How Blockchain may diminish/change the role of Auditors and Accountants

As an accountant, there are very few technologies that have scared me (and excited me at the same time) and caused me to think: “Is my job at stake…?…”. Most of them over the years have made my job as an accountant and Internal Auditor..much easier and faster. However Blockchain as a technology could significantly change my role as an accountant/auditor.

While the rest of the world’s focus is on Bitcoin, Ethereum, Ripple etc. its underlying technology (i.e. Blockchain) is a cause of concern for me as an accountant and auditor  – and how it will affect my specific skills.

The word ‘disruptive’ technology is used very frequently nowadays. However in the last 2 years, along with Artificial Intelligence and 3D manufacturing, Blockchain to me will change our lives as accountants and auditors – the profession as we know it will change….

Understanding Bitcoin and Blockchain for me a professional accountant has not been very easy and by far the easiest explanation I have found is included in this article.

However while the focus of most of the world’s attention is on Bitcoin and other related cryptocurrencies, the development or dare i say ‘invention’ of Blockchain technology is the real disruption.

At its heart Blockchain is distributed ledger. Think of it as a ledger or accounts book that is maintained by me, you and everyone else. Any transaction that causes it to get updated causes it to get updated in everyone’s ledger – so that if one ledger is lost/destroyed, the others are still there. However, what is the proof that the data is accurately updated every where….and that it is the original update? The proof of the ‘stamp’ is the ‘digital’ ‘cryptic’ signature.

Here we enter techspeak…to the extent I can understand and explain it..:The Block ‘chain’ is a distributed ledger that contains ‘blocks’. Each of these ‘block’s contains a time stamp and a link to the previous block using a digital finger print or digital signature. Each of these ‘blocks’ have data. This data can be land title deed records, purchase records, ownership information, a transaction record, bitcoin etc.

Herein comes the usefulness and innovative disruption feature of Blockchain.

In today’s world of double entry bookkeeping, each company or trader, updates her transactions in her books of accounts or her ledger. However for participants of a distributed ledger technology, the same transaction is simultaneously recorded in the distributed ledger or Blockchain  that is a distributed or shared ledger. Accordingly all transactions are recorded in real-time, time stamped and stamped with a unique crypto-signature- everywhere.

A few characteristics of the ‘block’ should now probably be mentioned – the data has a timestamp, cannot be changed and is accurate- some of the very characteristics of Information we as auditors look for.

The introduction of double entry book keeping was revolutionary as it brought about rigidness, structure and a way to ensure the accuracy of accounting records- ensuring that ‘all’ or both sides of a transaction is captured. However once the transaction is captured there is a requirement for stakeholders to have access to financial reports or records based on these accounts. At this point auditors come in to ‘check’ the accounting records and the financial statements and give their ‘reasonable assurance’ on the information being reported.

As accountants (in financial statements and other financial information) we tend to look for certain assertions in our financial information, these are:

  • Completeness- financial information and records are complete
  • Existence – of assets and liabilities are true and accurate
  • Rights and obligations- what our rights are and what is owed to others is captured accurately
  • Accuracy – information is accurately captured
  • The records or information has not been tampered with or is ‘immutable’ or unchangeable

Blockchain through its various characteristics above solve all these problems to some extent.

A simple example would be, lets say a bank sells shares (its investment) to another company. The Bank would credit Investments and Debit Cash; and the Company would debit Investments and Credit cash. In a scenario where there is a ‘distributed ledger’ or Blockchain, the whole transaction would be updated on the shared distributed ledger simultaneously with a timestamp and a crypto signature/digital fingerprint.

Accordingly the Company cannot falsify its records to say it received more shares than it actually bought and neither can the Bank say it received more cash than it actually did. The records cannot be changed and cannot be manipulated on a back-dated basis. (however the issue of method of valuation in each ones books would have to be separately dealt with)

To extend this analogy further, a purchase contract signed with a supplier could be included as data in a ‘block’. Since the Blockchain can have protocols for smart contracts enabled, this can seamlessly transfer and be included for the purchase order details, for the receipt of the goods details, for the payment details etc. In other words the transactions are updated simultaneously at all these points and cannot be modified-all persons with access to the blockchain have access to this information.

