Rebuilding trust will not be the work of a moment, says the Group Chairman of HSBC. It requires a new emphasis on values within corporations, so as to buttress the regulatory environment.
We are in the midst of the worst financial and economic crisis since 1929. Thanks to the timely action of governments around the world we have so far avoided meltdown. But the challenge for everyone – politicians, central banks, regulators and financial institutions – is to work wholeheartedly to avoid turning the worldwide recession into a full-blown depression. Keynes is enjoying a remarkable renaissance and the case for pump priming the economy in the short term is, in my view, compelling. At the same time, banks have an important role to play. They must continue to lend – to lend responsibly – and reassert their determination to operate on the basis of prudent and sustainable relationships with their corporate and individual customers.
Once the worst has passed – and I am confident that the actions taken so far are pushing us in the right direction – there must be no return to the status quo ante. In the longer term (say over the next two to three years) the imperative for policymakers, banks and businesses is to correct the global imbalances that have built up as a result of the major economic shift that has been taking place – and will continue to take place – toward emerging markets. Added to this, the excessive leverage that built up over many years in the financial system, and the misalignment of incentives (both market incentives and compensation incentives that created excessive risk and short-termism, in other words), must be reversed.
There are many lessons we should learn from this crisis – not just for banks but for regulators, ratings agencies, investors and borrowers. Banks became over-geared and too dependent on wholesale funding. Regulators did not pay enough attention to liquidity management in the banks. Ratings agencies were too ready to work with structured product innovators to help achieve high ratings, which, as it turned out, did not stand the test of illiquidity. Investors chased yield and forgot the “too good to be true test”. And borrowers too often succumbed to the temptations of jam today, which was proffered too freely by lenders.
However, we should be careful not to draw the wrong conclusions from what has happened. It is neither possible nor desirable to turn the clock back and to do without capital markets or securitization. It is neither possible nor desirable to return to the days when all financial intermediation was carried out through banks’ balance sheets. That is intrinsically inefficient in a modern economy. Capital markets are the crossroads of capitalism, where the providers and users of finance come together. And as capital markets today are borderless, we need to accept that national economies are inextricably interdependent.
Likewise, there is no workable alternative to the market system as a whole. Despite the plethora of articles on the “end of capitalism” and the schadenfreude engendered by some institutions that are symbols of capitalism taking taxpayers’ money, we should never forget that markets are a pre-requisite for successful, vibrant, modern economies. We have an imperfect system. Governments have had to intervene in markets before; they will again. But for all the obvious problems and issues, to paraphrase Churchill on democracy: capitalism and free markets are the worst system, except for all the others that have been tried.
Nevertheless, there is clearly work to be done to restore public faith in free markets. This has been shattered by the financial crisis, and by the ensuing crisis of confidence. Confidence and trust are at the heart of the market system, and of banking in particular – the word credit actually derives from the Latin word credere meaning ‘to believe’.
Rebuilding trust will not be the work of a moment, but is absolutely necessary to a healthy, functioning financial system. In my view, this requires a renewed emphasis on values within corporations, to buttress the regulatory environment.
Some institutions have grown accustomed to the value of their activities being fully delineated by the market, by regulatory compliance, and by the law of contract. If the market will bear it, if the law allows it, if regulations permit, then it must be acceptable. Questions of the appropriateness of a transaction in a more fundamental sense have too often been ignored.
This is not good enough. We have to recognize – boards, managements and owners alike – that values go beyond “what you can get away with,” and that values are in the end critical to the creation of sustained value.
Better risk management, enhanced regulation, codification of directors’ responsibilities in company law – all these things are necessary. But they are not, and cannot be, sufficient without a culture of values. As individuals, we have our own codes of conduct and hold ourselves accountable. We take responsibility for our actions. Companies have to do the same.
One specific aspect that has rightly received attention, so far as the financial markets are concerned, is how to avoid compensation structures in the banking industry encouraging short-termism and excessive risk taking. This is not a straightforward exercise. After all, staff at Lehman Brothers owned around a quarter of the company – which on the face of it looked a hugely strong incentive to stay in business. Any responsible bank will be looking very hard at this issue.
I think the current environment provides an opportunity to make serious progress on compensation approaches that serve the long-term interest of shareholders: partly that is because the mood has changed, partly it’s because the market expects a much more disciplined approach and partly it is because the regulator is going to demand it. Addressing compensation issues will go some way to restoring trust in the financial services industry. But this should be part of a wider requirement for corporates to underpin their businesses with a robust and well-understood set of values.
For all companies, including banks, this responsibility begins with their boards of directors. It is their job, and one which by its nature will never achieve perfection, to promote a culture of ethical business throughout their organization. Certainly in my experience, the good news is that the vast, vast majority of colleagues want this. They want to be able to look at themselves in the mirror and feel confident they are making a contribution. They also know that it is good for their business: graduates in the recruitment market expect banks to demonstrate a responsible approach to environmental issues, for example; customers expect the same sense of responsibility towards the communities in which they operate. Boards and managements that take this challenge seriously will find themselves pushing at an open door.
In practice what does this mean? It means calling management to account, demanding to know the strategy for the corporate culture and what is being done to nurture it. How is it being communicated internally? What is expected of employees? In my view, there ought to be a standing agenda item on this once a year, as part of an explicit analysis of what the brand stands for and what it conveys to investors and customers externally, and to employees inside the bank.
By placing a renewed focus on values, companies will create sustainable long-term value – for employees, customers and shareholders alike.
Stephen Green is Group Chairman of HSBC. The bank has around 9,500 offices and operates in 85 countries and territories around the world.