Commentary on the financial crisis

Alain Dromer, Chief Executive Officer of Aviva Investors, has called on global stock markets to increase the pressure on listed companies to adhere to common governance and corporate responsibility standards by asking them to comply or explain under their listing rules. [Source: Responsible Investor website, 19 Nov. 2008]

Financial exclusion is experienced by developing and developed economies alike. Without the ability to access loans and financial information, people cannot help themselves to escape poverty. The banking sector has an unparalleled capacity to lift people out of this poverty and enhance the quality of living across the world. However, banks must make money. Therefore, any institution, financial or otherwise, must meet the needs of both its shareholders and the wider society for its work in developing economies to be recognised as truly responsible and mutually beneficial. [Source: The Times, p55, 11 Nov 08]

1. We need a more robust discussion about the benefits to society and business of a different way of doing business. This needs to be quite radical - none of yesterday's assumptions are exempt from scrutiny. Why? Because the rules just changed. Even if you don't think that changes anything major, it would be as well to check.

2. Let's lose the sloppy thinking about CSR and bottom line benefits. Nobody believes that the equation is this simplistic. Any more than they would someone who 'proved' that companies that sell the most are the ones that spend the most on marketing.

3. The basics matter. But we, as a society, are prone to wishful thinking. The dot-com bubble. The credit crunch. How can we avoid this effect in the future - particularly over things that are genuinely too big to fail, and are now subject to a government bail-out if they do?

4. Is there a concept of a 'fair return' for shareholders to replace the 'maximum return' concept? Can we get more people to buy in to a sustainable future if it means that the smart or lucky ways to get unfeasibly large returns are no longer possible? Guess what - you have to work hard to get rich, not just get lucky?

5. Since pay for CEOs is one of the easiest targets for discontent when poor CEO performance is one of the big issues, we should expect to see this reined in. There's an opportunity there for some visionary CEOs to show leadership. And an opportunity for society to build a vision of what the job of a CEO is, and how they should be motivated. Pay peanuts, get monkeys. Pay obscene salaries, get obscenely greedy monkeys.

Learn from the best of the voluntary sector, and blend it with the best of the private sector.

6. Take the challenge to the private equity guys. The party's over. What are the real strengths of the private equity model we could learn from? What are the real downsides?  [Source: MallenBaker.net, 5 Jan 2009]

In an interesting article looking at the long term implications of the credit and financial crisis, Mercer discusses the role of pension funds in moving to a more sustainable capital market system.  The article suggests that the crisis has highlighted our vulnerability to large-scale, systemic risks in a way that could pave the way for significant reforms, leading to a system where sustainability is at the core of decision making.  The important lesson, it suggests, is that the problems are deeply embedded in the way the market currently operates.  [Source: Mercer website, 12 Jan. 2009]

In an interview with Jon Snow for Channel 4 News, Barclays Chief Executive John Varley (Chair of Business Action on Homelessness), said: "When I think about the credit crunch that has occurred there are a number of players in that drama: Governments, central banks, borrowers and lenders, banks.  Is it right for the banks to take their share of responsibility? Is it right for the banks to apologise for the fact that by getting some judgements wrong, some big judgements wrong, as we have over the course of the last years?  Is it right for us to acknowledge that?  Yes, absolutely it is.  First of all, because we owe our governments, our customers, our consumers.  We owe them that apology as an industry. But secondly because it is essential that we are at the seat of reconstruction.  And I believe that the world will go through a period of hard work over the course of the next twelve months to try and ensure that what has happened over the course of the last two years can not happen again.  The banks have to be at that table... 

"I think that bankers should have the humility to say we understand that we contributed to what has happened. We are not uniquely responsible.  We understand why we contributed...  I wouldn't say that we got you into the mess, I'd say that we are one of those that created the problem.  And the first point of trust, is there denial of that or is there an acknowledgement of it?  I do acknowledge it, candidly.  I say for the industry we are part of that issue.

"I don't say the banks are uniquely responsible for the credit crunch.  I think there are a number of things that have created the credit crunch:  The making available by central banks around the world of very cheap money over a very long period of time.  The asset price spike that occurred as a result of that.  The pursuit of yield by investors... The regulatory structure.  But also, I acknowledge it, over lending by banks.  Banks indulged too great a sophistication in some of the products that they engineered...  Would it be generally be true to say that banks, and I think others, were seduced by the view that, such was the sophistication of markets, such was the diversification of risk, such was the innovation and creativity of the age, that the risk cycle had been abolished?  Were we seduced by that?  Yes.  Does this industry bear its share of blame for that, absolutely it does. 

