Thursday, 19 November 2009

A snippet of Tory thinking on the crisis

This here is quite interesting. There's a quote from Conservative shadow Treasury minister Mark Hoban:
‘If you were to listen to what City minister Lord Myners says, you would think responsibility for this crisis rested with shareholders and boards. I don’t know what happened to Lord Myners in his earlier life that led him to this view,’ Hoban said.

Unless I'm being thick, the implication is that it's a bit wrong-headed to think that boards or shareholders bear responsibility for the crisis. I find that a bit difficult to comprehend. Surely the boards of the failed banks must take primary responsibility for the failures of those banks? Ultimately the responsibility for the success or failure of a company must lie with those running it. Otherwise why do they have power (and rewards) in the first place?

Now you could argue that some financial institutions are simply unmanageable, and that the boards of those institutions don't even understand some of the products and strategies being utilised. But I'm pretty sure that isn't where this comment is coming from.

Judging from the comments that come later the argument is that the regulators should shoulder the blame for not preventing the crisis. But that logic leads you to blame the Environment Agency for companies polluting.

What about shareholders then? Well, as is no doubt obvious, I don't think that institutional investors covered themselves in glory before the crisis. Some argue though that you can't blame them as they don't have access to the same information that boards have - they will never be able to second guess boards. Now that might be true - but how is it any different from the position of regulators?

Ahhh but, you may argue, that's what regulators are supposed to do. It's their job to prevent things from falling over. True enough - but what exactly then is the role of a fund manager? You pay them to put your money into companies (or in reality the shares of companies) that do well and thus generate a return on your capital. If they say they can't be expected to spot the sort of failures that led to the crisis, what can they be expected to spot? And surely as fund management as a service - as opposed to regulation - is basically all about performance, surely there ought to be more incentive for fund managers to get these things right?

I'm not at all suggesting that regulators don't bear responsibility, but I really don't get the idea that boards especially don't have a bigger case to answer. And if you think regulators are just hopeless box-ticking bureaucrats trying to cover their own backsides, then why didn't self-interested investors solely looking solely to maximize returns do any better?

This little snippet of Tory thinking leaves me a bit bemused.


Al Widdershins said...

I can explain this problem to you. You see, certain words do not belong together. When they combine the result is either confusion or laughter (perhaps both). Examples include "Tory" and "thinking".

Nick Drew said...

that logic leads you to blame the Environment Agency for companies polluting

yes it does, actually

if pollution were a freak occurrence then I'd say the EA couldn't be blamed, provided it followed up sternly when it discovered one of these rare instances

but since it is prevalent in our big industrial centres, and the EA knows all about it but (probably reluctantly) turns a blind eye, then yes, I blame them

but (and you know what's coming here) as with financial regulation I mostly blame their political masters who set the tone

Tom Powdrill said...

as with financial regulation I mostly blame their political masters who set the tone

I accept that they got it wrong, but they were lobbied to adopt such a 'light touch' too. I don't see how the management of the organisation causing the problem - be it a bank or a polluting factory - can't be the people who bear primary responsibility.