Regulation

Leadership: Libor, Barclay's and Executive Accountability

I have been fascinated as I've read the reports on the investigation into interest rate manipulation by Barclay's and other banks, the resignations of that bank's Chairman and CEO and, particularly, the "spreading of blame" that's now occurring as everyone who knew better is figuring out a way to run for cover.

Here's my take on this from the leadership perspective:

For all that Mr. Diamond explained to the Parliamentary Committee that his people had been asking the US and UK regulators questions about what they were doing/could do - and being given no specific guidance regarding their actions - they knew better.

People inside an industry - or holding any particular job, for that matter - know and understand better than anyone else the nuances and consequences of their actions and decisions.  That's why they take those actions and make those decisions.

Because, one way or another, those actions and decisions serve them.

So...

Should there be more and better regulation - particularly for those industries that are supposed to exist not only for profit but also to support the society in which they operate?  Sure.

Will regulation ever address all the agendas and actions of the individuals within any industry?  No.

Does it then fall upon the most senior executive to make clear - to the point of termination - that any action that could conceivably mar the reputation of the organization is unacceptable and will not be tolerated?  Yes.

And that's where Mr. Diamond and his colleagues continue to go wrong.  They're happy to say, in retrospect, that what was done "sickened" them - but that doesn't do anyone any good.  In fact, that, too, is self-serving.

Ultimately, this becomes about you - not them.  If there are reputation-risking actions and decisions going on in your organization, you either know who or where those are taking place.  That makes it your responsibility to stop those actions - now.

This is about morals and ethics and integrity.  Not business.

It's time for leaders to lead.

LEAN: Lessons Learned from Banking Regulation

There's a fascinating piece in Joe Nocera's New York Times column today about bank regulation and complexity.  In it, he raises the question of whether the over-complexity of new banking regulations worldwide are going to cause greater difficulties and possible failures than a more sensible, streamlined approach.

This is an easy one. The answer is: Yes - because complexity causes failure.

Big failures or little.  Lost time or opportunity. Lost money, customers, employees, profits, revenues, parts...you name it, if there's complexity built into your system, there are losses and failures going on.

The problem is, in most cases, it's hard to see them.  That's because, in most cases (and unlike what's going on now around the world with banking regulations) the complexities are so deeply built into the way you do business that you don't even see them anymore.

That's actually why Quality, Lean and all the rest exist: to hunt out the variation (for which read 'complexity') in your systems.  Once you can see them, then you can decide whether or not they serve your purposes.

Just so you know - in most cases, they don't.  They're there because someone at some point came up with a solution that made sense at that moment that was reactive to a situation that no longer exists.  Or wasn't as well thought out as it should be.

What we know is that the banks need to be better regulated - simply because the world can't afford another meltdown like we saw in 2008.

What we also know is that, not only because of Dodd-Frank in the United States, but in looking at banking regulation being imposed around the world (and, yes, that includes China, too) there is no coordination or consistency.

The threat - at least by the banks - is that the regulations are so overly complex and onerous that they won't be able to operate or keep their best talent.  That may or may not be correct, but, let's face it, they've got skin in the game and a real reason for not wanting to be held accountable.

Putting their arguments aside, we come back to the same issues you need to be addressing in your own enterprise:

  • Where does complexity exist?
  • Why? What was the purpose of those policies or procedures?
  • Do they still apply?
  • If no, how do we get rid of them without causing replacement complexity?
  • If yes, how do we redesign what we've got to reduce the complexity?
  • And, finally, do we have the right measures to ensure that this - as well as other - complexities in our system are findable and addressable?
Go through that mini-assessment and you'll suddenly find that there are LOTS more profits available in your existing organization than you currently gain.  Fast and easy, too.

Then you can start taking on the hard stuff.

For more information on successfully implementing Quality and Lean, take a look at:

And Now for the Hedge Funds: More on Your Financial Strategy

In my post a few days ago about VCs versus Private Equity, I talked about what your strategy should be as you look for money based on the agenda that each investment type has to offer.

In very short, VCs are in with you for the longer term as you build your enterprise.  PEs are looking for the money they can make from your organization on a much faster flip.

It's not that one is good and the other bad.  It's that you go to them - or they look with interest at you - based on what they are trying to achieve for their investors.

Now enter the Hedge Funds.  In an interesting - and somewhat disturbing - article in the New York Times today, it turns out that Hedge Funds are starting to take the place of banks in lending money to mid-sized businesses.

After all, the banks aren't lending these companies the money - so someone has to.  And Hedge Funds are.  Even some of the PEs are getting into the act.

That's the good part.

The not so good part is that the Hedge Funds are charging comparatively usurious interest rates (12.5%) and bring the same orientation to your organization's future as a PE fund.

There's even concern that the Hedge Funds - a pretty much non-regulated player in the financial arena - may cause the next economic meltdown as they grow their (and your) debt to astronomical heights.

So, as you look at what you need, put the Hedge Funds into your thinking - but, as always, ask yourself:

How much does this money really cost?

Sources:


VCs, PE and the Cash Infusion Question (OA)
Bank Said No? Hedge Funds Will Fill a Void in Lending (NYT)

BP and Goldman: You Manage What You Measure

It is a truism that "you manage what you measure."

The reasons why are simple:

  1. The measures are deemed important enough to warrant the effort to manage directly - which means that the right information at the right time is required.
  2. What is being managed is deemed to be tied directly to the success - or failure - of the department/division/enterprise to warrant the effort.
  3. Someone's - or more than one person's - compensation and/or future existence within the enterprise are dependent upon how that particular area is performing - based on the measures.
In those cases, not only are those measures managed, but they are known by enough people to be usable for everything from strategic and operational decision making to succession planning or terminations.  

