My usual liberal instincts tell me that governments have no place in micro-managing markets: that what companies choose to pay their staff is no business of either politicians or bureaucrats in a democratic society. Such interference is the hallmark of tyrannies and, practically, has been shown not to work very well in the log run, leading to a misallocation of resources and economic activity. Even more to the point, in a world where the residence of individuals and companies can be changed virtually at the flick of a switch, it is a quixotic gesture. Either the individuals the regulations are aimed at will suddenly be employed offshore, or corporate structures will be devised that enable them to stay in situ but to be paid offshore, or the jobs will move to other people in other jurisdictions where the dirigistes hold no sway. As Boris Johnson has identified, the effect on the individuals' earnings is likely to be small but the damage to the business of the City of London, and to the EU economy, may be large.
On the other hand...you can see their point...the interferers, the micromanagers, the bureaucrats the very indirectly elected politicians. They say that such large bonuses encourage individuals to take huge risks with other people's money. When the individuals who may receive the bonuses work for very large banks then the 'other people's money' is the public purse because a big risk that goes wrong must be covered by government intervention to prevent the collapse of the banking system. So the risk takers may not even be risking their jobs. When these risks are so large as to threaten the economic system then, the dirigistes argue, government must act to contain these risks. One way of doing so is to limit the incentives to take risk. Further, they may argue, the normal mechanisms of shareholder oversight of these financial institutions has failed. It has done so for two reasons; either shareholdings are so thinly spread that none has the power to influence or the institutional shareholders themselves employ large bonus schemes and are therefore part of the problem.
But then...oh how I wish for a third hand...voluntary codes of conduct have been put in place in the City of London that restrict the way bonuses are paid, spreading them over several years to try to limit the incentive to boost short-term profits at the cost of taking big long-term risks. Why can't such methods be extended to more individuals and permanent working parties be established, on a voluntary basis, to find ways to limit incentives that encourage bad behaviours? Are we sure that such voluntary mechanisms don't work?
I think, on balance, we the public need more information before we could possibly make an informed decision. And that is a big issue with these and other EU proposals: the democratic deficit of EU institutions. These matters are not debated and publicised in the public domain. Regulation within the EU is something that is done to us rather than something we can feel we participate in. That is why, in the end, the liberal in me revolts at EU regulation and supports Boris's protest
Saturday, 2 March 2013
Wednesday, 30 January 2013
Banking scandals, corporate memory and incentives
I have not blogged here for some time, which is not because I have tired of the subject. Many people would yawn at the mere thought of corporate governance but it holds a fascination just because it is actually not some arcane discipline beloved by crusty academics and dull accountants: it is about everyday life. It is about "why do people behave like that and what can be done?". My slowing blog writing arises from my failure in the realm of answers. I find I keep coming back to words like integrity rather than being able to suggest smart procedures that will solve our problems.
And what a host of problems we have. As an example, it is hard to open a newspaper without reading about legal actions by regulators and law enforcement authorities against banks in America, many of them British. There is the Libor scandal that encompasses many of them, accusations of helping drug lords to launder their ill gotten gains, accusations of helping countries evade UN and US imposed sanctions. In the UK there is the massive scandal of miss-sold loan protection insurance. You may want to click across and look at Forbes list of scandals...
I am not just picking on banks but they happen to provide such good examples. The question is, why do these things keep happening? What is it about the structure of these organizations or the incentives they offer (which is surely much the same thing) that makes it keep happening? It is not as though such behaviour is good for the these organizations. If you look at the size of some of the fines and settlements then you must conclude that their size swamps any gains. You may argue that there are lots of such scams that do not come to light but I am rather inclined to think that, eventually, most of them do and then again, there is the size of the penalties: HSBC, for example, recently settled for $1.9bn.
Then Daniel Finklestein, writing in the Times, discussed the private interests of public servants. In doing so he evoked the 'Mandy Rice Davis principle'.
Finally, to complete my parcel of evidence, came a private conversation with a friend that ranged over these banking scandals and touched on the work of a mutual friend, Arnold Kransdorff, who writes about corporate memory and the perils of losing those memories. My friend then observed that there is nobody left in any senior position in the City of London who remembers the pre-Big Bang world. And there you have it.....
