Corporate governance: Live and learn - problems with the global banking culture

It is still, people will tell you, a banking crisis and not
a financial crisis. By that they mean the causes were embedded in banking. And
so, they suggest, the need for extra regulation and greater disciplinary efforts
in the future should be directed at the banks alone. Strictly speaking, they may
be correct, but it would be a fool who didn’t take this opportunity, visited
upon us in so much chaos, to reassess the culture of corporate governance and
think through what fine tuning will be needed in the future.

It is, above all, a time to think rationally. We need to help the future
along. We need to distinguish the thinking through of ‘How did this happen?’
rather than being diverted down the unproductive route of ‘Who did this to us?’
The ill-informed mob loves to chase after scapegoats: it is enjoyable and
fulfils a desire for retribution. But it doesn’t make the future better. “We are
living in paranoia,” as one old corporate governance hand put it to me. “We are
spending too much time burning people when we should be building things.”

As the dust settles, it is obvious that three geographical strands of
corporate governance have developed across the world. There is that of the US,
where chairmen and CEOs still have far too much concentrated power, where the
market is still deemed to be all-powerful and there is little chance of
shareholders unseating the robber barons at the top. It means corporate
governance is very weak and company executives are largely left to themselves.
This reflects the biggest problem facing US business generally: with such a huge
internal market, the US has become the most isolated part of a globalised
system. Most US companies don’t need overseas markets. But this also means its
corporate culture is almost oblivious to the business culture changes taking
place in the rest of the world.

In the UK and where what we still call the Anglo-Saxon system is in place, it
is different. Institutional investors tend to hold sway. There are checks and
balances and the cultural influence of good corporate governance does change the
landscape. In continental Europe it is different again, but largely because of
different business structures such as block holdings of stock and control,
either through families, or through banks and other institutions. Minority
shareholders tend to have a hard time. Even so, the ethics of corporate
governance are highly influential.

True, our problem has been in UK banking, with the desirable split between
investment and retail banking having been ignored. The problems of the Royal
Bank of Scotland were far closer to the failings of the US system, with rampant
chief executive and chairman. But it is a recurring problem of global banking
culture.

Warring fiefdoms around the world all act in their own interests rather
than, necessarily, those of the bank. Risk culture goes out of the window.

The problems have all been of leadership and the behaviour of senior
executives in failing to rein people in. The last time the US tried to rein in
poor behaviour it invented Sarbanes-Oxley. It made the mistake of trying to use
process to change behaviour. It is not a process problem. It is a human
behaviour problem. People, not spreadsheets. Regulators do get this. Paul Boyle,
chief executive of the UK’s Financial Reporting Council, recently commented,
“Making regulatory judgements about whether a set of financial statements
complies with accounting standards is one thing; making regulatory judgements
about the quality of board decision making is quite another.”

And this is where the geographical differences in corporate governance are
breaking down. Across Europe behaviours are changing, not because new laws are
being put in place, but because people in corporate life can see that a
different corporate governance culture makes business life better and easier. In
the current climate, those objectives are a positive balm amid pain and unce
rtainty.

In some senses, it is a return to an older system. But it is a newer system
which has brought it about. Information has become common currency by virtue of
the sheer amount available. Embedding of information sources and easy systems
for its gathering has taken root in all of us. Word gets about.

Once upon a time, it was the information of the few gathered in a physical
marketplace, the streets, offices and bars around the bourse or the stock
exchange. Now it is all of us. If corporate governance is going awry in a
business, there are innumerable sources of information on it. And the events
will quickly reverberate. Independent directors can resign and make a fuss, or
go quietly. But anyone who wants to know what it was all about can and will find
out.

The idea that corporate governance is a huge driver of corporate
sustainability is now embedded. Corporate governance has come to be seen as a
system which enables change to occur naturally. It is easy not to see this amid
the current blizzard of panic, fear and crisis. But it is there.