Burgess COMMENTARY

Peter Burgess

Sustainable Finance A new take on what we mean by sustainable finance? The LSE project referred to is now under way and we are always looking for new researchers/input. Workshop on the Financial Sustainability of Banks ucl.ac.uk Speaker: Professor Roger McCormick (London School of Economics) Chair: Professor Emilios Avgouleas (University of Edinburgh) About this event: A league table of Bad Banks might lead to improvements in the ethics of Banking,... 7 days ago Like CommentUnfollow Flag More 19 comments Follow Tim Tim MacDonald • Sustainability should be expanded to mean 'sustainable prosperity', which means opting out of the recurring cycle of boom-and-bust that is dramatized most recently by the bust of 2008. We need to stop lionizing booms as Growth which is the norm and the goal, and recognize that every boom is an aberration, an exaggeration and a distortion of more normal and sustainable patterns of prosperity that will always and inevitably be followed by a bust. To avoid busts, we have to stop creating booms. Debt does not create booms, although it usually does trigger the bust. Booms are created by the inflation of asset prices through closed-loop trading in the financial asset pricing markets. As a lawyer with some experience of finance and investment, I believe that more regulation won't build better banks, unless they are regulations that make banks better at discounting inflated asset trading prices, so they can avoid lending into values that are not really there. Debt follows equity. If the equity prices are right, the debt will be alright. Banks can be most helpful in the work of getting booms to be recognized as the unsustainable aberrations that they are by refusing to take responsibility for a problem they did not cause, and therefor cannot fix. For reference, consider the Letter to the Queen issued by the British Academy in June 2009. A most remarkable document. 7 days ago• Like Peter Burgess • I cannot really understand why the idea of 'sustainability' has become so popular. A couple of years back I attended a conference on 'sustainability in the extractive industries' at Columbia University ... an oxymoron if ever there was one! So now its 'sustainable banks'. On April 17th, the President of Ireland made a speech at the European Parliament in which he deplored the lack of an intellectual dimension to addressing the issues that face Europe and the world as a whole, and I would agree with this sentiment. At the present time science and technology are way more powerful than they were when I left college 50+ years ago. There are more educated youth around the world than at any time in history. So what's the problem? These ought to be indicators of a world that is heading into a wonderful, productive and prosperous future. I argue that the problem is that policy makers and powerful decision makers have a fixation about the type of economy that Adam Smith described in his famous book published in 1776. My memory of that time was that the fasted thing on the planet was a horse ... and productivity was so poor that the world could not feed itself even though the population was small compared to now. From my perspective, the banking system that we have today was designed to solve the money and banking problems of the 19th century. The industrial revolution created real wealth because it was built on top of very real improvements in productivity. The same can also be said for the agricultural revolution that preceded the industrial revolution. Land plus labor plus capital added up to prosperity ... increasing over time because of the increments in productivity. Something went wrong in the 1930s ... badly wrong. Opinion is still divided about what actually ended the Great Depression since World War II happened. Fast forward to around the 1970s and the world changed from a global shortage economy to a surplus economy with more labor available than was needed to produce what we needed. At the same time all sorts of new technology was increasing productivity even more than in the previous era. Using the Adam Smith model for the economy, labor now started to get less, land and capital started to get more. To the extent that labor still wanted goodies and could not really afford them, capital stepped in with all sorts of credit instruments so that people could still buy, but without earning enough to pay for things. 40 odd years later ... the Adam Smith world is in a mess. Governments also wanted things they could not pay for ... so capital stepped in and gave them credit too. Meanwhile half the world remains poor and hungry. They really do need things, but they cannot ever pay for them in the sort of economic framework that we have constructed over the past 200 years ... and because of productivity things will get worse using the current model rather than better. I think this is ridiculous. If I was a hammer, I would look for a nail to solve the problem. But I am an engineer / economist turned accountant. I see the solution in better metrics. The terrible trio of (1) money profit for business; (2) stock prices for investors; and, (3) GDP growth for policy makers, pundits and politicians ensures that sooner or later society will fail. The first signs of failure are already evident ... but media and misinformation remains very powerful. I see the need for metrics that are as powerful as money profit accounting, but embracing impact on people, place and planet as well as merely profit for investors and C-class executives. Investors should be able to engage not only with activities that produce money profit but also social valuadd in its broadest sense. This is starting to happen, but it is tiny compared to the huge power of old fashioned established for-profit only organizations. I call this system of metrics TrueValueMetrics. Stay tuned! 