Rebuilding trust in financial services
Roger W. Ferguson Jr., president and CEO of financial services company TIAA-CREF, called for a series of changes in the way corporations are governed as a key step in restoring trust in the financial services industry when he delivered the 26th Durland Lecture on campus Oct. 17. The Durland Lecture is Johnson’s most prestigious speaking event.
Ferguson, a former vice chairman of the U.S. Federal Reserve, said trust in financial companies has plummeted in the aftermath of the recession and the continuing scandals — from insider trading on Wall Street to Libor rate fixing in London — that have marred the industry.
“Against that backdrop, financial services has become one of the least trusted industries in the world,” Ferguson said. For the third consecutive year, he noted, banks and financial services firms placed last in the 2013 Edelman Trust Barometer, a global ranking of trust in key institutions. It is critical that these attitudes be reversed because of the social role finance plays in people’s lives: providing mortgages, life insurance, and retirement plans.
“Finance is really one of those tools and mechanisms that allow us to achieve whatever our dreams and aspirations may be,” said Ferguson, who has led TIAA-CREF since 2008.
Since weaknesses in corporate governance have been held responsible in part for the 2008 financial crisis, Ferguson said the industry needs to change the way it operates. First of all, he said, corporate boards need to ensure that management is making prudent decisions that focus on long-term value for shareholders, rather than short-term profits. “Leaders of financial services companies need to promote long-term thinking, discipline, and sound risk management,” he said.
“We all recognize that there will be failures even in the best-managed company,” Ferguson said. “The secret for management is to recognize failures when they occur, learn from those failures, but recognize the distinction between failures that occur through past poor judgment versus malfeasance, and make sure that malfeasance is promptly punished.”
Speaking about retirement planning, Ferguson called for improving financial literacy, starting with parents teaching their children about financial management, and including required high school courses on the topic. Although Americans now have a longer life expectancy (76 for men and 81 for women), they are not saving enough to support themselves in retirement, he said.
Surveys show that only 57 percent of U.S. workers are currently saving for their retirement, while 28 percent reported they had less than $1,000 in savings. “It’s not surprising that Americans’ measured confidence in retirement and their security around retirement has gone way down,” Ferguson said.
Encouraging young people to save for retirement can be achieved by creating programs in which employees are automatically enrolled in a savings plan, Ferguson said, and by changing the current “opt-in” system to one that uses an “opt-out” for savings.
Ferguson encouraged students in the audience to consider finance as a career option, despite today’s negative perception of the industry. “We in the industry are doing what we should be doing,” he said. “I believe we need to pick up the pace, when it comes to corporate governance, but none of this will work well if we do not attract and retain the attention and support of students and faculty such as you.”