In those old, forgotten days, incentives were lower (still high but not so high) and an individual's reputation for integrity mattered - if you were rumoured to be a bit shifty then you were shunned and struggled to do business with or work for a City firm. What has happened since 'Big Bang' is that the rewards for success have grown so dramatically that they have overwhelmed the role of integrity as a restraint and have made it far more worthwhile to take the risk of being caught doing wrong.
The answer...? It comes from the top. First of all, the top team must talk about values and set an example and must live the talk. Too often the prime wrongdoers are the guys at the top. When they are seen to take outrageous rewards then you can hardly expect the little guys not to try to feather their nests too. But assuming a good example is set from the top and that they talk about values, promote values and reward values then they must also punish wrongdoers - when they get away with it then that encourages others to cheat. Secondly, rewards and incentives must be reduced to reduce the incentive to cheat. It is hard to do, seems to go against liberal economic sense but in the long run these incentives are not sensible because they encourage behaviours that have a massive long-term cost when you all get caught. Some of this is discussed in a book, The Value of Talent (due to be updated next year).
And what a host of problems we have. As an example, it is hard to open a newspaper without reading about legal actions by regulators and law enforcement authorities against banks in America, many of them British. There is the Libor scandal that encompasses many of them, accusations of helping drug lords to launder their ill gotten gains, accusations of helping countries evade UN and US imposed sanctions. In the UK there is the massive scandal of miss-sold loan protection insurance. You may want to click across and look at Forbes list of scandals...
I am not just picking on banks but they happen to provide such good examples. The question is, why do these things keep happening? What is it about the structure of these organizations or the incentives they offer (which is surely much the same thing) that makes it keep happening? It is not as though such behaviour is good for the these organizations. If you look at the size of some of the fines and settlements then you must conclude that their size swamps any gains. You may argue that there are lots of such scams that do not come to light but I am rather inclined to think that, eventually, most of them do and then again, there is the size of the penalties: HSBC, for example, recently settled for $1.9bn.
Then Daniel Finklestein, writing in the Times, discussed the private interests of public servants. In doing so he evoked the 'Mandy Rice Davis principle'.
He went on to mention the work of economist James Buchanan in researching such incentives in the public realm.It was June 30, 1963, and the second day of the trial of the osteopath Stephen Ward, charged with living off immoral earnings while Miss Rice-Davies was his tenant. The dancer was asked about her claim to have slept with Lord Astor.
Do you know, asked Ward’s defence lawyer, that Lord Astor has denied these allegations of yours? And Miss Rice-Davies gave her immortal reply: “He would, wouldn’t he.”
He would, wouldn’t he. The Rice-Davies principle. Much (most?) of what people say and do in politics and in life can be most readily understood by appreciating their incentives, by understanding what they have to gain or lose.
Finally, to complete my parcel of evidence, came a private conversation with a friend that ranged over these banking scandals and touched on the work of a mutual friend, Arnold Kransdorff, who writes about corporate memory and the perils of losing those memories. My friend then observed that there is nobody left in any senior position in the City of London who remembers the pre-Big Bang world. And there you have it.....
In those old, forgotten days, incentives were lower (still high but not so high) and an individual's reputation for integrity mattered - if you were rumoured to be a bit shifty then you were shunned and struggled to do business with or work for a City firm. What has happened since 'Big Bang' is that the rewards for success have grown so dramatically that they have overwhelmed the role of integrity as a restraint and have made it far more worthwhile to take the risk of being caught doing wrong.
The answer...? It comes from the top. First of all, the top team must talk about values and set an example and must live the talk. Too often the prime wrongdoers are the guys at the top. When they are seen to take outrageous rewards then you can hardly expect the little guys not to try to feather their nests too. But assuming a good example is set from the top and that they talk about values, promote values and reward values then they must also punish wrongdoers - when they get away with it then that encourages others to cheat. Secondly, rewards and incentives must be reduced to reduce the incentive to cheat. It is hard to do, seems to go against liberal economic sense but in the long run these incentives are not sensible because they encourage behaviours that have a massive long-term cost when you all get caught. Some of this is discussed in a book, The Value of Talent (due to be updated next year).
Thursday, 20 December 2012
What 'Plebgate' has to tell us about trust
For non-UK readers 'Plebgate' may hover between insignificance and mystery. It is the news story that a British government minister was pressured to resign his post as a result of abusing two police officers who were on security duty in the street outside the prime minister's office. It appears they declined to open the gates for him and insisted he wheel his bicycle (yes, really, some British government ministers are not grand while others make a public appearance of not being grand), at which point he lost his temper. It was alleged that he called them 'plebs', a short form of the latin word 'plebian' that implies a belief in his higher social standing.
