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149 Salz Review An Independent Review of Barclays’ Business Practices values and encouraging the right behaviours. And only a strong HR function, with sufficient standing in the organisation, can help Barclays achieve that. A strong HR function is also critical to the appropriate design and operation of a robust compensation system. In Section 10 we recommended that Barclays identifies ways to strengthen the effectiveness of the HR function and to see that it provides necessary challenge to business leadership, for example by ensuring the Group Head of HR is on the Group Executive Committee and by making the appointment and removal of the Group Head of HR subject to approval of the Board Corporate Governance and Nominations Committee or another major Board committee.
Salz Review An Independent Review of Barclays’ Business Practices 150 12. Management Oversight and Risk Management 12.1 What uniquely distinguishes banks from other companies is their role in risk transfer and risk management. As Walter Wriston famously said: “… managing risk … is the business of banking.” 237 The Three Lines of Defence Model 12.2 For any bank, the business practices associated with risk management and management oversight are critical. Banks use a ‘Three Lines of Defence model’ as the standard approach for the design and implementation of risk and control frameworks. The ‘first line’ is the business management. They are fully responsible for ensuring that a risk and control environment is established as part of day-to-day operations. The ‘second line’ comprises the control functions such as Risk, Compliance, Legal, and the non-advisory parts of Finance and HR. These functions collectively provide oversight of the control environment by setting frameworks and establishing, implementing and enforcing policies and procedures. The ‘third line’ is Internal Audit as the independent provider of assurance. 12.3 While the concept is straightforward, its implementation is more difficult in complex global organisations. All the more so where the operating model is relatively decentralised, as at Barclays. Such decentralised organisations can blur the distinction between the first and second lines of defence, since control functions exist (and often report) within business units. Where control functions feel greater affinity to the business unit they are supposed to control, they can lose the degree of independence they need to perform their roles effectively. 12.4 The ‘operating model’ – how authority is delegated, the degree of decentralisation, how the bank’s various businesses are managed, how decisions are made, and the role of the Group Centre at Barclays – is critical to the management oversight of risk. There have been periodic shifts in the level of decision making at the Group Centre but, for most of the past 10 to 15 years, there has been considerable delegation of authority. 238 12.5 After John Varley became Group Chief Executive in 2004, he increased delegation, setting up two powerful business clusters. He described in 2007 how he “decentralised operations so that many more decisions are made locally”. 239 Each cluster had a Chief Executive who was, as John Varley put it in the 2006 Annual Report, “the single point of strategic direction and control” for the businesses in that cluster. The underlying philosophy of this operating model, for the most part, was one of ‘devolution’ with the Group Centre providing strategic leadership, 237 Attributed to Walter Wriston, ex-CEO and Chairman of CitiCorp by the Economist in 1993 (“Survey of International Bankers: A comedy of errors” April 1993) though other sources also attribute the quote to John Pierpoint Morgan. 238 “Since I joined Barclays in 1996, it has been run on a relatively decentralised basis”, Bob Diamond Speech to UBS Global Financial Services Conference, May 2012. 239 “Barclays’ Global Acceleration”, strategy+business, May 2007; http://www.strategybusiness.com/article/07216?pg=all.
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Salz Review - April 2013
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