OECD Forum 2011.The fight to restore trust
It’s receding into the past, but the Great Recession – and the factors that led up to it – are still very much on attendees’ minds at the OECD 50th Anniversary Forum this week. At a session entitled “Restoring Trust in the System,” a wide range of opinions were heard on lessons for financial regulation and corporate governance in the wake of the crisis.
Seated side-by-side on the first panel were ministers from two countries that had very different experienceces in the crisis: Canada, which sailed through the recession and has come to be seen as a paragon for financial regulation, and Iceland, whose Finance Minister, Steingrímur J. Sigfússon, admitted that “we were not quite as lucky as Canada”.
Steingrímur managed to get to Paris despite the clouds of ash from the latest troublesome Icelandic volcano – “we picked an easier name this time,” he joked. That led him to draw comparisons between the forces of nature and the forces of the economic system: “When faced with forces of nature, we feel humbled,” he commented. With financial markets, we need a similar attitude, he said. We must realise the limits of what we know and don’t know, he said, and admit that things went wrong: “There were fundamental flaws in the system, otherwise this would not have happened,” he said.
The Icelandic minister raised an issue that was echoed by a number of speakers – pay and compensation for bankers and executives: “Why do we accept that bankers need tremendous bonuses to do their jobs, but not surgeons saving people’s lives?” Steingrímur asked. The point was also raised by Peter Mandelson, a former EU Trade Commissioner and British government minister. “Executive pay has become disconnected from reality,” he said, citing a big increase in payments to British business leaders. In 1998, said Lord Mandelson, payments to executives at FTSE 100 firms were 47 times average earnings at their firms; since then, they’ve risen to a multiple of more than 100, far outrunning any improvement in the firms’ share price. While stressing that he didn’t believe in the politics of envy, he said the “scale of what has happened cannot be justified.”
But Federico Ghizzoni, CEO of the Italian-based banking group UniCredit, defended his remuneration. He said there was a perception that everyone got huge bonuses, but this was not the case. On average, he said, after-tax salaries in Italian banks were only about 30,000 euros a year. He added that half his bonus was based on customer satisfaction and his company’s reputation, as measured by an independent survey. Still, he wasn’t complacent about the challenges facing banking: “The crisis of 2007 was a crisis of values,” he said, “if you don’t measure and test the values of your management, it will come back.”
Values were also on the mind of John Hope Bryant, founder of Operation Hope, which works to expand economic education and empowerment in the US. He said the crisis had shown the need to improve financial education: “This is a civil rights issue – if you don’t understand the language of finance today, you’re an economic slave.”
Lord Mandelson warned about the risks to social stability from the after-effects of the crisis. Despite the enormous progress in OECD countries over the past 50 years, “the mood of our citizenry is not celebratory,” he warned. There was a lot of apprehension and scepticism about politicians and business, he said, and these attitudes were very corrosive. If left unchecked, he said, they would sap our capacity to make the decisions we need to make.
Echoing Lord Mandelson’s comments, Christine Varney, US Assistant Attorney General, Department of Justice, said there was an argument for a fundamental change in the attitudes of business. At present, boards were legally required to concern themselves only with increasing shareholder value. That approach may be too narrow, she said; she called instead for a focus on stakeholder value – in other words, the interests not just of a business’s shareholders but of its customers, suppliers, and the society in which it operates. David Begg, an Irish labour leader, went further, and said that the economy must be embedded in society, and not the other way round. “Until we achieve that,” he said, “there can be no possibility of restoring trust.”
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