What were they thinking? Reports from interviews with senior finance executives in the lead-up to the GFC

Abstract

The impact of the Global Financial Crisis (GFC) on capital markets has demonstrated that corporate stakeholders (including shareholders, lenders and independent board members) need to be far more aware of the decision-making processes followed by corporate executives. Gaining insight into these processes is difficult at any time, yet attempting to uncover (in any meaningful sense) how executives reached critical decisions in the lead-up to the GFC is almost impossible in hindsight. This article overcomes this problem in that it reports the results of interviews conducted with senior Australian finance executives in the lead-up to the GFC. These interviews were designed to elicit granular explanations for the rationale underpinning major corporate finance decisions, and their timing and subjects provide a unique ex ante profile of the perceptions of senior executives in large firms as the GFC developed. The most significant finding is that the corporate executives shared a decision framework with core features similar to those of financiers that are thought to have contributed to the GFC, particularly permanently increasing asset prices, easy liquidity and safety in powerful risk management techniques. Our findings have strong implications for independent board members who – at least in hindsight – failed to identify and mitigate risks from systemic reliance on appreciating markets and the inevitability of mean reversion.

Acknowledgements

The authors acknowledge financial support from the Accounting and Finance Association of Australia and New Zealand. We are very grateful to the impressive group of managers who generously gave their time and skill in completing the surveys and taking part in interviews. We appreciate insightful comments from numerous colleagues, especially Rob Brown, Stephen Brown, Kevin Davis and participants in research seminars at the University of Amsterdam and the University of Melbourne. The usual disclaimer applies.