Feature

Europe's Balkan Failure

The U.S. vice president's trip is evidence of a lack of European leadership.

Something is terribly wrong with Joe Biden visiting the Balkans next week. It isn't his expertise that is at issue. Few Americans understand the region better than Biden, who had the temerity to call Slobodan Milosevic, the late Serbian dictator, a war criminal, to his face. The problem is that a visit from the vice president of the United States is even needed nine years after Milosevic lost power, a decade after NATO intervened in Kosovo, and 14 years after determined U.S. diplomacy ended the war in Bosnia.

Sadly, Biden's visit to Serbia, Kosovo, and, most especially, Bosnia, is all too necessary. The reason is simple: Europe is still not up to resolving its own security problems. Brussels is indifferent at best, and divided at worst, when it comes to the pressing issues in the Balkans. Five EU states still do not recognize Kosovo. The European Union lacks a viable policy toward Bosnia, leaving Washington to lobby most consistently for the steps that would bring the country into the EU.

By default, U.S. leadership remains indispensable in the region. Fortunately, it is quite welcome. Biden will get a warm reception in all three countries, including from Serbia's leaders, who are eager to open a new chapter in relations with the United States.

But the challenges Biden will face are serious and complex. The most acute is Bosnia, a country whose chronic ethnic divisions have defied one of the most intensive, multilateral nation-building efforts ever attempted. Last year, for the first time since the war ended, there was anxious worry in Sarajevo about renewed conflict. Even if the parties never pick up arms again, Bosnia risks permanent stagnation, a quite plausible scenario that would put the substantial American investment -- and continuing American interests -- in Bosnia at risk. In the words of a former senior Bosnian official, without swift reform the country is doomed to become an economic colony of its neighbors, supplying cheap labor from its chronically underperforming economy. Instead of an inevitable EU member, Bosnia is more likely to remain an unwelcome, dysfunctional and divided country, with an aggrieved Bosniak (Muslim) plurality, a frustrated, increasingly defensive Serb entity, and an anxious, existentially threatened Croat population.

Unlike its predecessor, the Obama administration is attuned to the need to quickly get a handle on the situation in Bosnia. All three parties still look to Washington for leadership. The question is: How can the United States maximize its influence before ceding to the EU sole control of international supervision in the country? There are two options. The first is to to simply get Bosnia through to the 2010 elections without further slippage. But the United States will still be saddled with the problem of what to about Bosnia once Brussels takes over and U.S. influence is diminished. It is unlikely that next year's elections -- the country's tenth -- will produce true moderates or transform relationships among divided Serbs, Croats, and Bosniaks. Once the country enters its election cycle early in 2010, politics will again revolve around defending parochial ethnic interests -- squelching any opportunity for productive dialogue. Washington faces the risk of being sidelined while Bosnia continues to languish under ineffective European stewardship.

The second and better option is to finally fix the core problem in Bosnia: the unresolved relationship between Republika Srpska (RS), the Serb entity that emerged from the war, and the central state that Serbs see as Muslim dominated. This means opening up the constitution to fundamental change, something the Serbs are reluctant to do. They understand that any move to strengthen the central government will necessarily weaken Republika Srpska. Getting the Serbs and their Bosniak and Croat counterparts to negotiate seriously on the constitution will require a game-changer, something that will reward cooperation and penalize intransigence.

That game-changer is accelerated NATO membership. Traditionally, as in the Baltics, NATO offers the ultimate protection against external threats; in divided Balkan states like Bosnia (and Macedonia), NATO represents a guarantee of internal cohesion. This is as important for Serbs, whose overriding objective is to preserve their entity, Republika Srpska, as it is for Bosniaks, whose overriding objective, shared by many Croats, is to preserve the integrity of the state. In short, NATO membership both protects Republika Srpska and prevents it from seceding. Instead of holding out for the next round (of fighting, negotiation or attempted secession), the parties will proceed from a platform of permanence. In the words of the leader of a prominent Bosnian party, NATO membership takes fear out of the equation. And by doing so, the prospects for reaching a compromise on difficult constitutional issues would be dramatically improved.

Unlike EU membership, accession to NATO is something that Bosnia can achieve in the near term, even by the next alliance summit at the end of 2010, given intensified support. To be sure, neither a membership action plan nor full membership will be given for free; Bosnia parties will have to do their part, including making substantial reform of the constitution, which locks the parties in a paralyzing, zero-sum relationship. Only the tangible promise of fixed-date membership will goad them to compromise - not the vague, passive hope of eventually crossing an open door.

