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Na´vetÚ of directors and regulators revealed by GFC

By Shann Turnbull - posted Friday, 17 September 2010


The Global Financial Crisis (GFC) revealed the naïveté and irresponsibility of governments, regulators and company directors being involved in firms “too big to fail”.

The GFC also revealed the irrelevance of corporate governance codes and risk management practices. As noted by the Association of Chartered Certified Accounts (in Risk and reward: tempering the pursuit of profit (PDF 993KB), June 2010): “During the banking crisis, organisations failed which were previously thought to have had leading-edge risk management functions.”

Another bleeding obvious insight, not generally reported, is that firms in their present form that are “too big to fail” are also too big to be reliably managed or regulated. This insight means that the most experienced, gifted and dedicated directors, regulators, promoters of governance codes, risk management professionals and their expertise are impotent to avoid further failures.

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It is only human nature for this observation to be vigorously denied by those involved. Denial will ensure future failures.

The really bad news is that governments of the US, UK and other leading nations now have little capacity to finance further bailouts of firms too big to fail. The only good news is that a breakdown of the current system could accelerate a breakthrough to a more resilient system with the spread of cloud banking. How this can occur is described in my forthcoming article “How might cell phone money change the financial system” (forthcoming in November, issue number 30, The Journal of Financial Transformations. Based on a working paper available here).

The denial by leading company directors, regulators, governance experts and other thought leaders of the bleeding obvious can be compared with the story of the Emperor who did not wear clothes. No one except a small child who did know better was prepared to state the bleeding obvious. It is the uninformed today that can see through the hubris of the great and the good and understand how the intellectually naked company directors, regulators, policy advisers and governance professionals are profoundly misleading themselves.

One exception was the head of the Australian Treasury, the most senior financial advisor to the Australian Government - Ken Henry. During a speech at the National Press Club in November 2008 he stated:

The array of financial instruments deployed within the global financial system has become so complex that it defies understanding. For decades to come, policy makers around the world are going to be asking why those with sufficient authority didn't, at some point, stand above the buzz of the financial markets and declare, in simple language, that all of this simply doesn't make sense. (Ramsey 2008).

However, this statement is self-incriminating as it means that regulators under his watch were irresponsible in allowing financial instruments to be used that were not understood.

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Young children understand very well how information about very simple things can get grossly distorted, misleading and wrong. They learn this from the party game of trying to transmit a simple message through a chain of people. Invariably the message gets mangled even with the very best intentions. It seems that when children grow up to become company directors, risk managers, regulators and governance advisers the lesson is not applied.

However, responsible journalists and courts of law recognise the problem of biased, incomplete or wrong information. They routinely seek the other side of a story and/or collaborating independent evidence. But such practices are not built into the Anglo system of corporate governance. As a result, senior management, company directors and regulators who they report to have no systemic basis for obtaining feedback information independently of management. This is not only naïve and irresponsible but dangerous for firms, investors and the capitalist system.

An additional way in which stock exchanges, regulators and governments are naïve and irresponsible is allowing firms to be publicly traded with their directors having absolute power to manage their own conflicts of interests. Power is widely accepted as being a source of hubris and corruption with absolute power being able to corrupt absolutely.

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About the Author

Dr Shann Turnbull BSc (Melb); MBA (Harvard) is the Principal of the International Institute for Self-governance based in Sydney and a co-founding member of the Sustainable Money Working Group established in the UK. He is a founding life Fellow of the Australian Institute of Company Directors, Senior Fellow of the Financial Services Institute of Australasia, Fellow of the Governance Institute of Australia and Fellow of the Australian Institute of Management. He co-authored in 1975 the first course in the world to provide company directors an educational qualification and wrote Democratising the Wealth of Nations. His bibliography reveals he is a prolific author on reforming the theories and practices of capitalism.

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