Top US Banks Disappoint in Investor Study
November 22nd, 2013
Five years after the crisis that rocked the financial world, seven leading U.S. banks scored a disappointing 60 or fewer out of 100 possible points in a benchmarking study released today by the Interfaith Center on Corporate Responsibility (ICCR), which represents 300 faith-based and socially responsible institutional investors with $100 billion in assets under management. The top banks were evaluated in terms of four key shareholder concerns: executive compensation, risk management, responsible lending and investing, and political contributions.
The financial institutions included in the ICCR report are: Goldman Sachs (60, which scored highest on responsible lending and investment and tied for highest on political contribution practices); Bank of New York (59.02, which scored highest on risk management and tied for highest on political contribution practices); JP Morgan Chase (56.5, which tied for highest on political contribution practices); Morgan Stanley (55.40); Bank of America (55.35); Citi (54.90, which tied for highest on political contribution practices): and Wells Fargo (50.73, which scored highest on executive compensation practices.).
Rev. Séamus Finn, director, Justice, Peace and Integrity of Creation for the Missionary Oblates of Mary Immaculate and ICCR board vice chair, said: “Five years after the U.S. financial meltdown, some of the banks are beginning to address their risk management protocols, but have much more work to do when it comes to responsible lending and investment. Overall disclosures are also weak, particularly related to both executive compensation and political contributions. What we see in these findings is a somewhat timid group of banks clustered in the average-to-below-average range with no single institution distinguishing itself as a leader for shareholders in the post-financial crisis era.”
Some key takeaways:
1. There is clearly room for improvement for all the banks since all the final scores range between 50 and 60 out of a maximum score of 100. While each bank had areas where it performed better than its peers, none of them are without issues and no bank emerged as a clear leader on all the themes surveyed.
2. Risk management continues to be an area of concern. The banks were quite happy to tell us about their improvements in risk management systems. However, to date there is no evidence of the effectiveness of these changes, and the banks continue to be involved in significant controversies. There is also a need for greater transparency around the company’s use of tax havens and around risky activities such as high frequency trading and dark pools, the latter being basically a means to avoid regulated markets.
3. US banks need to more fully integrate environmental and social issues such as climate change, water and human rights into their investment practices. This is really important as banks play a major role in shaping the way other industries operate. They lag their European counterparts in this area, even if they have implemented interesting initiatives in financing renewable energy projects, for example.
4. There are no strong mechanisms in place to cap executive compensations. Most banks have not capped bonuses, and the caps systems, when they exist, are weak. Since “say on pay” resolutions are not binding, the possibility for unchecked increases in bonuses remains. This can foster excessive risk-taking and ties back to the risk management concerns expressed earlier.
5. Finally, there needs to be more transparency and proactive communication about lobbying activities, both at the state and federal level, and around activities indirectly sponsored through banks’ membership in trade associations. The banks are refraining from direct political contributions as a whole but are spending significant amounts on lobbying.
In conclusion, the report proved to be an effective tool to gather a lot of information about banks’ practices and to go deeper in the dialogues with them. It nonetheless shows that progress is needed in the 4 priority areas and it also highlights the topics that need to be addressed by each bank, in order to be better aligned with the expectations of concerned shareholders.