What do we need to do differently to stop us repeating the follies and disasters that brought the financial system to its knees in 2007? What is the contribution of boards, investors, and regulators?
In my previous article I argued that we have misunderstood the importance of values to capitalism. People who are determined to make money without regard for their wider impacts can destroy trust in any marketplace. The destruction is worse in globalising markets without a corresponding globalisation of regulation.
The successful regulatory system of the future will be a combination of the new central regulation and frameworks locally for well policed self-regulation.
The most successful example I have experienced was the Health and Safety at Work Act 1974, whose provisions I was responsible for implementing in a GEC factory in the 1970s.
The Act broke new ground. It made safety the responsibility of every employee, not just the management. It required companies to make a statement of safety policy and say how it would be implemented.
The legislation was prescriptive at the highest level but flexible in application.
It had teeth, with safety committees and a system of trade union safety representatives to challenge the company.
In the run-up to G20 there is much talk of global regulation. The risk is we will see the pendulum swing from risky liberality to counterproductive rigidity, especially if the new frameworks are hastily bolted together in time for end-of-summit communique.
Here is what I would advise the summiteers.
1) Accept that your communique will disappoint whatever it says. Promise less now, deliver more later.
2) Professionalise financial practice. All those who handle our money either are, or should be, bound by professional codes that spell out obligations they must fulfil to society and their customer in exchange for their continuing licence to practice. Would-be investment bankers, dealers, fund managers, and investment consultants would be required to swear their own version of the Hippocratic Oath, the promise to “do no harm”. Those found guilty of scams, insider trading, misrepresentation, putting their own interests before the interests of their customers or of society could face disciplinary investigation and ultimately suspension from their profession.
3) Fiduciary duty and sustainability. It is now clear that fiduciary duty extends beyond pursuing immediate financial returns to beneficiaries. It covers responsibility for enhancing the operation of the investment process so as to ensure that those financial results can continue to be delivered in the future. Pension trustees, and all those who handle savers’ money, need to build this understanding into their approach. This is a huge agenda – something that Tomorrow’s Company will be tackling in the next phase of its work on Tomorrow’s Owners.
4) Professionalise the board. Under UK company law, the responsibilities of all board members, executive and non-executive are the same. There is a professional qualification for directors: it is called chartered director status, and government should impose a requirement on listed companies that by, say, 2015 a minimum of half of their board members are professionally qualified.
5) Make culture count. The most recent £9bn (€9.8bn, $13.2bn) of HBOS losses are, it turns out, attributable in particular to the excessive scope and power granted to one dominant banker. At Royal Bank of Scotland, no one on the board or among senior colleagues was strong enough to challenge Sir Fred Goodwin. The culture at UBS was so dysfunctional that senior sales-driven executives overrode established internal control policies forbidding them to flirt with further US tax schemes. The time has come for ethical audit with teeth – for a rigorous process in which independent observers check gaps between stated values of the business and its actual behaviours – and the board are forced to confront this because the results will be published.
6) Report on ethical and culture risks. We need to bring back the mandatory operating and financial review abolished in 2005 by Gordon Brown, then UK chancellor, and add to the discussion of risk management in it a section dealing with the company’s values and behaviours, with an independent external auditor’s comment with the boards’ own commentary.
7) Rebalance remuneration. Remuneration needs to be rebalanced so that it rewards performance over the whole cycle, with provisions for deferral and claw back, and a balance between teamwork and individual achievement. The remuneration committee should be required to explain whether remuneration policy promotes desired or undesirable behaviours.
This was was published in the FT on 29/03/09