Bank shareholders’ suffering is hidden from the headlines

People who put their life savings into banks are ruined, as directors shun shares and take fees,

OUR banks are much pilloried in public debate for their treatment of borrowers who cannot afford to meet their debts and who have often brought their woes on themselves. Little is ever said that is supportive of bank shareholders, who have suffered huge losses since 2008.

Most of these are people of modest means who invested much of their life-savings in bank shares, often on the advice of bank officials or stockbrokers linked to banks.

In AIB their shares were rendered virtually valueless when effectively appropriated by the State — the same State whose organs had failed conspicuously in their duty to supervise the banks.

And over at Bank of Ireland the shares have fallen to less than 5pc of their pre-crash value.

In both banks, suffering shareholders have had to endure the spectacle of executives who led their banks to disaster retiring with generous packages while most of the non-executive directors, who had failed to check the reckless lending of management, served out their time, drawing generous fees.

On Thursday at the Aviva Stadium, the Bank of Ireland board have their annual encounter with shareholders — at a meeting rather grandiosely entitled ‘the annual court’.

Ever since the crash, the directors have been subjected to crackpot abuse and other demonstrations at these annual courts that made good copy for the media who have, as a result, failed to cover serious criticisms voiced by sensible shareholders.

One such criticism is that non-executive directors have such paltry shareholdings that they have no financial incentive to look after the interests of shareholders.

Chairman Archie Kane, who enjoys the grandiose title of governor, has since 2012 drawn an annual stipend in excess of €500,000 — yet his own shareholding was worth less than €3,000. Even with the 200,000 shares he acquired last year following repeated criticism, his holding is valued at less than onetenth of his stipend.

Governor Kane has met criticism of his shareholding and that of board colleagues with a response insolent in its brevity. It is, he has said, a personal decision for each director to decide how many shares to buy.

It may be, but it is a personal decision with which shareholders have a right to be concerned. It is a reassurance to them when directors share their financial interest in the success of the bank and so can be counted upon to try to manage it in shareholders’ best interests.

The 2016 annual report reveals that deputy governor Patrick Kennedy purchased two million shares, giving him a holding valued at close to €500,000. But none of the other eight non-executive directors has a shareholding whose value is even half of their basic annual fee of €63,000 — to which there are, incidentally, significant extras added.

Two directors, Kent Atkinson and Patrick Mulvihill, have minuscule holdings.

The other serious criticism levelled at the board of Bank of Ireland is that it has never sought to determine who was responsible for the bad loans that brought the bank to the brink of extinction, let alone hold anyone accountable for bad decisions.

An Oireachtas inquiry that reported in 2015 found it impossible to establish culpability for the disastrous lending of financial institutions without examining individual lending decisions.

Client confidentiality was invoked by banks to prevent this being done, regardless of the fact that they have had no qualms about exposing defaulting borrowers by suing them in the public glare of the courts.

Given this confidentiality argument, the only possible meaningful inquiry would be one by non-executive directors, who were not involved in the original lending decisions.

Yet, at last year’s annual court of Bank of Ireland, governor Kane stated that they did not intend to have any such inquiry. So we shall never know who was responsible for the huge losses incurred on their bank loans.

It reflects the limited role assigned to non-executive directors that I myself encountered on the board of the ICS Building Society, which was a subsidiary of the Bank of Ireland.

In 2009, I asked that we should examine individually every loan that had gone wrong with a view to assessing whether the initial decision to make them was defensible. I was told peremptorily that non-executive directors were entitled to concern themselves only with general policy, not individual cases.

If non-executives on the bank board were similarly inhibited, and I have no reason to believe that they were not, then they did not provide an adequate check on the management of the company. That was a root defect in the governance of the bank.

If Bank of Ireland and other Irish banks are not to fail their shareholders again, they must re-think their governance. They need stronger, more active boards, who have the power and the incentive to see that management performs in the long-term interests of shareholders.

Non-executive directors should have substantial shareholdings, purchased, if necessary, out of their fees. There should not be a phalanx of bank executives on the board as this inhibits individual non-executive directors from criticising management’s performance.

As a protection against short-termism, directors, be they executive or non-executive, should be required to retain their shares for five years after they cease to be directors. Non-executive directors should not be prevented, as I was, from enquiring into individual lending decisions that go wrong.

Charles Lysaght was, until 2009, a director of the ICS Building Society, which was a wholly owned subsidiary of the Bank of Ireland. He is a shareholder of long standing

‘BoI has failed to hold anyone accountable for the bad decisions’