The Year Capitalism Went Cuddly | Financial Times

Starling Team

Ten years after a global financial crisis prompted a deep-seated distrust of corporate actors — and particularly those in banking and finance — many company leaders are today seeking to recast themselves as constructive social actors, and business groups across the globe are working to amplify the message that business can, and must, be a force for social good. For example, the UK’s Institute of Directors is now calling for more exploration of “new ways to combine the profit motive with social responsibility,” while Washington’s Business Roundtable has also ditched its allegiance to Friedman-style shareholder primacy.

“That was a profoundly significant moment in the debate,” says Colin Mayer, a professor at Saïd Business School. “I don’t think you should underestimate the extent to which the corporate community feels under threat,” he said. “There is a real sense that unless they grasp the initiative it’s going to be grasped by somebody else who’s going to do much more damage.”

A clear financial incentive for this change has come from the growth in environmental, social and governance (ESG) investing. According to the Global Sustainable Investment Alliance’s calculations — funds managing $31tn — apply an ESG screen to their investments. Further, there is growing evidence that companies scoring well on ESG standards outperform financially. As a result, there’s been a 29 percent rise in the number of executives referring to ESG on earnings calls between the second and third quarters of 2019.

While we expect this trend to continue into the new year, and well beyond, we agree with Saker Nusseibeh, chief executive of Hermes Investment Management. “We need to have a conversation on specifics,” he said. “The motherhood and apple pie conversation is nice but doesn’t get you there.”

At Starling, we believe that expectations will go unmet, and likely produce further broad disillusionment among aggrieved customers and stakeholders, unless we see the adoption of credible and industry-standard metrics around what “good” looks like. And this is especially critical, we believe, when it comes to governance metrics.

In discussions of ESG, the governance component often appears to be an afterthought: it is the environmental and social considerations that tend to win the lion’s share of attention in the media. Perhaps this is because there are some established means by which to measure things like a firm’s “carbon footprint,” or a reduction in the number of the “unbanked” following a corporate undertaking in that direction. But, as a spate of misconduct-driven scandals over the past year makes clear, without good governance mechanisms, shareholder and stakeholder damage is inevitable, with likely implications for a firm’s environmental and social efforts as well.

“Citizens’ expectations have risen around the world,” says Daryl Brewster, chief of the business coalition Chief Executives for Corporate Purpose. His question for 2020 is: “How can companies actualise this?” Now more than ever we need a means by which to assess the efficacy of a firm’s governance, the real drivers behind that, and what this means for its exposure to non-financial risks and likely financial performance outcomes.

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Australian governance taskforce seeks to promote bank culture reform

Starling Team

“A company’s culture often shapes its approach to corporate governance and its response to its regulatory obligations, and it drives conduct within the firm,” argued John Price, Commissioner of the Australian Securities and Investments Commission (ASIC), in a speech this week. “And that can be either good or bad conduct. This is why culture matters to ASIC.”

ASIC has made improving governance and accountability at the firms it supervises a key strategic priority. In this direction, the regulator has formed a corporate governance taskforce to conduct targeted reviews of the practices of the firms it oversees. “We have an important role in promoting an ethical culture in business and an ethical approach to business decision-making,” Price said, outlining several measures that ASIC will undertake in order to help drive bank culture reform:

  • Reviewing and reporting on industry practices and approaches to corporate governance;
  • Identifying and addressing significant harm to consumers, investors and markets;
  • Accelerating enforcement outcomes where there is a need for general or specific deterrence for poor conduct;
  • Implementing new approaches to supervise regulated entities; and
  • Promoting the adoption of regulatory technology (“RegTech”) by business.

 
“At the heart of the work of the corporate governance taskforce is a desire to build understanding and improve current corporate governance practices that can support changes towards a more ethical culture in business decision-making and so enhance trust in our financial system,” Price concluded.

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Almost Half Of America’s Banks Have Less Than Satisfactory Federal Reserve Supervisory Ratings | Forbes

Starling Team
On November 26th, the Board of Governors of the Federal Reserve System published its second annual ‘Supervision and Regulation Report.’  It shows that 45% of U.S. banks with more than $100 billion in assets have less than satisfactory supervisory ratings. 
 
According to the report, large financial institutions continue to remediate a significant number of adverse supervisory findings — matters requiring attention (MRAs) or matters requiring immediate attention (MRIAs).  But while it notes that the number of outstanding supervisory findings has decreased over the past year, the report doesn’t provide details on what these findings entail, which banks have supervisory problems, or how these challenges are being addressed.

Importantly, the report notes that “large financial institutions are in sound financial condition, although nonfinancial weaknesses remain.”  Across the globe, banks and other financial institutions struggle to manage non-financial risk successfully, regularly resulting in reputational damage, stock price impairment, regulatory enforcement action and career-ending punitive fines.  

There is a marked paucity of reliable metrics that successfully anticipate the appearance of these material risks.  This has poor consequences for risk governance, internally, and for forward-oriented supervision, externally.  It would therefore be helpful to have more meaningful insight into trends regarding: (1) the prevalence of non-financial risk across the financial system, (2) the form in which such risks most often manifest, and (3) the successful remediation of these risks.  We hope the Board of Governors will address these themes in future reports.

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