Building decent societies requires more than productivity miracles. It also requires a good set of checks and balances: execution needs oversight; the interests of marginalised groups must have advocates; and  long-term interests requires guardians. Otherwise things go wrong.

Both the current financial and environmental crises stem from the fact that some groups have been running much faster than others; parts of society outgrew their checks and balances. In practice, what happened was that CEOs ran faster than their boards, investment bankers outran financial regulators and business in general ran faster than politicians.

As a result, established checks and balances were circumvented and many things ended up between the cracks. This is true for risks packaged and resold across borders and between institutions. It is also true for the carbon emissions invisibly rising to the sky.

Unfortunately, the analogy between repackaged mortgages and carbon emissions does not end here. Things that fall between the cracks have an ugly habit of coming back to haunt you. Similarly, pressures that are allowed to build up unmanaged in a system will eventually wreak havoc. This is what has happened to the financial system. It is unfortunately about to happen also with the natural systems, only with a much graver systems breakdown as the consequence.

The question raised by these developments is not a question of the pros and cons of regulation per se. That is yesterday’s question. Rather, the question is whether boards, regulators and ultimately politicians, are good enough. Unfortunately, the answer to that question seems to be No.

Public goods are often served by well functioning markets. But this requires the right balance between sound business models and well designed regulation. When the business models are not sound, then corporate boards need to step in. When the business models are sound but serve only a subset of interests, then the regulators need to step in. Since both business models and markets are always going to be imperfect, corporate boards and regulators always need to be present and continuously respond to new developments. This of course requires that they understand what is happening, have the moral integrity not to bow to incentive schemes and herd mentality, and the guts to take tough decisions.

This has not been the case. The people guarding the stability of the financial system as well as those protecting the global environment have proven not to be up to the task. Often the failure has been at the institutional level – wrong incentives, inability to attract talent, limited mandates, lack of enforcement mechanisms, etc. However, in instances where institutions fail to perform their task, it is up to the people running them to initiate reform.

Contrary to common jargon, the heart of the problems we are currently seeing – both with the financial system and the environment – is, in this sense, a failure of politics, not a failure of business. The financial and environmental crises are both a damning verdict on our ability to innovate and ensure efficiency in the institutions guaranteeing the public interest. For this we need to hold corporate boards, regulators and ultimately politicians responsible. Like in the corporate world, public and democratic institutions require continuous innovation and learning. This has not taken place. In short, in a rapidly shifting world, the people responsible for these institutions have simply not been running fast enough.

Carl Mossfeldt

CEO, Tällberg Advisors