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The Global Financial Crisis and Its Effect Report (Assessment)


Global Financial Crisis

The latest global financial crisis managed to restart a debate on the value of both the stakeholder as well as shareholder theories. Towards the end of the 20th century, an acceptable consensus had been reached within the Anglo-American business environment. It presupposed that corporations should be governed taking into consideration shareholder primacy. This theory on shareholder primacy asserted that shareholders were the ultimate owners of the corporations. This meant that the company executives were obligated to do what was required by the companies’ shareholders. It was also believed that the main goal of these shareholders was to witness their profits grow. This process was measured by share price (Stout, 2012).

However, after the financial crisis, this concept seems to be crumbling. The shareholder primacy has to deal with a growing confidence crisis. This trend is being witnessed mainly because it is getting increasingly clear that the shareholder value concept is flawed. A good example of this trend can be observed in the United States. The idea that organizations are required to capitalize on their shareholder value has been behind the major alterations in the country’s corporate legislation.

This led to the managers being more attentive to the prices of the company shares (Stout, 2012). The results, as witnessed during the recent financial crisis, were disappointing, to say the least. Shareholders witnessed the least returns on investments since the great depression. On the numbers side, the number of publicly listed firms has shrunk by 41% while, on the other hand, the average life expectancy of a Fortune 500 organization has scaled back from 75 years during the initial years of the 20th century to only fifteen years currently (Stout, 2012).

The Global Financial Crisis had the effect of altering how many people viewed the concept of shareholder primacy. The idea of a single shareholder turned out to be impractical. This happened because different shareholders had diverse values. A significant portion of these shareholders shared the vision that did not comply with the probable way that a single company’s share price would behave at some point (Stout, 2012). In the late 20th century, most economic scholars were obsessed with the concept of optimization.

However, the implementation of this concept may not be the best of strategies. The global financial crisis showed that managers instead of concentrating on maximizing shareholder value should also be allowed to invest company resources in marketing, safety procedures as well as research and innovation to assure the firm of sustainable future growth (Blanpain, Bromwich, & Agut, 2011).

Regulatory response to the Global Financial Crisis

Ever since the recent global financial crisis, the financial and banking sectors have witnessed numerous regulatory reforms. In the United Kingdom alone, more than eighty pieces of legislation have been enacted. These new laws are aimed at making the banking industry more secure and stable. Banks were required to substantially increase the total amount of capital that they held to make sure that the taxpayer will never be called upon to bail out private banks. On top of this risk-taking is currently aligned to tangible wholesome benefits or rewards. These rafts of reforms are crucial steps aimed at once again restoring public trust in the financial industry (Ferran, 2012).

United Kingdom banks have raised the capital of the highest quality that they should legally hold compared to the years before the financial crisis. Currently, banks are also holding more high-quality liquid assets. This would put them in a better position to survive any future liquidity-induced stress such as the one witnessed in 2008. In three years, when the Basel III gets fully implemented, the banks will end up being more robust (Ferran, 2012).

Regulatory reforms in the UK introduced the concept of ring-facing. This meant that the country’s largest banks were obligated to have their retail arm separate from their investment arms. This new regulation has improved the banks’ resolvability and resilience through protecting retail bank services from risks that may emanate from somewhere else within the financial system (Ferran, 2012).

The United Kingdom is also pioneering regimes that are aimed to adopt what is known as a statutory bail-in power. This power allows the Bank of England to expose specific creditors of a failed banking institution to losses through the conversion of their interests into new capital. This new type of orderly resolution guarantees that the principal economic functions a bank fulfills will still be fulfilled in the case of a failure (Ferran, 2012). Bail-In is a crucial tool to end the nagging problem of such banks being too big to fail. Banks have also been required to restructure their balance sheets to cut back on exposure to trading assets that are considered as too risky. United Kingdom Banks have a compulsory obligation to participate in both the BoE and ECB’s regular stress tests (Ferran, 2012).

According to the FCA, all bankers that are classified as Code Staff are required to receive at least 50% of their bonuses in the form of shares. This new approach means that the best performing workers are no longer awarded for failure; instead, they are incentivized to make choices that benefit the shareholders, organization, and the broader economy. These new regulatory changes or reforms show that the banking system in the United Kingdom is in a better position than before the financial crisis (Ferran, 2012).

