Research Agenda

2. Research Agenda What can we learn about accountability by examining how it is used in the discourses associated with the global financial market crisis?

3. Research Problem • Why has effective reform of capital market proved so illusive? • Mapping the parameters of what constitutes the parameters of accountability is an exceptionally complex task • The creative ambiguity of accountability highlights a potential disconnect between the rhetoric and substance of reform. • We hypothesize that the failure of effective accountability to date rests essentially on the failure to focus on the normative infrastructure.

4. Setting Up the Board • Three interlinked global phenomena: • flawed governance mechanisms, including remuneration incentives skewed in favour of short-term profit-taking; • flawed models of financing, including (but not limited to) the dominant originate-and-distribute model of securitization; and • regulatory structures predicated on risk reduction which created incentives for arbitrage and paid insufficient attention to systemic credit risk.

5. The New Institutional Economics Framework (Williamson, 2000)

6. The Return of Depression Era Economics 1942 1944 1944

7. Destructive Creation • The ‘perennial gale’ of change ‘incessantly revolutionises the economic structure from within, destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism (p.84) • “No social system can work in which everyone is supposed to be guided by nothing except his short-term utilitarian ends...the stock market is a poor substitute for the Holy Grail (p. 137)

8. Re-Embedding the Market • ‘A self-regulating market demands nothing less than the institutional separation of society into an economic and political sphere’ (p.74) • Aim was to ‘annihilate all organic forms of existence and to replace them with a different type of organization, an atomistic and individualistic one… best served by the principle of freedom to contract…To represent this principle as one of non-interference…merely the expression of an ingrained prejudice in favour of a definite kind of interference, namely such as would destroy non-contractual relations (p.171)

9. Unshackling Hayek • “Parties in the market should be free to sell and buy at any price at which they can find a partner to the transaction” (p 27). • “To create conditions in which competition will be as effective as possible, to supplement it where it cannot be made effective....provide indeed a wide and unquestioning field for state activity. In no system that could be rationally defended would the state just do nothing. An effective competitive system needs an intelligently designed and continuously adjusted legal framework as much as any other” (p, 29).

10. The End of History or the Demise of Hubris? ‘We shall not grow wiser before we learn that much that we have done was very foolish’ (p, 177) ‘Few discoveries are more irritating than those which expose the pedigree of ideas’ - Lord Acton (p, 1) ‘I found a flaw. That is precisely the reason I was shocked because I’d been going for 40 years or more with very considerable evidence that it was working exceptionally well’ – Alan Greenspan, 23 October 2008

11. Research Design • A keyword is a “significant, binding” term that is “not only indicative of the meanings and interpretation of a particular discourse but simultaneously forms elements of the problem that the very discourse they addressed had generated” (Raymond Williams, Keywords: A Vocabulary of Culture and Society, New York: Oxford University Press, 1985, p15).

12. Raymond Williams: “Keywords” • Democracy • Equality • Class • Bureaucracy • Accountability

13. Observation 1: • Accountability is treated as “cause” and/or “cure” • As a causal factor, it is the absence or failure of effective accountability that provides the focus of the discourse. • In contrast, accountability is also central to many discussions about how to deal with specific failures or as a counter to the overall conditions that caused the crisis.

14. Observation 2: • Accountability is discussed as both “mechanism” (designed to foster accountability) and “condition” (state of “being accountable”) • Being accountable means being subject to those mechanisms that are designed to impose some form of control or guidance (answerable, liable, legally obligated, etc). • Alternatively, accountability is also treated as a manifestation of the normative condition of “being accountable” (something an agent is or ought to be).

16. Observation 3: • Power of accountability as a “keyword” is rooted in widely held “beliefs” about what accountability mechanisms can or should accomplish (e.g. control, performance, integrity)

17. Manifestations and Testing • Strategic approaches to reform are related to the perceived “promises” of accountability. • Therefore, the second stage of the research examines the role played by accountability in the design of corporate and regulatory strategies in response to the crisis, using a similar framework. • In particular we test (1) for the salience of the US-based perspective on global patterns of policy responses to the crisis and (2) for a possible disconnect between the rhetoric and substance of reform traceable to the creative ambiguity at the heart of accountability’s status as a key word.