All information of the contract, the purchase, the receipt of goods, the payment by the ‘Bank’ all being simultaneously updated and processed/enabled on the distributed shared ledger or Blockchain (which all participants including the supplier, the buyer and Bank) have access to at the same time. The information is accurate, cannot be changed and is accessible by all participants. The inclusion of all this additional information in blockchain transaction processing is even being called ‘Triple-entry‘ book keeping- as additional information over and above the two sides of a transaction are being encoded.

The use of Blockchain in the Banking system is being studied, implemented and tested by a large many Banks and financial intermediaries (such as SWIFT). Precisely because Blockchain and Bitcoin are a disruption technology. If they don’t become part of the change, they will get left behind. The technology can be applied to payment processing, transaction processing, trades settlement etc.

Now lets say your company as a participant for a Blockchain solution has financial/Bank transactions to be processed – as an accountant you have to record all payments and receipts in your bank accounts in your ‘books’, carry out reconciliations of your books with the Bank statement etc. All these steps get thrown out of the window in the Blockchain era. This will be an an era without Bank reconciliations and the need for auditors to check the reconciliations.

Taking the analogy of a purchase transaction mentioned above, in a distributed ledger or Blockchain environment, there is no need for the auditor to check whether the purchase was recorded correctly or whether a balance confirmation needs to be sent out, followed up, received and matched to the company’s accounting records.

The world of the accountant and the auditor accordingly undergoes a 365 degree change- as certain processes are no longer required.

For the asset management industry there are significant changes and benefits. Take the example of the number of intermediaries and support providers in the asset management industry, there are the administrators, the registrars, the custodians etc. In a process in which a secure Blockchain is used; customers could potentially deal directly with Fund Managers as all necessary information can be securely stored on the Blockchain. Transaction processing from a clients order to settlement date would be almost instantaneous due to smart contracts built into the Blockchain solution.

Even the transactions by the Fund manager, say a purchase of shares, disbursement of necessary funds by the custodian, settlement of the transaction, update of records by the administrator could all get simultaneously updated on a distributed ledger or Blockchain. The benefits of the same are immense and include shorter or very sort settlement times, removal of redundant processes (e.g. such a daily reconciliations), removal of certain intermediaries, lower operation costs (as intermediaries may get eliminated) etc.

Theoretically, this could mean in an environment in which Blockchain is widely used; the Fund Net Asset Value (NAV) would be calculated and updated in real time.

The same analogy would apply for financial records and reports – in an environment in which Blockchain is widely used financial reports may be real time.

As an auditor, the focus of audits may then shift from carrying out repetitive non-value add activities to review of the blockchain technology controls, the controls for use of the wallets etc. The role of the auditor may shift from periodical year end auditor to real time auditor. Focus of the audit may change to:

  • Confidence in the ‘system’ – e.g. the digital signatures
  • Time spent on audit activities that are repetitive and automated under Blockchain will need to be reconsidered
  • Systems and software auditing will have to be included

However a number of challenges to the widespread adoption of Blockchain include the adoption of such technology across sectors and across geographies, definition and acceptance of standards by all industries and participants, acceptance by all relevant regulators, establishment of security for all aspects of transaction processing etc.

Whatever are the challenges, the world for accountants and auditors is changing and the question to be asked of ourselves is: Are we ready?

The above article is an introduction to the topic only, please let me know your comments if any on the above information and if I have described any technical concepts incorrectly. These are my personal views and not in any way connected to my place of employment.

