While we in India are all captivated (and shamed) by the failure of corporate governance at Satyam, elsewhere in the world, in the not-so-venerable financial district of London, one Mr. Paul Moore has turned the spotlight on a surprisingly neglected aspect of the global financial meltdown – massive failure of corporate governance!

Here are some extracts from the full text of Mr. Moore’s evidence presented at the House of Commons ‘Banking Crisis’ hearing:

2.8 But let’s start with the cause and this fairly obvious proposition: even non-bankers with no “credit risk management” expertise, if asked (and I have asked a few myself), would have known that there must have been a very high risk if you lend money to people who have no jobs, no provable income and no assets. If you lend that money to buy an asset which is worth the same or even less than the amount of the loan and secure that loan on the value of that asset purchased and, then, assume that asset will always to rise in value, you must be pretty much close to delusional? You simply don’t need to be an economic rocket scientist or mathematical financial risk management specialist to know this. You just need common sense. So why didn’t the experts know? Or did they but they carried on anyway because they were paid to do so or too frightened to speak up?

2.9 What my personal experience of being on the inside as a risk and compliance manager has shown me is that, whatever the very specific, final and direct causes of the financial crisis, I strongly believe that the real underlying cause of all the problems was simply this – a total failure of all key aspects of governance. In my view and from my personal experience at HBOS, all the other specific failures stem from this one primary cause.

2.10 In simple terms this crisis was caused, not because many bright people did not see it coming, but because there has been a completely inadequate “separation” and “balance of powers” between the executive and all those accountable for overseeing their actions and “reining them in” i.e. internal control functions such as finance, risk, compliance and internal audit, non-executive Chairmen and Directors, external auditors, The FSA, shareholders and politicians.

Mr. Moore then goes on to state:

…I was obliged to raise numerous issues of actual or potential breach of FSA regulations and had to challenge unacceptable practices and the conduct of others in fulfilling their obligations under the Principles for Approved Persons including very senior executives.

As a result of which

…I was then summarily dismissed (portrayed as “redundancy”). James (now Sir) Crosby, the then CEO of HBOS contrary to HR policy, HBOS’s own internal ethics policy called “The Way We Do Business” as well as all other principles of fairness (let alone employment law) wrote – “The decision was mine and mine alone”.He said that I had lost the confidence of key executives and non executives but refused to explain why. I claimed that my dismissal was unfair and that I had a claim both for unfair dismissal and for a claim under s.48 of the Employment Rights Act 1996. In other words, I had a “whistle-blowing claim” under that Act for raising Protected Disclosures.

3.20 HBOS finally settled my claim against them for substantial damages in mid 2005 and I signed a gagging order at the time in our settlement agreement.

It does not stop there. Satyam at least had eminent, qualified individuals as non-executive directors on the board (why they did not challenge Ramalinga Raju is still a mystery). Take at look at what HBOS did:

2.18 Returning to my story: after I was dismissed and to prove just how seriously HBOS took risk management, I was replaced by a new Group Risk Director who had never carried out a role as a risk manager of any type before. The individual concerned had primarily been a sales manager and was a personal appointment of the CEO against the initial wishes of other Directors. You can’t blame her for accepting the job as it got her on the Group Management Board and shortly afterwards the main Board.

And here is another gem:

3.24 One final interesting but telling anecdote of my personal story relates to Charles Dunstone (founder of the Car Phone Warehouse). Charles was a non-exec director of HBOS which made good sense given their strategy of turning the bank into a retailing operation. He is clearly an outstanding business leader. But, strangely, he was also appointed to be the Chairman of the Retail (Halifax) Risk Control Committee (a divisional audit committee). He admitted to me that he was very friendly with Andy Hornby and that they met quite often socially. Of course, he was supposed to be challenging Andy Hornby. He obviously had no technical competence in banking or credit risk management to oversee such a vital governance committee. Another HBOS non-exec said to me one day of him and his role “Well, they got that appointment wrong, didn’t they”. Even more extraordinary than this, Charles Dunstone himself admitted to me and my colleague one day words to the effect that he had no real idea how to be the Chairman of the Retail Risk Control Committee!

And here comes the crowning glory:

5.2 Sir James is still the Deputy Chairman of the FSA and advises the government on how to solve the mortgage crisis. Some might now also question what his “contribution to financial services” has in fact been when this will have led to millions of people in excessive debt, 10,000s who will lose their jobs and many more whose balance sheets have been impacted by the precipitous fall of the HBOS share price – apart from the reduction in competition in the retail financial services market threatened by the new Lloyds Group?

Sir. James Crosby has resigned from his position as deputy chairman of the FSA now.

This is the first time I am hearing “poor corporate governance” liked to the banks meltdown. But now that someone mentioned it, it does seem so very obvious, doesn’t it?) 

The next time you hear anyone say “corporate governance in India is poor”, you know what your response has to be – a four letter word – HBOS!