In a recent article titled “Blood
Brothers: The Bank of England and the London Bullion Market Association
(LBMA)“, I charted the extremely close historical and contemporary
relationship between the LBMA and the Bank of England. This article
highlighted that:
- the LBMA was established in 1987 by the Bank of
England
- the original bullion bank founding members and steering
committee members of the LBMA represented 6 commercial banks active in
the London Gold Market, namely, N.M. Rothschild, Mocatta &
Goldsmid, Morgan Guaranty Trust, J. Aron, Sharps Pixley (former Sharps
Pixley), and Rudolf Wolff & Co.
- the Bank of England has been involved in the affairs of
the LBMA from Day 1 in 1987, and continues to this day to have observer
status on the LBMA Management Committee
- the Bank of England has observer status on not just the
LBMA Management Committee, but also on the LBMA Physical Committee and
in the LBMA Vault Managers group
- the Financial Conduct Authority (FCA) also has observer
status on the LBMA Management Committee
- although there are 2 other London financial market
committees closely aligned with the Bank of England, and populated by
bank representatives, that publish the minutes of their regular
meetings, namely the Foreign Exchange Joint Standing Committee, the
Sterling Money Markets Liaison Committee, the LBMA Management Committee
does not publish the minutes of its meetings, so the public is in the
dark as to what’s discussed in those meetings
Note that “observer status” does not mean to sit and observe on a
committee, it just means that the observer has no voting rights at committee
meetings. Note also that the structure of the LBMA Management Committee has
recently changed to that of a Board, so the Committee is now called the LBMA
Board.
One of the most interesting points in the previous article referred to the
very recent appointment of a very recently departed Bank of England senior
staff member, and former head of the Bank of England Foreign exchange
Division, Paul Fisher, as the new ‘independent‘ chairman of the
LBMA Management Committee / ‘Board’. Paul Fisher has also in the past,
been the Bank of England’s representative, with observer status, on this very
same LBMA Management Committee (now LBMA Board) that he is now becoming
independent chairman of. Fisher is replacing outgoing LBMA Board chairman
Grant Angwin, who if from Asahi Refining (formerly representing Johnson
Matthey).
‘Independent’ Non-Executive Chairman
This article continues where the above analysis left off, and looks
at the appointment of Fisher as the new ‘independent’ Non-Executive
Chairman of the LBMA Board, considers the ‘independence’ of the
appointment given the aforementioned very close relationship between the Bank
of England and the LBMA, and examines the chairman’s appointment in the
context of the UK Corporate Governance Code, which now governs the
Constitution and operation of the LBMA Board.
As I commented previously:
Arguably, the pièce de résistance of these Bank of England /
FCA relationships with the LBMA Management Committee, is the fact that Paul
Fisher, the newly appointed ‘independent‘ Chairman of the LBMA Board, a.k.a.
LBMA Management Committee, has already previously been the Bank of England’s
“observer” on the LBMA Management Committee.”
This was confirmed in Fisher’s speech to
the 2004 LBMA Annual Conference in Shanghai, Fisher, when then Head of
Foreign Exchange at the Bank of England, he stated:
“I am glad to be invited to the LBMA’s Management
Committee meetings as an observer.”
Fisher was Head
of Foreign Exchange Division at the Bank of England from 2000 to 2009, so
could in theory have been a Bank of England observer on the LBMA Management
Committee throughout this period. The Foreign Exchange Division of the
Bank of England is responsible for managing the Sterling exchange rate, and
for managing HM Treasury’s official reserves held in the Exchange
Equalisation Account (EEA), including HM Treasury’s official gold
reserves. One would think that when the LBMA announced in a press
release in July of this year that Fisher was being appointed as the new
LBMA chairman, that the fact that he had previously attended the LBMA
Management Committee meetings would be a fact of relevance to the
appointment. However, surprisingly, or maybe not so surprisingly, this fact
was omitted from the press release.
The LBMA press release, titled “Dr
Paul Fisher to be the new LBMA chairman“, dated 13 July 2016,
begins:
“The LBMA is delighted to announce the appointment of Dr Paul Fisher
as the new Chairman of the Association, effective from 5 September, 2016.