18. Observation 4 • Does reform enhance accountability? • Rhetorically focused on improving integrity of markets • Actual proposals focused on repairing or creating mechanisms of control

19. Change we can believe in? • The actions of many firms escaped scrutiny. In some cases, the dealings of these institutions were so complex and opaque that few inside or outside these companies understood what was happening. Where there were gaps in the rules, regulators lacked the authority to take action. Where there were overlaps, regulators lacked accountability for their inaction – President Obama, 17 June 2009

21. Applied Ethics and the GFC • Immanuel Kant’s categorical imperative, namely ‘act only according to that maxim whereby you can at the same time will that it should become a universal law’ • Utilitarian or consequential approaches apportion blame on impact • Essential to differentiate between the product and the inappropriate uses to which it was put to work • It is a deficient defence to claim ignorance of how these products were structured or how unstable the expansion of alchemistic engineering had made individual banks or the system as a whole • The failure to calculate the risks and design or recalibrate restraining mechanisms at the corporate, regulatory and political levels grossly exacerbated the externality costs

22. Virtue Ethics: The Promise of Integrity • ‘elevation of the values of the market to a central social place’ risks creating the circumstances in which ‘the concept of the virtues might suffer at first attrition and then perhaps something near total effacement’ (After Virtue, p 256, p.196) • ‘effectiveness in organizations is often both the product and the producer of an intense focus on a narrow range of specialized tasks which has as its counterpart blindness to other aspects of one’s activity’ (1982) • Compartmentalization occurs when a ‘distinct sphere of social activity comes to have its own role structure governed by its own specific norms in relative independence of other such spheres. Within each sphere those norms dictate which kinds of consideration are to be treated as relevant to decision-making and which are to be excluded’ (1999)

23. The Dimensions of Integrity • Integrity is a cluster concept: consistency of actions, values, methods, measures and principles within or between biological and ecological entities • ‘The condition of having no part or element wanting; unbroken state; material wholeness; completeness; entirety’ (OED); • Unimpaired or uncorrupted state • Soundness of moral principle (responsibility?); the character of uncorrupted virtue(s); honesty (self-interrogation), sincerity (self-synthesis) • Practical not a theoretical issue informed by practice: • ‘Lawyers must do more than know the law and the art of practicing it. They need as well to develop a consciousness of their moral and social responsibilities .... Merely learning and studying the Code of Professional Responsibility is insufficient to satisfy ethical duties as a lawyer’ - Justice Sandra Day O’Connor

24. Integrity in Practice: ASIC • ASIC has completed a strategic review of its operations. • a focus on outcomes; • the development of initiatives to help retail investors manage and protect wealth; • the introduction of new investigative techniques to reduce systemic problems; • the reduction of red-tape in administration; and • an emphasis on facilitating inward and outward investment by differentiating the Australian marketplace by demonstrable improvements in business integrity • Success, however, will depend on ASIC’s ability to cause market participants to embrace the reform agenda including, crucially, its conception of business integrity.

25. Integrity in Practice and Practise • The market in unrated, unlisted bonds accounts for $8 billion and involves 92 vehicles with variable risk • Benchmarked articulation of risk (e.g. credit rating, equity capital, liquidity, lending principles, portfolio diversification, valuation of stock, related party transactions and rollovers and early redemption possibilities and penalties) • External gatekeepers should explicitly take disclosure into account when issuing valuations but also risk that enhanced levels of disclosure can obfuscate as well as illuminate • Attention must also be placed on and accountability demanded from those providing corporate advisory services and the creation and dissemination of technically legal but misleading advertising (i.e. not just trustees and auditors but also copywriters, production teams, publishers) • Requires professional groups to acknowledge their own responsibility and be accountable: acquiescing to external scrutiny of what codes of conduct mean in practice

26. Strategies for Development • Retrieving the Meaning of Accountability in the Causes of the Global Financial Crisis • Retrieving the Meaning of Accountability in the Policy Responses • Explaining the Gap Between Rhetoric and Substance in Capital Market Regulation • Transcending Regulatory Failure by focusing on interaction of Rules, Principles and Social Norms in Capital Markets • Integrating Integrity into Accountable Design