Good value: reflections on the global crisis

HSBC Chairman Stephen Green speaks during the APEC CEO Summit in Singapore November 13, 2009.

(The opinions expressed in this article represent the views of the author, who is attending a meeting of CEOs on the sidelines of the APEC Summit in Singapore. They should not be seen as necessarily reflecting the view of Reuters.)

By Stephen Green, Group Chairman, HSBC Holdings plc

SINGAPORE - When the history books record their verdict on the events of the last three years they will, I believe, conclude that the world did a good job in tackling the financial crisis.

Thanks to an unprecedented level of co-ordinated global action we avoided the mistakes of our forefathers in the 1930s.

Fears of a rapid retreat into a past world of closed markets have proved unfounded. On that score at least, we can breathe a sigh of relief.

Yet we are left with a legacy of mistrust as a result of the devastation caused by the crisis. Declines in equity and real estate values wiped out almost US$29 trillion of global wealth in the eighteen months since the start of 2008.

Public trust in banking has been seriously compromised, and the very legitimacy and value of the market-based financial system is being questioned as never before.

The catalogue of errors is long: the appetite for excessive leverage; over-reliance on wholesale funding; over-confidence in risk modelling techniques; and misalignment of incentives.

The past two years have challenged in a fundamental way the argument that the market always knows best. It is clear that effective government oversight, regulation and even intervention in times of stress are all essential.

The challenge we now face -- as practitioners, policymakers, and regulators -- is to agree, share and realise a vision of the future that preserves the dynamism of market forces while taming their excesses.

As we search for this balance, we need to keep in mind that we cannot turn the clock back to some 'golden age' of a simpler, less-connected world. Moreover, we should not ignore the role that strong financial markets play at the heart of every successful economy, lubricating the engine of economic growth and prosperity.

In particular, financial markets have made an important contribution to the remarkable advances in countries such as China and India, as they have opened up their economies.

It is received wisdom that our current era suffers from unprecedented income inequality within western economies. But far more significant for the future historian will be the enormous increase in opportunity and reduction in hardship globally over recent decades, as a growing middle class has emerged and hundreds of millions have been lifted out of poverty in developing countries.

During this time of great demographic and economic change and in the wake of the crisis, the financial services industry now has another chance to prove the immense value it can bring. And we cannot afford to fail.

The working-age population of the developing world is now around three billion, and it will grow by another billion over the course of the next generation. As they start to benefit from a regular income, hundreds of millions more people will need access to financial services -- whether microfinance or small business lending, or savings and wealth management services as they prepare for their needs over their lifetime.

As drivers of innovation, effective market mechanisms to encourage -- and to finance -- the shift to low-carbon economic growth will also be essential.

I have great faith in the ability of markets to harness human capital to create man-made solutions for our man-made problems. However, the market can only succeed if we restore good value to the corporate agenda.

One of the outstanding leaders of HSBC's early days -- Charles Addis -- wrote in a letter over a hundred years ago that "the ultimate basis for all economic conceptions is ethical".

Yet one common underlying problem at many financial services companies in the lead up to the crisis was a greedy focus on the short-term.

A culture had begun to pervade many institutions that it was fine to pursue short-term returns without any concern for the longer-term consequences, or the rightness of what was done. The mantra had become one of 'if the market will bear it, if there is a contract, then I don't need to ask any further questions.'

Companies must apply the concept of sustainability to all their business practices.

First, there is the basic responsibility to earn as high a return as is sustainably possible on the capital entrusted to the company by its shareholders.

Some still think that the concept of corporate social responsibility is somehow incompatible with shareholder value maximisation, or fear it can be an excuse for poor competitive positioning, operational inefficiency and low returns to investors. They are wrong. Shareholder value creation is absolutely critical to any discussion of wider responsibilities in business. And yet this should not be management's over-arching objective. It should, rather, be the hallmark of business well done.

Business well done also requires the nurturing of customer relationships and engagement with the communities in which it operates. This, in turn, depends upon engaged employees, who are respected as 'ends' and not just treated as a 'means'.

Ultimately, business has to be able to answer the question, 'How do we contribute to the common good?' The answer to this question is not something which you can neatly package as 'corporate and social responsibility' and then just walk away. It runs much deeper than this, and it touches on every part of the company, and every business practice.

Answering the question is also critically dependent upon individuals. Boards and senior managers first need to be clear on their company's contribution to the common good themselves. They then need to be able to explain it in an inspirational way to their own people, if they are to bring the vision to life in their organisation.

It is, if you will, a question of developing, sharing and nurturing a set of clear, common values. It is about helping employees to understand how they can make a difference, and providing them with the support and opportunity to do so.

None of this can ever be an exact science. But it is one of the most important tasks for any business leader as part of their duties of good governance. Indeed, it should be the subject of explicit and regular board discussion at any company.

As individuals, the vast majority of us know that we want to work for something more than making as much money as quickly as possible, regardless of the longer-term consequences. We also have the opportunity to inspire others to do the same. In short, it is time to recognise that values matter, in business as much as in our personal lives.

Indeed, if the financial crisis leads to a genuine reassessment of the role of financial markets and the responsibility of individuals working within the financial industry, it may yet come to rank as one of the great turning points in history of the modern world.