Police reports were leaked and an enormous public fuss exploded in the national press and continued for days. It was all made worse by the minister, Andrew Mitchell, sticking firmly to the formula that he had not used the words attributed to him but refusing to say exactly which words he had not said. This raised suspicions that he was trying to muddy the waters having used the 'pleb' word but not used other words; or that he may not have used the 'pleb' word but had used other, equally uncivil language.
Anyway, what has this to do with governance?
It is actually all about trust. Our society is built on trust...does not function properly without it. That is the main reason why corruption is such a problem - the economic misallocation of resources is bad but corrosion of trust is far worse. Business depends on trust: you can't spend all your time in law courts getting redress from people who have tried to cheat you. So when it now turns out that police officers leaked the details of the original exchange and the ensuing investigation; and then allegedly went on to embellish the facts: that undermines civil trust.
Years ago I was a juror in a trial for possession of a knife as an offensive weapon. The defendant claimed in court that it was a tool he used for wire stripping but the policeman who had arrested him said that he had admitted it was for self defence. Eleven jurors found the man guilty but one found him not guilty and would not budge. She did not trust the police, so a man who was clearly guilty escaped justice (believe me, one look at the knife was enough to know its purpose). In much the same way, because trust in some aspects of the evidence is undermined, Andrew Mitchell looks likely to be allowed to return to front line politics despite having admitted that he behaved in an undignified and ungentlemanly manner (my words here). This trivial affair will result in the institution of policing being damaged - maybe other guilty people will escape justice because jurors don't believe police evidence - and engagement with civil society will be damaged as some potential voters think all politicians are smarmy liars who secretly despise them.
Police reports were leaked and an enormous public fuss exploded in the national press and continued for days. It was all made worse by the minister, Andrew Mitchell, sticking firmly to the formula that he had not used the words attributed to him but refusing to say exactly which words he had not said. This raised suspicions that he was trying to muddy the waters having used the 'pleb' word but not used other words; or that he may not have used the 'pleb' word but had used other, equally uncivil language.
Anyway, what has this to do with governance?
It is actually all about trust. Our society is built on trust...does not function properly without it. That is the main reason why corruption is such a problem - the economic misallocation of resources is bad but corrosion of trust is far worse. Business depends on trust: you can't spend all your time in law courts getting redress from people who have tried to cheat you. So when it now turns out that police officers leaked the details of the original exchange and the ensuing investigation; and then allegedly went on to embellish the facts: that undermines civil trust.
Years ago I was a juror in a trial for possession of a knife as an offensive weapon. The defendant claimed in court that it was a tool he used for wire stripping but the policeman who had arrested him said that he had admitted it was for self defence. Eleven jurors found the man guilty but one found him not guilty and would not budge. She did not trust the police, so a man who was clearly guilty escaped justice (believe me, one look at the knife was enough to know its purpose). In much the same way, because trust in some aspects of the evidence is undermined, Andrew Mitchell looks likely to be allowed to return to front line politics despite having admitted that he behaved in an undignified and ungentlemanly manner (my words here). This trivial affair will result in the institution of policing being damaged - maybe other guilty people will escape justice because jurors don't believe police evidence - and engagement with civil society will be damaged as some potential voters think all politicians are smarmy liars who secretly despise them.
Tuesday, 4 December 2012
The Starbucks Tax Scandal
Poor Starbucks. They seem to have been informally voted the leading corporate tax dodger in the UK by that independent, impartial and totally just tribunal: the press. Admittedly other US based corporations such as Amazon, Google and Apple have been held up to opprobrium too for contriving to shift taxable profits out of the UK, but Starbucks seems to have been awarded the crown.
Now there is a good point of public interest in this story. Clearly it is a sound argument that, if UK companies are unable to shift their taxable profits from the UK whilst foreign competitors can, then they will be at an economic disadvantage. Clearly, also, it would be madness for UK public policy to allow this to continue. But where does responsibility lie? When I started writing I intended to observe that there is an old maxim that nobody is obliged to arrange their affairs in a way that renders them liable to tax. I intended to qualify that by observing that people may not, however, arrange their fairs to flout the law. But that principle has been taken further and legislation was introduced years ago in the UK to make arrangements whose sole purpose is to avoid tax unlawful. In more recent times a new constraint has been developed, that of public opinion. As ideas of corporate (and personal) social responsibility have developed, so pressures have grown on those who seek to avoid paying tax.
