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Edited by Roland Schatz and Liv Watson Trust Meltdown II Everybody in the financial sector expected 2009 to be rough; the head- lines following the Lehman collapse were frank. But they expected the media would calm down in 2010 as better results proved that the finance sector was no longer loosing money. Now, in 2011 the picture is clear: Yes, the financial results presented in 2010 were much better than expected. But yet, the headlines remained the same. From a reputational standpoint no recovery has happened as the media on Wall Street and Main Street keep asking the same ques- tions: What have you learned from the crisis? And what was implemented in 2009 and 2010 to make sure another Meltdown will not happen? The first TRUST MELTDOWN report made it clear that the banking industry had not caught a mere cold, so much as it had been hit by a fundamental crisis that raised questions regarding its license to operate. Making money out of money was no longer a convincing story for the opinion-leading media. The bottom line in 2009: the media reputation of the financial sector had gone south, so much so, that it was ranked worse than the tobacco industry. Did 2010 help it to improve? No, the media reputation actually worsened Frank Brettschneider even while the pure economic figures improved. Obviously, Wall Street‘s Christian Dreyer Anikar M. Haseloff hope in this regard turned out to be counterproductive. And hiding away Jake Leon was no solution. Neither was trying to play the blame game that pretend- Michael P. Krzus ed that subprime had been a natural catastrophe. The only nature to be Oliver C. Oehri blamed here is the nature of mankind; it is human nature to do less good Maciej Piechocki Kurt Ramin when no control mechanisms are in place. Cornelis Reiman Olivier Servais Henry Schäfer Matthias Vollbracht Robert Zoellick TRUST MELTDOWN II highlights the trends and offers solutions on how to regain trust, starting with no longer hiding from the media and working to improve accounting standards. Without transparency, the industry‘s li- cense to operate is at risk. Trust Meltdown II Trust ISBN 978-3-906501-19-2 9.80 SFR-US$-% Beirut Berlin Boston London New York Ostrava Pretoria St. Petersburg Tianjin Windhoek Zurich Trust-Cover-2011.indd 1 21.01.2011 16:25:14 Uhr Trust Meltdown II Edited by Roland Schatz & Liv A. Watson INNOVATIO Publishing Ltd. Beirut Boston Pretoria Tianjin Zurich | 1 Cover Artwork: Malte Lück Special thanks to and Dr. Christian Kolmer and Racheline Maltese for editing this volume Copyright © 2011 INNOVATIO Publishing Ltd. ISBN: 978-3-906501-19-2 2 | Content: Introduction by Roland Schatz 5 1. Reputation: The Trust Meltdown Continues 1.1. The Financial Industry Continues to Ignore the Need for Reliable Answers by Roland Schatz 12 1.2. Two Years After Lehmann: Reputation Remains a First-Rate Risk for Banks by Matthias Vollbracht 24 1.3. Only he Who is Understood Can Convince. The Comprehensibility of Bank Communications by Prof. Dr. Frank Brettschneider and Dr. Anikar M. Haseloff 51 2. Accounting: Transparency is Key to Regain Trust 2.1. The Role of IFRSs and XBRL in Enhancing Transparency in Financial Reporting by Olivier Servais, Maciej Piechocki 62 2.2. Natural Capital: The Finance Sector & Financial Reporting – Catalysing Action? by Kurt Ramin and Cornelis Reiman 67 2.3. Integrated Reporting – A Means for Corporations to Become Socially Responsible and Accountable 77 by Liv Apneseth Watson 2.4.The Case for Integrated Reporting by Michael P. Krzus 82 3. Governance: The Rules for Regaining Trust 3.1. Trust, where Trust is Due by Christian Dreyer CFA 893.2. Microfinance Investment Funds – Analysis of Portfolio Impact before and after the Financial Crisis by Henry Schäfer and Oliver C. Oehri 97 3.3. Responding to Current Challenges: The Economics of Shared Societies by The Club de Madrid 112 3.4.Synopsis of Report on Deterring Financial Reporting Fraud – A Platform for Action by the Center for Audit Quality 120 3.5.The G20 Must Look Beyond Bretton Woods II by Robert Zoellick 144 Contributors 147 | 3 4 | Introduction by Roland Schatz Everybody in the financial sector Did 2010 help it to improve? No, the expected 2009 to be rough; the head- media reputation actually worsened lines following the Lehman collapse even while the pure economic figures were frank. But, at the same time, improved. Obviously, Wall Street‘s the chief executives of the finance hope in this regard turned out to be sector speculated the media would counterproductive. And hiding away calm down in 2010 as better results was no solution. Neither was trying proved that Wall Street was no lon- to play the blame game that pre- ger losing money. tended that ‘sub-prime’ had been a natural catastrophe. The only nature Now, in 2011, the picture is clear: yes, to be blamed here is the nature of