HBOS FAILURE IS A GREAT OPPORTUNITY FOR REFORM OF FINANCE THEORY AND RISK MANAGEMENT

Professor Atul K. Shah, University of Suffolk

New research just published exposes the reality of big business, power and hubris in the finance industry in Britain. It has vital lessons for the whole world. The largest corporate failure ever in British history is the collapse of HBOS in 2008. The latest figures show losses of over £52 billion and growing, but this excludes the wider economic impact of the egregious growth of HBOS. Founded on a solid and several hundred year old history of prudence and conservatism, both Halifax Building Society and the Bank of Scotland, plummeted in the short space of seven years after their merger. Parliamentary investigations have blamed the leadership and management for this epic failure, but is that the whole story?

Based on several years of forensic research, and the sifting through of hundreds of papers and documents, plus evidence from a famous whistleblower Paul Moore, this objective and independent study of the fiasco uncovers a much wider malaise. Whilst the leadership and the Board were responsible for the mis-management and outright hubris and greed, the auditors and regulators also failed in their critical role to challenge in a timely way. Politicians were captured, and also caught up in the sudden boom in finance which made them look good, albeit temporarily.

Where were the investors in all this? Could they not see the greed and mismanagement? Or did they not want to see, so long as they were being bribed by increasing dividends and share buy-backs? Finance theory has promoted the idea of management incentivisation by share options and bonus contracts which focus on high growth and shareholder value. Risk had been excluded from rewards and short-termism virtually ignored. Egoism, politics and hubris are totally denied by theory. Oh yes, and markets are perfect and efficient, so any fraud will be self-corrected in a timely fashion. This is the religion we teach finance students all over the world, and call it science.

This book is a thorough inter-disciplinary analysis of this fiasco, and shows that ideology was also very responsible for the 2008 crash, and has not gone away, leading us to a new and bigger financial crash. The forward has been written by Ian Fraser, author of the award-winning Shredded, the story of the collapse of RBS. Finance academics and accounting professionals are also called to account, with the audit profession exposed for its deep conflicts and fundamental cracks. Specialisation has reduced inter-disciplinary skills in the academy, and very few people can bring law, accounting, auditing, finance and politics together into one research study and help reveal the lessons to be learnt. Specialisation has also led to a fundamental ethical crisis for modern accounting and finance education, where culture, politics and history are abjectly excluded from the training. As to faith and cultural diversity, there is no space for it, as economics is the faith scientists want you to believe. My research on Ethical Finance shows us a very different way of building a sustainable accounting and finance profession.

‘Professor Shah has produced an unconventional, emotional and invaluable post-mortem of the ethical dimensions of the HBOS scandal. It calls on our business schools to help students cope with the deep moral challenges they are likely to face in an increasingly amoral business world. En-route, he holds up all the more as the exemplar of what is needed. But the whole establishment, is implicated.’ ­

Lord Andrew Phillips, broadcaster and former Chancellor of Essex University

Reading the book will open your eyes to how much reform is needed, and how little is understood by the regulators and the knowledge professionals about the cultural and institutional reform challenge that awaits us. It opens the door to my next book on Reinventing Accounting and Finance Education, published by Routledge and coming out later this year.

Professor Atul K. Shah is based at the University of Suffolk. The Politics of Financial Risk, Audit and Regulation – A Case Study of HBOS, is published by Routledge and available now.