Tag Archives: crisis

Scandals and Company Culture

Shhh; Scandal and culture

Years ago a court judge in New Zealand was convicted of expenses fraud, the judge’s defense was that he hadn’t understood what the forms required. The public reaction was disbelief; either he just thought he could get away with it or he was too stupid to be a judge.

Since that early example I’ve looked at company scandals and the explanations given with a suspicious eye. In every case there are signs of how the company culture has effectively colluded around the scandal – it’s never just one person, it’s people turning a blind eye, it’s fear of whistleblowing, it’s the company culture, it’s the CEO.

Following the Enron scandal I heard a story, possibly apocryphal, of a manager who joined the company. Shortly after joining he heard that the ambitious revenue targets had been sent out across the company, requiring a jump of 25% in sales from one quarter to the next. At the end of the next quarter, to his amazement, those sales targets had been met across the company. He smelt something rotten and decided to update his CV and move on, he was not surprised when the Enron scandal broke. At the time it was the biggest corporate bankruptcy the world had seen. The Sarbanes-Oxley Act was passed to prevent scandals of this scale ever happening again (it didn’t).

In the Bernie Madoff Ponzi scheme his family members were involved in the company, including his brother who was appointed as Chief Compliance Officer. There are rules in many companies about potential conflict of interest when partners or family members work together.

More recently Wells Fargo came under fire for the cross-selling scandal where staff opened credit card accounts for non-exisiting clients in order to meet targets. In companies employees focus on what gets rewarded; and when enough pressure is applied from their bosses and their colleagues some will break rules to meet those targets. The company directors’ failure to halt the scheme was called “gutless” by Elizabeth Warren – the company maintains that the employees – all 5,600 of them (so far) acted alone. Either the bosses knew or they should have know, but so far none have taken responsibility.

John Oliver’s piece on the US police system exposes the myth of the “one bad apple” and looks at some of the systemic issues behind the fatal police shootings in the US. The failures of process and policy erode the public trust in the police, reducing their ability to their job.

The points John Oliver makes could equally apply to businesses.

  1.  Leadership
    Your leader must lead, her actions must demonstrate her high ethical standards and she should speak clearly and frequently about the company’s ethics.
  2. Monitor/Collect data
    We can now analyse data and patterns of performance, look at patterns and changing patterns. At a financial institute I worked at we were required to take a break of at least two weeks. HR sold it as being good for employees but my security colleagues gave another explanation, the two week break was long enough to highlight any odd activities.
  3. Avoid conflict of interests
    Keep review processes independent, external if possible. Don’t hire siblings or partners into the same field. Declare any outside interests that might raise a red flag – I wrote some columns for a (former) supplier. I had to declare this and I donated the income to charity to remove any potential conflict. Independent reviews make a difference
  4. Transparent Processes
    The more open you are, the more public you can be about your processes, the less opportunity there is for fraud or scandal. A very simple example; some universities are using blockchain to certify their qualifications, as that becomes a public record there is no chance to create a fake degree.
  5. Rewards
    Be careful what you reward, that will direct the employee’s focus and in extreme cases leads to unethical behaviour to reach stretch targets.
  6. Whistleblower procedure
    Even with all the best practices in place something could go wrong. Create a robust, independent whistleblower procedure.  Whistleblowers are generally punished for coming forward, be the exception.

Building a scandal resistant company culture is not easy; not doing so is expensive, even fatal.

Image: Shhh  |  Grey World  |   CC BY 2.0

Ethics and Company Culture

…the bankers of course deserve their [fair share of the blame] too, but it’s not healthy for us to continually berate them, not all bankers are bad. You might never hear a banker say “I’m just building up some money so I can build a state of the art homeless shelter where tramps can live in peace, safety and comfort”. But then you’d probably never hear a doctor say that either. The bankers that got us into this mess deserve to be attacked but banking on the whole is still vital to the UK economy and not all bankers are evil. Those who have been tasked with sorting out the mess deserve our support…. I don’t know who people expect to be running RBS these days – Alan Titchmarsh?

Finally some balanced commentary. Where did I get this from? Well it’s a transcript from Friday Night Comedy on BBC Radio 4. Yes Matt Forde a comedian commentating on the state of banking.

He said “not all bankers are evil”; and yet as story after story breaks of improper deals, questionable morals and shoddy treatment of customers it’s easy to doubt it. In the week of Matt Forde’s riff we’d seen the latest “exposé” from Greg Smith who denounced the corporate culture of Goldman Sachs.

