00:00:17
Uh Erik Berglof, uh chief economist and
00:00:20
special advisor to the president at the
00:00:21
European Bank for Reconstruction and
00:00:23
Development. Welcome to uh Knowledge at
00:00:25
Wharton. Thank you for having me. Uh we
00:00:27
have a lot of ground to cover
00:00:29
um
00:00:30
because the issue of corporate
00:00:31
governance vis-a-vis the financial
00:00:32
crisis and the recession is a is a large
00:00:34
and important topic. But we do want to
00:00:36
focus if we count on governance
00:00:39
um exclusively and also to get your
00:00:42
your views on the European aspects of um
00:00:45
of this story.
00:00:46
But first of all, can you talk a little
00:00:47
bit about the
00:00:49
the role of any that that governance
00:00:51
played in either triggering or
00:00:53
exacerbating the financial crisis that
00:00:55
began in in 2008. Yeah, it's it's it's a
00:00:58
bit of a paradox that on the one hand
00:01:00
you have probably the the greatest
00:01:02
governance failure that we can remember.
00:01:05
And on the other hand, looking at the
00:01:07
research that has been done now to try
00:01:08
to to document
00:01:10
you know, which aspect of governance was
00:01:12
it that uh made the crisis happen or or
00:01:16
contributed to the crisis, it the
00:01:18
results from that type of research is is
00:01:20
is not very
00:01:22
clear. And it's it's not uh you you have
00:01:24
work being done on showing that banks
00:01:27
with concentrated ownership was not
00:01:29
different from banks with widely uh
00:01:32
uh held shares. And and you have a lot
00:01:35
of work trying to compare banks that
00:01:37
were state or
00:01:38
owned banks and private banks. Not a lot
00:01:41
of of difference. There are a few facts
00:01:42
that stand out, but but on the whole
00:01:45
I think we have just started to to un-
00:01:47
unravel what happened in the crisis in
00:01:50
terms of corporate governance. Are
00:01:52
researchers looking at the role of uh
00:01:54
not only issues of ownership, but uh the
00:01:57
role that the boards of directors of
00:01:58
these various institutions played? Yes,
00:02:01
I I I certainly think that's part of it.
00:02:03
And the problem with with that is that
00:02:05
the role of a board is very different in
00:02:08
a bank from in a company because the
00:02:10
banks are much more regulated and and
00:02:12
supervised.
00:02:13
But the board is also very different if
00:02:15
you have a controlling shareholder or if
00:02:16
you have a a widely held structure, if
00:02:19
you're a state-owned firm, so you're
00:02:20
private. So it's also hard to to say
00:02:23
even there that, you know, boards
00:02:25
should be of
00:02:26
particular structure, have a particular
00:02:28
number of independent directors, should
00:02:30
have operate according to specific rules
00:02:32
and so on.
00:02:33
So so it's it's it's hard certainly in
00:02:35
this crisis to point to that a certain
00:02:37
type of board made the crisis less
00:02:39
likely.
00:02:40
Is it um
00:02:42
is it reasonable to think that
00:02:43
researchers could determine whether
00:02:44
boards
00:02:46
in these various companies and banks
00:02:48
acted
00:02:49
irresponsibly or responsibly or just
00:02:51
with no knowledge in terms of
00:02:54
understanding and analyzing the events
00:02:56
that led to the crisis and the actions
00:02:58
that the executives in their own
00:02:59
institutions performed? Uh I guess what
00:03:02
I'm asking is often
00:03:04
it's kind of a cliché, but you know,
00:03:05
boards have been thought for many years
00:03:07
by some critics to be more or less
00:03:08
rubber stamps for whatever the chairman
00:03:11
of the company and the CEO want to do.
