A recent report on good bank governance emphasised the importance of taking “a long-term view on strategy and performance” among a number of other key recommendations. Recently published by the G30, a group of high-level banking and regulatory experts, “Toward Effective Governance of Financial Institutions” examines the impact that the governance of banks had on the development of the recent financial crises.
Japan’s very own property fuelled banking crisis put it in a 20 year slump from which it still hasn’t fully recovered- Piers Allen
They argue that “Ineffective governance at financial institutions was not the sole contributor to the global financial crisis, but it was often an accomplice in the context of massive macroeconomic vulnerability.” The problem was that “boards of directors failed to grasp the risks that their institutions had taken on” and that “management and the board focused on performance to the detriment of prudence.”
The G30’s report then goes on to make a call-to-action for the four components of a bank’s regulatory structure, which includes long-term shareholders, supervisors, management and ultimately the board of directors. As it explains, good governance “is an ongoing process by which the choices and decisions of FIs [Financial Institutions] are scrutinised, management and oversight are strengthened and streamlined, appropriate cultures are established and reinforced, and FI leaders are supported and assessed.”
An interesting point made is that the role of the board is threefold: to identify the strategy, to assess the risks, and to ensure that the people implementing the strategy have the talents to succeed. When discussing talent, surprisingly they observe that “a very good CEO is preferable to a “star” CEO”. Of strategy, in particular the board should be thinking of success, not in the next year, but in the next five to twenty years.
If risk assessment is an important board role, as outlined by the report, then “those accountable for key risk policies in FIs, on the board and within management, must be significantly empowered to put the brakes on the firm’s risk taking, but they also must enable the firm to conduct well-managed, profitable risk-taking activities that support the firm’s long-term sustainable success.”
Aye, there’s the rub: “Profitable risk-taking”. If I know now what will be profitable or not, I’m not sure if it would count as being risky. So on that thought of the difficulty of prediction, let’s leave banking and venture into economics. Napoleon, when asked of his strategy towards China, once predicted: “Let China sleep, for when she wakes the world will tremble.” Talk everywhere is of the inevitability of the rise of China to global dominance; bets are on as to exactly when China surpasses the USA’s economy, level of military spending, or number of Fortune 500 firms (or whatever).
While I’m not going to delve in any great depth into that question, I was reminded of a joke I heard back in the late 1980s, when George Bush Senior was US President, and the comically blundering Dan Quail his Vice President. Japan’s rise was the cause of much anxiety in an America that had struggled to recover from the tail-end of the oil crisis and which had recently experienced major problems in its own banking sector (specifically with the savings-and loan institutions). Film studios were being bought by the Japanese and the Americans even had to take lessons on how to make cars.
George Bush Sr (so the joke goes) went into a coma only to recover four years later, during which time Dan Quail had been called on to run the nation. “So, Dan, how’s the economy these days?” asks George with more than a note of unease as he reflects on Dan’s competency for fulfilling the responsibilities of America’s highest office. “Everything’s great George: unemployment is down, inflation is down, and the economy is growing fast. Nothing to worry about. Here, I bought you a coffee.” With a relieved sigh George thanks Dan for the coffee: “How much do I owe you for that?” “100 yen,” replies Dan.
Without reflecting on whether or not the gag is particularly funny it does echo through time the sense of American discomfort at being challenged economically on the global stage. Considering China’s holding of dollar reserves, and ambitious purchases of foreign assets, if we changed Obama for Bush and Joe Biden for Dan Quail I think the joke might still scan if the punchline was changed to “100 Chinese yuan.”
The future is notoriously tricky to predict; Japan’s very own property fuelled banking crisis put it in a 20 year slump from which it still hasn’t fully recovered, while America harnessed IT to its productivity wagon and drove west to recovery. The question is whether or not the predictions of global dominance reflected in the Chinese version of the joke will be as misplaced as they were in the original Japanese draft. We might also wonder on the role of effective governance in the destiny of nations.
Mr Allen has worked internationally in the technology sector, earning his first masters qualification in engineering from the University of Durham. For his second masters (in business administration, again from Durham) he researched the Maltese financial sector.