But I remained convinced that not all bankers are evil; I should add a disclaimer here – I work for a bank, although not as a banker. We’ve had plenty of mud thrown at us over the last few years – not all of it justified – and the company has changed. It’s more humble and more straight-forward, I know it’s not easy to see that from the outside, but it’s very evident from the inside.

I recently downloaded a copy of “Judgment Calls: Twelve Stories of Big Decisions and the Teams That Got Them Right” and when I read chapter 8 “Mabel Yu and the Vanguard Group” a lot of what I’d been thinking fell into place. (There’s an HBR article summarising this)

Mabel Yu was not the most experienced, highly expert financial analyst in the world. But she asked a lot of questions, the right questions, and when she didn’t get satisfactory answers she refused to invest. Her decision meant that the company she worked for, Vanguard, did not buy mortgage related bonds despite their AAA rating. The managed to steer around the whole sub-prime mess, and preserved value for its clients in a time when the sharemarket was diving.

What is clear from the book is that although Mabel Yu is unusual in making the right call amongst the thousands of analysts around the world her behaviour is “business as usual” for Vanguard. Their company values are taken seriously;

  • Every employee is taught that “it is a privilege and an awesome responsibility to be entrusted with the financial hopes and dreams of its customers”.
  • There is a strong recommendations that analysts and portfolio managers do not invest in financial products they do not fully understand
  • Vanguard promotes the view that “one person can make a difference”

These three values in particular meant that Mabel Yu felt responsible to the clients who were trusting the company with their money, motivated to fully understand the products being offered, and ultimately able to state her concerns and advise the company not to invest.

It wasn’t the first time the companies analysis was “off-trend” but ultimately proved correct; in the early 2000s the company had resisted the temptation of the technology bubble – because Vanguard does not aim to “time” the market for short term gains.

With that corporate culture set out – with the customer focus, the expectation of professionalism, and the faith that you can make a difference – it was easy for Mabel Yu to dissent, and dissent was the right decision for the clients and the company.

So how do you build that? It starts at the top. As a result of the publicity her managers expressed pride in her work, but commented there were other similar examples in the company that had not made it to the media, emphasising how normal thorough analysis and dissent are at Vanguard. The company hires for ethical attitudes, and sets out a company culture and investment practices that support that culture.

In another telling example of the frugality of the company John Bogle, the company’s founder, took Mabel Yu to lunch to thank her for her work on the mortgage backed bonds. He used the $5 reward voucher system they use to commemorate birthdays and successes within the company.

End of an Era

Today is the last day for Icelanders to eat at their local McDonalds. It’s a direct consequence of the crisis, Iceland’s isolation combined with fairly dire financial situation means that it’s no longer possible for McDonalds to import their supplies and sell burgers profitably. Apparently burgers at the Iceland McDonalds were above 5USD, almost the most expensive in Europe.

The venues will be taken over by a local business, they’ll be rebranded as “Metro” and offer a more local menu.

But today I suspect Icelanders will be lining up for their last fix of fries and flurries.

Are Layoffs Necessary?

Mid-crisis the pressure to cut costs was huge, and in a lot of companies (including mine), the result was a round of layoffs.

Screen Shot 2013-06-16 at 8.04.52 PMThere are a lot of costs associated with a round of layoffs that go well beyond the costs of the actual redundancy payout. BNET lists 5.

  1. Significant indirect costs often wipe out the direct savings of layoffs.
    The short term effect is positive, a reduction of costs. But if necessary work is not being done you’ll be rehiring within 6 months with hiring and training costs that wipe out your savings.
  2. Your best employees might bolt after a round of cuts.
    Research shows that in an environment of repeat downsizing your best employees will jump. That’s a loss of talent and expertise you can’t afford in a crisis but are more or less powerless to stop.
  3. The best types of workplaces often suffer the most.
    If you’ve built a workplace that prioritises personal development any shock to the personnel systems will be more unsettling than in a more cynical workplace.
  4. Layoffs decrease organisational performance.
    As you lose expertise, and the psychological effects ripple through the organisation performance will suffer.
  5. Employee retention is linked with customer retention.
    Customers may become disillusioned as their service levels drop.

I would add a sixth one; when the recessions passes (and they do) it will take you longer and cost you more to ramp up to new market demands.