6 days ago1 Click to see who liked this comment. Follow Tim Tim MacDonald • Peter I encourage you to take off your accountants hat and put your engineers' hat back on, to look at this as a systems problem. The current system is broken. Stewardship investing (pension plans, etc.) broke it. They broke it by turning the 'relay race' of individual share ownership in the public trading markets into a zero-sum game of closed loop trading that drives the economy in a recurring pattern of booms that go bust. If you look at this as a systems engineer, you will see that the problem is not that we need to modify the system, so that we can manage it better. The problem is we are using the wrong system. We are using a system that is engineered for liquidity. We need a system that is engineered for longevity. Metrics is about management. Systems are about method. What we need is not different metrics. What we need are different methods. 6 days ago• Like1 Follow Roger Roger McCormick • Thank you for these comments! Our project at LSE begins with fairly modest (but 'concrete') aims, starting with the 'given' that most banks now want (or say they want) to 'restore public trust' and tell us they are seeking a more sustainable business model, less focused on short term profit. Since we believe that their efforts in improving their 'culture' and reinstating some sense of ethics in their behaviour are central to restoring trust, we ask ourselves: where can we find concrete indicators of good or bad culture in any given bank? If such concrete indicators can be found, can they be used to hold banks to account and to compare one bank with another? We feel that, sadly, you will not find much that is useful in 'sustainability reports'. We have made a start. A team of researchers is now making a tally of what some of the leading banks have been clocking up as fines, sums paid in settlement of regulatory proceedings, sums reserved in accounts for compensation claims by customers who have been mis-sold products... etc., etc. This is being put together on a rolling 5 year basis. It enables comparison amongst banks, amongst jurisdictions, amongst different 'problem areas' and year on year. We aim to publish the first set of data (all from the public domain) by the end of the year. Meanwhile, we are also exploring how to advance a similar project focused more on banks' track records in ESG matters. Early days yet, but we felt we should do something that takes this highly relevant information (which is often left in very obscure parts of the public domain once the initial headlines have faded) and makes it more accessible, encouraging banks to reconcile the numbers with their statements of pious intention in the process. 6 days ago• Like2 Follow Ken Ken Back • I believe that the real problem facing the banking sector is one of failed corporate governance. In fact you might argue that this is a wider phenomenon which has ramifications across all sectors and regions globally. The lack of appropriate behaviours is also evidenced by the recently outed fiscal irresponsibility of our larger MNC's, as they treaty shop the global tax havens for ever more intricate ways of avoiding paying their dues in the very markets where they make their greatest profits. We have unfortunately largely dispensed with the concept of mutuality as a corporate governance and ownership model, with many of the largest insurance groups having adopted the joint stock ownership model with its fixation on shareholder value, as opposed to the more customer focused and societally responsible attributes of the mutual society. Triple bottom lines are one thing, but alignment of incentives is key to determining corporate goals and ultimately socially responsible outcomes. Our major banks should be at the centre of the impact investment movement, where profit is good, provided society is also benefiting. Now that we have two of our major banks in public ownership, we have a once in a generation opportunity to drive forward to a new and I would argue improved model of governance. We need to breed a generation of bankers whose incentives are better aligned with society's infrastructural renewal. If we are to get away from the failed socialist model of tax and spend, and derive a sustainable model of capitalist growth, then we need to develop the capacity of our recently 'nationalised' banks to morph into models of mutual sustainability. Rather than rushing to sell-down the public ownership of the banks as has already taken place in the US, let's leverage the capital which the British tax payer has already sunk into the bank bailouts, and provide the economy with the injection of long-term sustainable investment capacity, based upon a concept of mutual benefit, rather than a return to the single bottom line of the joint stock model. 