Book: Going Off The Rails
Author: John Plender
Price: John Wiley, £19.99
The events of the last three years have dealt a serious blow to the global reputation of Anglo-Saxon capitalism, or at least to its western variant. The excesses of the dotcom boom and bust, in which $4 trillion were added to and then rapidly subtracted from US equity valuations, followed by the revelations of corporate excess at Enron, Global Crossing, WorldCom and others, raised big questions about the efficiency of Anglo-Saxon markets as allocators of capital. Major questions have been raised, too, about the robustness of the regulatory framework surrounding our markets.
In London, the extent to which these events have tarnished the image of Anglo-Saxon capitalism is too little appreciated. We well understand that there are serious doubts elsewhere in the world about US foreign policy. The questioning of US capitalism is less widely understood. Yet behind the closed doors of central banks and finance ministries around the globe, many questions are being asked about whether the previous working assumption, to the effect that the world's money and capital markets were gradually converging on the North American model, remains valid. Should countries wish to move towards a world in which huge misallocations of capital can occur, and which generates such egregious examples of corporate excess?
This challenge is little appreciated here because, in spite of all that has happened over the last three years, very few people in Britain see any alternative structure. We have little belief in the efficacy of government-imposed controls on financial or commercial activity. That arises partly from deep historical roots. The decisive argument about free trade in Britain occurred almost 200 years ago, surrounding the corn laws. Protectionism has failed to generate any substantial political support ever since, and is at the margin of political debate.
We also have little belief in the efficiency of state control of the productive sector, undoubtedly driven by our own generally depressing experience with nationalised industries. Elsewhere, even just across the channel, state-run enterprises are less obviously inefficient, and are still looked on with affection and respect. So there is a consensus in Britain against the notion that governments should stand in the way of free movements of goods and capital, or legislate to constrain or control corporate decision-making. It is fair to add, as overseas commentators often do, that a further reason why in London we see less of a case for interference with the market is that the City of London is the prime beneficiary of the free movement of capital, as one of the largest international financial centres. For these reasons, we tend to see the problems of the last few years as indicating a need for, at most, tinkering with the rules.
Elsewhere, even in the US, there are more serious challenges. In parts of continental Europe, there has been something of a revival of the previously discredited belief in the virtues of managed capitalism on the Rhineland model. In large parts of the developing world, the IMF consensus is under significant pressure. The example of Argentina, a country which for some time was the pin-up boy of the IMF, or so it seemed, is now a cautionary tale rather than a role model. The somewhat petulant and personalised criticisms of globalisation made by Joseph Stiglitz, formerly the World Bank's chief economist, have achieved an unexpected degree of resonance in the finance ministries of emerging market countries.
The US case is, of course, somewhat different. But there we have seen a very muscular governmental response to the late 1990s crisis of capitalism. Congress is not afraid to legislate on corporate governance. The US justice department, and state attorneys general, have been robust in their prosecutions in the interests of a cleaner market. So we have seen the threat of criminal charges against Andersen lead to the destruction of the firm. There has been the Sarbanes-Oxley Act, which intrudes deep into the processes of US boardrooms, and indeed boardrooms elsewhere if companies wish to avail themselves of the services of the New York capital markets. There is a new public company accounting oversight board, chaired by Bill McDonough of the New York Federal Reserve Bank, which will require registration of all auditors operating in North America, and impose a significant degree of regulatory cost on them.
In Britain, the response has been rather different. The Financial Services Authority (where I am the chairman), has proposed changes in its area of responsibilities, notably to do with conflicts of interest in investment banks, and the industry is mobilising to resist some of them. In accounting, no new body or statute is envisaged. The existing self-regulatory organisations will be tucked in under a private sector-led financial reporting council, and the incoming commitment by the Labour government in 1997 to introduce statutory regulation of the accounting profession has once again been deferred, or perhaps reinterpreted.
We shall need to see whether this response passes muster in the US, whose accounting oversight board will judge the equivalence of other regimes of audit regulation when it decides who will and will not qualify for exemption from the US requirements. John Plender is clear that, in his view, the British response on this point, and indeed many others, has been inadequate. He believes that in the long run, one of two options will have to be adopted. Either auditing will be an independent regulatory function under the aegis of the FSA, or the appointment of auditors will need to be put in the hands of third parties, perhaps the insurance industry.
Plender, indeed, is among those commentators who think that the events of the last three years have indeed thrown the fundamentals of our capitalist system into question. Much of the analysis which lies behind this book is acute, and Plender has performed a useful service in cataloguing many of the absurdities of the dotcom boom and the egregious behaviour of US chief executives, in particular. It is hard to dispute his conclusion that many entirely lost their moral compass. The trends in corporate remuneration are perhaps the best illustration of this point. In 1980, the average compensation of a Fortune 500 CEO was 40 times that of the average worker. By 2000 it was 531 times as big.
We have seen a similar trend in Britain-albeit not on the same scale-and Australia has recently thrown up an extraordinary story concerning the failure of HIH, its second largest insurance company, which Plender would surely have included, had it been revealed in time.
There is, however, something of a "kitchen sink" feel about Going off the Rails. The dotcom bubble is linked to America's import of capital from the rest of the world-an extraordinary imbalance, it is true, but not one closely associated with corporate excess. There is a lengthy exposition of the Japanese boom and bust of the late 1980s and early 1990s: perceptive in itself, but hard to integrate into the broader story Plender tells. And he chucks in criticisms of other kinds-the reform of the Basel rules on bank capital, for example-which I found far less well-founded. It is also the case, sadly, that Plender is short of prescriptions. He is radical on auditing, though does not say which of the two outlined options he prefers. And there is praise for the British government's company law review, perhaps not unrelated to the fact that Plender sat on its steering group. But no legislation based on the review has yet emerged.
He wisely counsels against a lurch back towards protection and favours a "values-based" approach to corporate governance. But some good old-fashioned punishment would help. One striking feature of the last three years is that, so far, few errant senior executives have been effectively disciplined. Losing one's job is a form of discipline, but I suspect that unless the US justice system can make serious charges stick on the bosses of Enron, WorldCom and the rest, the message will still not get through.
