Sunday, 27 February 2011

Social Networking

I saw a post on social networking that raised important governance issues. Unfortunately it was a weak article, which is why I am not referencing it. But this subject goes beyond social media such as Facebook and Twitter. It also relates to use of discussion boads and forums. These are important platforms on which company employees can get advice and ideas that may be useful, even important to the company. The board must have policies in place. Access must not be denied because these media are important and because employees will disobey strict denial that seems to make no sense. Employees in modern businesses cannot be given orders without reasons: they expect to be persuaded not dictated to; but boundaries have to be set. The employees who may get inspiration that feeds into future products also have to know what they must not discuss. What company processes and developments are so confidential that they must not be disclosed even if discussion with outsiders might lead to their improvement? And who can they go to within the company to put forward a case for discussion with outsiders and under what terms can this be regulated? If people are given boundaries but also trust then valuable resources can be used effectively.

There are always risks from hackers, from trojans and viruses whenever company employees use the world wide web. Companies need sensible policies, clearly communicated to say what can be used and in what way and with what precautions and what cannot be done under any circumstances.

We live in a world where ideas are freely exchanged and where businesses customarily develop products in partnerships. These issues have to be considered.

What are the boundaries also on personal postings? When can a frivolous interchange become bullying and what are the sanctions? Are these policies in place and have they been clearly communicated?

These too are issues that need to be considered at board level.

Saturday, 26 February 2011

The film "Inside Job" and corporate governance

Ostensibly this documentary film is just about the ongoing financial crisis that started in 2007. It charts the immediate causes through a lending bubble, although it does not address the causes of that bubble in international trade imbalances and the choices made by governments. That, as they say, is another story. But the real strengths of this particular story is its success in getting interviews with some of the big names in government, regulation and business as well as using public archive sequences to demonstrate the corruption of politics, regulation and academia that allowed this particular crisis to happen.

Of course the film-maker has selected material to present a case but, nonetheless, you hear from the protagonists own mouths their sense of entitlement, their vested interests and their lack of contrition or self-awareness. This is very much a governance issue. The lessons do not just apply to financial services in the USA but hold up a mirror to corporate dysfunction worldwide. We see alpha males (and they are virtually all males), at the top of the tree, who obtain influence over their supposed regulators (in the USA, even becoming the regulators) and, of course, don't see the need for regulation. Their world view of how things work is guided by their own vested interests so, of course, they believe in efficient markets and light regulation and, having captured top roles in academia they shut down debate and marginalise ideas that contradict their own.

One of the best sequences in the film is the interview with Glenn Hubbard, economist and Dean of Columbia University Business School. He was an adviser to George W Bush on deregulation and is member or adviser on many committees, including the Federal Reserve Bank of New York. It asks him about his substantial business consultancies and the conflicts of interests this raises with his academic and government advisory roles. Instead of addressing this legitimate issue of public interest he becomes aggressive and defensive. Asked why an important advisory paper he penned, supporting the strength of Icelandic banks and written just before the implosion of the economy of that country, failed to mention that he had been paid for it, he failed to show any embarrassment. When it was pointed out to him that his on-line cv on the Columbia website wrongly stated the title of this paper as addressing the "Instability" of Icelandic banks instead of the "Stability" he lamely blames a typo and, again, shows neither concern nor embarrassment at the impression this gives of dishonesty.

All this is relevant to corporate governance. The unconstrained alpha male will not always seek self-interest at the expense of the multitude, but it only takes a few to wreak untold damage. We need balances, transparency and accountability to protect the common good.

See the film. Read "23 Things They Don't Tell You About Capitalism" by Ha-Joon Chang. Keep an open and critical mind on both but realise how important good governance is and how easily corruption takes hold of a poorly protected system.

 PS This is a blog about governance not about cinema...however...with the Oscars just announced I feel driven to observe that while Inside Job is a very good film it is nowhere near as original as its rival Exit Through The Giftshop. I guess it won the award because the voters wanted to comment on the message rather than on the film-making.

