Subjects on the edge: banking and finance

THE IMPACT on businesses of the economic downturn is presenting particular challenges to the region’s universities – and business schools in particular.

Equipping the business leaders of tomorrow with the skills they’ll need is made doubly difficult when the current economic climate remains in a state of flux. And teaching in the area of banking and finance has to continue against the background of considerable political and legislative pressures on this sector.

And some of the region’s leading academics are amongst the most vocal critics of the role of the finance community and the changes need to ‘clean up’ the financial system.

Professor David  Bailey of Coventry University Business School is regarded as one of the most incisive commentators on economics and industrial policy. He has proven as sharp a critic of the new coalition’s approach as he was of Gordon Brown’s stewardship of the economy.

Last month he turned his attention to the role of private equity in the 2006 collapse of MG Rover – a highly symbolic blow to the West Midlands automotive industry whose impact continues to be felt. The lessons learned are particularly pertinent today, against the background of Kraft’s hostile takeover of Cadbury last year.

In a paper jointly written with Dr Ian Clark of Birmingham Business School, Prof Bailey  criticised a BIs report which examined the way the ill-fated Phoenix Consortium had used the private equity business model in the dying days of MG Rover. The BIS report didn’t go far enough to ensure there wouldn’t be a repeat of the mistakes that led to the collapse, said the academics.

Writing in the Cambridge Journal of Regions, Economy and Society, professor Bailey said there had been no progress since the Rover debacle.
 
 He said:  “While the MG Rover case was unusual in the sense that it was not highly leveraged, the financial engineering entered into by the Phoenix consortium was still a classic example of value extraction.
 
“There was little real opposition to, or scrutiny of, the manner in which Phoenix Venture Holdings secured generous financial rewards and secured and ring-fenced MGR assets at historic cost before divesting itself of them at market value.”
 
 Professor Bailey added: “As long as policy elites in government circles support the unregulated PEB Model, there could be more failures like MG Rover and that is why the recommendations made by the BIS inspectors need to be followed up.
 
“Improvements could be made to auditing and reporting standards that would increase transparency in financial statements, and the issue of ‘going concern’ may also need looking at again.
 
“We’re still concerned over the key issue of value extraction by a minority. This needs tackling by securing wider stakeholder oversight of ‘special purpose investment vehicles’ (like Techtronic in the MG Rover case).

The authors call for reforms to the wider financial system. They argue the system is now made up of huge financial entities which can no longer be clearly identified as banks, hedge and private equity funds, re-insurers or credit default swap brokers.
 
Dr Clark said: “Legislative reform is needed to ensure that no British bank (or financial institution which contains a bank) can own, invest in, or sponsor a private equity fund which is unrelated to serving its own customers for its own profit.
 
“This would restrict the trading activity of British banks in off balance sheet instruments, special purpose investment vehicles or securities markets, which, if they result in distress and flight as in the MG Rover case, are today effectively secured by the taxpayer”.

When it comes to teaching the region’s thousands of full and part-time students in business and related disciplines, the tectonic shifts in the global economy simplay can’t be ignored, says Professor Nigel Driffield head  of the Economics and Strategy Group at Aston Business School.
 
 He said “Obviously students are interested in the economic downturn, not just from a macroeconomics perspective, but also from a more general business / management perspective too. I think “explaining” the downturn is relatively easy, simply there are cuts in government spending, and there is less lending. But oUr approach is to analyse how long this may take, to understand the differences and similarities between previous events, and to attempt to project the medium term.
 
Prof Driffield said business schools had an important part to play in equipping organisations to cope with future downturns.

“With bank finance restricted, cuts to business support services and continued inward investment challenges, business schools needed to help organisations and policy maker to answer some fundamental questions,” he said.

“These are: which businesses are a good bet for support, which potential investors are a good bet for capital incentives, what skills will be required and which potential inward investors should we target? These are just examples of how business school provision of programmes are facing up to these problems.
 
Course design and delivery was also changing to take into account the bew economic realities, he said.

There are many examples of more more flexible provision of courses the distance learning MBA  that we are bringing online for example. Equally, we also acknowledge that going forward much higher proportions of our students are going to look to start their own businesses, so developing modules that take people “off site” and into real businesses, either through a well developed placement programme for UG, the more practical problems now undertaken by MBA students, or the development of modules in entrepreneurship and small business are our key feature of our provision.