Interest Rate Manipulation – Where are the Boards of Directors?

At least 15 of the world’s biggest banks are being investigated by national authorities on both sides of the Atlantic for rigging interest rates, which possibly involved trillions of dollars of transactions, from the mortgages of you and me, to what big corporations have had to pay.  So far, only Barclays Bank has been forced to settle – it was fined over $400 million and its chief executive and board chairman were forced to resign.  Now, as they say, “the games can begin.” It is far from clear which bank will win the rate-fixing Olympics.  For those who like details, the focus is on LIBOR – the bank rate fixed in London that is the key influence on scores of other interest rates that banks charge their customers. Many of the investigations go back to 2008. The fines at the end of the day will run into billions. Then, the reputations of many of the biggest names in finance will be further soiled.

Now, you have to ask: where are the members of the boards of directors of all these banks? Are they in the South of France on their yachts enjoying the vacations?  Or, are they at their desks hard at work striving to figure out how to end the rot, take charge, read the riot act to rogue multi-million dollar salaried executives, and searching for ways to make sure there is real change in banking ethics?

Yes, I think you will probably share my view that they are enjoying their holidays, watching the Olympics and casually deciding that all this corruption is not their concern. Ok, I sound a bit cynical. But, we rely on the boards of our major corporations to ensure management oversight, to protect the interests of shareholders and be the first line of defense for customers – that is their fiduciary responsibility. And, boards have been missing in action in one big bank scandal after another.

Media pundits pontificate that banks have to change their culture – the only people who can try and do this are the members of the boards of directors. It is they who determine the pay of top executives and it is the signals that the compensation committees of boards send that have an influence on how managers behave.  But the interest rate scandal – just the last of a long list of banking scandals – raises issues well beyond those of just refining the pay schemes for top bankers.

The scandals are surfacing thick and fast because we live in a 24-hour news cycle/massive Internet age where information flows fast and freely, uncovering activities long held secret, revealing e-mails that are the smoking guns of evidence in prosecutions and demonstrating that it is far, far harder for rogues to hide their malfeasance. Boards of directors have failed to understand the challenges of the new hyper-connected mass information age. It demands pro-active, forceful interventions by boards of directors to prevent scandals, not just clean them up after the damage is done.

The starting place if for leaders of boards of directors to start speaking up publicly about their responsibilities, about the disastrous image of our financial services firms and what boards need to do. I am waiting for the first top director to lead the way.