Observing governments wrestle with something over which ultimately they have very little control; the global economy, and in particular, the behaviour of financial markets and banks, is a fascinating sport. It is ironic that governments’ impact on the economy may appear far greater and more direct when they are pouring in billions of taxpayer dollars to mitigate a global crisis than in their execution of carefully considered economic policies on health, education, transport or housing.
The current recession has offered finance professionals a supremely challenging opportunity to consider how a potent brew of boom-time optimism, liberal regulation, and excessive corporate risk, has brought world economies and the societies they support to the brink of global catastrophe. We must learn from this and do our utmost to prevent its recurrence.
While superficially there are similarities with the recessions of the 1970s and 1990s, the differences (notably inflation and a shortage of critical talent) are so significant that very few business leaders, politicians or accountants, if any, will have had experience of them.
This period also coincided with the disintegration of the great manufacturing industries and the rise of service economies, underpinned by what seemed a limitless supply of credit. Unprecedented deregulation, a dizzying rate of technological change and the relaxation of the conditions for individual borrowing helped to spawn both unwarranted optimism and unacceptable risk.
Suddenly, in the wake of the collapse of Lehman Brothers bank, our current recession became uniquely threatening, with a lack of transparency within business and markets, major risk undertakings in the global financial system at levels never seen before, and investment banks operating like hedge funds. The big question for many businesses is now ‘how can we get through this in the short term?’ The answers are not so apparent.
But a lesson must be learnt from one recurring recessionary reality; that global optimism and global pessimism – sociological and psychological human realties - act like yoyos in their effect on economic behaviours. We must get to grips with, understand and defeat this boom-bust mentality. Creating a corporate blame culture will not alleviate this very real problem. A combination of professionalism, trust and integrity are the key to a real solution.
Everyone hopes that sustained recovery will come, despite the most recent statistics, which show the UK still teetering on the brink. Different commentators suggest different forms and timescales for recovery. But the real spectre at the feast would be an exaggerated recovery followed almost immediately by a plunge into a further deep recession.
The UK’s new tax on banking bonuses, and recent pledges by the UK’s City Minister, Lord Myners to end a culture of risk-taking and excessive rewards aside, but the fact remains the Government is joined at the hip to the City as a central hub of UK wealth and tax revenue generation. These challenges and tensions will have to be balanced, and best practice championed, if the UK desires to remain a great world financial centre in the brave new world.
Finance professionals in global business must learn from these events to ensure that boards have in place effective and dynamic corporate governance measures, to manage enterprise and operational risk. As a profession we must seize this time to shift the criteria for corporate success irrevocably from short-term bonus delivery, to longer-term transparent, economic health.
Eileen Roddy is head of CIMA Relationship Management and Business School.
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