Monday, March 16, 2009

Fingleton's Hubris and Brass Neck

Michael Fingleton has dominated Irish Nationwide Building Society for more decades than I can remember. It operates a 50-branch network including a branch in Belfast and London.

Fingleton's €2.313 million annual remuneration in 2007 was more than 47 times greater than the average annual remuneration of each of his 400 staff. This increased to €2.38 million last year but there is no evidence that a remuneration committee is in place at the Society to sanction this.

Directors' emoluments between 2000 and 2007 amounted to €16.75 million but each annual report strongly and consistently advocates 'the importance of cost control and how it continues to be a major objective of the Society'. This was a period when its emphasis changed to commercial property and it was thought there were ambitions to demutualise.

There have been only 3 non-executive directors on his board (compared to 7 at EBS), each with long tenure - until the recent appointment of 2 non-executive directors, Rory O'Ferrell and Adrian Kearns, by the Irish Government, who are to act in the public interest. The non-executive directors received 8.4% of the directors' emoluments in 2007. Is this a measure of their proportionate influence? It would seem that their influence is as muted as that of the the impact of the Governor of the Central Bank in reigning in the Irish banks as the credit crisis worsened and they were knee-deep in property development.

The expression 'corporate governance' does not feature, even once, in the Society's 2007 annual report. There is not as much as a whispered comment on the website of the Corporate Governance Association of Ireland about the corporate governance standards at Irish Nationwide (or, indeed, Irish Life & Permanent Plc).

Some 60% of the assets and 70% of the revenue of Irish Nationwide is derived from the commercial sector in Britain and Ireland. It is hard to see how it can escape the carnage now visiting all financial institutions, particularly those embedded to the commercial sector, especially given the experience at EBS.

Mark Moran, chairman and Alan Merriman, financial director of the EBS resigned following the publication on 10th March of EBS annual results for 2008. This followed an impairment charge of €110 million on 20% of its loan book (€95 million arising from the provision of development finance and €15 million against funding provided to an Icelandic bank, now nationalised). This resulted in a loss before taxation of €38.2 million. No bonuses are payable to EBS management in respect of 2008; not so at Irish Nationwide! EBS, in assessing its loan portfolio, is concerned with €500 million in development financing. Irish Nationwide had over €9.75 billion in commercial mortgages in 2007.

Revelations about Fingleton's €1 million 'pre-contracted incentive bonus' is the lastest of many displays of hubris and brass neck and it is also another rusty nail in the reputation of Ireland's financial services industry.

Remuneration levels in this industry have risen so astronomically since the turn of this century that they bear no coherent relationship to the income and resources of most borrowers, savers, and personal investors, especially in the midst of such a severe economic downturn.

The decision of the Irish Government to nationalise Anglo Irish Bank in January and to provide very substantial resources to 6 others from the Republic’s National Pension Reserve Fund has intensified public scrutiny and outrage. The Irish Government’s Covered Institutions Remuneration Oversight Committee (CIROC) completed it report on February 27th and Mr. Brian Lenihan TD, Minister for Finance, published the report on March 13th. Pay ceiling ranging from €230,000, in the case of the chief executive of Postbank, to €690,000, in the case of the chief executives of Allied Irish Bank and Bank of Ireland were recommended in the report. The pay ceiling recommended in respect of the Republic’s two building societies is €360,000. But Lenihan has put an absolute cap of €500,000 on maximum bank chiefs’ pay.

Cheslea Building Society, in the south east of England, is comparable in scale, scope and longevity to Irish Nationwide - although its total assets are €2 billion greater. Established in 1874, it operates a network of 35 branches and had assets in 2007 of €17.95 billion, compared to assets of €16.04 billion at Irish Nationwide in 2007. It is the 5th largest building society in Great Britain. The pay of its chief executive, Richard Hornbrook, in 2007, was £424,000 (€576,640), a quarter of that paid to Fingleton, and just 12 times that of the average paid to each of his 1,018 staff.

The former chief executive of Bank of Ireland, Brian Goggin, was criticised harshly in many quarters for the remuneration of €2.972 million that he received in 2007. But Bank of Ireland's total assets in 2007 were €188,813,000,000,11 times greater than those of Irish Nationwide. Would this justify a salary of €33 million for the top job at Bank of Ireland?

It was revealed in a High Court case in November 2007 that Irish Nationwide made loans of over €10 million each to Michael Lynn and Thomas Byrne, two former Irish solicitors who were dismissed from the profession after they gave multiple undertakings to financial institutions in respect of individual properties.

Last September, the ratings agency, Moody's, downgraded INBS because of its exposure to commercial property and development, which accounts for 80% of its loans. Moody's took into account a rapid deterioration in land and property values, which it says was exacerbating the already high loan to value ratios on the commercial property and development loan book of the building society. It was also concerned about what is described as 'concentration risks to its largest 20 borrowers' of the Society.

The former chairman of Anglo Irish Bank, Seán FitzPatrick, by mid September, proposed a merger of Anglo Irish Bank and Irish Nationwide but this was rejected by the Minister for Finance who stated the INBS was ‘well funded’ when the Irish Government inaugurated the State guarantee scheme for bank deposits.

When the Irish Government guarantee scheme was inaugurated on September 29th, Michael Fingleton’s son, who is employed at the London branch of Irish Nationwide, sent an e mail to at least one leading global bank stating that as a result of the protection of the Government's new bank guarantee plan, Irish Nationwide “represented the safest place to deposit money in Europe . . ." This directly contravened the assurance of Brian Lenihan, Minister for Finance that there would be no anti-competitive practices as a consequence of the guarantee and he referred the e mail of Fingleton junior to the Irish Financial Regulator who fined the Society €50,000.

Ireland awakened on December 18th to the shock announcement that Seán FitzPatrick had resigned as Chairman of Anglo Irish Bank and as a director of several other companies. It was disclosed that personal borrowings by him of at least €228 million, over an 8-year period by him from Irish Nationwide Building Society had been used to conceal his personal borrowings from the auditors and shareholders of Anglo Irish Bank. His borrowings from the Society were repaid in lump sum payments shortly after the Anglo Irish fiscal year end. While the staff of the Irish Financial Regulator discovered these transactions as early as last January the former chief executive of the Regulator declared that he was not advised of them and he resigned this position last January.

The Chairman of Irish Nationwide, Dr Michael Walsh tendered his resignation on February 19th. He had been a board member since 1995 and chairman since 2002. He cited ‘unfolding events’ as a context for his resignation. He indicated that the Society cannot survive without significant Government support and further reorganisation. The Financial Regulator has concurred with this.

Lenihan has indicated that he intends to oblige Fingleton to repay his 2008 bonusand his view better prevail. How can a bonus be paid in repect of unknown results? The citizens are now vital stakeholers and must be afforded an opportunity to consider the 2008 results, the governance standards are appropriate at Irish Nationwide before the issue of bailout is decided.

The political system has sleepwalked around Michael Fingleton for far too long. Failure to prevail would be tantamount to the Irish Nationwide grossly disrespecting the sentiment of the Irish public on whose support and goodwill its future viability depends and who in turn face most threatening and uncertain circumstances. They must not to be treated as nincompoops and nitwits.

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