Paul is due to retire from the Bank of England at the end of July.”
The press release goes on to say:
“Paul brings with him a wealth of financial market experience
following his 26 years at the Bank of England. Prior to joining the LBMA, his
last role was as Deputy Head of the Prudential Regulation Authority. Paul
was selected by the LBMA Board following an independent Executive search
procedure.”
“Previously, from 2002, he [Paul Fisher] ran the Bank’s Foreign
Exchange Division where he had a constructive relationship
with the LBMA and developed a working knowledge of the
bullion market.”
Notwithstanding the capability of the appointment, there is absolutely
zero mention in this press release of the fact that Paul Fisher used to be
the Bank of England observer on the LBMA Management Committee, a
committee that he is now being made chair of. Why so? Was it to make the
relationship appear more distant that it actually was, thereby reinforcing
the perception of ‘independence’?
In addition, the recently added bio of Paul Fisher on the LBMA Board
listings features text identical to the press release, with no indication
that Fisher previously attended the LBMA Management Committee meetings.
Notice also the reference to an “Executive search procedure” being used to
support the new chairman’s appointment.
LBMA Board
At this point, it’s instructive to examine what drove
the re-definition of the LBMA Management Committee to become
the LBMA “Board”, and the appointment process to that board of an ‘independent‘
Non-Executive Chairperson. It can
be seen from the LBMA website archive that until July of this
year, the entity providing oversight and strategic direction to the LBMA was
the ‘LBMA Management Committee':
Only in July following a LBMA General Meeting on 29 June did the
website description change to LBMA Board:
The new Board structure of the LBMA allows it to have 3 representatives
from LBMA Market Making firms, 3 representatives from LBMA Full Member
entities, 3 ‘independent’ non -executive directors (inclusive of the
‘independent’ chairman), and up to 3 representatives from the LBMA Executive
staff, including the LBMA CEO.
One of the first references to a future change in governance structure at
the LBMA came in October 2015 at the LBMA annual conference, held in Rome. At
this conference, Ruth Crowell, CEO projected that
in the future:
“To enhance its governance, the new Board will include for the first
time Non-Executive Directors whilst giving more power to the Executive so as
to ensure any conflicts of interest are eliminated.”
On 29 April 2016, a LBMA “Future
Events” summary document confirmed that a General Meeting (akin to an
EGM) of LBMA members would be convened on Wednesday 29 June 2016 in London so
as to “update the LBMA’s legal structure and governance“. The
same “Future Events” summary also highlighted a change in schedule to the
LBMA’s Annual General Meeting (AGM), which due to the 29 June General
Meeting, would now be held on 27 September 2016 with an agenda item to “incorporate,
into the constitution of the LBMA, the governance and legal structure changes
agreed at the General Meeting in June“.
It would be quite presumptuous for any normal organisation of members, in
the month of April, to not only assume that resolutions that were only being
put to its membership in the month of June would be passed, but to also
actually hard-code these assumptions into the agenda of a scheduled September
meeting. However, this was what was written in the “Future Events” document
and appears to be the pre-ordained roadmap that the LBMA Management Committee
had already set in stone.
On Thursday 30 June, the day after its General Meeting in London, the LBMA
issued a
press release in which it confirmed (as it had predicted) that “Members
of the LBMA approved by an overwhelming majority a number of important
changes to its Memorandum & Articles of Association“.
As well as endorsing the LBMA’s expansion to acquire the responsibilities
of the London Platinum and Palladium Market (LPPM), which was the first
motion for consideration at the meeting, the press release confirmed that the
membership had endorsed the appointment of an independent Non-Executive
Chairman:
“The second change was to further enhance the governance of the
Association. The UK Corporate Governance Code was
incorporated and will govern both the Constitution as well as the operation
of the Board. While it is vital for the Board to have a
strong voice for its Members, it is important that any actual and perceived
conflicts between these parties are balanced by having
independence on that Board. This independence protects the
interests of the wider membership as well as the individuals themselves
serving on the Board. To address this, the LBMA has added an
independent Non-Executive Chairman as well as two
additional Non-Executive Directors (NEDs).”
