«A case study of Fair Finance Guide International Transparency & Accountability in the Financial Sector A case study of Fair Finance Guide ...»
An important caution might be inserted here, though. Sometimes more disclosure can actually be politically disabling for change agents. Financial institutions and financial regulators may flood their reports and websites with insubstantial information while withholding small amounts of more crucial data. Piles of published documents may reveal far less than confidential board minutes and the CEO’s appointments diary. Indeed, a surfeit of disclosure on relatively insignificant matters can distract activist and researcher energies away from key evidence that is kept invisible. Hence the quantity of released material can be less important than its quality.
Important is not only what is made visible, but also for what purpose. What is one trying to achieve with transparency in finance? For most regulators and mainstream economists, transparency is a tool to bring greater efficiency and stability to financial markets. In contrast, for social justice advocates openness and visibility is a way to expose and counter financial practices which enable tax evasion, undue executive remuneration, money laundering, and other morally dubious conduct. For democracy promoters, transparency is an instrument that enables greater public participation and control in financial governance. For environmentalists, transparency is a means to identify and where necessary correct the ecological impacts of financial activities. So while many people want more transparency in financial markets, they want it for different reasons. Indeed, different kinds of transparency will serve different goals and benefit different constituencies. This makes transparency an object of considerable political struggle.
A further core question is who should be transparent in finance. Clearly it is vital to obtain greater openness and visibility on the part of banks and other commercial institutions, as the Fair Finance Guide campaign emphasizes. For all of the purposes just mentioned – stability, equity, democracy and sustainability – it is important that financial market players can be better scrutinized by the wider society that they affect.
-74However, effective public-interest advocacy on the financial sector also requires transparency on the part of regulatory bodies. This visibility is particularly important since so much governance of finance occurs at sites of which the general public is unaware. National finance ministries and central banks can be substantially closed to external scrutiny. This impenetrability increases the more when these national regulators operate in transgovernmental channels such as the G8 and the G20, the Basel Committee on Banking Supervision, and the Financial Stability Board. In addition, considerable financial governance occurs through poorly visible private authorities such as credit-rating agencies and the International Accounting Standards Board. In short, transparency of the regulators can be as important as transparency of those who are regulated.
In addition, for the integrity of finance politics as a whole, transparency arguably should also be the rule for civil society groups. Commercial associations, labour unions, think tanks, NGOs and social movements can themselves fall short on disclosing who they are, how their policy processes operate, what funds their activities, and so on. Lobbyist registries and initiatives such as the INGO Accountability Charter201 aim to address these issues. Still, the opacity of some civil society activities can encourage suspicions about their claims to promote public interests.
Next to who is transparent comes the issue of transparency for whom. To what audience(s) is transparency of finance companies, finance regulators and finance campaigners directed?
Who is meant to understand and use the disclosed information? Is it for institutional investors, or individual savers, or market regulators, or tax authorities, or campaign activists, or the general public? When released information on finance is steeped in unclarified acronyms, obscure statistics and technical jargon, it is only effectively transparent for narrow circles of specialists. Likewise, disclosures in Chinese or English are useless for people who lack fluency in those languages. Thus if transparency in the area of finance is to be meaningful, it needs to be coupled with a careful communications strategy that transmits the information in comprehensible ways to various audiences.
Then there is the question by what means transparency is achieved in today’s financial markets. A central point in this regard – raised repeatedly in other contributions to this collection – is voluntary versus legally binding transparency practices. Measures such as the Equator Principles and the Global Compact, mentioned by Aldo Caliari, fall into the realm of (discretionary) ‘corporate social responsibility’. The Sustainable Banking Scorecard described by David Korslund is similarly laudable in principle, but it will only apply voluntarily – and to only two dozen relatively small banks. The OECD Common Reporting Standard for Automatic Tax Information Exchange discussed by John Christensen is likewise noncompulsory. The same optionality applies to the INGO Accountability Charter for that matter. On each of these occasions one has an uncomfortable intuition that transparency by self-regulation is not sufficiently robust.
However, if compulsory law is needed to achieve adequate transparency in today’s financial industry, from where can effective binding measures emanate? Uncoordinated statutes from individual nation-states will likely be insufficient, given that so much finance flows in global spaces and offshore jurisdictions. Likewise, directives from regional institutions like the European Union do not have the necessary global reach. Decisions of trans-governmental bodies such as the G8 and G20 and OECD committees can have global scope, but as informal recommendations they currently have no standing in any court of law. Treaty-based formal intergovernmental organizations such as the United Nations can issue legally binding measures, but enforceability is weak, and in any case major players including the US Government are generally unwilling to give global intergovernmental institutions this level of competence. Hence for the moment it is unclear from where a legally binding global regime of transparency for the financial industry could come.
-75Conclusion To sum up, these brief reflections underline that transparency is key for adequate governance of finance as one of the largest and most influential sectors in economy and society today.
Without better transparency, finance will continue to suffer major instability, injustice, immorality, unsustainability and democratic deficits. However, while transparency may be broadly endorsed as a principle for effective regulation of the financial sector, actual elaboration and execution of the practice is deeply political and contested. So much depends on transparency of what and for what; of whom and for whom; by what means and with what result. To this extent transparency itself is less important than how you do it.
