Open Dissent

by Mike Soden

  In Ireland there is frequently an outcry against cronyism with respect to the appointment of board members, cronyism being ‘the appointment of friends and associates to positions of authority, without proper regard to their qualifications’.14 It is also described as ‘a partiality to long-standing friends demonstrated by appointing them to positions of authority regardless of their qualifications. Hence cronyism is contrary in practice and principle to meritocracy. In the private sector it would often be referred to as an old boys’ club or a golden circle.’15

  Meritocracy, on the other hand, is a system in which advancement is based on individual ability or achievement, whereby candidates are chosen for their superior talents, intellect or experience and not because of birth, wealth or privilege.

  In the Irish corporate context an argument can be made both for and against cronyism. The country is small with a population that can be brought together under various ceilings during the course of life. It may well be the fact that you are born and raised in an area where you establish friendships from early childhood. Perhaps you go to the same school or university as these people and during this time you compete with them in sporting activities. The bonds that are established at birth through family relationships provide a solid basis for judging an individual’s qualities of honesty, integrity, intelligence and talent. These relationships are strengthened or expanded over the years when people enter professions or build their own businesses or inter-marry. To dismiss people because of acquaintance as candidates for key positions would be foolish.

  On the other hand, the case for going down the meritocracy route is simple. Choosing people who have demonstrated that they have the appropriate experience and skills for a post is perfectly fine. However, the assessment is not just about the intelligence quotient of a candidate but the emotional quotient. The emotional quotient is a nice way of indicating whether the right chemistry would exist between the candidate and the board. My own experience on international boards in the UK, the US, Australia and New Zealand has led me to believe that, when common sense combines with tried and tested processes of identification and election of directors, the results are above criticism.

  Boards are often criticised for the levels of cronyism that prevail. It is because of this criticism that we need to examine what level of cronyism is appropriate. In normal circumstances, board members of public companies should have three fundamental qualities – a recognised skill base, experience in an appropriate field that can demonstrate the use of this skill base and, finally, sufficient time to spend uninterrupted in the pursuit of good governance. Taking this as a guideline, we cannot dismiss a candidate simply because we know him or her socially. However, it is essential that when that person comes onto the board that his or her independence of opinion is permitted to prevail.

  Intimacy at board level often stifles much-needed debate on subjects that will determine the well-being of companies. When friends are part of an elite group it is often deemed disloyal if one professes an opinion that is contrary to accepted orthodoxies. This is the culture of silent dissent that has evolved in Ireland. In practice, silent dissent can be observed when individuals on a board or in a group disagree with policies and say nothing, disagree with actions or solutions in a given situation and stay quiet or, in certain situations, simply don’t reveal their position at all. There are invariably subjects that are sacrosanct, orthodoxies that, it is perceived, ought not to be challenged or social issues that are best not talked about. Rather than challenging the status quo openly at board meetings, members of boards who might have different opinions on given subjects are encouraged to discuss their concerns privately with the chairperson or chief executive. These concerns may never surface at board meetings if, in the opinion of the chairperson, they might be considered inappropriate or even offensive to the long-held opinions of other board members. It is for this very reason that, according to good corporate governance, a member can only serve on a board for a maximum period of six years. Continually refreshing the personalities on boards is essential to effective governance.

  It is dangerous to permit silent dissent to infiltrate the modus operandi of any board. The conscious suppression of people’s opinions in favour of the status quo is often cited as the reason major oversights occur with catastrophic consequences. Accepted social norms and politeness alone cannot provide the basis for constructive, open debate on key issues that affect an organisation’s well-being.

  So, in the context of Irish corporate life, it would appear that the best way to get around this practice of silent dissent is to appoint experts from abroad onto our boards. People who fulfill the technical requirements and who have relevant experience in other countries should be sought out and appointed. This is one sure way shareholders’ interests and the interests of the community at large will be protected. The abuse of power must be curtailed and regulators need to grasp the concept of public ownership and the nature of the responsibility of board members. Conflicts of interest are easily identified, provided they are brought to the attention of boards and not kept suppressed under a code of silent dissent.

  This culture of suppression that has fed the crisis is not only found in the boardrooms but in every tier of our society. Whether it is in the family, the Church, the Government or clubs, it is ever present in our business and social lives. The recognition by the Secretary General of the Department of Finance in May 2010 that the department had made mistakes was surely a confirmation that silent dissent had prevailed. This does not imbue trust or confidence in the decision-making processes at the level of government.

  In larger societies, silent dissent is less prevalent as it is diluted by the sheer size and distribution of the population. Open dissent and challenging the status quo can better serve society by refreshing our thinking. However, in Ireland, open dissent can threaten one’s reputation, livelihood, family or other relationships. It is always an individual’s choice to express an opposing opinion but the price paid may be disproportionate to the clarity gained.