I do wonder whether this is not, at least a bit, unfair. Is this not a scandal relating to the ineptitude of the tax authorities as much as anything else? Why do they allow companies to charge UK businesses fees from corporations they own abroad that drain away all their taxable profits? It is, after all, pretty clear that the businesses that stand stark naked (of profit) before them are, in fact, successful businesses that are playing the system. If they are allowed to get away with it then they will obviously all pile in. Whilst it is useful that journalists have revealed this scandal, the most appropriate outcome would be if it embarrassed the tax authorities into taking actions they should have taken years ago to limit these fees from connected companies that are allowable deductions against tax bills!
I don't say that the corporations or the individuals who have been a previous target of investigative journalism are simply freed of responsibility and can place all blame on governments that let them get away with it. It may be stretching a simile, but that is rather like a thief blaming his misdeeds on the householder who leaves a window open. There is a responsibility to be a good citizen and the public may take revenge if you are not.
Now there is a good point of public interest in this story. Clearly it is a sound argument that, if UK companies are unable to shift their taxable profits from the UK whilst foreign competitors can, then they will be at an economic disadvantage. Clearly, also, it would be madness for UK public policy to allow this to continue. But where does responsibility lie? When I started writing I intended to observe that there is an old maxim that nobody is obliged to arrange their affairs in a way that renders them liable to tax. I intended to qualify that by observing that people may not, however, arrange their fairs to flout the law. But that principle has been taken further and legislation was introduced years ago in the UK to make arrangements whose sole purpose is to avoid tax unlawful. In more recent times a new constraint has been developed, that of public opinion. As ideas of corporate (and personal) social responsibility have developed, so pressures have grown on those who seek to avoid paying tax.
I do wonder whether this is not, at least a bit, unfair. Is this not a scandal relating to the ineptitude of the tax authorities as much as anything else? Why do they allow companies to charge UK businesses fees from corporations they own abroad that drain away all their taxable profits? It is, after all, pretty clear that the businesses that stand stark naked (of profit) before them are, in fact, successful businesses that are playing the system. If they are allowed to get away with it then they will obviously all pile in. Whilst it is useful that journalists have revealed this scandal, the most appropriate outcome would be if it embarrassed the tax authorities into taking actions they should have taken years ago to limit these fees from connected companies that are allowable deductions against tax bills!
I don't say that the corporations or the individuals who have been a previous target of investigative journalism are simply freed of responsibility and can place all blame on governments that let them get away with it. It may be stretching a simile, but that is rather like a thief blaming his misdeeds on the householder who leaves a window open. There is a responsibility to be a good citizen and the public may take revenge if you are not.
Monday, 13 August 2012
Rodial and the governance responsibilities of newspapers
Newspapers have special governance responsibilities. There has been much reported on corrupt practices of British newspapers in paying public officials for information that informs news stories and also on an apparently widespread historic practice of hacking into people's voicemail to gain information for reporting. It is worthwhile pointing out, in passing, that while those journalists implicated were acting improperly their motivation was, generally, to investigate news stories that were of public interest.
There is another area where the news media has responsibilities that has, so far, received less attention. I recently spotted a very peculiar article that illustrates this, in the Sunday Times (Kiki Loizou, "How I Made It: Maria, Hatzistefanis, founder of Rodial", 5 August 2012). You may argue that there is nothing wrong in a reputable newspaper running a piece on the background of the founder of a controversial business. It did, after all, state quite clearly that Rodial had sued a docter who cast doubts on the efficacy of their products and quoted the business founder as saying she had no regrets in having done so. However, let us examine this by taking a wholly hypothetical and extreme position. Let us suppose that none of Rodial's products have the effect their manufacturer claims and that it is a business that preys on the credulous and the desperate. Would it then be right for a reputable newspaper to be offering helpful publicity without calling it an advertisement?
