Can we regulate our way out of a crisis? |
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| Written by Graeme Yell, Financial Services Expert, Hay Group | |
| Wednesday, 11 June 2008 | |
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Page 2 of 2 Establishing consequences To establish real consequences, we need to open up the possibility of total failure – for individuals, teams and institutions. We have to be prepared for organisations to collapse. The danger, as many commentators are beginning to note, is that risks and rewards are not symmetrical. There are life changing riches for success but also generous pay-offs and smooth transitions to new jobs for failure. If there is an area for regulation, it may be in the arena of pay-offs for under-performance, which should be eliminated. The risk of losing it all would create a sense of caution which might balance the lure of the Aston Martin. This is how markets work. We also need to ensure that performance measures fully reflect long term performance – for today’s profits, while having the capacity to create greater profits tomorrow and the risks taken on in pursuing both. Benefits to society Of course, we cannot allow the system to fail. There are significant benefits to society as a whole to having an effectively functioning financial system. But protection should be targeted to the public not to individual institutions. In the long run there would, be fewer crises to contend with if financial services organisations built in an appropriate appreciation of risk. In this light, nationalisation is not necessarily a bad response. The argument for intervention is, after all, that society benefits, and it is taxes that finance the intervention. Markets are good for regulating complex interactions, but when markets fail other mechanisms must be sought. Our recipe for a safer financial system includes strong principles capturing hard earned wisdom and leaders who protect these principles against short term greed. Consequences for risk taken It also requires a sense of ownership of these principles across each firm, full and symmetrical consequences for risks taken, and protection for society - not for individual businesses. How exposed are you? Do people – at all levels – really speak their mind about concerns and risks? How are those that do treated? Do you have meaningful and passionate debate in the senior team? Who are the heroes and what do colleagues think they are being rewarded for? Do performance measures cover results, risk and capacity? What three principles capture how your organisation has learned to create value over the long term? Graeme Yell is financial services expert at global management consultancy Hay Group. Related articles
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