Bank Bonanza? Forbes Says Don’t Bet On It

Earnings season won’t be an apocalypse. But boom times? Hardly.  Don’t let a little accounting change fool you; banks will still struggle to eke out profits this year.  Rising loan defaults and the gloomy economic conditions are largely to blame, despite factors seeming to work in banks’ favor.

It may be that Forbes is missing the big picture.  After all we have just had the G20 summit.  The world’s press has given a largely positive reaction to the G20 summit’s efforts to tackle the global financial crisis.  But some newspapers express fears that the G20′s measures do not go far enough.

The London-based Financial Times described the detail on future fiscal stimulus and cleaning up the banks as “disappointingly thin”.

The weakest part of the package is the financial element. Banks are still gravely wounded. The financial crisis lit the fuse for this recession. It may also prolong the fire; the crisis will last much longer if major countries refuse to clean up their banks. Given the range of countries at the G20, a one-size-fits-all bank rescue policy was never feasible. But the absence of detail about a common approach to cleansing the banks of their toxic assets is extremely disconcerting. Stating vague commitments only serves to create fears that little substance lies behind the words.

Here is a brief rundown of the measures announced at the G20 meeting in London on April 2:

1. An additional US$1.1-trillion program to restore credit, growth and jobs in the world economy
2. To increase regulation and oversight to important financial institutions, instruments and markets, including hedge funds, and to focus regulators on “macro-prudential risks”
3. Financial Stability Forum is renamed the Financial Stability Board and given wider mandate to promote financial stability, set financial guidelines and collaborate with the IMF
4. Endorse and implement the new principles on pay and compensation and to support sustainable compensation schemes
5. To take action against uncooperative jurisdictions, including tax havens
6. To extend regulatory oversight and registration to credit-rating agencies
7. To refrain from raising new barriers to investment or to trade in goods and services

Items 3 and 4 in that list may well have real teeth.  There is public outrage at the details that have been revealed about bonuses and the circumstances under which they are often awarded and paid out.  One might have hoped that corporate governance and individual morality might have made such bonuses the exception rather than apparently the rule. 

In that light it is most satisfying to see what Henry Mintzberg is writing on Executive Compensation: It’s time to call the bluff of those highrolling CEOs.  He is the Cleghorn Professor of management studies at McGill University. He suspects that when it comes to executive compensation, corporate boards are finally ready to take a stand.  He offers the following win-win advice:

Dismiss out of hand, without one second’s hesitation, any candidate for a CEO position who seeks a compensation package that would single him or her way out from everyone else in the company. In fact, terminate discussions immediately at the mere mention of the word “bonus.”

These prove the candidate has no business running a business of co-operating human beings. (Should this person not comprehend, cite his or her mention a few moments earlier of the importance of “teamwork,” and how “people are a company’s greatest asset.”)

This proposal will save tons of money and send a positive signal to everyone else in the company for a change, and the firm might just end up with a CEO who is a real leader. Imagine that.

Great advice.  It is a sad commentary on business when such wise words will be seen to be somewhat provocative. 

Nevertheless the outrageous behavior of some members of the financial communities in both the USA and the UK and the global publicity about them mean that the world can never be the same.  Banking bonanzas there may be in the future but it is essential that all stakeholders benefit rather than just a privileged and unworthy few.

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• G20 deal (news.bbc.co.uk)
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