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UAE Vs Bahrain – Corporate Governance framework for Banks, an attempt to compare

The framework for Corporate Governance as applicable to Banks in the UAE and Bahrain differs quite significantly. However ‘best-practice’ guidelines are the same the world over and accordingly most of the key requirements and principles are included as part of either rule or guidance in both these countries.

Bahrain

The framework in Bahrain appears to be more detailed and elaborate. Rules and guidelines for Corporate Governance are contained in the Central Bank of Bahrain (‘CBB’) rulebook under the relevant ‘High Level Controls’ or ‘HC’ Module. However, the CBB in its rulebooks has established separate HC modules depending on the type of business of a licencee. Accordingly, separate rulebooks (and HC Modules) exist for Islamic Banks and Conventional Banks, There are even separate rulebooks for Investment Firms, Insurance companies etc. Thought it must be said that the Corporate Governance requirements are substantially similar with some differences depending on the type of business entity.

The requirements included in the HC modules are split between ‘Rule’ and ‘Guidance’ with a ‘Comply or Explain’ principle for the ‘Guidance’ parts. Accordingly, all Rulebook content that is categorised as ‘Rule’ must be complied with. For other parts of the which are categorised as ‘Guidance’, every conventional bank is expected to comply with the recommendations, or explain its noncompliance in the Annual Report.

Listed entities are required to follow the Code of Corporate Governance of the Kingdom of Bahrain as well as the requirements included in Volume 6 of the Rulebook Module HC – which is to a large extent also based on the principles in the Code.

UAE

The situation in the UAE differs. For one, if the entity is listed on the DFM or ADX, it is bound to follow the Corporate Governance Code as issued by the Securities and Commodities Authority (SCA). This Code does not apply to Central Bank regulated entities (among others).

However for Central Bank licenced entities, the first major guideline which Banks were bound to implement was contained in Circular 23/00, containing binding recommendations for corporate governance structures in banks (the Central Bank Rules).

Subsequently the Central Bank of the UAE also issued Corporate Governance Guidelines for UAE Bank Directors to serve as an information pack and guidance. However these requirements do not appear to be mandatory.

Considering that most Banks are listed, a typical Bank would be required to comply with the requirements of the Corporate Governance Code as issued by the SCA as well as Circular 23 and Guidance to the UAE Bank directors.

A summary of the key requirements as applicable to Banks in the UAE as compared to the requirements in Bahrain will be explored in another blog post.

(The above attempt at comparing the Corporate Governance frameworks in both countries is based on publicly available information and my personal interpretation. I look forward to further reader comments to enhance the facts and if so, make it more accurate. The above is also published on my blog.)

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Corporate Raiders? Bring on the Pirates..

When did the dishonourable Corporate Raider become the venerated Shareholder Activist?

In the 70’s and 80’s the Corporate Raider was demonised by companies and portrayed as ‘wild-west’ profiteers who built up stakes in companies or acquired them through leveraged buy-outs, to later-on indulge in asset-stripping,  selling off divisions and even in some cases, leading to bankruptcy.

However, is the Corporate Raider as bad as he is made out to be? A Corporate raider generally only targets companies which are not harnessing all their growth opportunities. In other words, weak spots are targeted specifically because they exist and should not have been there in the first place.. Corporate raiders build up stakes in companies and then, when a substantial stake has been reached, asks for Board representation or proposes motions (using standard shareholder rights and tools) for removal of non-performing management, unlocking value by selling of profitable divisions etc. All actions ultimately resulting in increased shareholder value.

In the past however, there have been instances of Corporate Raiders ultimately leading entities into ruin. Even the (now) venerated Carl Icahn has been accused of ruthlessly taking over companies and then selling off pieces of the assets to pay off the debt taken on to pay for the acquisition. There is even a recent article on CNN Money portraying Carl Icahn as a Pirate.