There is, however, an obverse to this as well.  Sometimes, you measure and you manage - but you don't tell.  At least not many.

Sometimes, that's necessary.  I'm a great believer in information management.  In fact, I think that not enough thought - and forethought - is put into either measurement decisions or the ways that the information from those measures are being disseminated (or not) in the enterprise.

Information just moves...as if it has a life of its own.  

(Just so you know, it doesn't.  Whenever and wherever information moves - or doesn't - there is a purpose on the part of the person making the distribution decision.  And that purpose is not always in line with what you want or are working to achieve.)

But when information - particularly measures - are seen as being purposefully withheld, more and worse questions arise.  In those cases, you're asking for trouble.  You may well deserve it.

You've entered into the world of "transparency" - and a murky, distrusted world it is.

We're watching this happen now - and you've got your choices of which organizations deserve to join the "Corporate Perp Walk Hall of Fame."  (This is the next iteration of the "Executive Perp Walks" so popular a few years ago.)

Right now, we have two major corporations tied for first place.

To start, there's Goldman Sachs not quite being upfront with their customers about what they know and when they know it - not least whether the firm is betting against what they're selling with as good as insider information.

That decision has led them to being sued by the Securities and Exchange Commission for fraud - which has led to a 26% drop in their share value (to be fair, that includes a lot of other variables causing a market correction) and the possibility - if they can pull it off - of getting away with only a $1billion settlement.  (That's Goldman chump change.  In fact, they'd undoubtedly see it as a good investment.)

(On a side note, Warren Buffett has it completely wrong when he defends Goldman.  That's self-serving - he has a really big investment making lots of money from Goldman - and disingenuous.  This is an ethical issue and he well knows it.)

And, in a tie position, you've got BP - who are making a worse mess of their mess than they already created in the Gulf.

Because BP's executives are so concerned - now - with what will happen later when the litigation really hits, that their unaccepted, disingenuous replies range from:
  • "It's their fault" (not a good strategy in a Congressional hearing with the counterparts sitting next to you doing the same thing) to 
  • "It's only a moderate spill" (which is patently untrue - and sounds even worse to an angry American audience when it is said by the British accented CEO to a British television network) to 
  • "It's impossible to measure the amount of oil being spilled" (which has now been completely debunked by a quartet of scientists who figured out a way all on their own).
It doesn't matter what industry you're in - or, for that matter, what country or sector.  The problem that comes from all of this activity is that there is less and less trust extended to you by your customers.  In their eyes, they have no reason to trust you.  You're probably just like all the rest.

So, before you make your next set of decisions or as you start reviewing the most recent data being handed to you, stop and think for a moment.  Then ask yourself:
  • What are we measuring?
  • Are those measurements giving us the best, most useful information?
  • How do we know?  How are those data tied to strategic and operational goals?
  • How are these data being disseminated - and to whom?
  • Who else should get them?
And the seminal question:  What are we hiding?

Because you can count on it.  If you're hiding anything - then something is being hidden from you.

And you really don't want that keeping you up at night.


Bigger Does Not Equal Better

There's an interesting article in today's NY Times about Senator Christopher Dodd (D., Conn.) wanting to create a new financial services super-regulator. It would be established by combining four existing regulatory agencies while, simultaneously, reducing the authority and reach of the Federal Reserve.

Interestingly, there is a similar argument being put forward in Britain by the Conservative Party.  Their Shadow Chancellor of the Exchequer, George Osborne MP, wants to combine all financial regulatory responsibilities under the auspices of the Bank of England.  In the process, two other agencies would be incorporated into what would become one exceedingly large one.

The problem in both countries, from what is described, is not one of size, power or remit of the individual agencies.  The problem is coordination, clarity of responsibility and authority - as well as systems of accountability - among and between the existing entities.  That's what needs to be addressed - and it won't happen as a result of combining groups that don't mesh.

To get my drift on this, think M&A gone bad and you'll know where I'm going.  Better yet, if you're in the States, think Department of Homeland Security and you'll know exactly what I mean.

Too many organizations - public and private sector - are convinced that bigger equals better.  Not always - and especially not in a case like this.

Sometimes it is in the organization's (for which, in this case, read country's) best interest to allow each entity that owns part of a larger system to be specialist in exactly what it does.  That way, it can go narrow and deep in its activities to ensure that those within its remit are being well and clearly looked at and after.

The responsibility then lies with the corporate parent (for which, in this case, read Congress or Parliament) to ensure that those responsibilities are laid out clearly, lines of accountability are drawn and no competition for "favored" status exists or can be offered those being regulated  (a particular problem in financial services regulation).  Most importantly, the agencies should develop and execute proactive plans for coordinated, ongoing information sharing and joint action.

It's that last one that is the deal-breaker - because it is the lack of that planning that has caused politicians on both sides of the Pond (as well as their citizenry) to be so dissatisfied with the status quo.

Putting together the financial services agencies in either country isn't going to net the politicians what they say they want.  Nor will it give the public what it needs.  In the words of W. Edwards Deming, "The intent is noble.  The method is madness."

My recommendation to any executive who is considering going this "bigger is better" route is to go back to the drawing board and look at your intent - then look at your organization as it is and how you want it to grow.  Then you'll be able to decide how to get there - just as big as you want - without creating chaos and lost opportunity in the process.