5 days ago• Like1 Peter Burgess • Tim et al ... I like to think that the metrics that I am talking about are a product of system thinking ... and it is memories of measuring in the engineering lab at Cambridge that has been an important part of my thinking ever since I graduated. For a time I was a fairly successful corporate CFO because I used to work on fixing the factory rather than fiddling the books. With regard to the 'banking system', there is a lot of blogging about the way 'fractional reserve' money creation works ... or does not! The way money is created by the Central Banks and Commercial Banks seems like the ultimate Ponsi scheme, and runs completely unconnected from the real economy. The Chairman of BA/Iberia recently said in an interview that BA was doing just fine because London was prospering while the UK as a whole was not! Someone needs to write a book ... the Tale of Two Economies, rather than the Tale of Two Cities. Money is a big part of the economic problem that has infected the planet. Modern money is both a medium of exchange and a flexible measure of performance. This cannot work. For medium of exchange it will be better when there are multiple complementary or community currencies. These will facilitate trade within a local area, and encourage localization instead of globalization. Globalization has its place ... but should not be used for everything and indiscriminately. There are already a surprisingly large number of complementary currencies in play, and modern IT can make them even easier to implement. There are questions about how these should be 'backed' and I think there is a good answer for this. The measurement of performance, the money based metrics need to be quietly retired. I refer to the terrible trio of: (1) money profit performance for business; (2) stock prices in capital markets for investors; and. (3) GDP growth for policy makers, pundits and politicians. These measures worked reasonably well in a low productivity labor shortage economy, but cannot function for the benefit of society in a high productivity labor surplus economy that has been the norm since the 1970s. An economist friend in South Korea has suggested to me that the marginal price of labor is trending to zero, so capital can 'have it all' ... and he is not far off being right. With the terrible trio of money metrics in control, how can the economy work to reduce big issues of the planet? It can't! Investors cannot make money solving the problem of hunger in drought prone areas of the world, cannot make money handling the issue of climate change, cannot make money delivering health and education to those with no money to pay. However, all of these things have value. I want to see value quantified so that there are ways to compare different ways of delivering value and choosing the best. I want to see potential and opportunity become the backing for community currency so that everything that needs doing can be funded and get done. Money profit accounting is everywhere in organizations ... but there is nothing in 'community' that does anything like the equivalent. Progress and performance in the organization is measured. Progress and performance in the community is not. I want to see metrics around every economic activity ... with consolidation (aggregation) upwards into organization and upwards into place or community. Same data flowing that gives performance relating to both money and value. People say that value cannot be quantified ... I say it may not be easy, but it can be done. Just as in corporate cost accounting there are 'standard costs', in my world of metrics there are 'standard values'. All of this becomes quite feasible on top of smart phones and in the 'cloud'. This is, after all, 2013 and not 1813. 5 days ago Follow Tim Tim MacDonald • Peter I read you as saying that everything of value can be assigned a number, and that what we need is a better method of assigning numbers. I must demur. I contend that choices get reduced to numbers only AFTER the qualitative judgements have been equalized. The choices we make as between different qualitative experiences are not the consequence of mathematical calculations. Unless I am missing your point.... 5 days ago• Like Follow Chris Chris Stears • Fractional Reserve Banking; Corporate Governance Structures; Misaligned Incentives; or even Culture - they have all played a part, no doubt. They all, bar one, have been met with pubic / political rhetoric and in certain cases legislative and regulatory response. And Ken is right on, we must leverage the public 'control' [although this is arguable] and public sentiment over the nationalised banks to instil a change in culture. The reality is that the political will (driven to a large extent by the media's influence) will lessen over time - and the danger is that we progress into a positive economic cycle without fixing the underlying problems (Tim's comments agreed). The ICLR project (i'm declaring an interest here) is, as Roger's has outlined, attempts to ensure, through the publication of data (freely available) in an accessible and transparent way, that cultural-indicative trends (such as fines data, other regulatory/legal sanctions and sustained consumer complaints) are disclosed. We aim to raise awareness and promote debate in the area of non-financial performance reporting and accountability. As to the system-defects, there are proponents of Limited Purpose Banking (See Laurence J. Kotlikoff, 'Jimmy Stewart is Dead, Ending the World's Ongoing Financial Plague with Limited Purpose Banking') as an answer to the risk(s) inherent in fractional reserve banking. See also the IMF Paper, The Chicago Plan Revisited. Aside from the financial fixes, the issues surrounding governance, short-termism and integrity in the financial markets need equal attention. Work is afoot to better align incentives, to engage in long-term prosperity rather than ROI and to mitigate the legal risks where the duties of those who look after other people's wealth are poorly defined/protected. 4 days ago• Like1 Follow Richard Richard Ladzinski • Any system that bleeds its participants is not inherently sustainable. Sustainability is a term that should be reserved for ecological systems and biodiversity where extinction of species eliminates and limits the function and potential of the resource base. The ethic in banking and on Wall Street is to enrich the upper tier and corporate elite at the expense of its participants, which we have seen occur over the last several years. At the root of the problem is the mentality that a growth economy is better than a steady state economy. A growth economy equates to a perpetually extractive model where the majority of participants are being bled by the predators at the top of the food chain. This is no way to empower the populace, only a way to keep it down and in its place. The problem is much more simple than you gentlemen perceive; the problem is greed and a system that rewards it. Incentive is one thing, excess is another and that is what is unsustainable. 