It is now generally accepted that the crisis in the international financial markets and the subsequent economic recession are now behind us. However, we may seem to be already going back to the habits that predated that crisis. Those bad habits had been created because it was thought that the boom and bust cycle had been beaten, and only the cautious and the prudent – at the time labelled as latter day Cassandra’s – were noting and commenting about the excesses in the markets.
At this point I need to clarify that my comments do not relate to Malta but to the world around us, and that they may or may not apply to Malta.
We could start with the legislators and regulators. The knee-jerk reaction in the face of the excesses I referred to was to introduce more regulation. In many respects some of the new rules that were put into place were, to say the least, draconian. Moreover they were applied across the board irrespective of shape, size, country, and nature of business. The end result is that some of the regulation is already being rolled back, and the old habits are creeping back. It is therefore pertinent to ask whether we are losing the plot.
On the other hand there is other new regulation coming in, which will in effect work against the shareholders that the legislators are trying to protect.
Accountants know of the nightmare that the ever-changing International Financial Reporting Standards are causing. It is not only limiting what boards of directors can or cannot do, but it is also limiting shareholders in getting a fair return on their investment.
In addition, the need for compliance is taking away time from boards of directors to focus on their real job, that is to create value for their shareholders and for the company, because it is being taken up by making sure that the regulatory issues are being well taken care of.
Let us take this one step further. Regulation has to be approved by legislators in any democratic process. Sometimes I get the feeling that legislators are not sticking to their role, but have decided to go beyond it and are becoming prosecutors, judge and jury. For an economy to function well, the distinction between the roles of the judiciary, executive and legislator need to be respected fully.
We must have respect for the rule of law. We cannot sacrifice everything on the altar of the economy as I wrote last week.
On the other hand, the business sector needs to be given clear direction and allowed to operate ethically.
In many countries, banks have forgotten that wealth and jobs are not created by them but by the business sector
One particular example of this is banking. I remember marketing research that we had conducted at MISCO some 25 years ago. That research had shown that what businesses appreciated most in bankers is their ability to understand their needs. That was when banks used to make money from what is meant to be their core activity – taking deposits and lending money.
In the meantime banks have found other ways of making money. And these other ways have proved to be more lucrative. The need to understand clients became less important. The end result has been that instead of banks serving the economy, they became the ones to set the rules for business. In many countries banks have forgotten that wealth and jobs are not created by them but by the business sector.
The world’s leading economies have had to focus on addressing the unemployment problem caused by the recession and the need to introduce new regulation to stop abuses by various economic players. In the process they seem to have lost the plot. They need to go back to principles.
Those principles are fairly simple. First is the need to run a business ethically. The economy is there to serve society and not the other way round. Ethical business should be rewarded and not penalised, as may seem to be happening at present.
Second is the need to make sure that each institution sticks to its role faithfully, with a clear separation of powers and of functions.
We need to ensure that State institutions live up to their responsibilities fully. But we also need to make certain that private sector organisations stick to their core business.
Third is the need to understand that whatever we do as individuals must be for the benefit of the common good. Each business activity exists in a society made up of individuals. And the human person must remain at the centre of that society.
Fourth is the obligation to future generations. Whatever we do today, will have an impact on future generations. We cannot take our wealth to the other side. What legacy are we leaving to future generations?
If we do not stick to these principles, we would really be losing the plot.