How central bank boards/committees are different from private ones?

A nice speech by outgoing Bank of England’s FPC (not MPC) external member: Martin Taylor.

He speaks about how central bank boards/committees are different from the ones in private sector. He also discusses several others things:

  • Role of FPC
  • Role of external members vis a vis internal members
  • central bank independence
  • central bank neutrality: he rightly says that central banks should strive to be neutral but should not be neutered in the process
  • Brexit

On the differences between private board and public ones:

At the heart of the private sector board is a contradiction which amounts to a glaring structural weakness. The directors are supposed both to contribute to the formation of the company’s strategy and to judge those who execute it. As a result, their relation to executive management is at once collaborative and adversarial. Most of what goes wrong on boards arises from a  failure to balance these opposing requirements – often an understandable failure, since they do not sit easily side by side. Boards have the power of appointing and removing the business leadership, a power which they seem to exercise very frequently, as if afraid it might be taken from them, rather as ramblers zealously hack their way through brambles to preserve Rights of Way. My own view formed over many decades is that the corporate board should principally play a defensive role; it exists above all to prevent catastrophic outcomes.

Good governance, and there is plenty of it, passes largely unnoticed, while a board in the wake of a company failure looks like a collection of idiots. In  the financial sector, with which the FPC is principally concerned, it is inescapably clear that most boards in the early part of this century did an absolutely shocking

Policy committees, in contrast, do not have the power of appointment and dismissal. Members are not responsible for the composition of the body on which they sit. It follows that their duties are overwhelmingly collaborative rather than adversarial. This should make it much, much easier for them to function without Shakespearean alarums and excursions. 

On the need to balance central bank independence:

Questions arise from time to time about the continuing desirability of central bank independence. Those who oppose it tend to exaggerate its extent – they talk as though the Bank of England had been given unfettered freedom of action in all directions, rather as if the Treasury were a mid-20th century power which had embarked on a process of benign decolonisation. In fact the Bank remains quite clearly an arm of the state, and – as we saw in the immediate aftermath of the 2016 referendum – a highly effective one. Its independence is limited to policy responsibility in precise and restricted areas, and it is, as I have said,
subject to parliamentary oversight.

In addition, perhaps not all those who go on about unelected officials remember the debates of the 1990s. They forget that the electoral cycle has unintended consequences for policymaking. Those newly elected may indeed be held, for a while at least, to represent the views of voters; purified in the crucible of campaign and manifesto, they can surely be relied upon to do the right thing. But those seeking re-election, alas, cannot always be trusted to make decisions, especially those involving, for example, the setting of interest rates, in a disinterested manner. This weakness, of which there was ample evidence in pretty much every country, was the condition that central bank policy independence was devised to cure. It was a signal act of renunciation by politicians conscious of the temptations they faced.

On the role of a central bank board:

Long ago, perhaps in 1981 or thereabouts, when I was a journalist on the Financial Times, I went to cover the annual results of the then Cadbury Schweppes. Over lunch afterwards I found myself talking to the company chairman, Sir Adrian Cadbury. We must have run out of small talk and exhausted our
micro-analysis of the markets for confectionery and soft drinks. I suppose, looking back, that I ought to have asked him about Corporate Governance, which he was later to invent, but at the time we were both in the dark about this; after all, the young Pythagoras might have been baffled by a penetrating question about the square on the hypotenuse. Instead I asked Sir Adrian about the Court of the Bank of England, of which I knew him to be a member. What was the function of Court? I asked, not intending to be awkward, simplytrying to make conversation. He sat up very straight and replied “To support the Governor”.


The Governor at that time was Gordon Richardson, who certainly needed a bit of support, pounded as he was day and night by Mrs Thatcher’s heavy artillery, accused of being wet, as a generality, and, in particular, of failing to control the money supply (he was guilty on both counts, more or less). He himself memorably characterised their relationship: “We don’t get on; I am a cat, she is a dog”. Allow me to note in passing the limpid simplicity of this remark, simplicity being a quality not always associated with central bank communications. Twelve consecutive monosyllables; no need for an infographic to explain what he meant, though it would be easy enough to devise one.


Good one…

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