Government’s deceptive assertion the banking crisis was predominantly caused by external forces was blown out of the water yesterday by the two damning banking reports. Blame cannot be levelled at the feet of Wall Street. The Irish banking crisis would have happened without a global crisis.
It wasn’t complex – it was good old banking crisis caused by reckless property lending. Anglo Irish Bank and INBS were by September 2008 dead duck banks. Bank of Ireland and AIB may have just about survived without state aid. The banking guarantee, while inevitable, was far too generous.
Both reports illustrate how banking corporate governance failed miserably to prevent the crisis. No one was on watch. Everyone was busy partying below decks cheering on their well paid captains and officers. On auto-pilot, no one spotted the rocks until it was too late.
Bank boards, singularly focussed on maximising shareholder value, reneged on their responsibility to all stakeholders and wider society. Their greatest flaw was they did not understand or appreciate the risks they were running.
An all too cosy circle of friends, directors and senior management operated within a collective blind spot that first believed in the never ending wealth generating properties of residential and commercial buildings and laterally bought into the illusion of a soft landing to keep the party going. There is no evidence in the banking reports that any one at senior executive or board level challenged a collective wisdom that bankrupted the system.
Both reports write of a general systemic failure in governance – the one that resulted from herding behaviours and a myopic zeal to make money. They note that specific governance failures within certain banks were of world beating standards. Did these failures ever register on regulatory radar screens? It appears not. Would a code of corporate governance have prevented the crisis? Probably not.
Good governance is about stuff that can’t be captured in regulations or their supervision. It’s stuff such as ethics, honesty, integrity, vision and leadership. The latter two were singularly missing from Irish banking. Vision and leadership requires looking around corners and seeing risks for what they are.
Boards and senior managers shut out information that would have warned of the risks. Comforted by flawed, undeveloped internal risk assessment models, they did not perceive the risks in remunerating a buccaneering banking breed that drove a coach and four through tried and tested lending policies.
The Financial Regulator is currently consulting with the banking and insurance industry on corporate governance. It intends setting minimum standards it will insist on. The test of course is would these standards have acted as preventative measures in staving off the banking crisis?
Meanwhile some of the motley crew and directors who steered their ships onto the rocks remain in place. Some have even been elevated and promoted. New directors have been appointed mainly by the state. Within this melange of old and new blood, people are expected to forge a corporate behaviour based on standards of sound governance that will prevent reckless risk-taking. While good governance, minding the ship and ensuring the sustainability of enterprises is key to corporate leadership, it is also key to leading nation states.
Above all good governance and leadership is about individual courage; a willingness to listen to dissenting voices and to act, even if this means swimming against the tide.
The banking crisis was caused by governance failure in our banks, financial regulators, central bank and executive government. Taoiseach Brian Cowen, when finance minister defined a reckless national fiscal policy and oversaw its governance. His accountability and responsibility was clearly illuminated in the two reports.
Excuses built on “acting on advice” ignore a fundamental requirement of good governance and leaders. That is to listen and act even if this means leaving the party to steer the ship away from the rocks.
Good leaders also know that they are accountable for failing to act to prevent avoidable disasters. They step down without waiting to be told to do so.
A version of this article appeared in the Irish Examiner, Business Section, Friday 11th June 2010
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