What’s the Story?

The press reported last week that the proxy advisor, Glass Lewis, recommends a vote against the Barclays remuneration report. This is due to the failure to adjust the 2022 LTIP vesting for the former CFO.

Barclays was hit by an SEC penalty in September for $17.7 billion of unauthorised sales of structured financial products. Barclays settled $361m with the SEC and set aside £450m for investor compensation, helping to lower net income by19%

The problem started in 2017, when Barclays overcharged clients some $50m and agreed a $97m SEC settlement.

However, Barclays also lost its license to auto-update their structured financial products sale authorisation. For 2019 Barclays set a $28.8 billion limit, but actual sales were well above that figure.

Without an auto-update license, Barclays needed a system to track sales of registered securities, but the SEC has said “no such mechanism was put in place“.

Separately, Barclays has been fined $200m for widespread lapses in record-keeping practices by the SEC and the commodity futures trading commission.

As a result of these and other governance issues, Barclays announced in February this year that the 2022 bonus pool for top executives was reduced by £1m. This cost the CEO £403,000, and the current CFO £166,000.

However, Glass Lewis is commenting on financial control systems and the former CFO was in charge for the period when the current write-downs originated. Furthermore, the £3m LTIP vesting represents some two thirds of the former CFO package.

Glass Lewis believe a cut in the LTIP vesting should have been made too, notwithstanding the £1m malice cut in the Barclays bonus pool.

Why does it matter?

Banks are hugely important to the global economy. They are heavily regulated for good reason. Individual bank failures historically have resulted in extensive customer losses and insolvency. More latterly to avoid systemic bank collapse, central bank and government support leaves the final cost of bank failure with the taxpayer.

The global economy nearly collapsed following the 2008 financial crisis. In response, strong new rules on capital adequacy and banker compensation were introduced worldwide. The current economic slowdown and geo-instability will test the new system.

But extra rules do not always mean better culture. Big bankers’ bonuses and total compensation are strong drivers to deliver financial results. Culture is the most powerful tool for dealing with non-compliance or “playing the edge”. However, better culture is not imposed by external rules.

Newspoint view

SVB and Credit Suisse are recent big bank failures. The Deutsche Bank operation a €1m malus bonus cut in response to a 5 year €2 billion cost internal control failure and problems at the asset management subsidiary are worrisome. So too are Barclays multi-dimensional non-compliance issues, with extensive losses reflected in only a £1m bonus pool cut.

Token disapproval by minor malus adjustments might prove counterproductive. Yes it flags disapproval, but it might also signal non-compliance tolerance. A wrist slap, not a kick in the teeth.

Worse, it puts a market price on non-compliance. First for those in the bonus arrangement, and second the courts might use it in employment non-compliance disputes with more junior staff. Why should level 2 executive be fired, when their boss only got a 5% bonus cut for something similar?

Internal controls and strong culture are natural compliments to external rules and regulations for banks. Both bank boards and shareholders have a key role to play in ensuring bank results are delivered in the right way.

Glass Lewis are correct to raise the LTIP non-cut question, we will soon see the response from both the board and Barclays shareholders, running into the 3 May 2023 AGM.

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Please feel free to email or call:

Damian Carnell - [email protected]  +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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