You may argue that the article was balanced but I think that is questionable. At the time of the legal action against the doctor it was claimed its purpose was to make it too expensive for her to defend herself when she thought she had merely expressed a reasonable opinion - the intention, it was suggested, was to shut her up. The doctor had expressed only mild doubts, not an all-out assertion that the claims for Rodial products were balderdash, and she had merely asked for the company to publish scientific proof for what seemed to be extraordinary claims. See my previous post on this matter. No peer reviewed evidence for efficacy has ever been published. Loizou's article does not make any of this clear and it is pretty material. You may wish to look at Rodial's website yourself to inform your own opinion of the products and claims for them. You may disagree with me. The range has extended considerably over the last couple of years and the products that caused all the fuss - under 'bodycare' - are now a small element of the whole. I admit that, personally, I find the claims for this range of products hard to believe without seeing some convincing supporting evidence. A counter-view to mine might be that many of the skincare products sold by Rodial make claims that are no more extravagant than many cosmetic companies, which also offer no proof of efficacy to potential customers. Indeed, for example, a study published in the past year suggested that only two or three of the many anti-wrinkle creams on the market work at all - all the rest have no effect.
My problem with the Sunday Times article is that it provides unbalanced publicity for this company. Are there other articles in supposed 'papers of record' that are similarly unbalanced? Do not newspapers that claim to be 'papers of record' owe some duty of care to their readers? Is this not a governance matter? How did the article come to be written, did Rodial's representatives approach the journalist, is the journalist a user of their products? I do not suggest that News International, the owner of the Sunday Times, is worse than other proprietors. It just happens that they have recently been the centre of a public relations and media storm concerning governance, which might have made them a bit more careful.
There is another area where the news media has responsibilities that has, so far, received less attention. I recently spotted a very peculiar article that illustrates this, in the Sunday Times (Kiki Loizou, "How I Made It: Maria, Hatzistefanis, founder of Rodial", 5 August 2012). You may argue that there is nothing wrong in a reputable newspaper running a piece on the background of the founder of a controversial business. It did, after all, state quite clearly that Rodial had sued a docter who cast doubts on the efficacy of their products and quoted the business founder as saying she had no regrets in having done so. However, let us examine this by taking a wholly hypothetical and extreme position. Let us suppose that none of Rodial's products have the effect their manufacturer claims and that it is a business that preys on the credulous and the desperate. Would it then be right for a reputable newspaper to be offering helpful publicity without calling it an advertisement?
You may argue that the article was balanced but I think that is questionable. At the time of the legal action against the doctor it was claimed its purpose was to make it too expensive for her to defend herself when she thought she had merely expressed a reasonable opinion - the intention, it was suggested, was to shut her up. The doctor had expressed only mild doubts, not an all-out assertion that the claims for Rodial products were balderdash, and she had merely asked for the company to publish scientific proof for what seemed to be extraordinary claims. See my previous post on this matter. No peer reviewed evidence for efficacy has ever been published. Loizou's article does not make any of this clear and it is pretty material. You may wish to look at Rodial's website yourself to inform your own opinion of the products and claims for them. You may disagree with me. The range has extended considerably over the last couple of years and the products that caused all the fuss - under 'bodycare' - are now a small element of the whole. I admit that, personally, I find the claims for this range of products hard to believe without seeing some convincing supporting evidence. A counter-view to mine might be that many of the skincare products sold by Rodial make claims that are no more extravagant than many cosmetic companies, which also offer no proof of efficacy to potential customers. Indeed, for example, a study published in the past year suggested that only two or three of the many anti-wrinkle creams on the market work at all - all the rest have no effect.
My problem with the Sunday Times article is that it provides unbalanced publicity for this company. Are there other articles in supposed 'papers of record' that are similarly unbalanced? Do not newspapers that claim to be 'papers of record' owe some duty of care to their readers? Is this not a governance matter? How did the article come to be written, did Rodial's representatives approach the journalist, is the journalist a user of their products? I do not suggest that News International, the owner of the Sunday Times, is worse than other proprietors. It just happens that they have recently been the centre of a public relations and media storm concerning governance, which might have made them a bit more careful.
Lessons from the Olympics
I have been absent from the blogosphere for a while but am pleased to find I have some new things to say about corporate governance, even if they arise from unusual directions. Take the London 2012 Olympic Games...what does that have to do with business management or governance issues? The link is that good news drives out bad news.