00:03:14
And and many people may have that
00:03:15
feeling uh either either on an informed
00:03:18
or uninformed basis about the financial
00:03:20
crisis. Is that is that something that
00:03:22
you you and other researchers are
00:03:24
looking at as well? Yes, definitely. As
00:03:25
I so as I said, you know, a board that
00:03:27
has uh
00:03:29
to overlook what a manager does
00:03:31
uh and representing only minority
00:03:34
shareholders
00:03:36
has a very different role from a board
00:03:38
that's trying to control what an
00:03:39
owner-manager does. You know, it's an an
00:03:42
owner that's very deeply in involved in
00:03:45
in in management of of of a bank
00:03:48
in particular. Uh I think also what one
00:03:50
should remember is that the board
00:03:52
you know, when you have a a bank that is
00:03:55
regulated and supervised, maybe the
00:03:57
board is not the structure that we
00:03:59
should
00:04:00
expect to to to uh to react. I mean, it
00:04:02
it would be nice, but but what we see in
00:04:05
this crisis is that
00:04:06
there were sort of trends or or or sort
00:04:09
of overwhelming patterns of behavior
00:04:11
that were the boards more or less went
00:04:13
along. As you said, they were sort of
00:04:14
rubber stamp of of of of particular
00:04:19
you know, management
00:04:21
behavior. I I think one thing that is
00:04:24
people are looking at, which I think is
00:04:25
is a very very important aspect, is
00:04:28
whether you want to have friendly boards
00:04:29
or hostile boards. I'm probably someone
00:04:32
who thinks that, you know, a board that
00:04:34
has some degree of sort of co-optation,
00:04:36
some some degree of of alignment with
00:04:39
with management is is is something you
00:04:42
want. But you of course have to also
00:04:44
then have controls within the board to
00:04:46
make sure that, you know, management
00:04:48
does not get away with with anything.
00:04:50
But again, you know, boards may not be
00:04:52
the
00:04:53
the function that that in the end will
00:04:55
control
00:04:56
or prevent a a
00:04:58
financial crisis from happening. So so
00:05:00
boards may not be enough. Boards may not
00:05:02
be enough. And and you may we may not
00:05:06
have boards may not be
00:05:09
even uh helping very much unfortunately
00:05:11
because banks also one problem with
00:05:13
banks is that they may have become
00:05:15
ungovernable. They have become so large
00:05:17
that the only thing that really bites on
00:05:19
these large institutions is is
00:05:20
regulation and supervision. You know,
00:05:23
intervention from the government. So
00:05:25
again, I I'm not that's maybe a too too
00:05:28
negative view of boards, but I'm just
00:05:30
putting perspective a bit, you know,
00:05:31
what we can expect from boards. Sure. So
00:05:34
in terms of um
00:05:35
learning lessons uh from the financial
00:05:38
crisis and then implementing whatever
00:05:40
changes
00:05:41
um institutions and their boards feel
00:05:43
are necessary.
00:05:45
You're saying that some of these
00:05:47
reforms, so to speak, would have to come
00:05:49
from outside the institutions themselves
00:05:52
and then probably from government. Yeah,
00:05:53
some of these reforms will have to come
00:05:55
from government, I think. One thing I
00:05:57
should say to so that seemed to come out
00:05:59
is is that
00:06:00
attracting the right people to be on the
00:06:02
board. So whether they are hostile or
00:06:03
friendly is not maybe not the that's
00:06:05
important that's important to find the
00:06:07
right balance there, but also making
00:06:08
sure that you find the right type of
00:06:10
people. And one thing you you find, for
00:06:12
example, in Europe you have looked at
00:06:14
the the banks that have been to
00:06:16
protected by government and and
00:06:18
specially favored by government and they
00:06:20
have done very poorly in the crisis. And
00:06:23
when you look at what type of people
00:06:25
were in governance positions in in on
00:06:27
boards in these banks, it seems like
00:06:30
they were much less capable competent
00:06:32
and much less
00:06:34
able to
00:06:35
pursue or or full this fill this role of
00:06:39
of governance. So I think one thing we
00:06:41
should think more about what type of
00:06:43
people, what type of backgrounds, you
00:06:44
know, what level of competence should we
00:06:46
have on board. Based on what you know
00:06:48
now, are there certain reforms
00:06:50
specifically that you think should be
00:06:52
implemented uh on the part of financial
00:06:54
institutions? Well,
00:06:56
I think we see now a trend globally
00:06:58
towards
00:06:59
uh you know, two two important trends
00:07:01
globally. One is that national
00:07:03
governments are putting much more
00:07:05
of control over financial institutions,
00:07:07
particularly those countries that have
00:07:09
don't have their own institutions, but
00:07:11
have subsidiaries of large international
00:07:13
banks. Those governments they felt that
00:07:16
they were at the receiving end of the
00:07:18
global crisis. They need to do things.
