LBS Global Leadership Summit

I am currently in the midst of reading Prof Raghuram Rajan’s Fault Lines, an incisive analysis on the various forces that combined to create the perfect storm that was (and still is) the Global Financial Crisis. This happens to be a timely read as I contemplate the upcoming Global Leadership Summit, which will discuss the Future of Leadership: Beyond Villians, Heroes and Scapegoats. I am particularly looking forward to the panel discussion on ‘The Future of Financial Leadership’ – speakers include senior banking executives such as Tim Breedon and Alessandro Profumo, bigwigs in the regulatory space including Martin Wheatley and ex-central bankers such as Lucrezia Reichlin. I hope some of the following themes are brought up and discussed during the Summit:

The Role of Politics & Ideology in Economic Policy: In developing countries, it is explicitly acknowledged that politics play a major role in economic policy. This might be in the form of nationalised firms, particularly in infrastructure and utility sectors, or trade tariffs, subsidies or duty. These countries and their industries accordingly face an additional cost of capital in the form of ‘country risk premium’. However, the financial crisis was an example of how the economic policies in the West too are deeply entrenched in the politics of the respective countries. In the run up to the crisis, central banks and regulators made policies which synced with, rather than checked, the political agenda of the day, whether it was easy credit to ease the pains of unemployment or premium grading of sub-prime loan portfolios. The role of politics in ALL economics, irrespective of the stage of economic development of the countries, needs to be understood and discussed thoroughly.

Consumer Financial Literacy: Not to let the banking sector, regulators or the government off the hook, but there needs to be a discussion on addressing consumer behaviour, which is driven off some basic financial literacy. While central bankers expect that low interest rates stimulate increased consumption and decreased savings, nobody probably foresaw the circumstance which the mortgage crisis illuminated – not only were retail borrowers not saving enough, they were often borrowing over and over again against the same asset, based on the belief that property values would continue to appreciate as they always did. It is striking that five years into the crisis, there still is not a private or public body (of scale) looking into addressing the asymmetry of knowledge between the industry and the average consumer.

Incentives for the Financial Sector: It has become fashionable these days to focus on the top 1% of the finance sector and blame them for the woes of the wider public. Particularly in Europe, the lynching of bankers and their bonuses has been a relentless spectacle over the past few years, resulting in frankly impossible-to-implement policies such as caps on banker bonuses. However, it is time to investigate the broader context in which these actors played out their lives and ask whether anybody else in their situation would have done any better. Bankers, traders, hedge fund managers, everyone acted as per the theory of self-interest so well-espoused in economic theories, the broader result of which is supposed to be efficient markets and correct prices. For all the upside that professionals in this sector are exposed to, perhaps incentives and disincentives could be set so they feel the pain of the shareholders too. Such measures need to come not just in the form of increased regulation and reporting requirements (Basel III, ICBC etc), but also a fundamental shift in the industry’s culture and values, as reflected in its recruitment, training and progression.