Learning from the Equitable Life

Last Friday I was present at the presentation of a report "Did anyone learn anything from the Equitable Life?" issued to mark the 250th year since the founding of Equitable Life.

Over the summer I had helped the author, Professor Richard Roberts of the Institute of Contemporary British History, King's College London, with some of the background research and interviews, so I had been looking forward to the report launch for some time.

The launch event itself comprised a short talk by Roberts himself, followed by a panel discussion chaired by Adam Boulton, and questions from the floor, where a good number of Equitable policy-holders and members of the EMAG awaited the chance to air some strong opinions. On the panel were Lord David Owen, Prof Robert Winston, and Alex Brummer, City Editor at the Daily Mail.

In short, the report's conclusion was that "if lessons had been learned from the Equitable Life collapse in the late nineties, the severity of the banking crisis might have been lessened saving taxpayers millions". (The full report can be downloaded here.)

While the report itself focused on flawed governance models, executive hubris, risky business models, and regulatory/supervisory failure as factors of financial crises, the ensuing discussion raised a lot of interesting points and questions with regard to the moral culture of late financial capitalism. What follows is partly a summary of these points and partly an exploration of them and related ideas (all reflecting my own interest, which is not necessarily proportional to the time spent in the debate on these or other topics).

• Professional values. The panel seemed to agree that professional values in finance had been eroded during the last twenty-to-thirty years, and that we could look back to an age where things were done with a greater degree of mutual trust, and when gentlemanly leaders took personal responsibility for failings. Some members of the panel seemed to support the idea that the breadth of modern financial regulation actually discouraged the development of a true respectable code of conduct, one that was not enforced by law. There are similarities here with the ideas of those who argue that reducing road signage and removing physical barriers between traffic, pedestrians, and other road users ("regulation") actually encourages better driving by shifting the responsibility of care to the drivers themselves. There are also echoes of the anti-socialists of the nineteenth century, who denounced any legislation which they believed aimed to reform society without first reforming man. 

• Some reasons for the loss of professional values included the the mechanisation of operations and centralisation of decision-making in the financial sector. Technological change meant that transactions are less likely to be carried out face-to-face; and so agents became removed from the human consequences of action and de-sensitized to the results of exploititative or predatory behaviour. There are echoes of Ruskin here in terms of his critique of the cash nexus, which destroyed the paternal relationship between employer and employed. Along with technological change came globalisation, meaning the decision-making powers of regional managers were weakened. Sound finance based on long-term relationships and knowledge of the local community was gone; in its place, managers were left to simply implement centralised, model- and metric-based decisions that took no account of individual circumstances nor of the values embedded at the societal level. The ruthless application of centralised logic based on the rational, wealth-maximising principles at the heart of financial capitalism required sentiment, consideration, and compassion for the local to be stamped out. 

• Part-time and amateur Chairpersons. It was felt that the modern Chairman (I deliberately use the gendered term here to reflect the discussion) typically spent just 40-50 days a year performing duties as part of their role, and this lack of quality time spent engaging with their firms was compounded by the fact they were now more often non-technical specialists in their company's industry or market. Full-time, expert Chairmen were needed in order to scrutinise the company's affairs, and to expose the dangers of unexplainable profits. Indeed, it was noted more than once that it was unexplainable profits that were a greater cause for concern than greater losses which could be explained.

• Short-termism. From the floor, the modern-day short-term profits, short-term rewards culture in finance was cited, in noting that in the past rewards would have been paid later in life, a practice that encouraged businesses to work according to long-term cycles. There may well be links here with the Kay Review (which I have not read), and such ideas also chime with some aspects of my current reading, Hutton's The State We're In (aiming to post my thoughts on this volume in the next month or so, but we shall see...) Brummer mentioned that "short-termism" had been in the line of fire since Harold Wilson's report in the 1970s. 

• The 'magic circle', composed of leaders of large and profitable enterprises, chief auditors, top regulators, CEOs and Directors, all of whom rotate around the top jobs. There are conflict-of-interest issues when auditors move into leading positions of former clients, and when firms' executives become regulators. Also, it was mooted that auditors spend too long nurturing relationships with their clients, and that there were significant barriers to entry below the big four audit firms (or 'big three' as it was referred to in the debate - wonder who the missing one was) due to the globalised nature of the most lucrative audit clients. That add-on consultancy fees outstrip audit fees and as such impinge on independence of thought was also raised. This is all ground that has been covered in the past few years; the more interesting question is whether or not anything will be done, or indeed, can be done about it. But overall I am more interested in the notion of a 'magic circle' and how it relates to what I term the "discourse of the City", namely, the shared assumptions, conceptual possibilities, and the set of implicit and explicit beliefs all refracted from economics and "business thinking", and which informs and circumscribes the behaviour of City firms and the governments they back financially and relentlessly lobby. Is there some form of diffuse, soft, or institutional/industry-wide, groupthink at work here?

• Recruitment. This didn't come up in the discussion but I note it here as an addendum to the point above. To what extent is institutional groupthink perpetuated by the recruitment policies at work in the City? For both entry-level and executive roles.

In the report, one of the lessons Professor Roberts suggested might be learned from the experience of Equitable and the ongoing financial crisis in Britain was "the development of a formal and continuous process of learning from crises within sectors, across sectors, and internationally", adding that "now is the time to get this wired into the new regulators' modus operandi".

But why should the regulators have to enforce something which should be happening anyway? In fact, the best businesses in most other sectors do "formal and continuous learning" all the time, albeit, it might be suggested, with much reinventing of the wheel along the way. Firms outside the financial sector are compelled to learn from their own and others' mistakes and crises - which do nonetheless still occur - through competitive pressure and the discipline of the market.

The financial sector, however, seems to think it knows better. Is this just hubris, or is it a rational, calculating reflection of its power and influence in British society? Indeed, it might be argued that because crises in finance can devestate the wider economy and society with such rapidity and ease, society, in the form of governmental regulation, is forced to do the lessons and learning leg-work for the financial sector. Right now, it seems British society has little choice but to nurture and kowtow to the City, because, in a long process beginning a few hundred years ago, the former has too bought itself too big a stake in the latter. Throwing away the financial sector's armbands and chucking it in the deep end is pretty risky; if it can't stay afloat by itself, it might well drown us all in trying.

On the other hand, it may be worthwhile exploring further the hypothesis that in recent times the financial sector has lost a critical mass of professional values, and that modern-day financial crises are largely the product of a poisonous corporate culture in the City. It may be worth asking whether such professional values really existed, and if so, when and why did they begin to evaporate? What events in financial history - from the 1970s oil shocks, and the end of the Keynesian consensus, through Thatcher and the Big Bang, and to the 2007-08 financial crisis (via Equitable) - are the key driving factors of change, and which were mere milestones in the journey? Finally, what might be done to reintroduce or reinforce professional values in finance; what preconditions, mechanisms, policies, processes, and regulations would be necessary for the emergence of a respectable, responsible, and professional financial capitalism?