To skeptics, RS Prime Minister Milorad Dodik's recent call for Serb troops to pull out from Bosnia's participation in NATO exercises in Georgia offers proof that Banja Luka has no serious interest in joining the alliance. Dodik's ploy was indeed a grave blow - but against the authority of the state of Bosnia-Herzegovina much more than against NATO. His decision was derided by other Serb parties. Even the Serb member of Bosnia's presidency, who comes from the same party as Dodik, did not defend his position. Rather than expect EU supervision and the possibility of eventual EU membership to produce evolution in attitudes, it is imperative to present the parties with a serious choice now: NATO membership and a secure, normal country - or permanent dysfunction and insecurity. In the unlikely event that Dodik rejects the offer, it will at least elicit clarity about his true intentions.

NATO membership has been the way-station to the EU for every Eastern European member of the union. Accelerating NATO membership will boost Bosnia's EU prospects, spurring Brussels to energize its approach. And once Bosnia -- with Republika Srpska intact -- joins NATO, the nascent debate in Serbia on joining the alliance will be transformed. No longer will virulent nationalists in Belgrade be able to sustain the argument that NATO membership and Serb security are incompatible. And as Serbia moves closer to both NATO and the EU, rapprochement with Kosovo is inevitable.

When Biden visits Serbia and Kosovo, he will need to cite the violent confrontation that occurred last week between Serbs and Albanians in the Serb-controlled north of the fledgling Republic of Kosovo. (In general, warnings of calamity about Kosovo's year-old independence have not come to pass. Serbia has taken its opposition to independence to the courts. While Belgrade awaits its day in the International Court of Justice, Pristina continues to slowly accumulate international recognition.) Unlike in Bosnia, the key in both Kosovo and Serbia is to promote internal democratic processes and cooperation with international actors, not reach for a dramatic breakthrough just yet. Washington should support the genuine desire in each country to join Euro-Atlantic institutions, a development that will foster accommodation.

Until Europe finally shows the will and capability to deal with its troublesome corner, U.S. leadership will remain indispensable. And so will more visits by Vice President Biden and his colleagues.

Feature

Seven Questions: Colin Melvin

One of the world's most influential investors says that changing behavior on Wall Street will take more than regulation.

The global financial crisis has wiped out billions in pension schemes and retirement savings. But Colin Melvin, CEO of Hermes Equity Ownership Services Ltd., is optimistic about the future of the $100 billion-plus under his advice. Melvin is part of an emerging class of investors who look to change, improve, and remold the companies they invest in -- boosting, they argue, the firms' value and competitiveness in the long run. The model has gained particular attention after the financial crisis brought to bear the short-term risk taking that had come to characterize Wall Street. Now, investors from New York to London are looking for new models, and Melvin's is one they've found. Foreign Policy's Elizabeth Dickinson sought Melvin's insight on investment strategy, his reaction to recent G-20 actions to remold the global financial architecture, and the future landscape of the financial industry.

Foreign Policy: Wall Street's management culture has been particularly demonized for its role in provoking the the global financial crisis. What's your take? What were the fundamental problems with the financial world, exemplified by Wall Street, that led to the present downturn?

Colin Melvin: I think there was a lack of accountability of quoted financial services companies -- public companies -- to their ultimate owners, the shareholders. Another factor at play is the culture within Wall Street and the city of London, which focuses on short-term matters and returns. You have a situation where the link between the company and the end owner is mediated by Wall Street. And Wall Street is incentivized to trade rather than to own the asset. [Blame for the crisis] isn't limited to the action or inaction of funds, but that's a big part of it.

FP: Your firm, Hermes, takes a longer term view of managing assets. How does that strategy differ from the typical Wall Street approach? What are the benefits?

CM: Hermes is owned by the British Telecom pension scheme, the country's largest. That gives us a much longer horizon since a pension fund's horizon tends to be 15 to 20 years or more. We also though understand that it's not possible to be a good long-term owner of a company simply to trade the shares.

