Crisis is a form of market discipline, says professor

PUBLISHED : Wednesday, 13 January, 2010, 12:00am
UPDATED : Wednesday, 13 January, 2010, 12:00am

Professor Ferdinand A. Gul is head of the school of accounting and finance, and chair professor of accounting and corporate governance at Polytechnic University.

Are you satisfied that enough has been done to make systems of compensation (bonuses) more fair?

No, it is not clear what compensations are based on and they are too high in some cases.

What more needs to be done?

There needs to be more transparency including clear guidelines.

Are financial firms now more aware of reputational risk, and do you expect them to pay more attention to this in future?

Yes, they are, but history shows that when times are good they are likely to ignore reputational risk. There is growing evidence that investors and managers are driven by 'animal spirits'. During good times, bullish periods, managers are likely to take more risks and ignore reputational risk. During bad times, bearish periods, managers are likely to pay more attention to reputational risk since the risk of failure is high. One of the reasons why financial firms, and indeed other firms, are more aware is because of the financial crisis.

Economies and institutions have relied on government intervention to get back on track, but should more of them have been allowed to go to the wall?

Yes. The crisis is a form of market discipline and the market within limits should be allowed to play this role. It may be justified for limited government intervention, but too much of government intervention usurps the market's disciplining role.

Should government always pick up the pieces?

No. The failure of some firms may also be because of inefficiencies and negligence by managers. In these cases, these inefficient firms should be allowed to go out of existence - a form of economic 'Darwinism'.

Given one of the consequences of the crisis has been the amalgamation of large institutions, particularly in the United States, is there now a danger that getting clear information about activities in a single country that may affect a financial institution's global operations will be more difficult?

The idea that competition is good in terms of disciplining firms has been around for a while and in view of this theory, there is a danger that the amalgamation of firms and the creation of near monopolies may work against society's interest. My feeling is that these amalgamated firms may adversely affect global operations in terms of transparency.

Have different goverments co-operated enough on improving governance structures, particularly in the area of disclosure?

The answer is no. There seems to be some talk of protectionism (China versus the United States) and governance should be seen in a multinational context. The first step in thinking along these lines is co-operation.

What more do you think needs to be done?

Bilateral and multilateral co-operation.

What do you see as the main corporate governance issues for this year?

More transparency, more enforcement of laws.