Open Dissent (7 page)

Too much money was being borrowed by the banks' customers who in turn had little real capital to support their activities. In turn, the banks' own balance sheets were being swollen with increasing dependency on international wholesale borrowings from the international marketplace and not with retail deposits. There have always been safeguards in place in the running of banks' balance sheets, but one of the key ratios that was eventually overlooked, and should not have been, was the loan-to-deposit ratio. In effect, this ratio should never exceed 130:100. In other words, you can lend €130 worth of loans for every €100 deposit you have as the €30 difference can be borrowed in the professional international wholesale market. The rationale for this is that depositors' money is sticky and, in times of market instability, the wholesale funds may depart more quickly but the core deposits will stay with the bank. In the event of a run in the markets there should be standby facilities to protect the bank's balance sheets, like an overdraft, in order to replace the fleeing wholesale funds and ensure that the bank does not become illiquid. Confidence is essential in the financial markets, and loss of this creates panic.

The market in Ireland has four principal segments in property lending: developers, construction companies, residential mortgages and investment properties. There are subsets to each of these but for the purpose of this
observation it is best to leave it at these four. Leverage was not the preserve of the major developers, construction companies, private investors or hedge funds. It indeed proved to be the killer disease that attacked new residential homeowners. Anyone who has been faced with a demand from a bank for a loan that has fallen into arrears for an amount of less than €1 million will know to what lengths the bank will go to get repaid. Add another three zeros to this amount and imagine the respect the borrower receives when he owes the bank €1 billion or more. This borrower has the ability to hurt the bank if they are unable or unwilling to repay. As the saying goes, if you owe the bank €1 million it is your problem; if you owe them €1 billion it is their problem.

Thanks to competition and the professed need by all quarters for it, new products were being created every week, and variations on interest rates, fixed, floating or even deferred, together with mortgages that ranged from 90 per cent to 100 per cent, spurred things on. The 100 per cent mortgage was not a homespun invention, but was a concept imported into the heated residential market in 2004 by First Active, a subsidiary of Ulster Bank. We were not slow to follow and most banks allocated a percentage of their mortgage lending to this product area. It is easy after the fact to rebuke those institutions that participated in 100 per cent mortgages as there is no surer way of creating a negative equity trap for home buyers in the event of an economic downturn. Where was the Regulator at this time? Why was no action taken to curb this trend?

If a deal sounds too good to be true, it usually is. No young person or couple deserves to be trapped for an indefinite period with the fear of being unable to repay their mortgage. We now must find a way out of this dilemma, not only for those who may be trapped now but for the next generation. Homeownership is high on the Irish social agenda and, with the pains of negative equity evident in our society, the pros and cons of renting versus homeownership will have to be played out again. Finding a way out of negative equity for those who are trapped will likely benefit the whole residential market as it will remove the fear of a massive overhang in the market for first-time buyers.

Could the lenders have avoided the situation and protected the borrowers? The old adage ‘know your customer' was never more applicable. The judgment of the banks was thrown out the window and unfortunately everyone – families, bankers and shareholders – have paid the price. Leverage in property must be controlled in a way that both borrowers and lenders understand the consequences of a downturn and the financial responsibility of each party in this event. Banks should be forced to recalculate what a borrower owes after a downturn. In other words, no bank should lend more than 85 per cent of the value of a property; if it does, it should be held responsible for everything in excess of the 85 per cent should the borrower be unable to repay. This would automatically transfer the burden to the banks and, in turn, would protect the customer. Banks should have strict ratios to guide them on individual
mortgages and if they exceed these limits then they should absorb any future losses that might occur due to the excess provided. This would put the responsibility back on to the shoulders of the lenders and within a framework that would facilitate homeownership but would not encourage multiple unit ownership.

The effects of reckless lending on the individual might be best illustrated by the case of Caroline McCann. Mother-of-two Caroline McCann, a resident of Mullaghmatt, Co. Monaghan with its 300 mainly social housing units and a self-confessed alcoholic, failed to repay €18,063.09 to Monaghan Credit Union. Over ten years had elapsed from the time of the first credit advance by the credit union to June 2009 when Judge Laffoy made her landmark ruling. The money was long gone and McCann's memory was void of any benefit received. The fear that this mother would be separated from her children was all that remained. How any person in McCann's position could have ever raised such a large sum from a credit union begs the questions: How much was the principal? How much interest accrued? And what penalty charges were involved?

While the sanction of prison was aimed at debtors who would not pay, it also struck at those who could not. The judge found it inexplicable how the state could countenance the continuance of such a defective scheme of debt enforcement. In response, the Government moved quickly to produce a new Enforcement of Court Order, a bill which contained most of what was judged to be lacking in the previous regime.

Major borrowers now incapable of repaying their debts in full, debts which collectively run into tens of billions, are likely to be discussing their unfortunate circumstances (loss of fortune, loss of security, loss of helicopters, loss of mansions in the South of France, and so on). However, we have to thank the judiciary for their astute analysis, comprehension and swift decision making to change the system to protect the more vulnerable.

One of the main causes, or at least incubators, of the banking crisis was, I believe, the culture of silent dissent in our corporations and Government. Most people who have served on a board in any corporation or organisation in Ireland will be familiar with this disease. Perhaps it is also this culture that will prove to be a barrier to Ireland's financial recovery.

In the world of banking the shareholders' principal representatives are the non-executive directors on the boards of the main banks. The boards, whose principal responsibility is that of governance of the institution, are particularly charged with agreeing the strategy of the entity and ensuring that the executive management does not stray off the agreed path. Regular board meetings facilitate the reporting of performance from the executive directors together with confirmation of the entity's direction. In addition to the board meetings, there are a series of subcommittees that deal with risk, audit and compensation, and meet several times a quarter.

