The Dogs that didn’t Bark (1)

 

Throughout all the financial crisis, attention has been centred on one aspect -- the culpability of the bankers and the problem posed by the bonus culture in banking.

 

But there are at least three other areas that need attention if the same mistakes are not to be made again: the role of the non-executive directors and, particularly, the chairmen of banks; the role of ratings agencies; and the role of the auditors. None of the dogs barked. Guard dogs that don't bark are completely worthless. 

The Walker Report, issued yesterday (16/07/09) may go some way to shifting attention to the first of these three groups. Initial “reaction” from the banks – in fact more accurately, off-the-cuff responses from high-bonus earners  stirred up by the diligent reporters of the FT --  suggest that Walker’s review little possibility of being implemented, while Gordon Brown remains in thrall to the City.

But action has got to be taken in this country -- as it apparently is in the USA -- to make sure that the credit ratings agencies held to account.

At the beginning of the noughties they altered the way that they charged for their services shifting the burden to the businesses being rated and giving the ratings information away to their previous customers. This put them in a clear conflict of interest  since they were now taking fees from people who would wish to receive th best possible rating rather than impartial assessment.  They  either failed to recognise this conflict or else recognised it and failed to do anything about it. Consequently everything got rated highly regardless of the true  underlying risk.

The FSA should review the activities of Moody's; D&B; S&P and the other ratings agencies to make sure that they behave properly and observe their duties to the end customer who relies on the integrity of their information

The other issues of the auditors -- the other dogs who didn't bark -- is less easily addressed. All the big four are guilty of giving clean bills of health to banks who within months were found to be riddled from top to bottom with toxic assets There are some senior people in the accounting profession who need to be held to account. To be continued……

An object lesson in AGM management

 

 

The Marks and Spencer AGM on Wednesday 8^th July was an object lesson in how to run  a shareholders meeting. The arrangements weren’t entirely perfect – so many shareholders turned out that not everyone could be issued with a voting gizmo – but in terms of stage management, it could not have been bettered. It could have been called  the Stuart Rose (Finest) Hour – except that someone else has already appropriated the soubriquet “Finest’ of course.

 

Middle England turned out in droves to pack the Festival Hall – descending on the free lunch like a plague of locusts, stuffing themselves silly with egg and cress or BLT sandwiches, gathered up in clumps lest someone lese get them first; laughing uproariously  -- with not at --  the half-wit shareholders who think that any AGM is a chance to display their comic talents in asking questions; and swooning at the debonair charmer who, as he frequently reminds them, is their chairman of their company. (Although a moment’s reflection on that would have revealed the fatuity of the claim).

 

Sir Stuart Rose found common cause at every opportunity to side with the private shareholder – part huckster; part noble leader; part ‘simple man merely trying to do an honest job’, he evoked the same sort of admiration that the geriatric Middle Englanders used to  reserve for Mrs Thatcher.  He recited like a mantra the core values of M&S – quality; value; honesty – all things that the shareholders remember dimly from an earlier time. The enemy – by common consent of the majority of the private shareholders -- was to be found in the City, where whiz-kids who had never run anything were intent on snapping at the ankles of this retailing giant. The chairman of the LAPFF who requisitioned (something sinister in that term, underlined by the curl in Sir Stuart’s lip as he said it) the doomed resolution 16 asking for some greater observance of corporate governance principles, ran a close second.

 

The warm-up act for Sir Stuart was his finance director, Ian Dyson – for many in his geriatric audience an improbably youthful bean-counter to be holding such an elevated position. His thin-lipped dissertation on the year’s financial results  shot over the heads of the vast majority of shareholders like a flock of migratory ducks. Dyson’s ten-minute interlude spoilt the Stuart Rose Hour for the majority of the shareholders and his lapse into management speak – Like-for-like sales; ‘a truly multi-channel retail offering’ (in other words stores and mail order)  -- caused a restive murmur. Time for Sir Stuart to come on again, bring on his clothes rail and make some decorously risqué jokes.

 

Few questions challenged the board – or rather were allowed to challenge the board; Rose fielded whatever was asked  and defended his fellow-directors by not allowing anything to get past his straight bat to discomfort them. Shareholders’ questions were deflected – “I hope you agree I have answered that”; any hint of criticism was smothered or batted down through avoidance, obfuscation – or humour. Rose played the meeting like a violin. No one pushed home a secondary question; those who did have any sensible points did his work for him by asking multiple-clause questions, bundling four trivial points around a single  significant one or fluffing their lines.

 

The meeting’s temper was short with anyone who appeared to have some brains; a decent point or a foreign accent. The more facile and stupid the question the more cosy and familiar the terms in which it was couched and the warmer the reception it received from fellow-shareholders. The nasty side of the English lower middle classes -- superior and smug, without having anything to be superior and smug about except their smugness – was only fractionally below the surface. They would resent the term Poujadist if they knew what it meant – but it describes them exactly.