Other names that come to mind include Danny Loeb, Bill Ackman etc. Letters written by Danny Loeb to the Management of some companies are a joy to read – witty, acerbic and hard hitting –  like an expert surgeon’s scalpel and yet as painful as a pitchfork being roiled . More enjoyable than watching a soap opera. In case you would like to read one yourself, access the letter he wrote to the management of Star Gas in 2005 here. Written after much research by his company, it is truly an enjoyable read. An extract from this letter is quoted here: “…. A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America.“. Other examples of his letters can be found here.

Today however people such as Carl Icahn are to be lauded. Primarily because they have shown that the standard rights of shareholders, if used correctly, are powerful . They are powerful bulldozers that can force a company/Board into taking the right decision for all stakeholders, especially shareholders.

Believers in the power of Corporate Governance will be amazed that simple rudimentary tools that are the right of every shareholder, are being used so effectively by Corporate Raiders (or should I say Shareholder Activists..) The Corporate Raider of yesterday has metamorphosed into the Shareholder Activist of today, forcing and leading companies into effecting positive changes,  including last year at both Yahoo and Microsoft where management was forced out.

Recent articles on Economist.com and by McKinsey&Co highlight the wider benefits and contributions of Shareholder Activists. McKinsey’s report also pulls hard data to support their opinion on this. The McKinsey article even has tips on what to do when approached by a Shareholder Activist.

One could ask the question as to why a Corporate Raider is relevant in the Middle East and Asia. This is precisely because all the names I have quoted in this article are mainly American. While I have heard of stories of well educated shareholders preparing for and picking fights with Company Management in  Annual General Meetings in India, and forcing Company Management into into tight spots, I am yet to hear of successful Shareholder Activists in the MENASA region. The only example I can recall in the Asian region, relates to the Chandler brothers initiatives against SK Corp in South Korea. No doubt they walked away with returns of over $700million, however common shareholders also benefited as share prices increased during their campaigns against the management of SK Corp. A quote on an article on the Chandler brothers on Bloomberg.com even highlights their specific contribution to Corporate Governance “The Chandler brothers contributed greatly to Korea by raising the awareness of corporate governance and provided an impetus for big companies to change..

While I doubt that there is dearth of talent, experience, skill or even money in the region, the missing ingredient or catalyst is one large shareholder or Fund Manager to start the ball rolling. Once ordinary shareholders understand their powers, nothing can stop them..

I look forward to seeing more shareholder activists (or should I say Corporate Raiders.?) in the region.

Bring on the Pirates I say.

(In case you are aware of shareholder activists in the MENASA region, please assist me with their names/names of their companies in the comments section).

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Revolutionary Remuneration Rules in Bahrain

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No pun was intended in the writing of the above title, however the new rules governing remuneration introduced by the Central Bank of Bahrain are nothing short of revolutionary. Revolutionary because I do not think any other regulator in the region has established rules that are at once extremely progressive while at the same time taking into consideration older best practice publications on remuneration issued by BCBS and other bodies.

The word revolutionary is not used lightly in this article, as some Bankers I believe have not yet fully understood the significance of the changes that will be wrought once these rules are implemented. (The rules will be effective from 1 July 2014 onwards).

As a Central Bank, the CBB needs to be lauded for having the courage to introduce such rules. In most jurisdication the introduction of such rules would and could lead to mighty uproar by the industry and business media. The reaction in Bahrain so far however appears to be muted, which is a good sign. Or it could indicate that not everyone is aware of the revolutionary changes that are due.

I should probably start by making it clear that the rules apply only to ‘approved persons’ (AP) and ‘material risk takers’ (MRT) with a combined annual salary of BD1,00,000 or more- including  all benefits and allowance. This means a monthly consolidated salary of around BD8,333 or USD22,100.

