On 28 and 29 September 2016 the great and the good of the UK & Ireland's internal audit profession convened at the QEII Centre in Westminster for the Chartered IIA's annual conference, Internal Audit. Ahead of that date we spoke to former Shadow Chancellor and keynote speaker Ed Balls about the confluence of government and corporate governance, and why it’s important to take a step back when assessing risk.
Q. In the post-financial crisis, post-miselling era there is a clear need to rebuild trust and confidence in business, government and regulators. What further work would you say needs to be done on all three of these fronts?
A. No one can bury their heads in the sand and hope that things will go away. We can’t go back to business as usual. We have to accept that mistakes were made and that people want to see reform and change. Government and business have got to show people that things are done in a proper and transparent way and that everybody plays by the same rules. Whether that’s the way in which we regulate the financial sector, the way in which companies pay tax or how people claim welfare benefits when they’re unemployed. People want to know that the rules are fair and everybody is treated in the same way.
Q. Do you think it should be incumbent upon government and its policies to help rebuild the public’s trust in business or should this be led by business first?
A. During the early period following the financial crisis I think the response from a lot of people in the financial sector was that it was government’s duty to sort out the mess. Businesses felt that governments could change the regulation and the rules to rebuild trust. But over the last five or six years a deeper partnership has been forged between business and government and both sides know that they have got to lead on this. Regulation has been strengthened. But business is also very vocal about how it is changing its culture and making sure people can see that it is doing things in an open and long-term way. On the other hand government has stepped up to the plate in terms of strengthening regulation. But I don’t think it can be left to one side or the other. Both have got to see that the challenge of regaining the public’s trust is an issue that will not just go away.
Q. You mentioned the fact that business is placing more emphasis on culture. How important do you think culture is in terms of governance and business ethics?
A. It’s the same in government as it is in business: people want to be promoted and rewarded, and the way in which those decisions around bonuses and progress within the organisation are made send very clear signals about what is valued in the organisation. You can have an audit committee, a head of internal audit and a set of policies, but if people are rewarded for aggressive behaviour or shortchanging the consumer and putting profit before principles, then in the end internal audit is for the birds because the culture will be pointing in the opposite direction. The lesson that has to be learnt is that the process of challenging values and decision-making has to be something that happens all of the time in all parts of the business, and not simply be the responsibility of the chair of the audit committee and the head of internal audit.
Q. Are you confident that the risk of the banking scandals that we have seen being repeated on a similar scale has been mitigated thanks to new regulatory measures?
A. I think it’s a work in progress and there is a long way to go as government has not finished the process of putting in new regulations in the financial sector. It’s about ensuring that high standards are not only at the top of individual organisations, but that those standards are part of the culture throughout those organisations. That takes time. One thing that is absolutely guaranteed is that there will be future mistakes in financial regulation.
The Financial Services Authority (FSA) said that its approach pre-2007 to financial regulation was risk-based, and of course that is the right approach. You shouldn’t be heavy-handed and apply box ticking to everybody, everywhere. You should be heavier where there is greater risk. The problem was that the FSA did not see where the risks were, neither did the Bank of England nor the Treasury. Knowing where the risks lie is crucial. If you don’t know and just decide to regulate everything heavily then you end up choking off any activity. So there is a delicate balance to be struck.
One of the lessons that I learned is that you both have to make sure that you keep one eye on emerging risks, but also on those risks that are right in front of you. I was the Economic Secretary when the RBS/ABN Amro takeover arose and the biggest issue at the time was whether the merged bank would be regulated out of London or the Netherlands. Nobody at the FSA, the Bank of England or the directors at RBS questioned whether the move was a step too far for RBS. People were busy looking at the wider risk and whether there would be any regulatory problems, when the bigger risk was actually much simpler than that. So sometimes you have to be aware of looking at the risks that are right in front of you rather than looking for complexities and for something new.
Q. Finally, you took up chairmanship of Norwich City at the end of last year.How does football compare with your time in politics?
A. As a government minister you always believe you can make a difference, whether that be in an interview for the Today programme, a statement in Parliament or establishing a review. One of the challenges with football is that when the game kicks off at 3 o’clock, the board, the owners and the executive team can do absolutely nothing. It’s all down to what happens on the pitch which is up to the players and the manager. I realised when I first became the chair of Norwich back in December that if we lost to Aston Villa that day it would be a terrible start for me, if we won it would be better, but that either way it was out of my control. That’s a big difference between government and football.
One of the things that I have introduced since becoming the chair is a risk register, which we now discuss at every board meeting. We are drawing up strategies for every risk and embedding this approach across the club so that everyone is thinking about risk and the things that could go wrong, and planning accordingly. The biggest risk for any football club by far is relegation, as we know all too well at Norwich. If you’re a football club, planning for relegation should be a no-brainer, which is why all of our player contracts were written in previous years to include how we would manage relegation. So on that front we are already on the case.
But one of the things that I’ve been dealing with in the last few months is the sudden resignation of our chief executive the weekend before the end of the season. That’s the kind of risk that we will plan for better in future.
This article was first published in Audit & Risk July/August 2016.