Hermes's Equity Ownership Services doesn't actually make decision on buying and selling shares; we represent funds as owners of companies. My team decides whether to engage or disengage with companies. The kinds of discussions that we have with companies focus on the strategy in the longer term. We assess capital structure, we look at risk management -- particularly from a long-term perspective including social, environmental and ethical risks, and we look at governance, broadly defined as the quality of the board, the nominations process for the board, the way that directors are paid, incentives. We focus on those factors we believe are linked to companies' long-term profitability.

FP: You've had success this year when most other investors have taken a hit in the market. Do you attribute this to your different approach?

CM: We're attracting a huge amount of interest. Banks have failed so spectacularly, and those banks had owners -- they were you and me. It seems like somehow that ownership link has been broken, and we were unable to fix it. Now, large public funds are coming under pressure from governments to be better owners of companies. And that's leading people to our door.

FP: The criticism of an activist approach to investing in companies is that outsiders might miss the insights that managers of companies themselves have. In essence, outsiders might make changes that appear to them as appropriate, but might in fact be the opposite. What do you make of this critique?

CM: We don't seek to micromanage the companies; our goal is hold the management and the board to account for their performance. If there's no problem, if the company's doing well, they won't hear from us. It's just when there's a problem that we'll raise it.

Of course, it would be exceedingly disappointing if I knew more about the operations of a company than the board and the directors and senior management. However, we do additional research, and we commission people to help us understand companies from a long-term approach, and that's quite unusual. Most people involved in the financial-services industry look at the short-term financials. If you were a CEO of a large company in the United States, your experience of talking to Wall Street would be pretty disappointing. You'd be challenged about next quarter's earnings; you wouldn't be asked about those things you're thinking about day to day -- the people in the business, long-term strategy. Wall Street isn't interested in that. We are [interested], and we've assembled a team of people here who are able to challenge companies on those particular issues. So it's a question of business knowledge and understanding, which again is very unusual in the financial-services industry.

FP: What do you make of the response to the financial crisis -- particularly looking at the G-20 summit last month? What did they do right, and where did they fall short?

CM: The do right bit got me there. I think it's encouraging that people got together to consider solutions. The worrying bit is that the big idea appeared to be some sort of coordinated regulation. We won't solve this problem through regulation. Experience has shown that if you seek to prescribe behavior through regulation, financial markets will find a way around it. What we're talking about is behavior. It's culture. I don't think you can solve that by regulating. What we can do at a regulatory level -- and there was an optimistic note in the G-20 on this -- is that we can regulate to produce open, fair, and transparent markets.

FP: What are some of the short-term things that could or should be done to restart the markets?

CM: There are regulations in some markets that limit the extent to which shareholders can work together. In some cases, this is sensible, but for longer-term discussions, clearly it's in everyone's interests that the shareholders are able to work together to talk to companies. Otherwise, you get multiplicities of replicating, low-level conversations. Far better if they get together and share resources. That's better for the companies they're talking to as well, because the conversations are of a higher value.

Thinking a little more creatively, we might look to the definition of fiduciary duty. In many markets, particularly common law markets, there's a duty of trust, fiduciary trust, for example on the trustees of the pension fund to work to the benefit of the beneficiaries. So if you're a beneficiary of a pension scheme, there are people to whom your wealth is entrusted, and they have a duty to look after your interests. That duty is interpreted usually as adding value to the funds in the short term. Clearly, that's a problem. So why don't we look to this definition? Why doesn't the U.S. or the UK come out with some sort of statement: This is what we mean by [fiduciary duty]? A legal opinion would assist trustees in taking a longer term view of their role.

FP: Five, 10 years from now, what will the financial industry look like?

CM: We have a very important moment to implement this [investment model]. If we have another sustained bull run, then much of this will be forgotten and [London] and Wall Street will have a great time spending the assets of their clients. Perhaps that's a little strong, but you know what I mean.

Over the last 10 to 15 years, [London and Wall Street] have been able to overtrade because they make money from transactions -- the more transactions there are, the more money they make. I hope that will change, and that the clients of the investment industry and the end owners will understand and appreciate the self-interestedness of being better owners of the assets, and being more attentive clients. If companies are more accountable, they will perform better. And if funds are invested in a more sustainable way, that's good for all our wealth.

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This article reflects two corrections: We originally stated that Colin Melvin manages a fund of $100 billion. In fact, this is the amount under his advice. Nor does Colin Melvin classify his model as activist investing. We regret the error.