Eurocommissaris Kroes over de cruciale rol van investeerders bij een succesvolle Europese economie (en)
European Commissioner for Competition Policy
Market behaviour: the rules of the game
Figures and graphics available in PDF and WORD PROCESSED
Address at seminar of Algemene Pensioen Groep
Amsterdam, 12 th November 2009
Ladies and gentlemen,
It's a pleasure to be here today. It's not often I get to speak to a group of people who want to be more responsible regarding our banks and other important investments!
Having said that, the culture of many executives is changing. Maybe not in banking, but in general, I see more attention to market rules today than when I began as Competition Commission and the pressure you can add as investors in this regard is critical. This pressure will help to give you more sustainable returns and leave our economy more healthy.
Let me go through a few of the key concepts relating to this.
Why we need rules
Firstly, it's crucial for all market players to know why we need clear rules for markets.
Think of a football match, or a race at the Olympics. These competitions can only work when they are fair and there is a level playing field. Take away those elements and it's not fun for anyone, and the idea soon collapses.
So to have a referee who acts decisively is fundamentally in the interests of investors, law-abiding companies and the public alike. It’s not a question of red tape or government getting in the way of a fair profit - it's about making sure there is a market in the long-term.
The Competition Commissioner is that referee when it comes to Europe's Single Market.
If you do the right thing as a company there is nothing to fear from us. We’d rather help a company improve its behaviour than go through the hassle of a long and complicated case. But, of course, we sometimes face difficult customers and difficult decisions. But as you will have seen in the technology sector and in banking and maybe other cases, we are not afraid to stand up for the wider interests of consumers and taxpayers.
How the crisis changes the context
The sheer sums involved in crisis state aid mean that new ethical responsibilities come into play.
Decisions made in 2008, 2009 and even next year can have multiple and major consequences. This goes beyond what impact our work would have in normal market conditions. It is not just about competition in one market in one country or even the EU. The impacts range from the loss of thousands of jobs, to global depression, to debt hung around the neck of future generations if it is not handled in a disciplined way. Part of that of course, is that shareholders can't simply get a full bail-out when things do not go right for a company. We have intervened to save the system, not individual shareholders.
For both and investors and regulators the message is we all need to be looking much harder at the long-term. We need to make sure large banks have strong long-term business models. And investors really ought to be thinking about more than next year's dividend.
Many practices in the banks were crazy. It is appalling that the banks themselves did not understand the risks, but it should also have been obvious - if we looked harder - that something was wrong.
It should not take Albert Einstein to see that problems might emerge in banks with a loan-to-deposit ration of 180% - as part of the Lloyds Banking Group had. The Royal Bank of Scotland tripled its balance sheet in just two years from 2006, growing to be larger than all but the German economy (of Europe's economies). It was simply too big to operate and supervise. And it should have set off investor's 'alarm bells.' Of course we are all wiser with the benefit of hindsight ... my message today is: we can't let it happen again.
The Commission is taking its responsibilities in this regard very seriously. That is why you see decisions to make banks in Germany and the UK, and here in the Netherlands ING, viable without state aid.
It is important to see that we are not here to destroy banks or impose our will. We are trying to build up solid banks by working with them to face certain realities.
We need banks that recognise that we all live in the same world and we all have responsibilities.
I have great respect with the work of Jan Hommen in trying to set ING "back to basics" for instance. And investors must take their responsibility too.
We were all too greedy - need to look at the long term
The situation of the banking sector cannot be blamed on any one group, much less individuals. But because all of us - from kitchen tables to board-room tables - played a role, we have to examine our actions seriously.
Investors wanted too much from the system. That does not mean executives should have taken risks they did not understand, but they were driven by shareholder pressure also. This pressure existed in the form of share selling and media-hounding that could take place if a bank or other firm did not deliver the double-digit returns we all got used to.
Such a culture does not prioritise real investment, or building a stronger society, but only short-term gain.
I hope as investors re-assess their portfolios they look for companies that have viable long-term plans.
Let me discuss the different responsibilities we all have in some more detail.
Main responsibilities of companies
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-To be aware of the law and to follow it and therefore to play fairly
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-To tackle questionable behaviour 'head on.' Whatever the behaviour is: hiding it, denying it, is not acceptable and leads to enforcement action.
