‘Private Sector Architecture for Future Capital Markets
February 13, 2009, by invitation only.

The Center will host on February 13, 2009, with partner, The CFA Institute Centre for Financial Market Integrity, simultaneous high-level working groups on three critical areas that have been widely identified as issues for reform: shareholder stewardship, risk management and pay for performance.  Working groups addressed key concerns within these broad areas to produce concrete, practical recommendations.  The Center will incorporate the findings of each working group into an larger Policy Briefing Report to be issued in the spring of 2009. 

The current financial crisis is a clear indication of the massive failures of institutions that populate the world’s capital markets.  Banks, investors, ratings agencies, regulators and numerous other players demonstrated that confidence in the underlying stability of the market was misplaced.  The loss of faith in market institutions now represents a significant hurdle to recovery as financial institutions are wary of once again misplacing their trust in each other, and the public is wary of all.

Restoring trust in the system requires two pillars of reform.  Attention has been primarily focused on the first pillar, reform of the financial regulatory system, both nationally and globally. Many organizations, such as the G20, the OECD, the US Treasury, professional bodies, universities, and free-standing think-tanks, are assessing proposed reforms of laws and regulations, the roles of regulatory agencies, the supervisory process, and the need for a unified international regulatory system. The second pillar, reform initiatives and actions of the private sector for the private sector, has been largely ignored to date.

The second pillar, Private Sector Architecture, is the Center’s sole focus of this project.  This current initiative is a first step in designing that architecture.

Trust in capital markets cannot be restored without the action of private sector institutions. To restore trust in financial institutions and the capital market itself, the corporate governance system must become a focal issue in the private sector. Flaws in that system that have been exposed, from the apparent inability of boards of directors to manage risk, to the poor stewardship of institutional investors, to compensation systems which may have exacerbated risk, must be taken seriously and addressed thoughtfully. Of equal importance, studying flaws in the governance of financial institutions presents learning opportunities for improving corporate governance generally.

This project builds on the Center’s ongoing Modern Capital Markets program as a foundation for its work.  Since 2007, the Center has been exploring the link between corporate governance challenges and developments in the capital market.  This long-term program has included a series of global roundtables, academic conferences, infrastructure-building projects and sponsored research.  The roundtables – held in New York, London, Berlin, São Paolo, Dubai, and Paris (a high-level OECD session) – revealed five overarching challenges:  the emergence of new investors, the introduction of new investor demands, the use of new financial instruments, the assumption of new roles for familiar institutions, and the subsequent increase in uncertainty amongst managers and directors, all of which contributed to the current implosion, and the loss of trust in the market.

The project will be structured around two generic issues that underlie all the specific questions raised.

• What is the proper balance between public and private initiatives?
• What can be done to restore long-term performance goals to the corporate agenda?

A closing plenary session convened all three working group participants to discuss the future of the ratings industry. Respective working group members include knowledgeable and relevant executives, directors, and representatives of the many institutions which comprise the capital market and governance systems.