To what extent will banks be forced to rethink their models as a result of Google or Apple starting to provide banking services and having the trust of the younger generation?
That is a possibility. In the history of financial institutions banks have seen many challenges. One of the biggest ones was securitization. So what did they do? They bought investment banks and became universal banks. Why can’t they buy technology giants or why can’t technology giants buy banks? Oh, dear me… more power! [he laughs]
Why can’t the US and Europe agree on accounting standards? How does this affect financial information when a company is trading on both sides of the Atlantic?
I think we should look at this the other way around. There has been incredible progress made in the conversion as well as in standards, and that has to be welcomed. Accounting standards by themselves are not the solution, don’t overdo the differences. There is a problem in terms of trying to make decisions about what is an asset and what is a liability, what is cost and what is expense. You have to make judgements. And good accounting firms make sensible judgements. They have a track record of doing that. That’s what makes them good.
Should financial reporting be mandatory? To what extent? Some experts insist that shareholders and investors are getting too much and irrelevant information.
I think there has always been an incentive in company reporting and financial accounting to hide information through these complexities, because that incentive creates the opportunity for discussing those things in private with your fund managers. It’s not price-sensitive information or insider information. You are within the law and abiding by the accounting conventions, but the critical information is not clear in the public domain. Again there is an argument here for having independent verification.
That is what auditors are supposed to do, isn’t it?
Well the answer to that is: make sure the auditors just do the auditing and allow them to double their fees. It’s worth it for the rest of us! [he laughs]
You are a specialist in corporate governance. What is the best system you know and why?
There is no best system. It’s like democracy. It’s a flawed system but it’s the best we’ve got. The most important thing you can have is good quality disclosure, explain the companies’ business models and how they create value. You need a financial report to do that, but you also need a narrative about the business model that’s based upon fact. And you need somebody to audit. Also the receiver of knowledge has to be able to understand these ideas so we need people out there working on behalf of the public at large. To explain whether this business model information makes sense. That’s a financial journalist’s role. But, unfortunately, financial journalism has not been resourced very well these days compared to analysts and fund managers. I would say that is a pretty effective first step to corporate governance.
What about financial media outlets having their own agenda? Remember the Financial Time’s fierce campaign on the so-called Spailout. Bloomberg and others provide investors with recommendations. Isn’t that a conflict of interests?
I am not a journalist, you are a journalist. You’ve got to sort this out, not me.
We were talking about the oligopoly of auditing firms. Isn’t there an oligopoly of financial information whereAnglo Saxon media benefit from a competitive edge?
There is a high concentration of everything in the financial system. That’s the problem we have to address. It’s not only about auditing the large banks, but it’s also about the fact that these players operate in a handful of world financial centers: London and New York, for example. So yes, I agree with you.
Should regulators be able to punish firms who don’t comply with good governance codes? How legally binding should those codes be?
I used to think that self regulation was the answer, but now after the crash if you want to enhance public confidence in all of these mechanisms I’m afraid there has to be law about corporate governance and there has to be criminal law. So much has happened… And the Americans do this! The Europeans don’t. The SEC would walk into a New York office and put somebody in handcuffs. Well done! They structure their law to catch these people. We need to do the same, show them that we mean business. And we are not structuring it to destroy financial capitalism. We want it to prosper for the wider public interest because it’s a flawed system but the best we have for allocating risky capital.