Lessons from a short history of the credit crisis 1989-2009 – what place

for heretics, prophets and jokers (jesters)?

Professor dr. Nigel RoomeProfessor of Corporate Global Responsibility and Governance

TiasNimbas Business School, Tilburg CampusDaniel Janssen Chair of Corporate Social Responsibility, Solvay Brussels

School of Economics and Management, Free University BrusselsAcademic Chair of the European Academy of Business in Society

www.tiasnimbas.edu/learningfromthecreditcrisis

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A personal statement

I see my purpose as a University Professor to profess knowledge:

• advancing knowledge through research• placing that knowledge in the education I provide• ‘valorising’ that knowledge by bringing it to other actors in society

I am not simply an ‘observer’, as a professor I am an ‘agent of change’:• new knowledge creates change, through its effects on how I and

others think and act• new knowledge also has the potential to shape the content and

process of education and research, without which a University or Business School will not move with our time and with the knowledge we possess, accumulate and disseminate

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Background to this addressMuch has been said and written about the credit crisis:

• In early Summer 2009 I was invited to give a closing commentary at a leaders forum that was convened to discuss the credit crisis. The audience:

a number of European CEOs, senior business people, including bankers, Deans and senior professors from European Business Schools

• In introduction I said I had heard much about the crisis that was interesting but little was intellectually satisfying, BECAUSE most of the analysis was partial, revealing little about the processes by which the crisis occurred as a form of ‘movement in society’. A movement to which we had all contributed through our action or inaction. In that way we were all responsible

• That 5 minute presentation is the basis for this inaugural address

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My arguments• The credit crisis did not just happen it can be traced back at least to

1989

• 1989 was the time that many of the leaders and bankers of 2008 and 2009 were being educated in University and Business School

• We might then contrast what was happening in 1989 - that contributed to the crisis - with what was being taught in most MBA programmes at the same time

• This may help us provide education and research that is more helpful in preparing students for their/our future as we look out from today

• Much of what I am about to say is now more obvious as we have now looked back at that year of 1989 - please be tolerant if you know about the things of which I will speak

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With the credit crisis ‘systems’ related words were everywhere...

T i p p i n g - p o i n t

Systemic

risk

Turblence

Fina

ncial

syst

emFinancial systems interact with real economy

Complexity

But very few commentators used

systems analysis

to unpack the problems we were facingInterdependence

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Structure for today

• Introduction to open complex human systems

• Some events of 1989 and the presence (or not) in the MBA and management curricula of the analytical skills to identify similar events and manage their outcomes

• Link’s to ‘corporate global responsibility and governance’

• Conclusions – ‘an agenda for reform’

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Using systems analysis we can regard the credit crisis as a tipping-point – so what is a tipping-point…

• Normally a ‘living’ system is dynamic, developing its own patterns of behaviour and interaction

• These can move in the direction of some kind of ‘stable’ or ‘unstable’ state

• On occasion turbulence arises in systems that provokes rapid transition or a tipping-point

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We also know that…

• Systems do not exist in isolation - they are invariably open and complex – systems connect

• Transition to a future state can occur rapidly (by human time scale)

• This mostly occurs through the combined effect of multiple pressures

• In human systems – intent, as well as rational and irrational behaviour, and routines - take a central role in the emergence of trends, shaping patterns in systems and contributing to stability or transition

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A further primer on the characteristics of systems... Systems 101..

Time Spatial Relationshipsbetween objects

SYSTEMS ARE OFTEN OPEN - THEY CROSS BOUNDARIES – DISCIPLINES AND THEIR THEORIES,

GEOGRAPHIES, AND TIME PERIODS

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Take a look at open, complex systems from ecology…

Endogenous change- the beaver and its family

- from forest to a forest with lake

Exogenous change- the lightening storm and fire

- from forest to grassland eventually back to forest

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Yet human systems are different – human systems involve agency, intent and artefact… and especially aspects linked to the connection of people…

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human systems are fashioned by icons and symbols with their specific often culturally powerful meanings…

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… humans use models and metaphors to help them understand our world and these too have cultural significance...

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human systems have qualities based on intelligence…

Time

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‘Metaphor’ can even help to me to explain systems…

Trends aremade up of smaller issues. Just as thread is made of strandsand fibres

Yet what most people experience are events. Like knots in the fabric

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So... to begin the rest of my story I will start with some ‘knotty’ events of 1989… that shaped financial systems and led to the crisis of 2009??

