Open Dissent (8 page)

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.
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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.'
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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.
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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:
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...[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 some 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.
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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.

The two major banks in Ireland, AIB and Bank of Ireland, have, over time, drawn up frameworks as to the policies and procedures for the operation of their respective institutions. A great deal of thought has been put into this area, and over the years these policies became better articulated and more suitable and applicable to their customers, employees, shareholders and the community at large. However, such documents are only as useful as they are put into daily practice. Somewhere along the line, smaller banks that were under the control of the Financial Regulator and that were independently audited failed to follow or comply with accepted good practice in relation to conflicts of interest and the moral hazard that exists in a community where a large majority of professional people were not only doing their day jobs, sometimes carelessly, but were actively moonlighting and had outside interests. For example, many members of the legal and accounting professions, in their own right or on behalf of their own firms, borrowed large sums for investment purposes. Over the past decade these investments were likely to have been in property. Whether such investments were part of a partnership's capital expenditure programme or part of a pension portfolio, they put the investor in an unenviable position when the downturn occurred. When the Government prepared a list of solicitors who would be deemed eligible for NAMA advisory work, many on the list presented conflict of interest issues as they owed banks substantial amounts on property loans on the one hand and, on the other hand, were being asked to represent
NAMA to prosecute people who were in a similar position to themselves.

Banks are traditionally cautious in the context of the borrowings of directors and executives. Normally, to avoid potential conflicts of interest, if members of one bank have a need to borrow they will do so from a competitor bank, and often reciprocal arrangements may exist to accommodate the directors and executives of the other bank. These borrowings would be used for mortgages, personal loans, car loans and shares. Frequently, an accommodation would be put in place to allow the executives to execute share options and subsequently share purchases. The purpose of these loans was always made clear and the size of outstanding personal borrowings was monitored closely. Directors and executives were encouraged to have a shareholding in their bank but the quantity of shares was limited to a multiple of remuneration (salary) or some amount that most would consider conservative. If there was, for whatever the reason, a failure to perform under these loan agreements, the discussions were of a private nature between the director and the facilitating bank. Thus, any potential conflicts of interest were avoided by the director's or executive's bank.