An interpretation of the CBB’s objectives in enacting such rules leads one to believe that the CBB intends to protect shareholders and other stakeholders from the following:-

  • Employees will not be able to introduce deals, products or projects that are profitable in the short run (or appear profitable in the future) while ultimately leading to losses – the rules require that when remuneration (or bonus) is awarded based on a new projects or deals, it should be linked to the outcome of a deal or project i.e. essentially aligned with risk. Accordingly deferral is actively encouraged and legislated.
  • The rules even allow for cancellation or ‘clawback’ of agreed remuneration or bonus – which is unprecedented in this part of the world. To quote from the rulebook: “Accrual and deferral of variable remuneration does not oblige the bank to pay the variable remuneration, particularly when the anticipated outcome has not materialised or the bank’s financial position does not support such payments”. The clawback rule is highlighted below later in this article.
  • Short term risk taking or short sighted strategies are avoided. By implementation of these rules, it is assumed that remuneration of material risk takers will be intimately linked to short and long term performance of the Bank, the assessment of which will be deferred. One could even assume that Banks will be turned into lean mean performance oriented machines- with a conscience. To quote from the rulebook again (which applies to MRT and AP):
    • “(a) A substantial proportion of remuneration must be variable and paid on the basis of ….. measures that adequately measure performance; and
    • (b) The variable proportion of remuneration must increase significantly along with the level of seniority and/or responsibility.
    • (a) At least 40% of the variable remuneration must be payable under deferral arrangements over a period of at least 3 years; and
    • (b) For the CEO, his deputies and the other 5 most highly paid business line employees, at least 60% of the variable remuneration must be deferred for at least 3 years.”
  • The CBB has even been smart enough to ensure that even the deferred remuneration is not all paid out in cash. To quote again from the rulebook:
    • As a minimum, 50% of variable remuneration (including both the deferred and undeferred portions of the variable remuneration) must be awarded in shares or share-linked instruments or where appropriate, other non-cash instruments.
    • The remaining portion …. of the deferred remuneration can be paid as cash remuneration vested over a minimum 3-year period.
    • Awards in shares or share-linked instruments must be subject to a minimum share retention policy of 3 years from the time the shares are awarded.”
  • Approved persons or people in controller positions will be prevented from earning remuneration that is heavily linked to outcome or performance of the Bank. One would assume that the CBB’s intention with this rule is that, it would prevent approved persons’ from being lax or ‘going easy’ on reporting or questioning serious issues, or performing their duties in such a way that would allow persons in power from usurping authority or carrying out questionable transactions. Essentially the days of the ‘star’ bonuses for the Internal auditor or CFO are over. Their remuneration should be linked to achievement of goals and objectives of their departments/roles and should be skewed in favour of fixed and not variable remuneration as is the case for material risk takers.
  • Banks will not have to pay out contractually obligated bonus or remuneration simply because it was agreed in the past, if the performance of the Bank, or as interpreted by me, even of a division is negative or has resulted in losses, Bonus need not be paid out. To quote from the rulebook again:
    • “Existing contractual payments related to a termination of employment must be re-examined, and kept in place only if there is a clear basis for concluding that they are aligned with long-term value creation and prudent risk-taking. 
    • Remuneration systems must link the size of the bonus pool to the overall performance of the bank.
    • Subdued or negative financial performance of the bank should generally lead to a considerable contraction of the bank’s total variable remuneration, taking into account both current remuneration and reductions in payouts of amounts previously earned, including through malus and clawback arrangements.
    • Recognition of staff who have achieved their targets or better, may take place by way of deferred compensation, which may be paid once the bank’s performance improves.”

The modifications to the rulebook require various activities such as approval of remuneration schemes by Board Remuneration Committee, shareholders, External auditor certification of compliance with schemes etc. However I have not sought to highlight these requirements of the modifications to the rulebook in this article.

If you as a reader are an employee with a Bank, this probably means its time to review your employment contract and assess how it will change and how your remuneration may also change.

For a Bank I believe this maybe the time to ignite and ensure conversation on the changes that will have to come through by July 2014. Most Banks I assume would have already appointed consultants to revisit and update their remuneration framework, others have set up internal committees to discuss the issues and ensure policies and procedures and contracts are updated in house.