  Silent dissent, in a strange way, has given birth to the phenomenon of whistleblowing, which is when someone discloses illegal, immoral or illegitimate practices in an organisation to those who can take action.

  Over the past twenty or so years, a great deal of public discourse has been dominated by scandals that have led to an erosion of public faith in commercial and other institutions. A proportion of this wrongdoing has come to light due to the actions of some celebrated whistleblowers. One such whistleblower was Eugene McErlean, a former group head of internal audit with AIB, who blew the whistle on overcharging and other wrongdoings at the bank, only for the Financial Regulator to ignore his evidence. Was the Regulator’s inaction some sort of silent dissent?

  The traditional view of the whistleblower in Ireland has been equated with that of the informer. ‘Whistleblower’ is

  a term with negative connotations arising from Ireland’s history of political dominance by Britain. Native informers were widely perceived to have assisted the British authorities in their rule of Ireland. Informer became synonymous with ‘traitor’. Ireland continues to have a culture where loyalty is valued highly, political clientelism is practised openly, elite networks are tight and the person who ‘gets one over’ on the State for personal gain will as often enjoy popular praise instead of censure.16

  Traditional attitudes have modified with time and there is evidence to suggest that there is currently a ground swell of support for whistleblowing.

  The Company Law Review Group, the body established by the Company Law Enforcement Act 2001 and whose recommendations for changes in Irish company law are generally enacted, was asked in early 2007 by the Minister for Finance to consider the inclusion of a whistleblower provision in the Companies Consolidation and Reform Bill 2009. The Company Law Review Group began its discussion paper on whistleblowing and company law by stating: ‘One cannot say that there is any evidence of endemic failure in relation to corporate governance
or its enforcement in Ireland that negatively affects the investment climate and which requires enhanced whistleblowing provisions.’17 The statement might have been debatable when made in 2007 but it is one which would not be countenanced today.

  The opposition parties have recently backed the call of the Director of Public Prosecutions James Hamilton for legislation to protect whistleblowers. A Bill to protect whistleblowers has been in existence since 1999. In 2006, the Government removed the Bill from the Dáil agenda. An updated version of the Bill was introduced in 2010.18 It remains to be seen whether this Bill has more of a chance of becoming law. Ireland’s legal elite would perhaps find it difficult to adopt the UK Public Interest Disclosure Act. This Act runs to a mere nine pages and applies to the private and public sectors in the UK. It is an example of a simple and very effective law adopted by a jurisdiction resembling Ireland’s.

  Are we really intent on avoiding disclosure of the unvarnished truth in our corporate lives? Making people accountable in a commercial environment is essential if the interests of the public are to be served and protected. However, any legislation protecting whistleblowers must also carry penalties for those who engage in whistleblowing in bad faith, perhaps because of promotion disappointment in a company. The need to protect individuals and institutions from possibly vindictive accusations by employees must be kept uppermost in any enquiry. The penalties put in place must be sufficiently harsh to ensure bad faith claims are kept to a minimum. The need for a Public Interest Disclosure Act should not be diluted by arguments about the possibility of whistleblowers acting unreasonably and in bad faith.

  ‘That’s the way we always did business, so what’s wrong with it?’ This is the mantra anyone attempting to change the culture of corporate Ireland is bound to hear. In the past, the accepted practices in corporate life in Ireland prevented people from recognising what today would be deemed as insider trading, which is using your privileged position to acquire knowledge of a company with which you are trading, thus providing an opportunity for you to gain an advantage over the general public. Slowly but surely, this mindset had to give way to improved standards of corporate governance.

  From September 2008, the boards of financial institutions were faced with very difficult decisions. A number of chairpersons and CEOs acted honourably and gave way to the pressure for change. However, delays occurred and a lot of time often elapsed between the announcement of the resignation and the departure. This was a bit rich, considering that shareholders had seen close to 100 per cent of the value of their bank’s market capitalisation disappear. Many directors actually held on to their positions on the grounds that they would be difficult to replace or it would be unfair to cast blame on them, even though many had served for in excess of five years. Perhaps they felt that their very presence had a stabilising effect on the sinking ship.

  It is interesting to observe that, when problems surfaced at Royal Bank of Scotland in June 2008, they were met by the immediate departure of seven directors. The response was swift and the honourable thing was done. Perhaps we should have taken guidance from this example. It is difficult to grasp who the boards are serving when the values of shares are plummeting and many of the shareholders are being hit. Should the decision be pushed into the Regulator’s hands or the hands of the new shareholders? Voting for the reappointment of directors is now an annual requirement in the UK. This will only be as effective as the commitment of the major shareholders to taking a genuine interest in the performance of directors. Ticking a box on a form is not the equivalent of having made an informed decision.

