Gilbert Morris, executive director of The Landfall Centre for Finance, Trade & International Affairs was invited to the Cayman Banker’s Association Conference in Grand Cayman, March 24-25. He dealt with matters such as the Patriot Act, which will have major consequences for The Bahamas.
Here’s the second in a three-part series on his presentation.
Part II: Good governance is self-governance:
To get a giant’s attention, in this case let’s say the U.S., one must first take responsibility that one’s jurisdiction is not a nuisance, and secondly, one must show that in stepping on oneself, the giant risks stepping on a nail.
You will have noticed that I have spoken of corporate governance in the context of the financial services crisis faced by OFCs of late. That is intentional, as issues such as Know Your Customer (KYC) rules, Information Exchanges and International Financial Regulations (let’s call this the “compliance package”) are and will now remain at the core of corporate legitimacy and depending on a company’s approach to them and the perception of that approach, these initiatives will form a double-edged risk to shareholder’s value.
On the one hand, if companies lack the compliance package, they open themselves up to serious penalties and add to jurisdictional risk for their colleagues in the profession.
If companies go too far and suffer regulatory overkill, they will regulate themselves out of business, which is equally as problematic for shareholders.
At the Landfall Centre, in our Future of Financial Services Report, we have assembled some of the finest thinkers in the world to address a means of balancing these two competing but incompatible objectives this summer.
In particular, the financial-services crisis is the key concern for financial-services institutions today and the key issue is how to stay in business profitably whilst satisfying the interests of the larger powers, preventing your own jurisdiction from acting foolishly or (using our approach) educating both as to the danger to themselves of following certain reactionary policies.
Our general view is that we must have a good compliance model, which enhances the prestige of our jurisdictions and projects our commitment to sound business practices. However, our main problem has been threefold generally.
We have been followers, and are not the drivers of our compliance packages or our corporate governance models.
Since we have attained and now maintain our successes by attracting foreign firms, we have had the conundrum of reconciling the regulatory interest (including issues of governance) of the home countries of our foreign institutions with our own.
This problem has been a subtext of offshore investment for decades and now will require reconciliation if we are to survive as attractive jurisdictions for such investment.
The ad hoc manner in which our financial services communities were built did not anticipate changes (in corporate practice and responsibility) in the global environment. We had no set of known pre-conditions, and never engaged in regulatory reassessment and reconciliation as a means of getting “ahead of the curve.”
We seemed to have operated out of immediate necessity or insecurity, or both. Either we had to adopt models we have adopted to get the business we have, or we were afraid of losing it so we adopted what we were told. The new situation in the world which I have laid out above will not permit this undisciplined approach anymore.
If I may say so, here is a better way: Lee Qwan Yew, the former prime minister of Singapore, adopted a very different strategy when Singapore decided to move into financial services, and more specifically to attract foreign firms into that jurisdiction. First, he decided on the direction in which he wanted to go and selected a distribution of products he thought Singapore could cultivate the advantage to offer. Next, he chose amongst them which he thought could become a market leader. He then examined the existing standards and most importantly designed a “Singapore standard,” for which that jurisdiction became known.
Lastly, to his credit, Lee Qwan Yew enforced those standards even against G-7 institutions and companies. When it was time to invest in Singapore, one did not say: “We had better keep us our standards even though we can get off in Singapore with less.” Instead, one had to bring one’s standards of operation up to that of Singapore’s. The reality was often that the rules were not as strict or hard-tasking as first perceived. What matters, however, is that they were perceived that way in the first place, even in G-7 or OECD nations.
The credibility which grows out of this approach (of bespoke, home-grown disciplined, self-imposed standards, which may supercede or are at the cutting edge of regulatory research in OECD nations) is the most important arbitrage available to small jurisdictions in the current world situation in general, and in the offshore financial-services sector in particular. This approach demonstrates to the world that jurisdictions undertaking it are worthy of being taken seriously. If this is not the subject making its way around boardroom tables, I doubt respectfully that you will long have anything to manage in the current climate.
As such, no matter what text you read or how many foreign consultants you hire, or how slavishly you may follow some “one-size-fits-all” regulatory model, it will not buy you respect, even from those who designed it or forced you to follow it. Only through deliberate, refined, institutional and constitutional self-made rules, promulgated in confidence, will you gain reputational capital and respect.
Stay tuned next week for part three…
By Dr. Gilbert Morris
