Anticompetitive (?) alumni networks, and more on credit rating agencies
[We were a bit inactive this week; Nico is at a conference in Hong Kong (lucky b...) and I had an important deadline to meet. We have some long and substantive
geeky boring posts on the pipeline that we intended to post this week (on the MasterCard Judgment, on recent cartel case law and on Google), but have been unable to think/write them through properly. In the meanwhile, here's an "easy" post to finish the week off]
A few days ago the Financial Times featured a piece (click here for a podcast) discussing a recent report from the Competition Commission (“CC”) that concludes that the alumni networks of the ”Big 4″ auditing firms (who have a practical joint monopoly over the auditing of publicly traded companies; 99% of the FTSE 100 according to the report) stiffle competition in the business.
According to the CC, 60% of audit committee chairs and 66% of Chief Financial Officers in FTSE 100 companies had previously worked for the Big Four firms. The report states that “it is possible that this familiarity will make them more favourably disposed to the appointment of a Big Four rather than a non-Big-Four firm” and that “it could make them less aware of the quality and experience of the non-Big-Four firms”, thus raising barriers to entry.
The Financial Times’ piece takes a different view. It argues that “alumni networks are not a problem at all – in fact they are a thoroughly good thing. Think about it. If you have worked somewhere, you know what it is like. You know exactly how hard people work, how straight they are, how often they screw up and, above all, whether they are charging a fair price for what they do (…) So an honest thumbs-up from a current employee means quite a lot. But one from a former one means even more. When you leave a company, it is human nature to pretend that the move was a success. That may mean bigging up the new place and littling down (to coin a useful new phrase) the old one. If, in the case of the big four, the alumni are prepared to spend huge amounts of their current employer’s cash on their ex-employer’s services, that suggests that the market is working rather nicely“.
So, is this an unavoidable fact of life or a market failure calling for intervention? Any views?
The truth is that this issue is not confined to the audit world. For good or for bad, there’s a lot of this, for instance, in investment banking, and even in the legal -academic and professional- world too (although the inferior level of concentration in the legal world certainly mitigates the issue to the extent that, if anything, it would be a de minimis concern).
What could actually call for intervention (if true) are the findings in this most interesting report “Bank ratings: what determines their quality” It argues that “rating agencies assign more positive ratings to large banks and to those institutions more likely to provide the rating agency with additional securities rating business (as indicated by private structured credit origination activity). These competitive distortions are economically significant and contribute to perpetuate the existence of ‘too-big-to-fail’ banks”. If interested on finding what could be the legal grounds for antitrust intervention in this sector, you really should read Prof. Petit’s award-winning piece on Credit Rating Agencies, the Sovereign Debt Crisis and Competition Law.
Have a great weekend!