the financial results presented in 2010 mankind; it is human nature to do were much better than expected. Yet less good when no control mecha- the headlines remained the same. nisms are in place. From a reputational standpoint there has been no recovery as the media No company can exist for two con- on Wall Street and Main Street keep secutive years reporting that its own asking the same questions: what business, products, and, above all, have you learned from the crisis? And its management are time and again what was implemented in 2009 and associated with massive accusations 2010 to make sure another meltdown from the judiciary, politics and soci- will not happen? ety: correspondingly, the ratings re- corded by Interbrand for selected fi- The first TRUST MELTDOWN report made nancial institutions all point towards it clear that the banking industry had the negative. This development was not caught a mere cold, as much as it particularly shocking for Citibank had been hit by a fundamental crisis or UBS which, after the halving of that raised questions regarding its li- their brand value in 2009, now also cense to operate. Making money out had to suffer a further loss of 13% in of money was no longer a convincing 2010. Others such as HSBC or Morgan story for the opinion-leading media. Stanley had, in particular, learnt their The bottom line in 2009: the media lessons from their communication reputation of the finance sector mistakes in 2008 and 2009, and in has gone south, so much so, that it 2010 were rewarded with a balanced was ranked worse than the tobacco media image. This also paid off in industry. the brand value index: although the | 5 Introduction Chart 1: Global Brand Value 2009 - 2010 Brand value 20% 0% +10% +8% +7% -20% -40% 2009/2010 change: -13% -13% -60% HSBC Morgan Stanley AMEX Citi UBS 2008-2009 change Source: Interbrand, Best Global Brands, http://www.interbrand.com/de/best-global- brands/Best-Global-Brands-2010.asp; http://www.interbrand.com/de/best-global-brands/ best-global-brands-2008/best-global-brands-2009.aspx losses from the prior year could not try. Far more fatal for the entire yet be compensated for, the trend industry was the lack of clear com- was at least upwards. munication by the individual banks regarding the repeatedly posed Similarly to the tobacco industry, the questions: banks, with their communication 1. Why did you portray the products behaviour prior to and in particular as being secure when you must after the financial crisis in autumn have and could have known in 2008, manoeuvred themselves into a advance that they did not comply position which made individual dif- with the usual requirements? ferentiation difficult. The fundamen- 2. What have you done to prevent tal loss of reputation became less due this in the future? to the images from the respective hearings in Washington, London or The answers which were given in Berlin in which the banks’ directors 2009 were already then rejected as were optically perceived similarly to unconvincing by the opinion-lead- those accused in the tobacco indus- ing media. The tactic employed by 6 | those responsible of not learning the the criticism doubles: every second lessons from this in the following 12 statement is negative, even though months, and instead convincing the the actual business data were again sceptics through repetition, may have positive in 2010 – from Citi through worked in the 20th century. However, to UBS. The fundamental rejection in the wake of Enron etc., as well as of the financial institutions and their the experiences from the unforget- representatives can clearly no longer table value-destroying machine, be justified by saying that the people the internet bubble, in which the were dissatisfied with their finan- banks also played their part in the cial performance. Goldman Sachs or first instance, it no longer works to Deutsche Bank are earning money replace sound argument with good again but the wording of the head- clothes and expensive appearances. line by the FINANCIAL TIMES on GS “The The chart below spells out the un- bank we love to hate most“ was not changed destructive result: concrete dictated by the mood of just one day. banks and concrete bank directors are, on average, negatively presented This is not just due to the conduct of in the opinion-leading media – but if bank representatives since the bank- the same media mention “banker“ ing crisis. The information on their Chart 2: Individual Banks and the Banking Industry in Comparison, Tone of Coverage 2003-2010 10% 0% -10% -20% -30% -40% Individual banks -50% Individual bankers Banks in general -60% 2003/1 2005/1 2007/1 2009/1 2004/1 2006/1 2008/1 2010/1 Basis: 50,081 reports (at least 5 lines/seconds) in 21/29 German TV and print media | 7 Introduction actual business also did not improve the banks.

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