4 days ago• Like1 Peter Burgess • I am feeling some 'push back' about the idea that for performance to be optimized, then performance must be measured. In order to measure something, it is convenient for the parameters to be quantified in some reliable way. The push back that I am getting around the idea of value and impact ... around the whole idea that progress is when quality of life is improved ... reminds me of early in my career when it was something of a revolutionary idea in the business world that analytical accounting was going to be used inside the corporate organization to measure performance and improve performance. 40 years on, almost everything inside the corporate world has metrics, and the money profit performance of these organizations is pretty amazing. I argue that when the organization is measuring every aspect of its internal performance, and society is doing absolutely nothing to measure the externalities, and the impact or corporate activity on the externalities, then the money profit corporate organization is going to win, and the society is going to lose. In the sporting world, I argue it is pretty clear that a coach that pays attention to the performance of the players using metrics is going to do a whole lot better than the coach that simply works on the basis of feeling good about the players. I am not naive. There are many instances where the wrong metrics are being used ... but that does not mean that there should be no metrics. Rather it means that we should be sensible in the use of metrics. I think that the pre-occupation with money profit, stock prices in capital markets and GDP growth are an example of wrong metrics, and propose simply that they should be complemented by metrics that address the important social issues and impacts. A starting point for this effort is the development of 'standard values' as a baseline for measurement, rather like standard costs inside the corporate organization. 2 days ago Follow Roger Roger McCormick • Once again, thanks for all these contributions! I wonder if anyone would like to have a go at listing all the different issues raised?! Here are a few: 1) Should sustainability be given a much narrower meaning than the very broad one that it has acquired these days? (Good luck with that one!) 2) Can we/should we 'stop creating booms'? (Good luck with that one too!) 3) Are 'better metrics' the solution to the problems of the modern world's economy? (Any examples of how this could work? Who would ascribe the values and what would the sanction for poor performance be?) 4) Should those with money to invest (and those acting on their behalf) have some overriding duty as to investing 'responsibly'? (And who would police that, what would the sanctions be etc?) 5) If we can all agree that corporate governance in banks failed us, then what follows from that? We cannot expect zero failure in the private (or public) sector ----accidents will happen. Can we make really bad accidents less likely? 6) Will throwing a light on how banks compare with each other in their 'ethics/sustainability performance' encourage better performance by them? 7) Can we stop people being greedy? (And why stop there? ) 2 days ago• Like Follow Tim Tim MacDonald • Roger It is one thing to agree that governance at banks has failed, it is another to agree that governance is what has failed us. When a bridge collapses, the engineers don't just say 'the bridge collapsed because this support failed'. They dig deeper, to find the reasons why that support collapsed. I keep waiting for the Economics profession to step to the plate, and conduct a properly thorough-going deconstructive analysis of what, exactly, it is that caused our governance supports to fail. Perhaps your proposed study will be a good first step towards doing that. Tim 2 days ago• Like Follow Roger Roger McCormick • Tim, I agree that to say that it's all due to a failure of corporate governance merely invites more questions. One might as well just say that the banks failed because they weren't run very well. Various investigations (see,e.g the workings of the Parliamentary Comm on Banking Standards) have revealed a range of possible contributory causes to a range of different 'bad outcomes' (such as LIBOR manipulation, mis-selling products, misleading regulators, severe liquidity crises and total financial failure). I doubt that there is any regulatory fix for all of this. You don't stop people stealing by having a law against theft. What we can do is keep a tally of the 'data of failure', invite banks to explain how it reflects on them and, importantly, keep it going...so that this does not all get forgotten in a few years' time. Roger 2 days ago• Like Follow Tim Tim MacDonald • Absolutely right to keep a tally of the 'data of failure'. That is the first step towards a better experience. Not willing to leave it to the bankers, however, to interpret that data, or to come up with the innovative adaptations we need to move to a better place. mostly because I don't think the problem or the solution can be found within the four corners of the banking business. Instead, both exist in the ecotones between Government, Depository Banking, Investment Banking and Stewardship Investing 1 day ago• Like Follow Alex Alex Stobart • Roger 1) Should we not have a nationalised bank or two to provide competition for the greedy banks ? This might be on ethical grounds, or by offering better rates for people's money etc. Should their Boards of these nationalised banks be made up of ' ethical ' people to allow us to compare performance ? The Archbishop of Canterbury appears to be a candidate. 