The financial crisis that erupted over a decade ago brought about a seismic change in regulation. Some of the changes were easy to define, even if controversial and difficult to implement. In the bail-in era, investors in banks had to learn that when things go wrong, their capital may have to be used to save a bank from going out of business.
In January 2019 Andrea Enria took over as chair of the Supervisory Board of the European Central Bank, replacing the no-nonsense Daniele Nouy. In an interview published on the ECB website, Enria made a very valid point about what remains to be done to strengthen the Single Supervisory Mechanism.
“Banks now have more and better capital, more liquidity, and have reverted to more stable sources of funding. However, all this is of little value if a bank suffers from poor governance, short-sighted leadership and a problematic culture,” he argued.
The change in culture, not just in banks but in all business communities, is the acid test of how successful the regulatory reforms will be in making another crisis less likely. Doing what is right is different from merely observing strict laws and regulations. It is difficult to define what constitutes good governance. You know that an organisation is doing the right thing when you see it caring for all its stakeholders.
“The one thing we must remember is whom we are working for: European citizens, investors, borrowers and the economy at large. Our work must benefit them, and we are accountable to them,” Enria added.
Many still believe that the board of directors is there primarily to protect shareholders’ rights. Banks are certainly an exception to this often-quoted maxim, because depositors should be the primary concern of bank leaders.
The shift in corporate culture will be challenging because it will involve a change in the mindset of a generation of businesspeople who are used to dealing with their bankers in a way that in today’s post-crisis environment is unacceptable.
Decisions are often negotiated before formal meetings
The old boys’ network where bankers and business leaders scratch each other’s backs is still prevalent in some countries. Those who follow the evolvement of the crisis faced by certain Italian banks will understand the perversity of such informal networking. The revolving door practice is still alive and kicking in organisations that cultivate the traditional corporate culture. Big business finds it convenient to employ their former retired bankers.
The ethos of some banks and businesses aims at reaching consensus in board meetings where no director is expected to rock the boat. Decisions are often negotiated before formal meetings. Any director who dares challenge the decision of a powerful executive or a dominant chair is labelled as opinionated and ostracised.
Informal networks often have political connections in some countries where politicians still rule the roost in some businesses. The nods and winks between businesspeople and politicians ensure that the traditional corporate culture remains embedded in some organisations.
When scandals caused by misconduct erupt, it is the weakest stakeholders who have to foot the bill. Those who are at the root of unacceptable behaviour recycle themselves and soon wear new hats that ensure that they lose little of the power they held previously. Regulation to prevent this happening is still weak and difficult to define without impinging on the freedom that businesses need to create wealth.
Strengthening the autonomy of regulators in all areas of business is one way of promoting good governance in all industries, including financial services. Until directors sitting on the boards of major organisations cultivate their independence of thought in such a way that they feel free to say “no” even when many others expect them to say “yes” we will run the risk of perverse corporate cultures harming the wellbeing of society.
Human respect is a human instinct that saves us from the unpleasantness of confronting those who abuse their power in a business organisation. It is easier to tacitly consent to wrong decisions that are endorsed by colleagues sitting on a board than to stand up for what one believes is right. Of course, there will always be some who will oppose any sensible proposal as a matter of principle. Clearly such obdurate obstructionists should never be allowed to sit on the board of a business.
Shakespeare’s advice “to thine own self be true” is still valid for those who want to work meaningfully in a sane corporate culture.
johncassarwhite@yahoo.com