00:07:20
They could not uh accept to be
00:07:23
uh such victims. And and they they're
00:07:25
putting in place regulation. That's
00:07:27
going to make it very hard to have the
00:07:29
same level of financial integration,
00:07:31
same level of financial openness. That's
00:07:33
one trend. The other trend is the the
00:07:36
trend towards the global harmonization
00:07:38
of of of uh capital requirements,
00:07:40
liquidity requirements,
00:07:42
uh you know, what to do with what large
00:07:44
systemic organizations, what to do about
00:07:45
levies on banking systems, and so on.
00:07:48
That trend goes against, but I think
00:07:51
that is now generating some results and
00:07:53
and that's I think on the whole very
00:07:55
positive, but it's it's too slow and
00:07:58
probably
00:07:59
well, I don't I wouldn't say too late
00:08:00
because it's very hard to do things in
00:08:01
the midst of the crisis,
00:08:03
but also the political momentum on some
00:08:05
of these reforms may not be there right
00:08:07
now. Yeah, that that may be an
00:08:09
understatement. Uh
00:08:11
uh here here in the US, I think uh
00:08:14
I I would think that some
00:08:16
many people uh
00:08:18
average people, even people who were
00:08:20
like yourself, who were kind of immersed
00:08:21
in this um all the time, may wonder
00:08:24
whether
00:08:25
there's a chance that some of this might
00:08:27
be forgotten, you know, as another year
00:08:29
goes by and another year
00:08:31
year goes by and perhaps reforms are not
00:08:34
as comprehensive as some would like to
00:08:35
see. I mean, there may be a sense that
00:08:38
um
00:08:39
you know, why hasn't anyone been
00:08:41
punished or
00:08:43
or or put in jail or something for some
00:08:45
of the activities by these institutions
00:08:47
having caused such um
00:08:50
terrible repercussions around the globe.
00:08:52
Uh is that is that likely to happen? Are
00:08:53
we likely to see
00:08:56
the Basel Committee or the the
00:08:57
government of the United States, whether
00:08:59
it's the SEC or other institutions,
00:09:00
actually
00:09:02
coming down hard on some of the
00:09:04
individuals or institutions that
00:09:07
engaged in these activities? I I don't
00:09:09
see that happening, I think. The the
00:09:12
there is a very difficult trade-off here
00:09:14
because in the middle of the crisis,
00:09:16
you know, first of all, there are many
00:09:17
things that you have to do just to try
00:09:20
to keep
00:09:23
things going.
00:09:24
But one thing you don't want to do is to
00:09:26
have harsher rules on on banks in the
00:09:29
midst of the crisis because you know,
00:09:31
you want banks to whatever to do
00:09:33
whatever they can to lend to to the the
00:09:36
real economy.
00:09:37
So so that's why we have been waiting
00:09:39
for these rules for so long. And and
00:09:40
also now, if you look at these most
00:09:43
recent
00:09:44
international rules, the Basel three
00:09:46
so-called rules on capital adequacy and
00:09:48
liquid- liquidity and so on. They are
00:09:50
going to be phased in until 2019.
00:09:53
It's a very long period and it's exactly
00:09:55
because you don't want to impose rules
00:09:59
too early in the recovery. You don't
00:10:00
want to threaten the recovery. So,
00:10:02
that's one aspect of you know, why we
00:10:04
have to wait so long. And then, I think
00:10:06
on some of the issues of compensation,
00:10:08
some of which I think one could have
00:10:10
addressed earlier when there was a
00:10:11
political momentum.