The UK press has engaged in a bout of national self-congratulation at the close of the Olympic fortnight, and it is well justified. Most things worked very well indeed. The stadiums were ready on time, were comfortable and visually exciting; the Olympic Park was a fun place that handled feeding throngs of people perfectly well and the capital's transport system coped with the extra journeys without breaking sweat. Above all the people of this country were really engaged. Hundreds of thousands of people, if not millions, went to see the Olympic torch carried by a relay of 8,000 people through the country to finish, eventually, at the Olympic stadium. I was one of those spectators who, alerted that someone I know slightly had been chosen to run one of the legs as a reward for his voluntary community work, went out on to a street near where I live to watch. I met dozens of other people I know by sight. I waved a flag and cheered, took photos and was uplifted by the experience. In another flash of inspiration the Olympic venues used a team of 70,000 volunteer stewards who smiled and cracked jokes and good humouredly chivvied the crowds to where they needed to go. I also bought tickets to a couple of events as well as going to free events held in London parks, where giant tv screens carried broadcasts of the competition to enormous crowds.
So yes, it was a triumph. I notice, however, that failings and lessons that might be learnt for the future are being overwhelmed by the good news and conveniently forgotten. Some examples...the ticketing was a fiasco that, in this digital age, should have been avoidable. Security was well handled...in the end...by the expedient of drafting in the army to help. Yet the problems that arose on the very eve of the games should have been predicatable months, if not years in advance. To make way for the expected throngs of visitors the authorities called on people to avoid London, which resulted in empty roads, empty shops and empty hotels. The experience of the Beijing Olympics four yours ago should have alerted everyone to the problem of empty seats at competitions, yet it was apparently a surprise all over again, and even if it is the fault of the Olympic organising committee it could still have been addressed well in advance. I could go on...but I will mention just one more thing, that general good sportsmanship was nearly, but not absolutely, universal. A member of one of Great Britain's medal winning cycling teams admitted on a tv interview having deliberately crashed his bike to get a restart. Instead of being disqualified (which should have happened), the matter was quietly forgotten. I also noticed that US swimming coaches implied drug use about a 15 year old Chinese competitor who clocked up a remarkable time to win a gold medal, yet were silent when a 15 year old American did the same thing...hmmm.
Going back to linkages...the same thing occurs in business. Failure and bad behaviour are forgotten if someone can associate themselves with a bigger triumph. Just today a book review in the newspaper brought to mind how individuals take credit also for triumphs that were not theirs: a new biography of the iconic Israeli general Moshe Dayan explains that he initially argued against policies which he later claimed credit for, after they proved successful. The lesson for us all is that we must struggle to stop failure being forgotten because lessons will then not be learnt and mistakes will be repeated in future - perhaps with more serious consequences next time. Individuals who should be removed from office may also go on to perpetrate further 'crimes'. In practice how do we stop the well-connected from evading responsibility? It is hard and may call for individual courage on the part of whistle blowers or on the part of those who seek investigation of the failures or bad behaviour that has been buried. When everyone around only wants to talk about good news and to forget the bad news it can be emotionally hard to go against the crowd but it needs to be done. Are you an Olympic champion, will you stand up and do it?
The UK press has engaged in a bout of national self-congratulation at the close of the Olympic fortnight, and it is well justified. Most things worked very well indeed. The stadiums were ready on time, were comfortable and visually exciting; the Olympic Park was a fun place that handled feeding throngs of people perfectly well and the capital's transport system coped with the extra journeys without breaking sweat. Above all the people of this country were really engaged. Hundreds of thousands of people, if not millions, went to see the Olympic torch carried by a relay of 8,000 people through the country to finish, eventually, at the Olympic stadium. I was one of those spectators who, alerted that someone I know slightly had been chosen to run one of the legs as a reward for his voluntary community work, went out on to a street near where I live to watch. I met dozens of other people I know by sight. I waved a flag and cheered, took photos and was uplifted by the experience. In another flash of inspiration the Olympic venues used a team of 70,000 volunteer stewards who smiled and cracked jokes and good humouredly chivvied the crowds to where they needed to go. I also bought tickets to a couple of events as well as going to free events held in London parks, where giant tv screens carried broadcasts of the competition to enormous crowds.
So yes, it was a triumph. I notice, however, that failings and lessons that might be learnt for the future are being overwhelmed by the good news and conveniently forgotten. Some examples...the ticketing was a fiasco that, in this digital age, should have been avoidable. Security was well handled...in the end...by the expedient of drafting in the army to help. Yet the problems that arose on the very eve of the games should have been predicatable months, if not years in advance. To make way for the expected throngs of visitors the authorities called on people to avoid London, which resulted in empty roads, empty shops and empty hotels. The experience of the Beijing Olympics four yours ago should have alerted everyone to the problem of empty seats at competitions, yet it was apparently a surprise all over again, and even if it is the fault of the Olympic organising committee it could still have been addressed well in advance. I could go on...but I will mention just one more thing, that general good sportsmanship was nearly, but not absolutely, universal. A member of one of Great Britain's medal winning cycling teams admitted on a tv interview having deliberately crashed his bike to get a restart. Instead of being disqualified (which should have happened), the matter was quietly forgotten. I also noticed that US swimming coaches implied drug use about a 15 year old Chinese competitor who clocked up a remarkable time to win a gold medal, yet were silent when a 15 year old American did the same thing...hmmm.
