The global credit crunch has created an entire industry of commentators, some more seminal than others, but it is noteworthy that much of the response has been in terms of macroeconomic and historical analysis, rather than the human aspects. That is not to attempt to divorce economics or history from people, but rather to suggest that a greater emphasis on the behavioural implications of the crisis and the human cost may be instructive; a question that might be asked, therefore, is do we need an anthropology for what has been happening?
Of course there is not much new under the sun. Many have rummaged around for their dog-eared copies of The Great Crash (The Great Crash 1929, J.K. Galbraith (Penguin)). J.K. Galbraith concluded in his famous book, which sets the standard for blending economic theory and social history, that bubbles will occur as long as the investing public holds the almost mystical belief that there is unlimited wealth available in which each is destined individually to share.
The classic response has been to blame someone: Government and regulators are high on the list of supposed culprits, as are boards of directors of greedy investment banks. Consumers are surprisingly low on the list, yet the conspicuous consumption of the past decade (including mortgage and other debt that should never have been acquired) is at the centre of much that has led to the meltdown, particularly in its origins in the US subprime market. Oddly, financial journalists have come in for much blame from some quarters. Might they have reported the early stages of the run on Northern Rock or the collapse of Lehman in such a way that the crisis was exacerbated? It seems unlikely, although journalist egos have been swelled at the suggestion that they have such influence.
Institutions do now seem to be asking the more human and behavioural questions that arise and governments and corporates are starting to look ahead to what these questions imply in terms of the type of global talent that will be needed in the future if lessons are to be learned. Angel Gurria, OECD Secretary-General, speaking at the recent G8 Labour Ministerial Summit said: "Restoring global growth is an economic and political priority, but also an ethical, moral, social and human imperative." The theme of the meeting was People First: tackling together the human dimension of the crisis. Religious leaders have added their analysis. The Archbishop of Canterbury, in a recent lecture in Cardiff, said: "Blaming the greed of individual bankers for the financial crisis was too easy and people should instead be asking profound questions about how poorly regulated economies obsessed with ever-growing consumer choice have skewed the judgments of entire countries." He is not alone in apparently pointing the finger at the regulators.
Many column inches have been consumed through discussion in the UK of the tripartite system under which, since 1997, the Bank of England, Financial Services Authority (FSA) and HM Treasury each act to regulate the financial markets. Colin Mayer, Dean of the Said Business School at the University of Oxford has noted: "In the nineteenth century the Bank of England encouraged excessive conservatism, but recently there has been inadequate questioning. It was symptomatic that at the height of the boom the City of London issued a report on the damaging impact of regulation. Now we will go from excessive deregulation to excessive regulation. We need a much more independent and balanced view."
The Turner Review (The Turner Review: a regulatory response to the global banking crisis (Financial Services Authority March 2009)) has so far provided the best analysis of the crisis. In an understated recommendation, it called for the formal character of the relationship between the Bank of England and the FSA to be defined. It also focused on the new vocabulary of macro-prudential regulation and the perils of procyclicality. Cynics might be forgiven for questioning whether these concepts will remain in full view when the next global recession hits, but clearly the absence of appropriate tools has been a factor. The review also challenges boards of financial firms in a number of areas, in particular risk management. The application is, however, wider and can equally be applied to non-financial companies and also third sector organisations.
A particular challenge to boards is whether changes in governance structures are required to increase the independence of risk management functions. Turner is suggesting a more direct relationship between senior risk management and Board risk committees. It is becoming increasingly clear that the widespread use of derivatives throughout the 1990s was not understood by non-executive directors. Did the Board of Northern Rock think that management was using these instruments to hedge the bank's positions or as a proprietary trading tool designed to enhance the profits?
The key learning point for the future is that some boards will need reshaping to ensure that non-executives and those charged with governance are fully equipped to understand the strategy and risk parameters and are able to engage with the risk managers, if necessary without the senior management team present. That will require a change of mindset and is recognition that corporate behaviour needs to be changed.
Remuneration policy is equally in the spotlight. Turner is at its clearest in stating that remuneration policies should be designed to avoid incentives for undue risk taking and that risk management considerations should be closely integrated into remuneration decisions. The banks institutionalised a permanent culture of high compensation, whereby success was rewarded largely by cash and without regard to the cost of capital on a risk adjusted basis. Times of plenty will now have to see provision made for times of famine. Quite how shareholders will react to that is unclear and it is easy to see why a UK and global code will be required to ensure a level playing field for talent and reward. In terms of how incentive compensation is structured in the future, more will need to vest over a longer period and will be more equity-based. The inevitable market response to that will be a one-off increase in base pay to compensate and banks will have little option but to act if they want to attract and retain the best talent.
For listed companies, the Combined Code is likely to be revised. The Financial Reporting Council is currently consulting with interested parties. One of the accountancy bodies, the Chartered Institute of Management Accountants, has made a full and interesting response (http://www.cimaglobal.com/enterprisegovernance). A key challenge, it argues, is for boards to ask the right questions of management. It seems a rather basic recommendation. The submission states: "It has been suggested that the failure of boards to 'ask the right questions' has been a major contributor of recent corporate difficulties. For example, the purchase of ABN Amro by Royal Bank of Scotland has been acknowledged by the former chairman, Sir Tom McKillop, as a mistake. However, in defence, he argued that the board had 18 meetings to discuss the proposed takeover and that there was widespread support for it. But what the external observer cannot know is the quality of the debate at those 18 meetings. Did anybody play devil's advocate to ask the most awkward questions? Did the NED s fully understand what was being proposed so that they could ask the right questions?" The submission is too diplomatic to go on to infer that a Board with a dominant chief executive has its work cut out to ensure the debate is of the required objective quality.
So what might a new anthropology of corporate behaviour look like? This analysis, which cannot be exhaustive, suggests that companies, both banks and non-banks, need to examine in some detail their governance machinery, particularly the way in which the non-executive directors engage with management. There will be inevitable soul-searching about the ethics underpinning a company's mission in the current environment. Is the reward culture in balance? In terms of raw governance skills, the approach to risk management has been catapulted to the top of the agenda. Are the risk management processes sufficiently independent? Is the right talent available to staff the function? The events of the past 12 months or so have proved an immense wake-up call for global business and government. The regulators will have their say, but in the final analysis, the questions are human ones and no amount of fresh red tape will guarantee how executives behave towards their stakeholders.
Anthony Archer is a Partner of Odgers Berndtson and a member of the General Synod of the Church of England. The views expressed are those of the author.