• 3 events.... shaped our globally connected financial system

• 2 events…. based around ideas shaped the content of our emerging global financial and banking system…

• These events are ‘symbolic’ as well as ‘real’

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Toward globalisation...events 1 & 2

Toward a globally connected capitalist economic and financial system

April 14, 1989

November 9, 1989

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a global system connected by a ‘vision’ and ‘technologies’...event 3

March 1989

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a global financial system shaped around new ideas and practices…event 4

late 1988!

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A side-comment on models…

Conclusion from the 1989 edition: We do not yet know the effects of 24 hour trading on the price volatility of options and futures…John Hull 1989No comment was made on:• the limits of the model• the difference between modelling an option and modelling the system of which that option is part• the effect of option/derivative interactions on the financial system as a whole (turbulence)

John Hull modelled options using Markov analysis – derived from the study in physics of the movement of particles in gases and liquids – ‘Brownian’ motion

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A global financial system also shaped by political (ideology)…event 5

1989 No. 1146 (C. 37)

WATER, ENGLAND AND WALES

The Water Act 1989 (Commencement No. 1) Order 1989

Building Societies Act 1986

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a new global banking system emerged in the UK, Europe and beyond…

Building Societies Act 1986

Domestic mergers & acquisitions, cross-selling of

financial products

2008

Global Banking

International M&AsAbbey was acquired by Santander 2004

July 12, 1989

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indeed beliefs, regarded by some as theories, became powerfully symbolic, ubiquitous inpolicy, research, education and practice…

Executive Compensation and Corporate Production Efficiency 1992-1998: A Stochastic Frontier Approach By Baek, H Young and Pagan, Jose A. Quarterly Journal of

Business Economics

Bankers dining after 25m euro

bonus (for those at the table)

celebrating their trickle down

contribution to

society??

2008

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Indeed these ‘theories’ were so powerful they became a kind of social/economic mantra…

Definition of a mantra

Mantra - a sound, syllable, word, or group of words that are considered capable of ‘creating transformation’

Sounds that are manifestations of ultimate reality!!

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What was the mantra of the new order in financial, economic, political and social systems…

Efficient market hypothesis +

Trickle down economics

Free and open markets are efficient, efficiency arises in the face of competition, competition provides for performance,

performance requires the alignment of senior managers, alignment requires bonuses, this benefits society because

markets are efficient and wealth is createdSHORT MANTRA

Compete and perform - richness will follow and society will benefit

VERY SHORT MANTRA‘Greed is good’

+Agency theory of

corporate managers

=

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But there was an alternative mantra.. from systems theory... that would come to haunt us....

When there is high interdependence between actors (and between the effects arising from the actions of actors) in a system, then the system can become turbulent. Greater turbulence is provoked when actors pursue unrestrained self-interest. Turbulence often leads to system collapse

In these conditions actors need to co-operate to set new rules for the game that provide for their longer term self-interest

Co-operation to set new rules for the game - maintains stable systems within which to compete

Learn when and how to cooperate, when and how to compete, and when and how to combine the two

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What were the captains of industry and banking of 2008/9 taught at business school from 1989 onwards??

• Which mantra did they learn?

• Which mantra ‘manifested as their ultimate reality’?

• Which mantra did they never/rarely hear for it contained ‘inconvenient truths’?

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The Official Guide to MBA programs 1990-1992 The editorial acknowledges:

• Rapid change in the world• Growing demand for MBAs• Diversity of courses • ‘General management’ or ‘specialism through

concentration’

Course content of 550+ Schools reflects:• Disciplines & functions with some integration• Content preferred over process• Data analysis preferred over human factors• Analytical and quantitative skills preferred over

synthesis and synoptic skills• Inside organisation preferred over outside/context• Efficiency preferred over effectiveness (and no

comment on relevance)

• If you want ‘systems theory’ don’t do an MBA

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Before moving my conclusions I should alert you to two other events of 1989 that I contend have shaped our world

Both with major significance for global and local management, for corporate governance and for operations

The consequences of these events were mostly not introduced in most MBA programs of 1989 and after... or the ‘thinking’ enabling a student to judge what events might matter… or

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Contest of values 1...