Legal responses to the Global Financial Crisis

The Global Financial Crisis sparked a raft of regulatory and legal changes in the U.S. and Europe. The GFC led to heightened scrutiny of tax jurisdictions that are otherwise known as paradises of tax havens. Such havens are no longer restricted to uninhabited islands but operate right across the world and paint themselves as offshore financial centers. For several decades, such financial centers have been undermining the tax-raising powers of several countries like the U.S. When the financial crisis hit in 2007, the U.S., together with other countries, began losing their tolerance towards them. This was mainly due to the capital flight that was experienced in most developed economies (Halliday & Carruthers, 2009).

During the G-20 summit, the world’s most developed economies issued a clear and concise message to offshore financial centers that were deemed to be uncooperative. The G-20 warned the tax havens to strictly adhere to internationally accepted laws and treaties that aim at curbing money laundering. Laws and treaties were enacted that threatened to impose sanctions on such jurisdictions that pride themselves to be tax havens (Weiss & Kammel, 2015).

Is the Social License to Operate any more than an exercise in rhetoric?

The term Social License is defined as being present whenever a project attracts the ongoing approval within the locality in which it operates. At the individual project level, a social license is usually rooted in the perceptions or opinions that are held by the project’s local stakeholders (Sun, Stewart, & Pollard, 2010). When one discusses the Social License to Operate (SLO), they are always discussing the issue of public trust and social acceptance.

The social license may be described as shorthand for a more complex situation (Sun et al., 2010). SLO is an expression that can misalign expectations and focus any debate on a vague governance concept that defies conventional form and definition as opposed to emphasizing improving performance levels, the reputation of the firm, interests of the community as well as positive community engagements. Without much ado, the extent of social acceptance matters to most decision-makers (Sun et al., 2010).

However, overt support from all the main public communities is a rare fete to achieve. The word license in SLO illustrates specific permission when various positive developments can only achieve a lukewarm tolerance even in the presence of a concerted effort to achieve the desired level of social acceptance. In the end, decisions that touch on resource development ought to be grounded on viable assessments of the benefits versus the risks (Sun et al., 2010). The organizational decision should also reconcile the eventual distribution of essential resources. The phrase SLO will most probably continue replacing currency due to its widespread use. Public trust is earned through performance and not merely abstract metaphors (Sun et al., 2010).

How potentially transformative is the fair and effective market review and what are the barriers to the domestic and international application?

The fair and effective markets review appropriately examined the FICC. When it comes to remuneration, the review states that the recommendations were always going to be unpopular. The FEMR drew interest from regulators across the globe with the final report recognizing that worldwide FICC markets require international standards. Gaining global acceptance appears much easier for some recommendations compared to others.

Although the BBA agrees with FEMR’s description of the terms effective and fair, the main issue is how these concepts may be implemented in the FICC markets. The BBA holds the belief that any sort of reforms to the basic structures of the wholesale FICC markets ought to be regarded with and agreed at an international level. Any initiatives that are formulated should be disseminated to the lower levels of the economy. Moreover, the novelties will be implemented by private entities, to minimize regulatory arbitrage and disintegration of the target market. The shift of some kinds of transactions in the FICC to electronic platforms is an evolution that has projected the FEMR onto the international trade.

Overall, it sets out several changes that should be effected within the FICC markets. These proposals include the creation of statutory civil or criminal abuse regimes in the case of spot FX, increasing the maximum sentence allowed in the event of gross criminal abuses. The proposals also extend the certification regime to include coverage for asset managers, brokers, and hedge funds. How the review has been developed gives the personnel a significant range of flexibility. This allows the staff tasked with implementing it to evaluate numerous options when it comes to how they tackle challenges.

References

Blanpain, R., Bromwich, W., & Agut, G. C. (2011). Rethinking corporate governance: From shareholder value to stakeholder value. Alphen aan den Rijn: Kluwer Law International.

Ferran, E. (2012). The regulatory aftermath of the global financial crisis. Cambridge: Cambridge University Press.

Halliday, T. C., & Carruthers, B. G. (2009). Bankrupt: Global lawmaking and systemic financial crisis. Stanford, CA: Stanford University Press.

Stout, L. A. (2012). The shareholder value myth: How putting shareholders first harms Investors, corporations, and the public. San Francisco, CA: Berrett-Koehler.

Sun, W., Stewart, J., & Pollard, D. (2010). Reframing corporate social responsibility: Lessons from the global financial crisis. Bingley: Emerald.

Weiss, F., & Kammel, A. (2015). The changing landscape of global financial governance and the role of soft law. Leiden: BRILL.

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IvyPanda. 2020. "The Global Financial Crisis and Its Effect." October 10, 2020. https://ivypanda.com/essays/the-global-financial-crisis-and-its-effect/.

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