 

For a student of governance the meeting provided conclusive proof that the small shareholders deserve everything that they don’t get. Instead of demanding  a chance to exercise some real power they merely want a day out. They are content to stuff their faces with a crinkly sandwich, drink a glass of warm white wine, sip at cup of stewed tea and then go home thinking that  they have performed their duty as shareholders, clutching the party-bag they have been given as they leave; they go home thinking that corporate democracy is alive and well.

 

Shareholders like that  are not decent moderate people; they are bovine. They are not temperate, tolerant and thinking which is what shareholders should be: they are simply lazy and smug. They deserve chairmen like Stuart  Rose, who only play by the rules when it suits them. Stuart Rose’s recitation of M&S’s mantra -- quality; value and honesty -- may apply to the business but not to fair dealing with the shareholding principles of the Combined Code. Come on -- the man’s a grocer for goodness sake.

Start Worrying -- It's Business As Usual for the Banks

On Wednesday evening (1st july 2009) Jeremy Paxman devoted most of his BBC2 Newsnight programme to new reports of bonus payments in the financial sector. He had heavyweight guests: Nobel prize winner Joseph Stiglitz; Liberal Treasury spokesman Vince Cable; Sir Brian Pitman, ex-chairman of LLoyds TSB; and Paul Myners (Lord Myners), Financial Services Secretary to the Treasury. Gillian Tett of the FT, this year's Financial Journalist of the Year and award-winning author also played a walk-on part

Paxman's story led with the news that for the City the recession is over; "Bonuses are Back" and the good times are rolling again. Goldman Sachs has reportedly set aside £600m in bonuses for its staff and 430-plus Barclays managers will share over £732m in bonuses.

Now, neither of these two financial institutions talk government rescue money, so they are free agents as to how they remunerate their staff. But these bonuses are being paid within a few months of the near-collapse of the financial foundations of the Western world when the change in the culture was supposed to be shifting to long-term horizons matching bonuses with certain returns and was supposed (if it was going to work at all) to apply to all banks -- either by diktat or by osmosis.

Presumably neither Sir Brian nor Lord Myners are fools -- their positions in life would suggest that they can assess evidence; make rational and reasoned judgments and add up to twenty without taking their shoes and socks off. So why did they persist in insisting -- in the face of a billion pounds worth of bonus evidence -- that the bonus culture of the City had changed? Why aren't they devoting their energies to changing that culture with concrete actions rather than singing lullabies to send us to sleep -- again? and if they aren't fools or knaves or liars -- what do they presume we are?

The Sorcerer's Apprentice

Think of the chiefs of the large banks like a character from Mickey Mouse. Yes, i know it's hard -- but try.

Think particularly of Fantasia -- and the Sorcerer's Apprentice sequence, where Mickey dresses up in the magician's cloak (much too big for him), consults the book of spells and proceeds to get the brooms to carry water backwards and forwards to clean the floor of the magicians house. Hold that image in your mind while you read the rest of this note.

As the immediacy of the crisis recedes, so more time for reflection brings increasingly complex solutions to the financial mess we find ourselves in.

Originally the proposed distinction seemed to be between 'good banks' and -- somewhat unoriginal, this -- 'bad banks'. Good banks would be what was left after all the financial pus was cleaned out of the wound and bad banks was where all the icky stuff would go. The Swedes more or less invented the structure years ago during their last banking crisis, (in comparison to the Japanese who kept everything bundled together and ended up with 'zombie' banks). Ordinarily banks want to retain and attract customers; that sort of bank would be the good banks. By contrast the purpose of the bad banks would be to get rid of their customers by gradually working out the loans, with minimal losses of value; running the two different sorts of bank requires different sets of managerial skills.

A development of the good bank/bad bank idea was to revive the structure brought about by the American Glass-Steagall Act of 1933 (repealed by one W Clinton in 1999) which prohibited American banks from undertaking both commercial and investment banking. The thinking behind this was that it was the investment banks which got us into this mess so if we can them separate from the High Street retail banks, then we shan't have any more runs on banks, which so frightened the horses, and the financial regulators can contain the effects of whatever self-harm the bankers do to the bankers themselves, rather than precipitating the whole world to the brink of financial catastrophe.

Recently, however, the debate has got more complex. Some commentators have pointed out that it wasn't just the investment banks (the complex ones) that got us into trouble. it was in fact the High Street (simple) arms of the banks playing around with things that they didn't know the power of -- a bit like the Sorcerer's Apprentice.

So the argument from these supposedly more sophisticated commentators is that we shouldn't try to separate the banks into simple and complex or good and bad , because that wasn't the root of the problem.

Regardless of whether it was or was not, what the recommendations of the simple bank proponents ignores is this. The money that the investment banks play around with is mostly based on pension funds, insurance funds, corporate treasury money and municipal treasury. In other words all the really big money that matters for the long run. So regulating the paltry High Street funds tightly and letting the Sorcerer's Apprentices continue to play with the long-term wealth of the economy doesn't really seem like too sophisticated a solution, does it?.

Rather than give Mickey Mouse the book of spells to play with in any part of the banking structure and try to proof the rest of the structure against him, we ought to make sure that all the structure is as Mickey Mouse-proof as we can get it in the first place.