2) Will social investment prove an innovative adaptation ? 3) If LIBOR had been set by my local publican, would this have caused less damage to the world economy ? What is the point of LIBOR ? 4) As GAAP and all other accounting principles can be invented / adjusted to suit by clever bankers, and their auditors who stay in post for 50 years, what difference would any other standards really make ? Standards have always been invented inside the system, to perpetuate the system. How do we get in touch with your researchers ? 1 day ago• Like Follow Roger Roger McCormick • Alex, If I may, I will just deal with your last question for now..... The researchers are currently very busy unearthing and collating data. If anyone 'out there' would like to know more about what is happening in our project (maybe lend a hand?) please do send me an email with your contact details and I will be happy to let you have some more information. So, for now, the way to get in touch with our researchers, is via yours truly. Tim There is no question of simply leaving it to bankers to interpret the data. (They will be given the opportunity to correct any errors of fact, however. If they really want to restore trust, they will be co-operative in this). Once the findings are published (we hope by the end of the year) we would expect comments, explanations, justifications etc. from a range of sources. I see no harm in that. In fact, it is what I hope the project will bring about (amongst other things). Thanks! Roger 1 day ago• Like Follow Tim Tim MacDonald • Roger Looking forward to your data, and the commentary they trigger! 7 hours ago• Like Follow Nicole Nicole Reynolds • All, I love this discussion and am looking forward to more of your research and findings. The thought that keeps coming to mind for me as an American is how to do we change the incentive matrix in such a way that we get the 'clever bankers' or 'banksters' to sign on to create more sustainable economic growth that will benefit all in society and preserve the health of the planet? Where ever there is an arbitrage opportunity to be exploited to make a profit, which is a central feature of a market economy whether the measure is GDP growth, stock prices, interest rates or corporate earnings, individual actors will pursue it to their benefit. Such actors would have to believe that non-monetary profits and reduction of harmful externalities are in their best interests but as long as zero-sum thinking associated belief systems rule the day this won't happen. In the US changing this paradigm must begin with term limits in Congress and campaign finance reform so that democratic governance can no longer be bought and paid for by banksters and zero-sum thinking corporatists. 49 minutes ago• Like Follow Alex Alex Stobart • Hello, Is anyone able to go to this Conference ? The Auditing Special Interest Group of the British Accounting & Finance Association is pleased to announce that its annual conference will be held on Thursday16th and Friday 17th May at Anglia Ruskin University in Cambridge. The conference offers a unique mix of distinguished speakers and highlights of the latest unpublished academic research on auditing. The following topics will be addressed by the 5 distinguished key note speakers: Audit and Accountability in Modern Government by The Rt Hon Lady Margaret Hodge MBE MP, Chair of the Public Accounts Committee; Public Audit and the Public Finances by Caroline Gardner, Auditor General, Audit Scotland; Repairing Confidence in the Audit by Nick Land, Chair of the Audit & Assurance Council and non-executive director of a number of FTSE companies; IAASB's Work on Audit Quality by Jon Grant, UK representative on the International Audit & Assurance Standards Board (IAASB); and Assurance on Narrative Reporting by David Wood, Executive Director ICAS The following panellists will debate how to restore confidence in auditing: Paul George, Executive Director Conduct, FRC; David Hatherly, Professor Emeritus, University of Edinburgh; Diana Hillier, Partner PwC (formerly Vice-Chair IAASB); Nick Land, Chair of the Audit & Assurance Council; Steve Maslin, Head of External Professional Affairs, Grant Thornton; Liz Murrall; Director Corporate Governance and Reporting, Investment Management Association; and Mark Rhys; Partner, Deloitte Martin Martinoff will lead an ICAEW AuditFutures session on the '21st century role of the audit profession in rebuilding public trust'. Ilias Basioudis of Aston University Business School and Chair of ASIG commented: 'I am sure that our annual audit and assurance conference will appeal to academics and auditors alike. I am particularly pleased that Margaret Hodge has agreed to address the conference on the subject of 'Audit and Accountability in Modern Government'. Once again we have been able to attract a distinguished selection of speakers and panellists in addition to a number of both well established and young academics presenting their research on current topics. The conference provides an opportunity to engage with the speakers in an informal atmosphere'. Further information about the conference can be obtained from ASIG's Chairman Ilias G Basioudis at email: i.g.basioudis@aston.ac.uk, or via the ASIG website http://static.aston.ac.uk/asig/NAC2013%20-%20RegistrationInfo_Cambridge2013.htm 36 minutes ago• Like• Reply privately• Flag as inappropriate