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-To realise wider responsibilities to shareholders and society. This is not about having a charity programme, or sacrificing profits to feel good - it is about understanding that an effective management culture can see beyond its own backyard. It's the same principle at stake in climate change. Most of us might be personally better off if we do nothing - but then we are all damaged.
Main responsibilities of investors
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-Asking questions so you understand how a company is working towards and protecting your long-term growth
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-Working with other investors to demand high standards of governance
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-Speaking out when you have good ground to believe your concerns are being ignored.
You have a different opportunity to the public authority. We have limited powers and often need solid evidence before taking a specific action. With a private relationship with the companies you invest in, you have different incentives and earlier opportunities to make a difference to company behaviour. I urge you to take it.
Main responsibilities of the Commission
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-We have a duty to look out for problems and to act on this.
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-We have a responsibility to enforce our rules predictably and transparently and to consult if there is an idea to change them.
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-We must do this because it is the best way to ensure the rights of consumers and show that competition law exists for the benefit of all.
As part of this responsibility we defend the Single Market in practice and in principle - and we do not look favourably on special pleading. There are very few exceptions to the need for companies to support themselves and operate on a strict level playing field.
More than that, we must communicate frequently and transparently. This is exactly what we did regarding the banking sector in 2009. I am highly surprised that some commentators, investors and the banks themselves claimed to be shocked at the changes we are working towards when news emerged in recent weeks.
I want to say clearly that our goal is not to break-up banks. We have said all along the change must happen and were very clear about the principles and the scale of the changes needed.
I am not some kind of bank destroyer. I am actually trying to help the banks to make the right decisions. We are always starting from the business plans of the banks themselves.
Our proposals are good for the individual banks, good for the system and the right thing to do for taxpayers.
Changing the banking culture
If you will allow me a few more words on this. I think it is only an arrogant culture in banking that could have fooled itself to think that the Commission was not serious about change.
We are serious about change, and not just via state aid control.
We support choice in consumer markets. But there should not be choice in regulation. A bank should not be able to 'cherry pick' the lightest regulation, knowing it might end up harming the taxpayer in the process.
The only way to avoid that is a proper European rule book, and international co-operation. We should not be leaving bills to other countries and other generations when, with cooperation now, we can significantly reduce the risk of repeating this crisis.
And in this regard it is not just national governments that need to act. National regulators need to step up to the mark. There aren't any second chances here.
Regulators need to demonstrate that they have the capacity to control their national banks and make sure the financial system is safe.
And part of that means promoting culture change in banks. I believe the smartest regulation in the world can't make up for bad or reckless judgment.
If a banker can't exercise good judgment and due diligence, then it doesn't matter how smart they are or how hard they work. The taxpayer is still left with the same bill, and that simply isn't good enough.
This then overlaps with other topical issues like bankers pay. Now, pay issues are not part of my job description, except to the extent that pay schemes may or may not reflect the sustainability of a bank's overall business model. But you can't separate pay from the banking culture, and as investors you can change the culture as much as regulators.
Don't underestimate your influence here. Just as advocacy from the Commission can help to change the tone of a debate, so can investor voices. Right now that debate is a divisive one between, as the Americans might call it 'Wall Street and Main Street'.
Put simply, banks and the public are not speaking the same language. Too often bankers think they are better, smarter people who deserve different rules and different pay to everyone else. They can only think that if others let them.
So we must change that culture - regulators and investors together. That means asking questions, demanding answers and speaking publicly about these issues. Banks should not be allowed to go back to business-as-usual simply because they have the best paid lobbying voices or because others are afraid to ask questions.
This is all comes back to having a sense of responsibility and acting on it. Now is not the time for tantrums. Now is the time for the banking industry to show some respect to its customers, investors and the people who are often funding it all - taxpayers.
Conclusions
In conclusion, I think investors have a crucial role to play in building the long-term prosperity of the European economy.
There are limits to what you can do - that is why governments and the Commission are also important. And, by the way, I think that enforcement is even more important in a crisis as people look for leadership to guide us forward.
But I leave you with the message that this crisis is leaving our economy with a big hangover. And we must use the pain to learn that we have to be safer next time.
There is still good money to be made investing in sectors like finance, but there are bigger questions at stake. We need companies - banks especially- that recognise that we all live in the same world and we all have responsibilities. It's about what sort of state we want to leave the world in for our children and grandchildren.