Should know-how come before independence?

In March 2009, UBS Global Wealth Management CFO Mark Branson testified before the US Senate on how UBS may have helped US clients evade taxes through secret accounts Keystone

The interim appointment of former UBS bank manager Mark Branson at the head of the government’s financial watchdog has again fuelled discussions over how relevant work experience of the staff at supervisory institutions should – or can – be.

Chantal Britt, swissinfo.ch

Deputy Chief Executive Branson, who may be proposed to replace CEO Patrick Raaflaub at Swiss Financial Market Supervisory Authority FINMA permanently, is well acquainted with financial matters. But his nomination as permanent successor would draw criticism, not only because he is a British national, but explicitly because of his experience.

Branson was head of a UBS unit in Japan from 2006 until 2008. During that time, UBS tried to rig the London interbank offered rate in an effort to boost trading profits. Switzerland’s largest bank was later ordered by United States, British and Swiss regulators to pay a fine totalling $1.5 billion (CHF1.4 billion) for the manipulation of global interest rates.

Over the past years, the Swiss public and politicians have increasingly found fault in such entanglements.

After Raaflaub’s resignation, for example, Rudolf Strahm, a member of the centre-left Social Democratic Party and a former price supervisor, told Swiss public radio SRF that “it would be a large risk for FINMA’s reputation if Branson stayed on”.

“I would opt for an academic with strong professional connections to the financial industry, who would have therefore already proved his independence,” Simone Westerfeld from the Swiss Institute of Banking and Finance in St Gallen told public television SRF. “The CEO should be able to deal with uncomfortable inquiries impartially.”

Corporate governance experts, on the other hand, say that Swiss regulators should not write off specialists because of their ties. Know-how, experience and management skills are more important than independence, they find.

“Somebody who is really independent will also have too little experience,” said Katja Rost, a professor for economic and political sociology at the University of Zurich. “It’s extremely important that executives have a profound knowledge of the trade they’re supervising and a network within the industry.”

Corporate governance

Corporate governance refers to the system by which companies and organisations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants, including the members of the board of directors, managers, shareholders, creditors, auditors and regulators.

The principles of governance specify the rights and equitable treatment of shareholders, interests of other stakeholders, role and responsibilities of the board, integrity and ethical behaviour, as well as disclosure and transparency.

Interest in the corporate governance practices of modern corporations increased between 2001 and 2002, when a number of large high-profile corporations collapsed, most as a result of accounting fraud.

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Experience

Branson’s insights and experience may also speak in his favour now that Switzerland’s tax dispute with the US is in a crucial phase. Branson has the advantage of having been able to familiarise himself with FINMA’s matters since 2010.

Rost points out that it takes a long time, particularly in a country the size of Switzerland, to recruit and train people with the right qualifications, international experience and a network. And private firms in the financial industry pay salaries that are multiples, and not just percentages, higher than regulators.

The shift in society’s values plays a large role in the discussions, she said. “The elites have lost their glamour. Today they are attacked, questioned and accused of enriching themselves to a much greater extent than a few decades ago.”

Governance is not only an issue at FINMA, but also in other trades like the energy industry, where nuclear watchdog ENSI has been criticised for hiring experts with vested interests, and the pharmaceutical sector, whose regulator Swissmedic now requires its specialists to sever all ties to companies.

More surprisingly, Rost said that governance can really be applied to almost any system – even to monasteries.

“For years convents and abbots have enriched themselves. And with recent scandals of sexual abuse by the church they also had to manage major crises which have infused the organisational structures and now require new mechanisms and controls,” explained Rost, who did some research at a Benedictine abbey.

Multiple skills

CEOs at regulators need professional expertise and must understand the mechanisms, have management skills and be on top of politics, experts say. Board members – the critical counterparts complementing the CEO – require more experience and more seniority, and need to communicate very well because they are more exposed to politicians and the media.

The requirements are fundamentally the same, irrespective of the industry, but it is also clear that financial regulator is one of the hardest positions to fill at present.

“The economic and financial crises as well as the wrongdoings in the financial industry have toughened requirements for executives working for FINMA,” said Reto Steiner, a professor at the Center of Competence for Public Management at the University of Bern.

That’s why hiring a banking expert to head FINMA is contested. “For bankers it’s really quite difficult because they were at the wrong place at the wrong time,” Rost explained. “That’s a shame, because some would be well qualified. Branson really has a dream profile.”

Friends

Calls for full impartiality have complicated the search. Today, it is no longer enough to cut ties to the industry, to sell company stock, resign from advisory or supervisory boards or not to recruit acquaintances. Intangible non-material independence is required – candidates may simply have too many friends in or feel too close to the trade, Steiner explained.

What gets lost in the shuffle are people’s competences and achievements, Rost warned. For her the independence requirements have got out of hand. “We can’t have a jack of all trades person.” And Steiner warns that there is a danger that countries will overthrow functioning systems because of single events, scandals and crises.

Eventually, FINMA’s board members will have to elect a new CEO, a person who is unlikely to be popular with everybody, regardless of who they choose. That’s why it will be a tough job. “But “regulators have to be respected; they do not need to be loved,” Steiner said.

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