"Yes, I believe absolutely [we can get us out of the crisis].  It requires good collaboration between the regulators, the governments and the banks.  I see evidence of that all around me.  It absolutely necessitates that...  What we want is a world where people have confidence and trust in the banking system.  And I am confident about our ability to regenerate that trust... Will it take a lot of hard work? ...No doubt about that, but this will pass."

You can watch the full 30 minute interview at: http://www.channel4.com/news/articles/business_money/extended+interview+john+varley/2903807 [Source: Channel4.com, 14 January 2009]

Reflecting on his sense that the "corporate citizenship movement would find itself in a crucible" John Elkington of SustainAbility critiques a column by Lucy Kellaway of the Financial Times in an article for Director Magazine.  Kellaway predicted that 2009 would see the influence of chief financial officers rocketing. Whilst CFOs and "economic value added" would be in the ascendant, she suggested the writing would be on the boardroom wall for egalitarianism, empowerment, human resources directors and the war for talent, worse still awaiting "the corporate responsibility supremo", who will be "told to take a gap year indefinitely".  Elkington argues instead that one impact of the financial crisis may be that "CFOs will be forced to engage with climate change and other societal issues that they have so far managed to duck. And they will be expected to help design the new order, not simply to massage the old."  [Source: Director Magazine/ SustainAbility.com, 23 Jan 09]

Thank goodness, now the recession's here we can forget all that nonsense about corporate social responsibility (CSR) and get back to trying to make some money.  Admit it, the thought had occurred to you. There may have been much talk of (newly rediscovered) responsibility in Davos last week. But for most managers the biggest responsibility of all will always be to make a profit and stay in business… http://www.ft.com/cms/s/c4d25c8a-f13d-11dd-8790-0000779fd2ac.html   Stephen Howard, CEO, Business in the Community responded http://www.bitc.org.uk/media_centre/comment/stephen_howard.html  [Source: Financial Times, 2 Feb 09]

The underlying problem faced by policymakers is a massive breakdown of trust in the financial system, a difficulty which cannot be fixed overnight.
http://www.independent.co.uk/news/business/comment/stephen-king/stephen-king-fiscal-and-monetary-policy-can-do-little-without-some-return-of-trust-1604651.html  [The Independent, 9 Feb 09]

Organisations can't be run by elaborate computer models or by majority votes. Strong figureheads are needed today more than ever. http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5740644.ece [Source: The Times, 16 Feb 09]

Business in the Community’s vice president was guest of the day on BBC2’s Working Lunch on 17 Feb, talking about the importance of corporate responsibility during a recession. http://www.bitc.org.uk/media_centre/news/julia_bbc2.html  [Source: BITC website, 18 Feb 09]

Noreena Hertz argues that the conditions are in place for a new form of capitalism to arise from the debris - co-op capitalism, with co-operation, collaboration and collective interest at its core.
http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5798645.ece [Source: The Times, 25 Feb 2009]

Mark Price Managing Director Waitrose and Chair of BITC’s Rural Action Leadership Team said in a challenging speech to the NFU:  “I also believe, like many people, that recent events have demonstrated that the current shareholder driven business model is far from perfect – greed, I’m afraid, is not good for anyone….A single-minded focus on shareholder returns results in an unbalanced system; free trade and consumer power are important, of course, but so is a fair deal for employees, suppliers and the communities in which we trade …it is this belief in the value of all stakeholders, a philosophy that I know works well, that has led me to accept The Prince of Wales invitation to chair his Rural Action Committee, part of Business in the Community …surely now is the right time for that action; a point in history when the very fundamental notions of how we do business and generate wealth are being reviewed. The old rulebook is being thrown out and a new, more sober and dare I say it, ethical one, written. …I am not calling for protectionist policies, nor can we realistically aim for total self-sufficiency in food production, but we can ensure that, as a nation, we refocus on the true value of farming as a well-rewarded career in a diverse and sustainable sector populated by a skilled, passionate and engaged workforce.  …As talk turns to The New Capitalism, I hope we can steer some of that enthusiasm for change into the rebuilding of agri-culture.”  [Source: Victoria Harris, BITC, 16 Feb 09]

The Independent's Business and City Editor has set out his 10-point plan to defeat the credit crunch and preserve our economic system for future generations.  Under point 7 “Enforce Corporate Responsibility” he suggests “A statutory code of conduct may have to be introduced to ensure generally accepted ethical values are injected back into the system, and to encourage long-term thinking in investment decision making. Bankers should be forced to take something similar to a Hippocratic oath. Alternatively, they could be made personally liable for failings within their institutions, leading to confiscation of their ill-gotten gains when things go wrong. Many bankers have so far lost their jobs, but they have yet to pay any penalty in terms of personal assets. Personal liability would increase the sense of partnership with other stakeholders, as well as discourage excessive risk taking.”  He also sets out the need to complete the Doha trade negotiations, get a global deal on climate change at Copenhagen, and reform international finance institutions, so that they are treaty based along similar lines to the WTO.
http://www.independent.co.uk/opinion/commentators/jeremy-warner-a-manifesto-to-save-the-free-market-1546275.html [Source: The Independent, 5 Feb 2009]

