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Post-credit crisis governance: The role of the professional

Jaap Koelewijn, Business UniversiteitNyenrode

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Agenda

• The credit crisis: fiction and facts• Towards solutions• The role of the professional

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The credit crisis: questions & answers

• What caused it?− Imbalances in the global economy?− Alan Greenspan’s mistakes?− Bonus-hungry bankers?− Wrongly-priced risks?− Globalisation?− Reagan’s and Thatcher’s neo-liberalism?− Lack of integrity?

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Imbalances: US - China

-300-250-200-150-100

-500

1985 1988 1991 1994 1997 2000 2003 2006

$ Billion

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Greenspan’s mistakes

0,00

1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

2000

-01-

05

2000

-04-

26

2000

-08-

16

2000

-12-

06

2001

-03-

28

2001

-07-

18

2001

-11-

07

2002

-02-

27

2002

-06-

19

2002

-10-

09

2003

-01-

29

2003

-05-

21

2003

-09-

10

2003

-12-

31

2004

-04-

21

2004

-08-

11

2004

-12-

01

2005

-03-

23

2005

-07-

13

2005

-11-

02

2006

-02-

22

2006

-06-

14

2006

-10-

04

2007

-01-

24

2007

-05-

16

2007

-09-

05

2007

-12-

26

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Bonus-hungry bankers

• Staff at Lehman’s New York office who helped to cause the world’s biggest corporate bankruptcy are to share in a $2.5 billion bonanza.

• A McDonald’s employee earning $35,000 a year is granted a $400,000 mortgage.− ± $37,000 in commissions− No fixed contract− Inadequate documentation

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Wrongly-priced risks

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Globalisation

• Globalisation causes the demise of existing systems of checks and balances.

• A decade ago, Dutch pension funds had 60% of their shareholdings in the Netherlands.

• Today, that’s 3%.• Local, informal supervision is dead.

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Globalisation

• Globalisation also causes:− Risks to be shared across the globe− The relationships between risk-shedders and

risk-takers to become anonymous− Transactions to supersede relationships− The Anglo-Saxon governance model to lead

– to date, that is− Economic cycles to synchronise

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30 years of neo-liberalism

• After 1979, Reaganomics combined with consistent monetary policies to end:− The power of labour− High interest rates− High inflation

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Interest rates, real wages and inflation

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

16,0

Contractual wages market sector Reële rente Reële lonen

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30 years of neo-liberalism

• Increased corporate profits-to-national income ratio

• Power shift to shareholders• Very low interest rates made mergers

and acquisitions easier to finance• The pendulum inevitably swung too far

– ABN AMRO being an unhappy case in point

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Lack of integrity

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Lack of integrity

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And boy did it pay!

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To recap

• World capitalist crisis caused by:− Macroeconomic discrepancies and policy

errors− Too much focus on the importance of

shareholder value− No/inadequate alignment of stakeholder

interests− The demise of checks and balances in a

globalising world

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Appropriate remedies

• More and better counterforces:− Shareholders, particularly institutions

• As per comments Wouter Bos− Better protection of external shareholders

• Sentences for WOL underwriters• Class actions against Ahold

− Improved internal controls

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Improved internal controls

• For Dutch readers who haven’t read this: a textbook case!

• Showing up painfully clear failure of internal controls

• Come up with other examples

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Internal controls in the Netherlands

• Increased power to Supervisory Boards− Less hands-off− More influence on strategy and operations− Greater – personal – accountability− Improved balance of interests of ALL

stakeholders− More management information

• Not just from the CFO

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Role and position of the professional

• Changing role as fellow player in the playing field− No management puppet− Not a business partner− Acting in the interests of clients− Reward system should provide appropriate

incentives• Bonus schemes should not encourage

additional risk-taking

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Only possible when:

• Management and Supervisory Board agree on− The company’s mission and goals− Risk appetite – and get it just right

• Willingness to learn from mistakes− A reasonable and fair balance of all

stakeholder interests− Ethical standards

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On morality: Adam Smith

• Our conscience tells us what is right and wrong: and that is something innate, not something given us by lawmakers or by rational analysis. And to bolster it we also have a natural fellow-feeling, which Smith calls "sympathy". Between them, these natural senses of conscience and sympathy ensure that human beings can and do live together in orderly and beneficial social organisations.

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Business and morality

• More regulation, more protocols won’t help

• Companies will have to deliberate their moral actions

• Professionals need to grasp the nettle and take responsibility

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Real liberalism

• So our morality is the product of our nature, not our reason. And Smith would go on to argue that the same 'invisible hand' created beneficial social patterns out of our economic actions too. The Theory of Moral Sentiments establishes a new liberalism, in which social organisation is seen as the outcome of human action but not necessarily of human design.