00:10:13
I think there we lost the window. And uh
00:10:16
I I you know, that whether that is
00:10:18
because of the lobbying power of the
00:10:19
financial industry because we didn't or
00:10:21
because we didn't really have a good
00:10:23
alternative. We didn't maybe have a good
00:10:24
model for how to how to regulate the
00:10:28
compensation.
00:10:30
I think now we are slowly starting to
00:10:32
realize and and maybe we knew all along,
00:10:34
but we we have much stronger evidence
00:10:37
that compensation was a very important
00:10:39
aspect of the crisis. And then, so the
00:10:41
way we reward managers is absolutely
00:10:44
critical for their behavior. And and
00:10:45
that I think is something we really need
00:10:47
to sit down and and and and and work on.
00:10:49
And and here
00:10:51
whether this can be done globally, I'm
00:10:52
not sure, but it's certainly or no rules
00:10:55
coming into play that have been designed
00:10:58
globally. And so, they will
00:11:00
play some role. I'm not sure how
00:11:02
powerful they will be in the United
00:11:04
States. The the issue of compensation
00:11:06
that you raised, of course, is the one
00:11:07
that um
00:11:09
touches, I think, the
00:11:11
uh everyone who reads about this crisis
00:11:13
because of the outsized compensation
00:11:15
packages that many CEOs had. Do you
00:11:18
really expect that um
00:11:20
that those packages will be adjusted,
00:11:22
that the incentives will be adjusted in
00:11:24
such a way to
00:11:26
to perhaps forestall the next I I I I
00:11:29
can't speak so much about the United
00:11:32
States, but I can say from the UK and
00:11:33
the UK, you know, is is very closely
00:11:37
related to to the US in this regard. So,
00:11:40
you know, things that happen in
00:11:41
compensation in the US affects what
00:11:43
happen in the UK and and vice versa. And
00:11:46
and in the UK, it's very clear that base
00:11:48
salaries are coming up and bonuses are
00:11:50
coming down. And and actually a lot of
00:11:53
you know, employees often prefer this.
00:11:56
The the the thing is that that it's
00:11:59
often a
00:12:00
more costly way sometimes of rewarding
00:12:02
people because you have to give them,
00:12:04
you know, very you know,
00:12:05
raising the base salary turns out to be
00:12:07
you know, quite expensive. So, so there
00:12:09
are some I know in London, uh for
00:12:11
example,
00:12:12
you know, we are recruiting in the
00:12:13
similar markets and and I think you
00:12:16
know, some expect 80% increases in base
00:12:18
salaries in London this year. Which is
00:12:21
you know, quite dramatic and
00:12:24
and
00:12:25
that you know, whether that is you know,
00:12:27
that that we're seeing happening,
00:12:29
whether this will resolve some of the
00:12:31
issues, I'm not sure. Uh just one or two
00:12:34
other things uh before we close. The
00:12:37
uh in your view, how have European
00:12:40
institutions and their regulators
00:12:42
approached or attacked the the financial
00:12:45
crisis
00:12:46
um compared to US
00:12:49
companies and regulators? Have have they
00:12:50
both been looking at similar reforms?
00:12:53
Have they looked at this in much the
00:12:55
same way or not? I think there is a
00:12:56
there is a common pattern in it's one of
00:13:00
a very reasonable
00:13:02
response in the crisis. Maybe it's
00:13:04
slightly late, but still when it finally
00:13:08
came, it was a a very strong response
00:13:10
and both at the national level, at the
00:13:13
sort of regional level in the European
00:13:15
Union, and at the international level,
00:13:17
the the role of the international
00:13:19
financial institution, particularly IMF.
00:13:21
That was a very good response. I think
00:13:23
if we look back at it without the
00:13:25
response, the world would have been much
00:13:26
worse off.
00:13:27
I think when we look at dealing with the
00:13:30
causes of the crisis and and all these
00:13:32
things we discussed now in terms of of
00:13:35
of compensation, regulation, provision,
00:13:37
the response have been much have been
00:13:39
much slower both in Europe and and in
00:13:42
the United States.