The times of leaning back and enjoying a bonus (as in the armchairs shown above) is changing …. One waits to see the effect of implementation of these rules on the Banking sector in Bahrain. Doomsday soothsayers would predict that it could lead to choking of the sector in Bahrain, others would predict that it would lead to exit of ‘shortsighted high-risk-taker Bankers’ from Bahrain – which is good for the sector..

I remain hopeful.

 

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The CEO cum Chairman – Best Practice?

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As a young student of Chartered Accountancy in India I was once asked to present on Corporate Governance at the local chapter of the Institute. It was my first introduction to the subject/topic and I have been fascinated by it ever since. At the time, one of the key reports or publications on the topic was the Cadbury report of 1992- a report issued by a Committee chaired by Sir Adrian Cadbury, which was in response to major corporate scandals in the UK at the time.

One of the key recommendations of the report was a separation of the roles of the Chairman and CEO. Over the years, various Codes of Corporate Governance (including Bahrain’s) have advocated and recommended the need for splitting the roles of Chairman of the Board and Chief Executive Officer (CEO):

The UK Corporate Governance Code of 2010 (also known as the ‘Combined Code’) under Division of responsibilities Paragraph/section A2.1 includes as follows: ” The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.”

The Corporate Governance Code of the Kingdom of Bahrain under Principle 1, paragraph/section 1.3 recommends as follows ” The chairman of the board should be an independent director and in any event should not be the same person as the CEO, so that there will be an appropriate balance of power and greater capacity of the board for independent decision making.

The HC module para/section 1.4.7 & 1.4.8 , Volume 2 (as applicable to Islamic Banks) of the Central Bank of Bahrain rulebook also contains the following and is quite specific on the issue of division between executive and non executive roles in a Bank: ” The Chairman and/or Deputy Chairman must not be the same person as the Chief Executive Officer.The Chairman must not be an Executive Director.” A similar provision is contained in the rulebook applicable to conventional banks.

While leading and conducting Corporate Governance reviews and consulting engagements at one of the leading practice leaders in Corporate Governance in Bahrain, I was sometimes asked the question ‘what is the international best practice on CEOs also being Board Chairman?’

A reading of the above Codes, rulebooks etc. leads one to a conclusion that experts and professionals around the globe advocate the need for separation of these two roles. Considering how long these ideas have been around, one would think that leading Banks and institutions, organisations and companies worldwide would have already implemented this key corporate governance recommendation.

However the reality is quite far from the truth…

Given below is list of some major Banks and Companies whose CEOs are also their Chairmen/women:

Goldman Sachs: Lloyd Blankfein

JP Morgan Chase: Jamie Dimon

Xerox: Ursula Burns

GE: Jeffrey R. Immelt

Gap Inc: Glenn Murphy

As can be seen above, a large number of large international Banks and MNCs still have the same persons leading both their companies and their Boards.

The main reasons advocated for separation of these roles are situations concerning Board review and approval of management compensation, Board review of CEO and Senior Management performance and, ensuring that a Company is being run in line with the mandate and best interests of the shareholders. In any Board deliberation on management compensation or performance of the senior management, a CEO cum Chairman would be in a ‘conflict’ situation. Being a Chairman, he/she could also influence the Board in which direction to vote. Whereas it is expected that an independent Director Chairman/woman would primarily have the interests of the shareholders at heart when it comes to deciding or discussing on the operations of a Company.

A look at major headlines across business news portals throws up many indications of stakeholders/shareholders asking for separation of this role. Recently Jamie Dimon faced requests for splitting of the roles at JP Morgan, though eventually shareholders approved him continuing with the dual role.

It was also heartening to note the way in which a similar issue at Goldman Sachs was resolved when a major advisor to Union Pension funds (with $250billion of assets-CTW Investment Group) pushed for splitting of the roles at the Investment Bank. The issue was resolved with one of the lead Directors being given new powers such as setting Board agendas and writing annual letters to the shareholders.

