The Great Debate UK
Big bonuses have dominated headlines in recent weeks, and it is expected that David Walker’s review of corporate governance in British banks, due out on Thursday, will add fuel to the debate. While remuneration is likely to steal the limelight, deeper in the darkness lies a less emotive evil – risk.
Risks, particularly financial risks, have been taken by our most powerful organisations to a disconcerting degree – one that our current corporate governance system and non-executive directors were not able to control. So did non-executives fail to understand the scale of the risks involved, or did they not deem it their responsibility to challenge their respective boards?
Arguably both are to blame. Let’s first consider board directors’ understanding of the risks. Structural issues currently hamper non-executive director’s access to information. Non-execs are not super-human, but they are set with a phenomenal task – to supervise these vast multinationals with little support, limited capacity and restricted resources, relying almost exclusively on information provided by the executive. It is like trying to gauge the severity of an upcoming volcanic eruption with a thermometer.
Hard to imagine with financial markets still buoyant and newspapers full of tales of bonus greed, but there is still the possibility that captialism will end. At least there is according to prestigious investment consultants Watson Wyatt in their latest study called "Extreme Risks".
The firm listed the demise of the system of private ownership as one of 15 threats to investors and the global economy that probably won't happen but which it reckons are worth worrying about anyway. The idea behind the report is that such things as climate change, the break up of the euro zone and war are always worth being included in an investment risk management process.
A month or so ago, there was a lot of talk that risk appetite would be pared back over the coming months. This talk was built around relatively cautious expectations for economic growth in most of the G-10 next year.
Three months is a long time in the markets, and particularly for banks. Alongside the rally in bank shares, investors have also bid up bank bonds, especially so-called tier 1 bonds which rank just above the equity in the list of creditors.
from The Great Debate:
-- Preston Keat is director of research at Eurasia Group, a global political risk consultancy, and author of the forthcoming book “The Fat Tail: The Power of Political Knowledge for Strategic Investors” (with Ian Bremmer). Any views expressed are his own. For the related story, click here.
There are a number of macro risks that will continue to grab headlines in 2009, including the conflicts in Afghanistan and Iraq, cross-border tensions and state instability in Pakistan, and Iran's ongoing quest to develop advanced nuclear technologies.