What the banks must do - Essay
I WAS SITTING in the witness chair last Dec. 11, all set to appear before the Senate banking committee on the topic of governance. Peter Dey, the lawyer who wrote the 1999 report on Canadian corporate governance (a mixed bag, he concluded—some companies were doing well, others not), was to testify after me. Then, to our surprise, the meeting was abruptly postponed until 2003 (for reasons which are still unclear). That was unfortunate for many people, I would suggest, because the issue of good governance in the banking world looms even larger as we now contemplate possible mergers. Borderless financial markets, and public scrutiny of those markets, should be one of the strongest forces in encouraging the adoption of superb leadership models.
The banking committee’s mandate included the provocative statement: a “Canadian perspective to the Enron collapse,” rather than a more industry-specific reference to the Allied Irish Banks scandal. In that latter instance, we learned earlier this year that US$691million was lost over several years in botched currency trades. A siren call for good governance—as is, of course, the Enron case. The banking world is implicated in its aftershocks, as that debacle now enters the American legal system (the Americans, as we know, are a litigious society: lawsuits are just beginning). The Enron tentacles also reach into Canada: in recent weeks, it’s been reported that the J.P. Morgan Chase bank engineered a transaction for Enron named Slapshot (did they have to use hockey terminology?), which pulled into its vortex two entities in Nova Scotia and Quebec, as well as two Canadian law firms.
Should Canadians have confidence that our banks are taking the governance issue seriously?
Just for fun, I did a random Web site search of approximately 30 home pages of Canadian, American and European banks to see if I could find any up-front references to corporate governance principles. With on-line banking increasing in popularity, most clients will seek their company information from their home computers. Since many consumers learned tough financial lessons through the dot-bomb meltdown, it’s reasonable to assume that consumers will be extra careful when it comes to “lending” banks their money for safekeeping. When choosing a bank, presumably, governance information is important.
To my surprise, the Deutsche Bank was the only one I could find which mentions corporate governance on its home page. Canadian or American banks tend to highlight public accountability statements or community-giving reports. However well-intentioned such largesse might be, community philanthropy is not the same thing as corporate governance.
Perhaps it’s worthwhile to remind ourselves of the need for good governance in light of the still escalating cost of corporate recklessness. By some estimates, 30,000 financial jobs in London—or 10 per cent of the head count—will have been lost between the end of 2000 and the middle of this year as the fallout from financial scandals, the dotcom meltdown and general economic malais continues. Among others, international giants Merrill Lynch and Morgan Stanley have said that they will be cutting the numbers of their brokers by about five per cent.
It’s about more than lost financial sector jobs. American stocks lost US$7 trillion in value between the spring of 2000 and last summer, and the imploding stock markets have caused billions to vanish from retirement savings. And then there’s the public cost of looking into all this: there have already been 14 American congressional committees examining the Enron scandal alone. Quite a price tag—and more to come.
If the economic cost isn’t bad enough, there is also the question of lost trust. Today, CEOs are the butt of cartoons; MAD magazine recently devoted an entire issue to corporate governance/CEO jokes. John Ruggie, the director of the Center for Business and Government at Harvard, calls CEOs “bewildered” as they try to deal simultaneously with public scrutiny generally reserved for politicians, and also with the changing role of corporations. As corporations grow larger, so do expectations of their obligations to society.
Waning government resources everywhere mean that multinational or large corporations are asked to fill the void created by the withdrawal of some government services. In Canada, the number of stakeholders who are demanding more of their companies is also growing, as evidenced by last year’s report on corporate social responsibility by Avie Bennett and Ed Broadbent. Because of corporate scandals, it may be that there is no longer only one bottom line. For example, Royal Dutch/Shell is going to combine its financial statement and its social and environmental performance report into one. It raises the bar for everyone.
We all know the times we were living through just a short while ago—a red-hot economy bursting with promise, aided and abetted by new technology that changed our culture in front of our eyes. Individuals were on-line with hourly trades; young people used their cellphones or BlackBerries to buy and sell.
We forgot that investing in the stock market is a gamble; instead, it became a way of life—a kind of “casino culture.” Corporate culture became corporate swagger, as excessive executive compensation and “star” talent replaced balanced remuneration and teamwork. “Corporate fraud is not a new phenomenon but comes along in cycles when greed overcomes fear,” said U.S. Senator John Corzine, a former co-chair of Goldman Sachs, at a recent forum organized by Harvard’s Kennedy School.
(As published in MacLean’s, January 20th, 2003)
While the private sector was hot, the public sector was not. Deregulation or various other forms of it—privatizing, contracting out, restructuring—were the order of the day. In fact, the deregulation of the American energy market played a huge role in the Enron saga. Combined with government cutbacks, whatever regulatory agencies still left standing lacked resources and were understaffed and simply not up to the task of understanding a fast-paced, massive octopus like Enron, which seemed to morph into a different company with each quarter.
Regulatory oversight simply couldn’t keep up with a corporate culture running amok. Lessons learned. Before we press the “merger” button for banks, Canadians have a right to ask if the many regulatory agencies that currently scrutinize the banking industry are strong enough and co-ordinated enough to withstand powerful corporations. Secondly, how much do we really know about the corporate culture of our banks? For example, is there protection for whistle-blowers, as exists in new U.S. legislation?
As our banks face possible mergers, we must demand answers to questions about governance. Perhaps the Senate committee might ask the bank CEOs, who were happy to testify on the subject of mergers, if they would also testify on the subject of corporate governance. After all, it is in their interest—and ours.
Penny Collenette, a former adviser to Prime Minister Jean Chretien, is a senior fellow at the Center of Business and Government at Harvard University. Her research focus is corporate governance.
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What the banks must do - Essay
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