THIS IS WHY we are in urgent need of changes in corporate governance in Ireland – nothing has changed since the crash, and there is no reason to expect that what happened before cannot happen again.
Or as Albert Einstein reportedly said, “The definition of insanity is doing the same thing over and over again and expecting different results.”
The Irish crisis was facilitated by liberalised lending practices across the EU and by lax cross-border regulation of the financial sector.
The Irish authorities also contributed to a property bubble with a range of tax incentives to property development and lax oversight of the financial sector. The Department of Finance, the Central Bank and the Financial Regulator were all negligent in this regard - precipitating the total breakdown in corporate governance.
I passionately believe that there exists an immediate need to reform corporate governance in Ireland.
The mess that we managed to get ourselves into with the meltdown in the banking system could have been avoided if the directors of the banks – and property developers – didn’t enjoy the full cover of directors’ liability insurance, if they had been personally on the hook for the massive losses and pain to millions their irresponsible actions caused.
What has really changed since the collapse of the banking system in Ireland, when we were forced by the European Central Bank to give bondholders 100% of their money back – something unheard of for those who knew they were taking risks with the investments?
The short and the long answer is that nothing has changed. So, let’s start with what can be done in the financial sector.
The banks, the insurance companies and semi-financial organisations are regulated by the Central Bank of Ireland. In theory, it has the power to take away the licences of the institutions under its remit. Has it done this once? The Central Bank needs to start cracking down on the institutions that break the rules.
In the US, the Federal Deposit Insurance Corporation (FDIC) has the power to immediately close down any bank.
Banks generally operate with three types stakeholders: shareholders who own the bank, bondholders who lend money to the bank and depositors who put their savings in the bank. In the case of a failure, the shareholders and bondholders lose everything.
I know, as I was, at the time, a shareholder in Washington Mutual, which was one of the biggest bank failures in the US before the crash.
My wider solution to corporate governance failings is not good news if you are a chairman of a company looking for a director…
Personally, I think that directors joining any board should only enjoy coverage under director’s liability insurance for the first year.
This would give them time to know what they have got themselves into, while it would have the added advantage of sending a message to shareholders that all is not well if a boatload of directors resign after the first year!
I also think that putting some of the auditors who prepared the books and the managing directors who signed off on the books in jail – as well as taking their assets – would not be a bad idea. That would go a long way towards making sure we do not repeat the mistakes of the past!
It would certainly make people think long and hard before they accept any offers of a directorship in a company – and make them think and behave in the best interests of the shareholders and bondholders they represent.