Monday, 21 February 2011

Wall Street Journal and Independent Directors

I picked up a sceptical piece on independent directors via Professor Bainbridge that originated at the Wall Street Journal.

We're still waiting for evidence that independent directors yield better financial results. Merrill Lynch's 2006 annual report proudly noted that 11 out of the 12 members of its corporate board were independent—people who had never worked at the firm and had little connection to it. Merrill was a model of trendy corporate governance, with a board of esteemed Americans who could offer an unbiased perspective.

As it turned out, what Merrill really needed was a board that knew how to manage financial risk. And it would have helped immensely if directors had understood the mortgage-backed securities on which they had unwittingly bet the firm. The report was released in early 2007, and by that October the company was searching for a new CEO after an $8.4 billion quarterly loss.
In 2008, the firm again boasted of independent captains manning the board deck as Merrill sailed into the financial crisis. The company had 11 directors by then, and 10 of them were untainted by intimate knowledge of the business. Several months later, the securities that the board never did comprehend forced Merrill to sell itself to Bank of America.

Today the regulators are pushing aggressively for independent directors at both public and private companies, but there is even less of an argument for such changes than there was at Merrill.
 This raises a good point that applies to all companies and not just financial services. It is important that non-executive directors understand the business they are in if they are to contribute anything. However, it may push the balance too far. Having an outsider who can ask apparently simple questions and challenge the company orthodoxy is probably helpful but you don't need everyone to be like that. It also points to a weakness of the American model where most boards predominantly comprise non-executive directors. That leads to power residing elsewhere and protects the real decision makers from scrutiny.

Bainbridge questions whether the evidence from financial returns supports the effectiveness of a majority of non-executives on a board. He suggests the benefit may arise from having any such independent element, though highlighting a study that argues that the reason for the weak evidence by company is that the whole market has improved governance and performance as a result of this independent scrutiny.

Thursday, 3 February 2011

Unilever, sustainability and maths

Unilever - the world's third largest maker of branded goods - has just published its 4th quarter results. They show a significant rise in sales and profits.

I admire Unilever. I admire its commitment to sustainability. The company's public communications say some very sensible things. For example, they try not only to reduce their direct environmental footprint (the energy and the materials they use and the waste that results) but to use research to reduce the footprint of their customers when using Unilever products.

But I have difficulty with the term 'sustainability'. It misleads people. Growth is not sustainable - I don't advocate stopping growth but is does not carry on forever. Imagine that Unilever continued growing at 5% per annum in real terms. In 100 years they would be 131 times the size they are today, with sales of some £5,200,000,000,000. That is 4 times the size of the UK economy today. In 200 years...well the number is unimaginably huge and probably much bigger than the world economy will be then.

Companies do not grow forever. They stop growing or fail completely or they are eventually split up and disappear into the background economy. What Uniler mean by 'sustainability' is not sustainable it is just reducing their impact on the environment.  It is more sustainable. I know that is not such a snappy catchphrase but it says what it means.

The paradox is highlighted by the report of the UN's Brundtland Commission in 1983 that defined

"Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs."
 Which is admirable but must surely preclude any mining activity whatever? Sacrificing today's civilisation for tomorrow's is a paradox because you don't get civilisation tomorrow without it building on civilisation today. And today's civilisation does not exist without the extraction of raw materials to feed it. Much of our high tech communications depends upon Rare Earth metals that seem to be in limited supply in the earth's crust. Do we stop mining in order to preserve stocks for future generations? Why do those generations deserve more than we do? Maybe the best solution is to carry on mining and to hope that new technologies emerge before we exhaust supplies. This is a rational strategy but it may not work. There may be no alternative technologies.

My conclusion? I have no answers but let us not delude ourselves that 'sustainability' means any more than minimising our impact on the environment.