Notice the reference to 2 other independent non-executive
directors. Nine business days later, on 13 July 2016, the LBMA issued a
further press
release revealing that ex Bank of England Head of Foreign Exchange
and former observer on the LBMA Management Committee, Paul Fisher had been
appointed as the “independent Non-Executive Chairman“.
Executive Search Procedure
Recall also that the 13 July press release stated “Paul was
selected by the LBMA Board following an independent Executive search
procedure.””
Nine days is an extremely short period of time to commence, execute, and
complete an ‘independent Executive search procedure‘. It
immediately throws up questions such as which search firm was retained to run
the independent Executive search procedure?, which candidates did the search
firm identify?, was there a short-list of candidates?, who was on such a
short-list?, what were the criteria that led to the selection of the winning
candidate above other candidates?, and how could such a process have been run
and completed in such a limited period of time when similar search and
selection processes for chairpersons of corporate boards usually take months
to complete?
How independent is it also to have a former divisional head of the Bank of
England as chairman of the London Gold Market when the Bank of England is the
largest custodian of gold in the London Gold Market, and operates in the
London Gold Market with absolute secrecy on behalf of its central bank and
bullion bank customers.
Since the LBMA voluntarily incorporated the UK Corporate
Governance Code into the operations of its Board following
the General Meeting on 29 June, its instructive to examine what this UK
Corporate Governance Code has to say about the appointment of an independent
chairman to a board, and to what extent the Corporate Governance Code
principles were adhered to in the LBMA’s ‘independent‘ chairman
selection process.
UK Corporate Governance Code
The LBMA is a private company (company number 02205480) limited by
guarantee without share capital, with an incorporation
filing at UK Companies House on 14 December 1987. Stock exchange-listed
companies in the UK are required to implement the principles of the UK
Corporate Governance Code and comply with these principles or else explain
(to their shareholders) why they have not complied (called the “comply or
explain” doctrine). In the world of listed equities, monitoring and
interacting with companies about their corporate governance is a very
important area of institutional and hedge fund management. It has
to be so as the share owners are able to monitor and grasp if any governance
issues arise at any of companies held within their institutional / hedge fund
equity portfolios.
Non-listed companies in the UK are also encouraged to apply the principles
of the Code, but are not obliged to. When a private company chooses to
incorporate the UK Corporate Governance Code to govern its
Constitution and operation of its Board, one would expect that it would
also then ‘comply’ to the principles of the Code or else ‘explain’ in the
spirit of the Code, why it is not in compliance.
The UK Corporate Governance Code is administered by the Financial
Reporting Council (FRC). The April 2016 version of the Code can be read here.
The main principles of the Code are divided into 5 sections, namely,
Leadership (section A), Effectiveness (section B), Accountability (section
C), Remuneration (section D), and Relations with Shareholders (Section E).
One of the main principles of Section B is as follows:
“There should be a formal, rigorous and transparent
procedure for the appointment of new directors to the board. “
Section A also addresses the independence of the chairman, and Section
A.3.1. states that:
“The chairman should on appointment meet the independence criteria set
out in B.1.1″
Section B.1.1, in part, states that:
“The board should determine whether the director is independent in
character and judgement and whether there are relationships or circumstances
which are likely to affect, or could appear to affect, the director’s
judgement. The board should state its reasons if it
determines that a director is independent notwithstanding
the existence of relationships or circumstances which may appear relevant to
its determination, including if the director:
- has, or has had within the last
three years, a material business relationship with the company
either directly, or as a partner, shareholder, director or senior
employee of a body that has such a relationship with the company;
- represents a significant shareholder;”
It goes without saying that the Bank of England has a material business
relationship with the commercial banks which are represented on the LBMA
Board, and I would argue that although the LBMA has no share capital, because
the Bank of England has a material business relationship with the LBMA, and
because since Paul Fisher was a senior employee of the Bank of England until
July of this year, then the LBMA should “state its reasons as to why it
determines that this director is independent“.