  As far back as 3 June 2003, in a speech at the International Monetary Conference in Berlin, Howard Davies, then chair man of the UK Financial Services Authority, provided guidance with regard to corporate governance of financial institutions. Irish boards would do well to adopt his principles:19

  ...[P]eople are more important than processes. Many of the failed firms, or near-failed firms, had boards with the prescribed mix of executives and non-executives, with socially acceptable levels of diversity, with directors appointed through impeccably independent processes; yet the individuals concerned were either not skilled enough for, or not temperamentally suited to, the challenging role that came to be required when the business ran into difficulty.

  ...[T]here are some good practice processes worth having. Properly constituted audit committees and risk committees can play an important role, as long as they are prepared to listen carefully to sources of advice from outside the firm.

  ...A regulatory regime built on senior management responsibilities is absolutely essential. In some of the cases we have wrestled with, senior management did not consider themselves to be responsible for the control environment and... were able to successfully claim they were not responsible even if the business failed. So our regulation is built on a carefully articulated set of responsibilities up and down the business.... We do not expect the CEO to check the bottom drawers of each of his traders for unbooked deal tickets. But we do expect the CEO to ensure that there is a risk management structure and control framework throughout the business which ought to identify aberrant behaviour or at least prevent it going unchecked for any length of time.

  ...[R]egulators must focus attention on the top level of management in the firm. For the major firms...our supervisors [must] have direct access to the board and...present to the board their own unvarnished view of the risks the firm is running and of how good the control systems are by comparison with the best of breed in their sector....

  ...Boards should take more interest in the nature of the incentive structure within their organisation. I am talking about ensuring that the incentives with the firm, and pay is a very powerful one, are aligned with its risk appetite...

  ...[There must be] engagement on the part of the share-holders...if those shareholders are not prepared to vote and show little interest in business strategy, then that accountability is somewhat notional and unlikely to be effective...Regulators cannot hope to substitute for concerned and challenging shareholders, though in some senses they may complement them.

  Looking at these points of governance in the context of what has arisen over the past several years in the Irish financial sector can highlight where our system may have failed.

  On this subject it is worth differentiating between the roles and responsibilities of the executive and nonexecutive directors. The executive directors who are on the boards of Irish banks are given the mandate to manage the performance of their bank, including the protection of the bank’s balance sheet. These directors are paid to ensure that the strategy of the bank is pursued in a positive way that will yield returns to the shareholders in line with market expectations. This group is ultimately responsible for the bank’s survival. The non-executive directors, on the other hand, provide a strong governance framework that ensures that shareholders’ interests are not put at risk. Failure by either of these groups with regard to their responsibilities requires an overhaul of the whole board. Unfortunately, the price of putting the bank’s reputation ahead of one’s personal reputation is often deemed to be too high. Those directors who believe they have done their best under the circumstances, and are unlikely to feel they have been paid enough fees in their career to warrant personal reputational damage, will act accordingly.

  It is highly likely that at the beginning of the downturn the opinions of many non-executive directors in the banks differed from those of the executive directors who provided the financial forecasts. Discussions may well have taken place on the value of property, the loan-to-value ratios and ultimately the size of the haircut NAMA was going to demand. Experience, knowledge and judgment, all qualities meant to be demonstrated by the executives, were not in evidence. The executives, largely in a state of denial, unintentionally misled the boards with optimistic forecasts. This optimism of the executive directors did not increase the size of the write-offs and provisions, it merely deferred the judgment day. It may, however, have misled s
ome shareholders who might otherwise have sold their shares. Whether or not this denial was a symptom of the culture of silent dissent, one has to believe that many of the directors believed differently but kept quiet because of the sensitivity of the share price and the market to valuations and provisions. Such denial led to announcements that the debts were less than they actually were, which must have contributed to the public shock when finally the extent of the recapitalisation of the banks emerged.

  Common sense is required in these difficult times and it could be said that those who oversaw the destruction of the balance sheets of the banks are definitely not those who should be entrusted with their recovery. Appropriate sanctions have not been exercised in the banking system as those who were present at the highest levels when the crisis arose remained in their positions for some time after and many are still there today. This applies equally to the Department of Finance.

  The need for strong corporate governance has been highlighted through major failures and lapses in corporations and banks over the last number of years. The failures invariably arose due to a lack of awareness among the boards of credit, market, operational or liquidity risks being taken by institutions. In considering reforms in this area, one might also include the issue of tackling conflicts of interest in financial institutions, so that raising a loan from your own bank, as people like Sean FitzPatrick have done, would be impossible, as it should be.

  Drawing on lessons learned from the current financial crisis, the Basel Committee on Banking Supervision laid out ‘Principles for enhancing corporate governance’ to set standards for best practice in banking organisations.20 The key areas addressed by the principles include the role of a board; the qualifications of board members and the composition of a board; the importance of an independent risk management function including a chief risk officer; the importance of monitoring risk on an ongoing firm-wide and individual entity basis; a board’s oversight of the compensation systems; and, finally, a board and senior management’s understanding of the bank’s operational structure and risks.