In Ireland there is frequently an outcry against cronyism with respect to the appointment of board members, cronyism being ‘the appointment of friends and associates to positions of authority, without proper regard to their qualifications'.
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It is also described as ‘a partiality to long-standing friends demonstrated by appointing them to positions of authority regardless of their qualifications. Hence cronyism is contrary in practice and principle to meritocracy. In the private sector it would often be referred to as an old boys' club or a golden circle.'
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Meritocracy, on the other hand, is a system in which advancement is based on individual ability or achievement, whereby candidates are chosen for their superior talents, intellect or experience and not because of birth, wealth or privilege.

In the Irish corporate context an argument can be made both for and against cronyism. The country is small with a population that can be brought together under various ceilings during the course of life. It may well be the fact that you are born and raised in an area where you establish friendships from early childhood. Perhaps you go to the same school or university as these people and during this time you compete with them in sporting activities. The bonds that are established at birth through family relationships provide a solid basis for judging an individual's qualities of honesty, integrity, intelligence and talent. These relationships are strengthened or expanded over the years when people enter professions or build their own businesses or inter-marry. To dismiss people because of
acquaintance as candidates for key positions would be foolish.

On the other hand, the case for going down the meritocracy route is simple. Choosing people who have demonstrated that they have the appropriate experience and skills for a post is perfectly fine. However, the assessment is not just about the intelligence quotient of a candidate but the emotional quotient. The emotional quotient is a nice way of indicating whether the right chemistry would exist between the candidate and the board. My own experience on international boards in the UK, the US, Australia and New Zealand has led me to believe that, when common sense combines with tried and tested processes of identification and election of directors, the results are above criticism.

Boards are often criticised for the levels of cronyism that prevail. It is because of this criticism that we need to examine what level of cronyism is appropriate. In normal circumstances, board members of public companies should have three fundamental qualities – a recognised skill base, experience in an appropriate field that can demonstrate the use of this skill base and, finally, sufficient time to spend uninterrupted in the pursuit of good governance. Taking this as a guideline, we cannot dismiss a candidate simply because we know him or her socially. However, it is essential that when that person comes onto the board that his or her independence of opinion is permitted to prevail.

Intimacy at board level often stifles much-needed debate on subjects that will determine the well-being of companies. When friends are part of an elite group it is
often deemed disloyal if one professes an opinion that is contrary to accepted orthodoxies. This is the culture of silent dissent that has evolved in Ireland. In practice, silent dissent can be observed when individuals on a board or in a group disagree with policies and say nothing, disagree with actions or solutions in a given situation and stay quiet or, in certain situations, simply don't reveal their position at all. There are invariably subjects that are sacrosanct, orthodoxies that, it is perceived, ought not to be challenged or social issues that are best not talked about. Rather than challenging the status quo openly at board meetings, members of boards who might have different opinions on given subjects are encouraged to discuss their concerns privately with the chairperson or chief executive. These concerns may never surface at board meetings if, in the opinion of the chairperson, they might be considered inappropriate or even offensive to the long-held opinions of other board members. It is for this very reason that, according to good corporate governance, a member can only serve on a board for a maximum period of six years. Continually refreshing the personalities on boards is essential to effective governance.

It is dangerous to permit silent dissent to infiltrate the
modus operandi
of any board. The conscious suppression of people's opinions in favour of the status quo is often cited as the reason major oversights occur with catastrophic consequences. Accepted social norms and politeness alone cannot provide the basis for constructive, open debate on key issues that affect an organisation's well-being.

So, in the context of Irish corporate life, it would appear that the best way to get around this practice of silent dissent is to appoint experts from abroad onto our boards. People who fulfill the technical requirements and who have relevant experience in other countries should be sought out and appointed. This is one sure way shareholders' interests and the interests of the community at large will be protected. The abuse of power must be curtailed and regulators need to grasp the concept of public ownership and the nature of the responsibility of board members. Conflicts of interest are easily identified, provided they are brought to the attention of boards and not kept suppressed under a code of silent dissent.

This culture of suppression that has fed the crisis is not only found in the boardrooms but in every tier of our society. Whether it is in the family, the Church, the Government or clubs, it is ever present in our business and social lives. The recognition by the Secretary General of the Department of Finance in May 2010 that the department had made mistakes was surely a confirmation that silent dissent had prevailed. This does not imbue trust or confidence in the decision-making processes at the level of government.

In larger societies, silent dissent is less prevalent as it is diluted by the sheer size and distribution of the population. Open dissent and challenging the status quo can better serve society by refreshing our thinking. However, in Ireland, open dissent can threaten one's reputation, livelihood, family or other relationships. It is always an
individual's choice to express an opposing opinion but the price paid may be disproportionate to the clarity gained.

Silent dissent, in a strange way, has given birth to the phenomenon of whistleblowing, which is when someone discloses illegal, immoral or illegitimate practices in an organisation to those who can take action.

Over the past twenty or so years, a great deal of public discourse has been dominated by scandals that have led to an erosion of public faith in commercial and other institutions. A proportion of this wrongdoing has come to light due to the actions of some celebrated whistleblowers. One such whistleblower was Eugene McErlean, a former group head of internal audit with AIB, who blew the whistle on overcharging and other wrongdoings at the bank, only for the Financial Regulator to ignore his evidence. Was the Regulator's inaction some sort of silent dissent?