Furthermore, although the Bank of England is not a ‘significant
shareholder’ of the LBMA, it is the next best thing, i.e. it has a
significant and vested interest in the workings of the LBMA and interacts
with LBMA banks through the London vaulting system, the gold lending market,
and in its regulatory capacity of the LBMA member banks. The Bank of England
also established the LBMA in 1987 don’t forget, so the extremely close
relationship between the two is of material concern when a senior employee of
the former suddenly becomes chairman of the latter.
Section B.2 addresses ‘Appointments to the Board':
“Main Principle
There should be a formal, rigorous and transparent procedure
for the appointment of new directors to the board“
Section B.2.1.:
“There should be a nomination committee which should lead the process
for board appointments and make recommendations to the board. A majority of
members of the nomination committee should be independent non-executive
directors.
The nomination committee should make available its terms of reference,
explaining its role and the authority delegated to it by the board. [7]
[Footnote 7]: The requirement to make the information available would
be met by including the information on a website that is maintained by or on
behalf of the company.“
Was there a nomination committee? As of the time of appointing the new
chairman to the LBMA Board, there were zero independent non-executive
directors on the Board. And, excluding the newly appointed chairman, there
are still zero other independent non-executive directors on the LBMA Board.
If there was a nomination committee, notwithstanding that it couldn’t by
definition have a majority of independent non-executive directors when
overseeing a search process for an independent chairman, then did it “make
available its terms of reference” “on a website that is
maintained by or on behalf of the company.” Not that I can see on
any part of the LBMA website.
Section B.2.4. of the UK Corporate Governance Code includes the text:
“Where an external search consultancy has been used, it should be
identified in the annual report and a statement made as to whether
it has any other connection with the company.“
The company here being the LBMA (which is a private company). There has
been no public identification as to the identity of the external search
consultancy that the LBMA state was used in the appointment of Paul
Fisher as ‘independent’ non-executive chairman.
Section B.3.2. states:
“The terms and conditions of appointment of non-executive directors
should be made available for inspection.[9]
[Footnote 9]: The terms and conditions of appointment of non-executive
directors should be made available for inspection by any
person at the company’s registered office during normal
business hours and at the AGM (for 15
minutes prior to the meeting and during the meeting).
There is no reference on the LBMA website as to the terms and conditions
of appointment of non-executive directors being made available for inspection
by any person at the company’s registered office, nor was
this communicated in the LBMA’s press release wherein it announced the
appointment of the ‘independent’ non-executive chairman. It is one thing to
claim to incorporate the UK Corporate Governance Code into a Board’s
operations, but an entirely different matter to actually implement the
principles into the operations of the Board. Given the above, I can’t see how
the LBMA has done much of the latter.
Further ‘Independent’ Non-Executive Director Appointments
Given the opacity in the appointment of the Bank of England’s Paul Fisher
as the new ‘independent’ non-executive chairman, it is therefore not
unreasonable to suggest that the entire appointment process was a
pre-ordained shoo-in. Without substantially more transparency from the LBMA,
this view is understandable. Nor have there been any announcements about the
appointment of “two additional Non-Executive Directors (NEDs)” that
was claimed in the LBMA’s 30 June press release.
The LBMA held its Annual General Meeting this past week, on Tuesday 27
September. During the AGM, the outgoing chairman, Grant Angwin commented in
his speech
that:
” I’m delighted to have by my side Dr. Paul Fisher who will be
replacing me as the first Independent Non-Executive Chairman of your Association
– Paul will introduce himself to you in a moment. Paul and I
will Co-Chair the Board until the end of this year. This is
the first major step to making the Board more independent, Paul will be
joined by up to 2 other Independent Directors in the near future.“
“The Board will now comprise of 6 representatives from the market –
three each in the categories of Market Markers and Full Members, up
to 3 Independent Non-Executive Directors (of which one will be the Chairman)
and up to 3 LBMA Executive Directors. We expect to make
further announcements on these roles very shortly.”