2001and

beyondJanuary 14, 1989

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Contest of values 2...phase 1 (9 days in 1989)

March 24, 1989April 1, 1989

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Contest of values 2...phase 2 (13 years and more after 1989)

1989 CERES announces the (Valdez) Ceres Principles

Ten-point code of corporate environmental conduct to be publicly endorsement by

companies

1997 CERES starts the ‘Global Reporting Initiative’. www.gri.org

2000 Corporate governance ..holding the balance between economic and social goals and ...individual and communal goals… to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society.” Sir Adrian Cadbury 2000 World Bank Report

2002 KING REPORT COMMITTEE ON

CORPORATE GOVERNANCE IN SOUTH AFRICA

April 1, 1989

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King Report 2002 – an existential view of business and the implications for corporate governance...

By 2002 some realised that economic, social and environmental systems were connected and that this would have important implications for corporate governance and corporate practice

‘There is a move from the single to the triple bottom line, which embraces the economic, environmental and social aspects of a company’s activities:

…economic aspects involve well-known financial aspects as well as non-financial ones relevant to that company’s business….

…environmental aspects include the effect on the environment of the product or services produced by the company….

…social aspects embrace values, ethics and the reciprocal relationships with stakeholders other than just the shareowners…..

…the Global Reporting Initiative….lays down guidelines on how a company should report on the triple bottom line’.

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An hypothesis… and then some conclusions...

If Bankers:had followed, the principles of ‘systems’ theory - in

setting new rules for the game in the face of turbulence

And, if they had adopted and enforced:

the ‘principles of corporate governance’ as found in the Cadbury and King Reports

I doubt we would have had the credit crisis

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What does this mean for business, management, management research and education?

Do not condemn heretics to take the hemlock just because they ask difficult questions and question conventions

This is poor reward for those who only seek out (inconvenient) truth(s)

Reflect on the adequacy of the existing reward structure of Universities and Business Schools as the experiences of 1989 would suggest that they may not be fit for future purpose

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• Institutionalise heretics, prophets and jokers/jesters - their ‘inconvenient truths’ are important and need to be heard - although their truths come to us as ‘weak signals’ and are therefore hard to hear, hard to see, and hard to act on

• Encourage and value inquiry, scepticism, and courage, thoughtfulness, synthesis (integration and contextualisation) and wisdom, as well as, information, data analysis and knowledge as theory

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Recognise that just as 1989 laid a foundation for today, so events and trends of today lay the foundation for the future

• What, then, are today’s events, issues and trends?

• Where are they found in a management curriculum and who teaches them and how?

• What new skills and competences do these issues require, where and how are they taught?

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• Separate as clearly as possible the ‘role’, ‘contribution’ and ‘limits’ of ‘economics’, ‘management’, ‘corporate governance’ and ‘governance’ and the models they use

• These are different words, different meanings, different practices, different skills and different knowledge

• Separate as clearly as possible ‘theories’ from ‘ideologies’ from ‘mantras’

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question the future, the pathways and the assumptions by which we work…

Scenarios Multi-actor processes that create ideas and shape new solutions

Know, teach and practice the skillsof co-operation needed to learn how to learn and to learn how to act with others

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implications for academics who seekto be part of the solution not part of the problem …

Include ideas from the Cadbury and King reports and the thinking from which they stem in the core economics, business and management curricula

Innovate, integrate, contextualise,

communicate and practice knowledge

for change

• Link theory with practice• Expand as well as reduce - deploy some models which fit the systemic, a-disciplinary nature of the real-world• Question the limits and assumptions of any model, for what it does not explain is of more value than what is explained

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NEVER STOP ASKING – THE RIGHT QUESTIONS AT THE RIGHT

TIME – THEY ARE JUST

AS FUNDAMENTAL TO A UNIVERSITY

AS THE ANSWERSFROM DISCIPLINES -

FOR ONLY WITH THE RIGHT QUESTIONS IT IS POSSIBLE TO

FIND THE RIGHT ANSWERS

In 1990 I joined Manchester Business School to establish the International Institute of Corporate

Responsibility for some of the reasons set out in this address –

This initiative was founded in 1989 by the Dean, Professor Dr. Tom Cannon

I look forward to continue this work at TiasNimbas Business School

and Tilburg University from 2009…

I dedicate my presentation to Tom Cannon – a heretic and a man of vision

Endnote and starting point

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Power point and paper found at:

www.tiasnimbas.edu/learningfromthecreditcrisis

Never stop asking