but it sets out, in a written form, objections to that reward prepared by an impartial source.

When we look at reward – whether the payment of bonus or the granting of honours – we often comment at the seeming absence of things we like to call “checks and balances”. And, although these comments are sometimes spiteful and motivated by other considerations than the wider public good, there is a real need for such challenge.

We are watching such a slow motion challenge in the matter of Stephen Hester’s bonus (and saw a similar public castigation in the discussion of Fred Goodwin’s knighthood) where each and every politician is fighting over a tiny scrap of moral high ground. Now there are some important considerations here:

"The contract says that he should be considered for bonus in good faith. That decision is taken by the board. Yes, shareholders have a role in that. UKFI, as the government's shareholder, takes a very active interest. But we are not the only shareholder in that company … The board is required to act in the interests of all its shareholders and the board takes this decision."

To not even consider a bonus payment for Stephen Hester would be a breach of his contract but equally, the firm is under no requirement to pay that bonus. It seems to me that this makes such a payment subject to discussion – negotiation even. And those who decide on the payment (or non-payment) would benefit from a written statement explaining all the reasons large and small, petty and momentous, for not paying that bonus. From a non-partisan source.

Instead we have the quite hideous spectacle of politicians clambering over each other to be the one who rams the knife into the quivering corpse of Stephen Hester’s bonus. Plaintiff cries of “fair” are heard as the strange birds flock, each one looking for the headline rather than for the future success of RBS.

So let’s instead require one Director to set out the argument against discretionary rewards to his peers. Not to decide on those payments but to make the case for those who will make that decision. And that case should be formal, written and subject to external audit. A Devil’s Advocate for the Board!


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