-76Re-Defining Success – Incentives for Cultural Change Chapter 10 in Banks Angela McClellan Transparency International Banks play a vital role in modern economies and affect the daily lives of millions of people. With nine out of the 20 largest publicly-listed companies being banks, the industry dominates the global economy. As a consequence, poor risk management and integrity lapses by senior management and traders have had an enormous impact beyond the countries where the problems have started, as evidenced by the 2008 financial crisis that led to huge increases in public debt with resultant poverty and unemployment for millions of people worldwide.
Despite enhanced regulation after the 2008 financial crisis, recurrent scandals exposing the collusion of traders to manipulate the foreign exchange rate and the role of banks in money laundering show that corruption and collusion in the banking sector persist. As a consequence, banks have suffered a deep and long-term reputation loss. There is an overall impression that the banking sector is more concerned with short-term profits and excessive risk-taking than with its societal purpose of provision of credit to ensure a stable and sound economy. Banks and also governments have to increase their efforts to address this impression. Banks themselves need to drive cultural change towards incentivizing integrity as the regulatory regime cannot fully change core integrity issues. Governments have to ensure that those responsible are held accountable for their wrongdoing.
10.1 Toward a culture of integrity in banks
Transparency International has a few suggestions to promote a culture of integrity in banks.
Banks face integrity risks through the conduct of their own staff (e.g. collusion by traders) and through their clients (money-laundering). This article will focus on two elements of a greater culture of integrity: (i) how banks can promote integrity in their incentive system and (ii) on banks’ due diligence duties on anti-money laundering.
The first key element of a culture of integrity is the incentive system. As long as financial and other incentives encourage high risk-taking and the costs for engaging in illegal or unethical behaviour remain negligible, no major paradigm-shift in the banking sector will take place.
A 2014 research paper asserted that the prevailing culture in the financial sector weakens and undermines honesty and a 2013 survey found that close to one third of financial services professionals (29 per cent) believe they may need to engage in unethical or illegal activity in order to be successful. A quarter of those surveyed (26 per cent) said compensation plans or bonus structures incentivise employees to compromise ethical standards or violate the law.
The financial industry is starting to say publicly that a return to “business as usual” is not an option. According to a recent survey of industry executives, financial institutions are paying greater attention to non-financial risks. However, more than 90 per cent of those interviewed admit that a cultural change is still very much work in progress.
Cultural change starts at the top: Senior managers have to demonstrate clearly and unambiguously to middle management and employees that ethical behaviour is expected from them. William Rhodes, a former Citibank executive suggested that banks should establish Board Integrity Committees with explicit responsibilities to monitor corporate ethics and culture. This would strengthen Board level accountability for all aspects of reputational risk.
Furthermore, it is important that the compliance function reports directly to the Board and possesses sufficient authority and resources, including staff who are competent to identify risks in the business.
-77Furthermore, levels and structures of remuneration can incentivise staff towards particular types of behaviour. A large amount of bankers’ total compensation is determined by variable payments such as cash bonuses, stock options, pensions and other benefits, which in most cases exceed the base salary.
Until recently, metrics for remuneration and career advancements have largely failed to account for non-financial performances, relying exclusively on quantitative profit targets.
According to a 2014 survey of financial services professionals, a quarter of those surveyed said compensation plans or bonus structures incentivize employees to compromise ethical standards or violate the law. Furthermore, according to the same survey, close to one-third of financial services professionals believe they may have to engage in unethical or illegal activity in order to be successful.
Most recently, some banks have reformed their remuneration metrics increasing the weight of non-financial performance criteria. Furthermore, in order to encourage long-term planning, several banks have introduced a deferral of bonuses paid to executives. European, US and other legislators have also recently equipped banks with clawback and malusix clauses to protect them from losses caused by employees’ conduct failures as well as through legal costs and fines. To determine whether these changes led to the desired results and to establish industry-wide best practices, public reporting on their impact would be key.
In summary, to promote integrity performance reviews should also reward good behaviour and not only short-term gains. Financial and non-financial performance metrics should both have impact on compensation and promotion decisions; when certain behaviours pose a risk to the company’s values, this should override assessments of financial performance. In addition, there must be an appropriate balance between long and short-term incentives to give executives and senior managers a personal interest in the firm’s longer-term performance.
And built into this, there should be the possibility of clawbacks for excessive risk-taking.
Another key element of a culture of integrity in banks is rigorous anti-money laundering procedures. Banks face integrity risks through their clients as they might become complicit in laundering the proceeds of crimes including corruption, tax evasion and organised crime.
Therefore, banks are obliged to identify the owner and the legitimate source of the funds before entering into any business relationship. In addition, they have to conduct periodic monitoring of their clients. If they identify suspicious activities, banks are obliged to report them to the relevant national authorities.
There are several customer groups that present increased risks for banks. These include high net-worth individuals, people known for having a dubious reputation or corporate clients with complex or opaque beneficial ownership structures. One high-risk type of customer are so-called Politically Exposed Persons (PEPs) who are people entrusted with high public functions as well as their relatives, business and other close associates. Banks are required to identify potential PEPs, conduct enhanced scrutiny of their funds, monitor their transactions and report supicious activities to the authorities.