00:13:43
In in Europe, you had the additional
00:13:45
problem of of the European Union had no
00:13:47
mandate in this area really before the
00:13:50
crisis. That is changing now quite
00:13:52
dramatically. So, they're now creating
00:13:54
new institutions at the European level
00:13:57
to to deal with with both regulation and
00:14:00
supervision with this future prudential
00:14:02
regulation trying to to look into to the
00:14:05
you know, the health of these
00:14:07
institutions, the systemic
00:14:09
importance and so on.
00:14:11
We didn't have anything like that before
00:14:12
the crisis. And the European Central
00:14:14
Bank where it explicitly said that was
00:14:16
not their role. And that was something
00:14:18
that was very damaging in the beginning
00:14:20
of the crisis. And and
00:14:22
luckily, in the end, you know,
00:14:23
politicians reacted and then we we got a
00:14:25
good response, but it took a long time.
00:14:27
And that's something we also need to
00:14:28
think about, how do we put in place a
00:14:30
good crisis management uh system because
00:14:33
now these institutions are global and
00:14:35
they probably will remain global in one
00:14:38
form or another. We need to deal with
00:14:40
that. And then, how do we deal with the
00:14:42
all these links between countries? And
00:14:45
if you want to be able to resolve
00:14:46
institutions, how do we that? A lot of
00:14:48
these issues are now on the table and
00:14:50
and
00:14:51
needs to be addressed. Some commentators
00:14:53
have said that um
00:14:55
uh that that not much is not enough has
00:14:58
been done to prevent another crisis and
00:15:00
that it's only a matter of time before
00:15:02
banks and brokerage firms and uh uh and
00:15:06
other financial institutions kind of
00:15:08
repeat the same mistakes or or the same
00:15:10
actions they had done
00:15:12
previously and that there's just it's
00:15:14
just a matter of time before we see the
00:15:16
next crisis. Do you believe that or are
00:15:18
you optimistic that that reforms will
00:15:20
take place to forestall
00:15:22
such a crisis again? I I I think we are
00:15:26
making progress on on
00:15:28
you know, some aspects of regulation,
00:15:30
supervision. But the the deep structural
00:15:32
issues are not being addressed. And and
00:15:35
here I think there's only one country
00:15:36
that I know of that is trying to tackle
00:15:38
this. And this is the the UK, actually,
00:15:40
because they have now put in place a
00:15:42
commission.
00:15:43
You know, of course, when you put a
00:15:44
place in a commission, there's not a
00:15:45
guarantee that something will happen. It
00:15:47
could actually be a way of sort of
00:15:50
postponing a discussion. But but
00:15:52
actually, the way this commission is is
00:15:55
constituted, the the the the people on
00:15:57
on that commission,
00:16:00
I think will bring about a discussion
00:16:03
that is goes to the fundamental aspects.
00:16:05
You know, what should we do about what
00:16:07
should commercial banks be allowed to
00:16:09
do? What what level of risk should I be
00:16:11
allowed to be engaged in? You know, a
00:16:14
lot of these deep structural issues that
00:16:17
I think they are the one we need to
00:16:19
address to be able to
00:16:21
reduce the risk of a future crisis. And
00:16:24
do you think the United States and other
00:16:27
uh countries, European countries and
00:16:29
others should look to the UK for any
00:16:31
benchmarking or guidance along
00:16:32
Well, I think it's too it's too early to
00:16:34
say what will come out of this, but I I
00:16:36
think all all the countries need to
00:16:38
think about these structural issues. And
00:16:40
I think
00:16:41
particularly United States because the
00:16:43
United States is the home of many very
00:16:46
important global financial institutions.
00:16:48
So,
00:16:49
you know, the US probably doesn't want
00:16:52
to be, you know, responding to what
00:16:54
other countries are doing. They they
00:16:55
should take the lead. Okay. Dr. Berglöf,
00:16:58
thank you very much for joining us
00:17:00
today.
00:17:00
Thank you for having me.
