16 Jul 2009
The financial crisis has raised questions about how institutions at the heart of capitalism operate. Over the last 20 years charities have constantly been exhorted to become more business like perhaps it is time for the current to flow the other way.
The first area of reform is the audit of quoted companies, which has become a way of audit firms to leverage other business.
A recent Treasury select committee report expressed concern about auditor independence and recommended a ban on non-audit work. But we need to go further and create a new not-for-profit organisation, the public companies audit office. It would licence and allocate firms to carry out audit work for public companies and nothing else. Fees would not be paid directly by but through an annual levy to the public audit office. Plcs would have no say in which firm is appointed and at regular intervals, say every 10 years, the firm would be changed by the authorities.
In this way audits would be undertaken by genuinely independent firms and engender a much tougher and tighter audit regime deserving public confidence.
The second issue is the credit ratings agencies, which operate under a massive conflict of interest. They are for-profit companies owned by shareholders who want to maximise profit by selling their services to the financial institutions. If the ratings agencies do not play ball with their client, they might lose them. So there is immense pressure to rate products in a way that the agency’s clients like.
The only way to end this conflict is for the agencies to be reformed as not-for-profits. Costs should be met by a levy on the banks, the insurance companies and all quoted plcs.
Finally, boards. Over the last 20 years there has been a remorseless concentration on shareholder value. But even Jack Welch, former CEO of General Electric, now believes it is ‘the dumbest idea in the world’. It is depressing that the board of UKFI, established to hold the taxpayers’ stakes in the nationalised banks, is dominated by civil servants and those who got us into this mess.
A move away from focusing on shareholder value could be partially addressed
by diversifying the boards of quoted companies. All should be required to have
at least one non-executive director with experience of the social/environmental
These simple reforms which could transform the financial system but will any government have the courage to implement them?
Stephen Lloyd is senior partner at Bates Wells & Braithwaite London
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