Also noteworthy are the cases of Chesapeake Energy and Avon shareholder activists succeeding in stripping their CEOs of the Chairman/woman role (or as in the case of Andrea Jung for Avon, vice versa)

I would also argue that good CEOs need to be in a position to influence their Boards if they are to take an entity from where it is, to achieve much loftier goals and strategies. Good CEOs should be Drivers.

A ‘Chairman CEO’ is just one of the eight or nine Directors (typical Board size) on a Board. Therefore it cannot be assumed in all situations he/she would be allowed to hijack a Board’s agenda and actions. Different Board sub-committees (with independent Directors) can also balance out the undue effect and influence of a ‘CEO Chairman’.

It can be seen from the above that ‘one size doesn’t fit all’.

So if you ask me ‘what is the best practice?’ I would say that I definitely endorse the view requiring separation of the roles. I would also say that Europe seems to be much ahead of the US in practicing this key corporate governance best practice. Finally I would say that ‘one size doesn’t fit all” provided appropriate mitigating controls as in the case of Goldman Sachs above, are established.

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Investment Banks Strategy, the strategy of ‘do nothing’?

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As a child one learns about animals that store up food before winter and then go into long deep sleep or periods of inactivity while living off their stored food reserves during the winter months.

As a Manager in the Risk Consulting division of one of ‘Big 4’ in Bahrain one comes across many types of Banks. There are the Banks that are busy all year round and there are those that choose to do absolutely nothing during recession years other than conserve capital. The region as a whole has been going through a deep recession and Banks in the region also took a big pounding due to their exposure to predominantly long and medium term real estate assets and projects. Many say that we are looking at the slow upswing of the curve in the long climb from recession. News reports tend to suggest that Investment Banks have started to do deals and have started looking at ventures and businesses for purchase in MENA, Europe etc.

However there is the breed of Banks that took a decision to not touch a single deal during the deep recession years. They tended to focus on ‘rolling’ of short term money market deals and nothing else. Due to depressed asset values, exits could not also be processed and hence ‘asset-management’ and ‘value- extraction’ were what Banks appeared to be focusing on, with an allergy towards further capital injections and loans to existing projects. While this was perfectly justifiable for Banks with little liquidity or mired in projects with significant unexpected stumbling blocks, a question needs to be asked as whether this ‘hibernation’ strategy was in the best interest for all stakeholders of the Banks who had reasonable available funds for investment.

Now that it appears that the economy is on the upswing, I start to wonder whether the concept of hibernation works for Banks. Was this strategy that was followed by some of these Banks the right one?

A review of financial figures and deal activity that are published in the paper does seem to suggest that some of them came away unscathed in the crisis as they maintained capital without any further exposures. They pared down staff to the most essential only. Placement, Investments, Operations, Corporate Communication and HR departments experienced the bulk of termination with numbers being pared down to the absolute minimum.

Stakeholders such as shareholders suffered the most. Shareholders had to stretch (and still are forced to) their patience razor thin. The question is, while the Bank survived and some employees retained their jobs, was this the best use of capital for all concerned? Have the economies in which these Banks are registered ultimately benefited?

Shareholder and customer activism in the region is almost non-existent (which is the subject of another blog post) as opposed to the situation in the United States, Europe and other regions such as India etc.  This allowed Banks to take the strategy of ‘hibernation’.  In regions such US, Japan, we see shareholder activists such as Daniel Loeb, Carl Icahn target Sony, Yahoo and others asking them to merge, split etc. as they are not performing.

On the other side it also appears that the relatively active Banks who continued looking at deals actively during recession years and did not shed their placement staff completely, were able to return much quicker to the markets and new customers at the first hint of return of investor confidence.

It seems they may have the last laugh as shareholders are compensated with dividends and employees with bonuses at the end of 2013.

One waits to watch whose strategy was better, those who hibernated or those were active…Two to three years from now the picture will be clear.

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