In a lengthy profile of George Soros, Financial Times US Managing Editor Chrystia Freeland introduces his conceptual framework for markets at the core of which is the idea “reflexivity”.  Soros defines this as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”   It is at odds with the 'rational expectations' economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.  Larry Summers, Head of Obama’s National Economic Council says: “Reflexivity as an idea is right and important and closely related to various streams of existing thought in the social sciences. But no one has deployed a philosophical concept as effectively as George has, first to make money and then to change the world.” 
http://www.ft.com/cms/s/2/9553cce2-eb65-11dd-8838-0000779fd2ac.html?ftcamp=Late_headline2/NL/UKFeb2009/Vanilla_soros/0/ [Source: FT.com, 30 Jan 2009]

In his blog posting at the end of the World Economic Forum, Simon Zadek of Accountability highlights the “shocking data point that by 2020, 85% of the world’s population will live in water stressed area unless something changes …”.  He concludes “...as we turn as a generation to the matter of governance, whether for global trade, to manage climate, to secure water, to stabilise food supplies or just to bake bread and biscuits, it is worth I believe considering some more radical options based on a hard nosed view of what is not going to work, and an insightful take on the potential offered by today’s experiements.”
http://www.opendemocracy.net/economics/article/email/need-new-governance [Source: OpenDemocracy.net, 31 Jan 2009]

The United Nations Global Compact Office has released a paper, Global Sustainability in the 21st Century: An Action Plan for Business, to coincide with a speech made by UN Secretary-General Ban Ki-moon at the World Economic Forum in Davos. The paper argues that the confluence of global threats, most prominently the global economic downturn and climate change, provides the most compelling case for business to embrace corporate responsibility.  It calls on companies to take an expanded view of risk and opportunity management that includes environmental, social and governance (ESG) factors and to increase focus on long-term value creation.  In his speech in Davos, Ban Ki-moon urged business leaders worldwide to embrace “global cooperation and partnership on a scale never before seen”, to eschew short-term thinking and seek long-term solutions to climate change and other pressing global challenges. The Secretary-General referred to 2009 as “the year of multiple crises” and he stressed that, amid worries over a global recession, climate change “threatens all our goals for development and social progress”, but that it also “presents us with a gilt-edged opportunity” to invest in sustainable technologies and spur long-term growth. [Source: UN Global Compact website 29 Jan. 2009]

Writing for Responsible Investor, Tom Powdrill explores how the House of Commons Treasury Select Committee’s inquiry into the banking crisis is generating a huge amount of material that could prove very useful as we try and find our way out of the crisis. The written submissions from two of the leading institutional investor bodies – the Association of British Insurers (ABI) and the Investment Management Association (IMA) – provide some particularly interesting perspectives on the limitations of attempts to get shareholders to exercise ownership. For example, Powdrill highlights the ABI argument that the fragmented nature of share-ownership means that effective shareholder engagement is often hamstrung because some ‘owners’ are not very interested in governance. Similar arguments were made in a series of reports in late 2008: Tomorrows Owners (Tomorrows Company), Tomorrows Investors (RSA) and Compassionate Economics (Policy Exchange/ Jesse Norman). [Source: Responsible Investor, 16 Feb 2009]

In an interesting new article, Mallen Baker of Business Respect, has singled out five elements of great socially responsible leadership.  He suggested key attributes include: being prepared to challenge the logic of your industry; doing something because it is the right thing to do, and then working out how to make it pay; understanding that the leaders sets incentives - and sometimes the bottom line is the wrong incentive; understanding when to follow the rules, and when to use common sense in the face of unintended outcomes; and understanding that being accepted as a leader does not equate to being a good leader. [Source: Business Respect website 16 Feb. 2009]

Aron Cramer, President and CEO of Business for Social Responsibility, has suggested in a new blog that “some fundamental principles of corporate governance have been underplayed and misapplied over the past few months. But making policy to address the symptoms, rather than the causes, of such actions is a poor practice. Instead, we should be thinking about redefining core principles of corporate governance, for a systemic approach to decision-making that can cushion business, investors, and the public from the kind of shock we are now experiencing.”  [Source: BSR website 11 Feb. 2009]