A crisis of values?
Andrew Sheng, President of the Fung Global Institute and Chief Adviser to the China Banking Regulatory Commission, is one of Asia’s most respected commentators on global finance and corporate governance. As guest speaker at the HKICS’ latest Members’ Luncheon event, he delivered a passionate defence of better corporate culture and value systems reinforced by appropriate and timely regulatory interventions.
Andrew Sheng is much in demand as a speaker on global financial reform and corporate governance. It is not hard to see why. He brings to the subject a wealth of knowledge of global markets – based on his experience on both sides of the regulatory fence internationally – but he also takes a no-nonsense approach to exposing the problems that can lead to the kind of crisis we saw emerge in 2007/ 2008.
He was therefore the ideal speaker to discuss ‘post-crisis thinking on corporate governance’ at the HKICS Members’ Luncheon held on 18 July 2012 at the Foreign Correspondents Club. He started by asking whether we have learned any lessons from the financial crisis. Fortunately we have learned at least one, he suggested – namely that our faith in market discipline was misplaced.
‘Markets are not efficient and stable on their own because clearly the system can be gamed,’ he said. He cited various examples of how easily companies have been able skirt the regulations designed to keep markets fair, open and stable. For example, the practice of hiding debts in offshore ‘special purpose vehicles’ so that the company’s accounts look healthy. He also cited the recent scandal at Barclays bank which was found to be manipulating the London Inter-bank Offering Rate (Libor).
There is some evidence, however, that regulators have started to take a tougher stance where companies overstep the line. Mr Sheng pointed to the response of the UK regulators to the Barclays scandal as evidence that we may be experiencing a ‘sea change’ in regulation. As the scandal unfolded, the Bank of England took the unprecedented step of telling Barclays that its CEO Bob Diamond had to go. ‘It used to be thought that is a decision for the market not the regulator,’ Mr Sheng said, ‘this suggests that regulators are now taking a more active stance.’
That, however, was the end of the good news. Mr Sheng went on to describe how the ‘systemic risks’ highlighted by the financial crisis are still largely unaddressed. He focused on two of these – over-concentration and overcomplexity. The former has been very high on the media agenda since the crisis.
Major multinational banks in particular have become ‘too big to fail’ which has resulted in serious moral hazard problems. ‘When you get to the point where there is industry capture, regulatory capture and intellectual capture, you essentially don’t have any regulation at all’, said Mr Sheng.
He focused his attention, however, on the latter problem – over-complexity – which has not been so much discussed. As multinational companies have become ever larger and more complex, he suggested, they have become essentially unmanageable. ‘Can you expect an independent non-executive director of a multinational bank operating in 180 countries, subject to a minimum of four regulators in each country, to really understand the compliance risks?’ he asked.
He cited the debacle in May this year when JPMorgan Chase announced trading losses of US$2 billion as a result of trading losses in credit default swaps. This was just another reminder that even the best risk managers cannot totally comprehend the risks they are facing – what hope then for managers and directors who do not have an intimate knowledge of how the derivatives markets work?
Some suggested solutions
Finally, Mr Sheng turned to a discussion of possible solutions to the problems highlighted by the crisis. Firstly, he discussed the need to enhance regulatory enforcement. ‘There has been a general complaint of not enough tough enforcement action – no significant heads on pikes – although this is changing,’ he said. In particular, financial settlements may not be enough, while they are good for speedy results they are often borne by shareholders and there is little or no personal accountability by management.
He added, however, that there is a limit to how far legislation and enforcement can really improve governance practices on the ground. ‘It is really about changing company culture,’ he said, ‘since you can’t put everything into the rules.’ Indeed, he pointed out that trying to put everything into the rules quickly renders those rules unintelligible. Over the last decade, financial regulation has become a lot more complex – ‘subject to the interpretation of section one, sub-section (e) of appendix three…’ he quipped – to the point where it is largely unintelligible to non-specialists.
Moreover, even where you are able to draft intelligible rules and guidance for market participants, they can still be abused in practice. ‘It is the corporate culture and value systems that are critical, reinforced by appropriate and timely regulatory interventions,’ he said.
This is where, Mr Sheng concluded, the HKICS and its members have an important role to play. Company secretaries are ideally placed to be advocates of sound corporate social responsibility and corporate governance in companies. He urged the HKICS members in the audience to point out to their boards that, in the emerging business environment, directors will increasingly have to answer personally for any bad corporate governance and bad ethical practices they have been party to. ‘Tell them, “if we don’t get this right, you’ll be the one sitting in front of the tribunal when the issue becomes public,”’ he said.
Andrew Sheng is the President of the Fung Global Institute (www.fungglobalinstitute.org) and Chief Adviser to the China Banking Regulatory Commission. He delivered his presentation ‘post-crisis thinking on corporate governance’ at the HKICS Member’s Luncheon held on 18 July 2012 at the Foreign Correspondents Club.
More photos of this event are available in the Institute News section of this journal. Please refer to the HKICS website (www.hkics.org.hk) for news about similar events in the future