Given that the new chairman has been appointed, it is odd, in my view,
that the 2 other independent directors have yet to be appointed and their
identities announced. Likewise, for the 2 new directors from the LBMA
Executive, who, if and when they join the Board, will give the LBMA Executive
3 seats on the Board. Surely the AGM would have been the ideal venue in
which to make these announcements, since other board changes were being voted
on at this meeting.
The New Board Profile
For completeness, the changes to the LBMA Board’s composition that did
take place at the AGM, based on Board member resolutions that were put to a
vote, are explained below:
Prior to the AGM last week, the LBMA
Board consisted of the following members:
- Grant Anwin – Asahi Refining (co-chairman of Board)
- Paul Fisher (new chairman of Board)
- Ruth Crowell – Chief Executive of LBMA
- Steven Lowe – Bank of Nova
Scotia-ScotiaMocatta (and vice-chairman of Board)
- Peter Drabwell – HSBC Bank
- Sid Tipples – JP Morgan Chase
- Jeremy East – Standard Chartered
- Robert Davis, Toronto Dominion Bank
- Philip Aubertin – UBS (‘Observer’ status)
- Alan Finn, Malca-Amit
- Mehdi Barkhordar, PAMP
Notice that there were 5 LBMA Marking Making reps on the Board, namely
from HSBC, JP Morgan, Scotia, Standard Chartered and Toronto Dominion Bank.
There was also an ‘observer’ from full LBMA Market Maker UBS. There were 3
Full Member representatives, namely from PAMP, Malca-Amit (the security
carrier), and Asahi Refining.
At the AGM on 27 September, there was a vote on the Full Member reps to
the Board, of which there are 3 positions in the new Board. The existing Full
Member reps had to stand down and they, and other Full Member candidates,
could re-stand for election:
The voting
results elected / re-elected the following:
- Grant Angwin, Asahi Refining (and co-chairman of the
Board)
- Mehdi Barkhordar, PAMP
- Hitoshi Kosai, Tanaka Kikinzoku Kogyo
Because there were 5 Market Maker reps already on the Board, and the new
Board structure only allowed 3, there was also an election on which 3 of the
5 would remain: The results were:
- Steven Lowe, Bank of Nova Scotia-ScotiaMocatta
- Peter Drabwell, HSBC Bank
- Sid Tipples, JP Morgan Chase
Noticeably, these 3 remaining reps represent what are probably the 3 most
powerful bullion banks in the LBMA / LPMCL system, HSBC, JP Morgan and
Scotia, two of which, HSBC and JP Morgan, operate large commercial gold
vaults in London, and all 3 of which operate large commercial COMEX approved
gold vaults in New York City. The reps from HSBC and Scotia have also been
very long serving members of the LBMA Management Committee / Board, having
been re-elected
in 2015.
The AGM voting results press release also added that:
“The other two Non-Executive Directors of the LBMA Board will be
announced in the near future.”
Given the aforementioned profile of the new ‘independent’ LBMA Board
Chairman and ex Bank of England senior staffer Paul Fisher, it will be
intriguing to examine the new independence credentials of these 2 new Non-Executive
Directors who will be announced in the near future. Will
they be truly independent, or will they be former bullion bankers previously
affiliated with the LBMA and the London Gold Market, or ex FCA people
previously affiliated with the LBMA, or maybe a combination of the two.
As per the UK Corporate Governance Code:
“There should be a formal, rigorous and transparent procedure for the
appointment of new directors to the board”. The board should also “state
its reasons if it determines that a director is independent“. If an
external search consultancy is used in finding either of the 2 new
non-executive directors, there should be a “statement made as to whether
it [the search consultancy] has any other connection with the
company [the LBMA]“.
If 2 extra executive directors are also added to the Board from the LBMA’s
staffers, to bring the number of Board directors up to 12, who will these 2
people be? My money in the first instance would be on the LBMA’s senior legal
counsel (for regulatory reasons) and the LBMA’s communications officer. Whether
the minutes of future or past LBMA Board meetings will ever be made public is
another matter, but given the persistent secrecy that surrounds all important
matters in the London Gold Market, it would probably be very naive to think
that real LBMA communication via, for example LBMA Board meeting minutes,
will ever see the light of day.
Ronan Manly
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