Going back to linkages...the same thing occurs in business. Failure and bad behaviour are forgotten if someone can associate themselves with a bigger triumph. Just today a book review in the newspaper brought to mind how individuals take credit also for triumphs that were not theirs: a new biography of the iconic Israeli general Moshe Dayan explains that he initially argued against policies which he later claimed credit for, after they proved successful. The lesson for us all is that we must struggle to stop failure being forgotten because lessons will then not be learnt and mistakes will be repeated in future - perhaps with more serious consequences next time. Individuals who should be removed from office may also go on to perpetrate further 'crimes'. In practice how do we stop the well-connected from evading responsibility? It is hard and may call for individual courage on the part of whistle blowers or on the part of those who seek investigation of the failures or bad behaviour that has been buried. When everyone around only wants to talk about good news and to forget the bad news it can be emotionally hard to go against the crowd but it needs to be done. Are you an Olympic champion, will you stand up and do it?
Thursday, 3 May 2012
Dinosaur attitudes to governance in private equity
I have a report from a recent round-table discussion on making non-executive directors effective which was led by a director of one of the UK's major private equity firms. It was fascinating and horrifying for its old fashioned attitudes that are surely, to borrow a cliche, not fit for purpose.
Asked about where directors nominated by private equity firms owe their allegiance he seemed to imagine there was no issue to worry about here. Well.....Later asked about board diversity he merely trotted out the old mantra that if women have other priorities and don't get to board positions then that automatically means there is an inadequate pool of qualified women to serve as non-executive directors. And of course he opposes quotas for female participation at board level. No idea of making changes to make it easier for women's careers to advance to board level. No concept that aspects of approved career progression paths in the UK are too conservative. Needless to say this chap's executive team colleagues comprise just 12% women and not a single coloured face. He accepts that diversity improves corporate performance but, of course, that applies to others and cannot conceive how he could sensibly change the status quo. I too worry that quotas avoid the difficult questions but I think they are inevitable when such young fogeys are so common in this country.
A wonderful remark remark reported by my informants was to the effect that there was, however, a big demand for female non-execs in specific industries, such as cosmetics. What a ******!
Talking about finding senior people for companies he spoke about installing CEO's and Finance Directors: very revealing - no concept that HR is a key discipline that should improve the bottom line, as are engineering skills in many cases.
Where are the open and enquiring minds? Such attitudes as reported here are all too common, to the detriment of our nation's corporate performance; and they are most damaging when they are found in finance businesses such as banks and private equity because there they infect the companies these guys finance, so the virus is spread and reinforced.
Asked about where directors nominated by private equity firms owe their allegiance he seemed to imagine there was no issue to worry about here. Well.....Later asked about board diversity he merely trotted out the old mantra that if women have other priorities and don't get to board positions then that automatically means there is an inadequate pool of qualified women to serve as non-executive directors. And of course he opposes quotas for female participation at board level. No idea of making changes to make it easier for women's careers to advance to board level. No concept that aspects of approved career progression paths in the UK are too conservative. Needless to say this chap's executive team colleagues comprise just 12% women and not a single coloured face. He accepts that diversity improves corporate performance but, of course, that applies to others and cannot conceive how he could sensibly change the status quo. I too worry that quotas avoid the difficult questions but I think they are inevitable when such young fogeys are so common in this country.
A wonderful remark remark reported by my informants was to the effect that there was, however, a big demand for female non-execs in specific industries, such as cosmetics. What a ******!
Talking about finding senior people for companies he spoke about installing CEO's and Finance Directors: very revealing - no concept that HR is a key discipline that should improve the bottom line, as are engineering skills in many cases.
Where are the open and enquiring minds? Such attitudes as reported here are all too common, to the detriment of our nation's corporate performance; and they are most damaging when they are found in finance businesses such as banks and private equity because there they infect the companies these guys finance, so the virus is spread and reinforced.
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