The leaders of 20 of the world's biggest economies committed to a laundry list of executive pay reforms for financial firms, including limiting bonuses to a portion of total net revenues and linking them tightly to share prices. But don't count on sweeping mandates from regulators just yet.
Wrapping up a daylong meeting in Pittsburgh, the Group of 20 issued a lengthy statement that, in part, called on member countries and financial firms to end multiyear guaranteed bonuses; pay out "a significant portion" of variable pay over time, tying it to performance and making it vulnerable to forfeit under various conditions; and disclose more information about corporate pay policies.
It also called on member countries to give regulators the ability to review pay at financial firms and impose higher capital requirements or other "corrective measures" where compensation practices increase the risk to a firm or financial system. They should also be able to change pay practices when firms fail or the government must intervene.
But that could prove tough sailing in the U.S., where regulators currently only have real control over the compensation practices of banks, notes Brian Gardner, a financial policy analyst for Keefe, Bruyette & Woods (KBW). Unless new legislation is passed, that leaves out hedge funds, insurance companies, private equity funds, and unregulated lenders—which could begin poaching top employees from banks that are subject to the restrictions, putting the banks at a competitive disadvantage. "It's going to pose some difficult challenges for the banking industry," Gardner says.
Many Goals, Few Enforcement Mechanisms Much of the rest of the 23-page, densely worded "Leaders Statement" issued by the G-20 reads not so much as the outcome of one meeting but as an ambitious and potentially far-reaching agenda for many years to come.
It is long on deadlines but short on specifics, most of which it leaves to the finance ministers and central bankers of member countries and to global institutions such as the International Monetary Fund and the newly expanded Financial Stability Board. It is also short on enforcement mechanisms, largely leaving compliance in the hands of "name and shame" reports calling out those countries that fail to measure up.
But the world leaders who took part hailed the meeting as a success, calling the proposals significant steps toward vital goals, and the statement itself congratulated the member countries for successfully staving off a more serious financial collapse through their actions since the crisis began last year. Still, they said too many people remain without work and emphasized that the global financial system remains in need of repair.
"There is much more work to be done," President Barack Obama said at a post-summit press conference. "But we leave here today more confident and more united in the common effort of advancing security and prosperity for all of our people."
At its heart, the document focuses on the effort to reform global financial regulation, which also took center stage at the group's pivotal April meeting in London—and in particular, reining in executive compensation at financial firms. It also emphasizes a sweeping new attempt to increase domestic consumption in countries like China and to reduce borrowing in the U.S.
The G-20 leaders also sought to lay the foundation for revamping the governance of the IMF and the World Bank, making progress on climate-change and global energy initiatives, phasing out government subsidies for fossil fuels except for the very poor, forestalling protectionism, and pursuing an international development agenda that has previously been the purview of the richest countries.
The statement also marks the group's ascendancy over older, more exclusive multinational gatherings. The G-20 will officially replace the G-8—dominated by the U.S. and Europe—as a forum for economic policy coordination, leaving the smaller organization to focus on noneconomic foreign affairs.
Going Beyond Basel II On regulatory reform, the G-20 statement covers much of the same ground as previous efforts, and echoes proposals made by member countries' finance ministers in London earlier in the month. It highlights a key U.S. priority, higher capital requirements for financial firms, as well as the executive pay changes championed by French President Nicolas Sarkozy. But in both cases, it kicks decisions on most of the specifics into the future.
Finance ministers and central bankers for the member countries must agree on new capital standards by the end of 2010, with the goal of phasing them in through the end of 2012. The statement says they should include generally higher minimums, countercyclical capital cushions—which grow in good times and are allowed to shrink in bad times—and provisions for additional capital at institutions holding risky off-balance-sheet assets. Following the lead of U.S. regulators, the document calls for an overall, but as-yet unspecified, leverage ratio limiting a bank's total debt relative to assets, regardless of the quality of those assets. Similarly, all G-20 members are to adopt an earlier standard—called the Basel II Capital Framework and largely adopted by Europeans—by 2011.
The Financial Stability Board, made up of central bankers and market and banking regulators, is to monitor progress on pay and report back to the G-20 by March. In remarks to reporters on Sept. 24, Treasury Secretary Timothy Geithner called the group a necessary fourth leg for the global financial infrastructure created after World War II, which includes the World Bank, the International Monetary Fund, and what is now the World Trade Organization.
Another major U.S. priority—rebalancing global consumption—similarly relies on more detailed proposals drafted in coming months and years by the G-20's finance ministers, and on monitoring by the IMF. Without naming names, the statement promises that countries with surpluses—China, for example—will work to increase domestic consumption, while those with large debts—the U.S., primarily—will work to reduce them. The IMF is charged with helping determine whether actions taken by individual countries are "collectively consistent" with the G-20's global goals.
Across multiple issues addressed by the G-20 statement, "the IMF has become a more significant player in the international financial system," says Gardner, the Keefe Bruyette & Woods analyst. "There's a lot being asked of the IMF."
Can the IMF Force Compliance? In effect, the IMF and, to some degree, the FSB will be in charge of reporting on how well G-20 countries comply with the goals established by the group. How well that works remains to be seen, but history doesn't offer a lot of hope, says Morris Goldstein, a senior fellow at the Peterson Institute for International Economics.
"This peer-group effort is really the triumph of hope over experience so far," Goldstein said. "Peer-group pressure has been tried a lot over the past decade or so, and it hasn't worked very well," he added. The IMF "has really been reluctant to call countries on the carpet for not meeting their responsibilities."
That's especially true on the subject of exchange rates, which many see as critical to the G-20's goal of rebalancing global consumption. But to reduce U.S. consumption, the country will need to export more—which is hard to do unless policymakers allow the dollar to weaken. Meantime, China pegs its own currency to the dollar, meaning its exports become no more expensive to Americans when the dollar declines.
"If the dollar declines further, some other currencies have to go up—and they have to allow them to go up," Goldstein says. And China has shown little interest in letting its currency appreciate.
Global leaders tend to downplay the tension "so as not to have disagreement," Goldstein says. "But they need to do a lot better on currency if they're going to make this system work."
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