Brussels, 27/01/2010
When it comes to trust, some business leaders are in the same position as Tiger Woods is with his wife. And although the bankers are probably near the top of the most mistrusted league table, others have problems too. Mr Schwab has made this point very well in the build up to this year’s Davos.
So how does the escalator reverse and reputations begin to rise?
First, not by lobbying to return to business – and bonuses – as usual. If Wall Street, London and the rest resume practising “alchemy”, as Paul Volcker called it, trading dodgy derivatives, those “ weapons of mass destruction” as referred to by Warren Buffet, and engage in activities which are generally “socially useless” as Lord Turner called them, then reputations will plummet even further.
It won’t happen too if the pay of CEOs continues to accelerate at many times that of the average worker with an ever widening gap between rich and poor.
And it won’t happen if the preferred formula is to run companies for short-term again, using them as tax minimisation vehicles, ripe for asset and job stripping, funded by extreme leveraging. This promiscuous model of operation has been adopted by many private equity operations and by others too. It is hardly a basis for any trust. Short-term shareholder gain as the main goal of companies is a route to anorexia, and probably to oblivion. We need less financial engineering, more real engineering as one British Government Minister recently remarked.
A little illustrative story – a good friend of mine works as a senior manager for a successful public company which has grown quickly. He, and the rest of the leadership team, have shares which can only be fully redeemed when they retire, or there is a takeover. Many of them are, apparently, praying for a takeover bid, and a windfall in their earnings. How can that be right? A leadership prepared to sell out the company for their own gain, and not fight to be able to continue to grow the business their way? These are perverse incentives.
The real question for business and Governments, and other interested parties like trade unions, is how can we alter business culture, especially in the English speaking world where too many business leaders are wide open to the accusation that they are looking after themselves first, where many shareholders take a short-term view of their responsibilities – as one London investment manager told me – “I do have long-term investments; they are short-term investments that have gone wrong”; and where leveraging has become a way of life, and a dangerous one when the downturn comes, as it inevitably does.
Can you therefore, representing the biggest assembly of business leaders on the planet, take steps to change the prevailing culture? Can you move towards a social market, more socially responsible, model, recognising a wider range of stakeholders and a more diverse set of responsibilities? Can you now – and I address this to Mr Dimon on behalf of Wall Street – recognise the full scale of the economic disaster originated by your world (less by JP Morgan than the others, I know) and recognise that the banks owe society a huge debt that must be repayed by a change of model, not just by paying back the loans you have had.
Can you move towards a social market, more socially responsible, model, recognising a wider range of stakeholders and a more diverse set of responsibilities?
If business is unwilling to tackle these, no doubt, rather impertinent questions, then do not complain when governments regulate, and seek to change your world. The political pressures are not subsiding as the green shots of recovery look a little stronger. Indeed they are strengthening as the White House’s reaction showed just last week. And this is not just a left / right political matter – The German and French Governments and more opaquely, the British Conservative Party back the Obama / Volcker plan.
If Wall Street mobilises against Obama, then that is a war which Governments everywhere cannot afford to lose. For trust to develop, we need a financial system which supports the wider economy, rather than makes vast profits out of activities so likely to destabilise it.
There are many business leaders I respect but they are not the ones that have set the prevailing culture at the moment. Entrepreneurs who develop exciting new products and services, who can help solve the problems of climate change, who can innovate, raise productivity and create jobs, who can develop new ways of prolonging health, who can entertain, amuse and inspire; these are the business leaders who earn and deserve respect. Can we develop this culture? Otherwise Governments will be forced inevitably to act on this, just as they were forced to intervene to avoid financial meltdown.