Years on from the financial crisis, we are still dealing with ‘knee-jerk’ regulation. Who can blame the non-executive directors of HSBC who resigned? There must be better ways to make a living.
If matters persist in marching relentlessly in the direction of ever more onerous regulation, we will soon have to re-think the whole governance around board structures.
Non-execs, with the same responsibility as executive directors for the business, will not be volunteering for roles in highly complex regulatory environments or, at the least, it will be difficult to attract those most capable for the roles in the first place.
Executive Search professionals seem to see the issue slightly differently, at least until non-execs are actually prosecuted. They regard the biggest detraction being the level of time-commitment required, with non-executive positions in major financial institutions potentially taking 100 days a year to fulfil. This, combined with sufficient integration into the business to adequately understand it, could result in question marks over independence.
The current economic climate should provide a good environment to re-think regulation. We are not in the eye of the storm, and so can reflect on best practice with full and early industry consultation.
This is what the property industry has endeavoured to do with ‘A Vision For Real Estate Finance’. Led by knowledgeable people from within the industry, this should give rise to the best framework. The areas it addresses are sensible, covering everything from senior expert support for regulators enabling them to do their jobs properly, through to regulatory capital requirements, better reflecting the actual risk arising from CRE loans.
For me, the craziest thing about debt financing in the run-up to the financial crisis, was the predominant focus on loan-to-value ratios in a world of ever-inflating asset prices and lack of affordability.
With hindsight, the consequences were inevitable. But we will have learnt nothing from this experience if we don’t now look to the alternative long-term measures of value and income in assessing appropriate gearing levels.
Perhaps the most controversial recommendation within the Vision document is the creation and maintenance of a database of all commercial real estate loans. The argument against it – aside from easily quashable contentions around data protection and commercial sensitivity – is that it gives rise to substantial additional work on reporting. If banks are doing their jobs properly, it shouldn’t. The art will be in gaining consistent information for the banks and regulators, and keeping it simple. Because it is simple, it probably won’t be fit for every possible purpose and analysis, but it will be maintainable.
Regulation needs to be right-sized, not over-sized, not least because however ‘nearly’ right we get it, regulation will not be the thing that prevents the next financial crisis. The best that anyone can do to protect their business from future shocks – and this absolutely has to start with systematically important businesses in the economy – is getting the culture right.
From viewing many businesses, both up close or at a distance, I believe we have a long way to go on this. The latest blow-up is Tesco’s. There the problem apparently started at the top (or so the gossip goes), but for all those bank CEOs now espousing ‘the right culture’ they need to look at how the culture they define flows through the business, as I suspect there are still many blocks in place. One could argue I have a gender bias in suggesting Antonio Horta-Osorio’s aim, of moving towards 40% of senior roles being filled by women, will assist in improving culture across his business, but at the very least it will create a shake-up that may remove some long-standing obstacles.
Back to non-execs, and this time to where they add value. Culture is an area which may be difficult to tackle but, if done well, it can make a huge difference to the performance of a business.
So what can the non-execs do? Ensure there is not an untouchable star chamber, structure remuneration policy to focus on the right goals and understanding that long-term success for all stakeholders is poorly served by an isolated and relentless focus upon quarter on quarter improvement in profit figures. Now that sounds like quite an interesting and challenging job.
Rebecca Worthington is chief executive of Lodestone Capital
