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Note on collective and individual accountability

By | 05/02/2021 in Blog posts
Note on collective and individual accountability

In December 2020 the Prudential Regulation Authority (PRA) published an evaluation[1] (the Evaluation) of the operation of the Senior Management Regime (SMR) which was developed after the 2008 crisis and launched for PRA regulated firms in 2016[2] and introduced new regulatory obligations for senior individuals

The Evaluation explores a number of themes including the tensions between the principles of collective responsibility for boards and the obligations which apply to individual directors. While this issue has particular resonance for the boards of PRA firms subject to the SMR, some of the points discussed in the Evaluation have wider relevance for all boards.

The tension between individual and collective responsibility can manifest itself in a number of ways. Sometimes individual directors may be reluctant to address issues which they consider to fall outside their ‘comfort zone’. This can be a particular risk where directors are expressly invited to join a board because they have a particular skill which is relevant to the business of the company. In this situation the risk is that such directors may only feel comfortable intervening in relation to issue which touch on their specific area of interest.

The other side of this problem is that those directors without specialist knowledge can be tempted to delegate responsibility, for challenging the executive on specialist issues brought before the board, onto colleagues who are considered to have the relevant knowledge.

An added issue is that formal and informal contact between directors with specialist knowledge and relevant executives can lead to directors becoming too close to the executives, risking ‘group think’ the loss of the ability to consider matters objectively.

An effective a board should operate as a collective and not as a group of specialists. All directors, but particularly non-executive directors, should be prepared to ask questions and challenge any matter that comes before the board. Anecdotally, company secretaries and general counsel sometimes observe that the best questions to the executive can come from directors without specific subject knowledge.

More generally, directors should be able to manage collective obligations with their own individual duties. These obligations can complement one another. Another PRA publication[3] suggests board culture as an example of where collective and individual responsibilities can be mutually reinforcing:

… while the PRA recognises that culture is the collective responsibility of the board, it also requires the chair to lead the development of the firm’s culture and standards by the board as a whole.

In the context of the SMR the Evaluation confirms the PRA’s position seems to be that if ‘[a]pproached correctly, individual and collective accountability [should be seen as] complementary’.

However, it seems that debate on this issue is not closed and one of the Evaluation’s recommendations is that the PRA will ‘seek further views on whether board responsibilities and individual accountability are mutually reinforcing’.

[1] Evaluation of the Senior Managers Regime, December 2020. Prudential Regulation Authority – Bank of England

[2] The Financial Conduct Authority (FCA) has since introduced a similar regime for FCA solo authorised firms.

[3] Supervisory Statement SS5/16. Corporate Governance Board: Responsibilities July 2018. Prudential Regulation Authority Bank of England.

Peter Snowdon is a legal and corporate governance expert, with a particular interest in issues affecting financial services firms, banks and investment firms. A former partner at Norton Rose, he also worked for the Financial Services Authority (FSA) prior to joining Bvalco.

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