So with all that in mind I wondered if anyone had steered their way through a crisis avoiding the layoff decision. I found one case; Alexander Kjerulf reports on a small company (2800 employees) called Xilinx. Rather than cut jobs the then-CEO Wim Roelandt cut salaries, starting with taking a 20% cut himself. He devised a series of strategies under the umbrella of “share the pain” and he communicated with employees – including using employee focus groups in developing the recovery strategies.

Although it was never promised Xilinx, a software company, survived the dot.com crash of 2001 without making anyone redundant.

Recent research shows that 94% of employees would consider a different pay/work structure rather than go through layoffs. So employees can see alternatives even if companies aren’t there yet.

It’s clear cost cutting needs to be done in a downturn, but given the costs of building a great team and the benefits to the company, layoffs should not be the automatic solution.

Image penger i fall /KaVass/ CC BY 2.0

Blame the Business Schools

As governments search for solutions to the current finanial crisis others are looking for who to blame and business schools are getting their share of the blame.

A colleague – who also holds and MBA – sent me the article “Harvard’s Masters of the apocalypse” in early May. Which discusses the accolades given and the business cases written by business schools at the heart of this and earlier crises and says;

Business schools have shown a remarkable ability to miss the economic catastrophes unfolding before their eyes.

picture-10The debate is being played out on the Harvard site, where Harvard defends itself saying that those responsible for the companies and organisations involved in the current crisis graduated some years ago and the courses have changed since then. Yet the Harvard graduate writing in the Times article above points out that both Enron and RBS were studied as best practice up to the time of their respective falls. Granted RBS was studied from the perspective its successful acquistion and integration of NatWest, but still the company has fallen a long way in a year, and the CEO is now labelled as the “world’s worst banker“. So the defence offered by Harvard doesn’t really hold.

Some commentators predict that the age of the MBA is over, I don’t think so – and not just because I happen to have one. But there need to be some changes.

  • Conflict of Interest

The first thing that needs to be addressed is that there is a fundamental conflict of interest; students pay a lot of money to join courses – making it difficult for school’s to kick students out for either bad performance or unethical behaviour. At my school, in my year, there was one student who cheated and one who did not perform, taking a second attempt at every exam. The exam retakes were legal but both guys have the same degree as me, effectively undercutting the value of my degree. But they paid the same as me.

  • Silo Thinking

During the degree subjects are studied separately; finance, accounting, organisational development, HR, marketing are all kept separate. Business ethics and shareholder management come far down the list. But the subjects affect each other and need to be integrated. A friend who went to IMD told me of one case study they did where each group recommended strategy changes to grow the business. At the end the professor of organisational development criticised them all saying “this is a family business – why did you all assume that the right thing to do was to grow big? why did none of you think of the current culture of the company?”

By getting out of the silo thinking students would be required to integrate finance, marketing, growth, organisational culture and ethics in developing their strategy.

  • Subjects studied

Beyond the risk and return ration and the discussion of WACC I don’t remember much about risk management. Judging by the current fall out it’s been missing from some other school curricula.

  • Underlying assumptions

The underlying premise of almost all of MBA teaching is that the company should grow. That you measure the success of the company by market capitalisation, or by market share, or by any other simple numeric measure relating to size – one company director boasted of headcount.

But companies can define other measures of success particularly if they’re private companies and not driven by the shareholders’ expectations.

There are other changes suggested, doctors and lawyers have to register each year, ship’s captains and pilots have to update their training regularly. Perhaps it’s time for this level or professionalisation to occur in the business world. Afterall the accounting is regulated and audited, internal processes are now guided by SOX. Certifying business leaders might be the only thing left.

POST SCRIPT: Bob Sutton is even more specific, he doesn’t just blame MBA training – but suggest that economics and the economists are too blame. Well, there’s enough blame to go around I’m sure the ecomomists can take their share.

The Crisis Explained

There are lots of videos on youtube trying to explain the crisis, 275 results for “financial crisis explained”, most of which are talking heads – watching them generally makes my eyes glaze over. There are some attempts at cartoon style simplifcations – most of which display get distracted by the narrators anger at the banks/regulators/government.

But there is one that stands out, it’s the rather brilliant work of Jonathan Jarvis. It’s clear and simple, but not over simplified. There’s not too much attitude in it.

Vodpod videos no longer available.

more about “The Crisis of Credit Visualized on Vimeo“, posted with vodpod