Corporate governance - the future of financial regulation
Updated: 2012-08-21 05:52
By Andrew Mak (HK Edition)
We need urgently a legally binding international agreement to facilitate the recovery of the world economy. The Standard Chartered Bank saga in the past two weeks provides the best lesson for both the financial industry and the regulators. It also sets an important example.
Standard Chartered Bank is one of the companies to have come under threat under the harsh scrutiny regulators. As a result, Standard Chartered was required to pay fines comparable to the GDP of some less developed countries. The bank has not disclosed to the investing public exactly what happened, only to promise investors things will be better in future. Standard Chartered is preparing a swift boardroom shake-up, having come under pressure from investors over the manner of its handling of allegations that it concealed details of transactions with Iran totalling $250 billion.
The situation arose as a result of an action by a regulatory body whose mandate jurisdiction resides within US borders. All of a sudden, no financial institution is immune to regulatory charges inside the US.
The global economy has become swept up in a trend of increasing international conflicts after a deep recession. Politicians of the day want to divert attention far from home, as a result of their own failures in good governance. In an election year, conflicts are given particular prominence. This is what we saw in recent months in both the US and Japan. Foreign, and notably Chinese enterprises doing business overseas, are an inevitable target for regulatory investigation.
From this side of the globe, one view is that China, as an expanding economy, has attracted jealous attention. This highly biased view toward China has its followers. Reports about corruption and market misconduct among Chinese enterprises listed in the US are prominent issues for the media here in Hong Kong. US regulators may be seen as tools to pursue US political and national interest internationally.
The future of regulation and the veracity of regulators do not offer much hope for improvement. What is the nature of the misconduct of Chinese enterprises? Is it that corruption is inevitable in the capitalist market, a lack of integrity by individual companies, or a difference in business culture between Chinese and US companies, or their regulators? The answer may be a bit of everything.
However, the grievance against the regulators is that the importance of corporate governance is clearly not a priority for the regulators in the past years. The countless international meetings of the regulators in sumptuous tourist spots in the past two decades were insufficient to ward off four years of global recession originating in the US and overflowing to other countries.
Regulation seems to have given way to the urgent need to "put out the fire." The numerous international meetings of the financial regulators one after another seem to put rescue foremost, over maintaining institutional structure and rules over the long term. No long-term vision has been revealed. It is time for the US, the international governments, and their respective regulators to rethink what they should promote in the long run.
This view on the urgency to collaborate at an international scale has its support in a number of ways. The term "corporate governance" emerged since the 1970s in the US. Company legislation has mushroomed. The UK Companies Act today imposes over 1,000 duties on a director. It seems rather surprising that the UK Parliament should require a business man to understand that he has over 1,000 duties before he can act as a director.
The objective of corporate governance, if it is to benefit the public investors, has clearly failed. It has been too little on the right side, and too much at the wrong end. International banks are particularly difficult to govern because conflicting national interests are often in play. The relationship between the US and Iran is a classic example.
It is now almost four years since the decline of the fourth-largest bank in the US, Lehman Brothers. The demise had brought about an economic recession almost on the scale of the 1929 depression. It is essential for the international community to understand the often quoted "together we stand, divided we fall".
The author is a HK barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.
(HK Edition 08/21/2012 page3)