Morality? What Morality?

A true tale of a global financial services organisation that offers wealth management facilities to private investors. In so doing they charge fees to deal with the paperwork and accounting associated with running a portfolio.

Imagine then the scenario where, following a withdrawal instruction, they pay out the cash but singularly fail to account for this in the online valuation and paperwork. Some 3 months later the investor decides to review his portfolio and believes that there is some £18,000 of cash lying around he hadn’t noticed. He then invests this in a series of companies over the ensuing 4 months. Still no warning from the managers that something is awry.

A full 11 months after the initial withdrawal the wealth managers wake up to their error and ask for their money back. This leaves our investor in a quandary. Does he disinvest the “new” shares or some of his other holdings? He opts for the latter, only to suffer a major setback a few weeks later when the price of one of the new holdings collapses due to unforeseeable circumstances. Overall the exercise has left our customer some £17,000 down on where he would have been if nothing had happened from Day 1.

You might agree with the wealth managers who blame him for the loss and refuse to compensate. But hang on a moment. They have put our investor in the invidious position of having to call heads or tails between two options. Moreover they are effectively saying that if anything goes wrong with that call then they are not to blame.

How can that be? The Financial Ombudsman service operates on the principle that when an error is made, the customer should be put back in the position they were in before it happened. In my view that means the wealth managers should reconstruct the portfolio as it would have been if they had accounted properly for the first withdrawal - thereby disabling the subsequent purchases and switching. They should also compensate for the substantial lost dividends on the holdings that were encashed. Instead they choose to hide behind a legal opinion that absolves them from any responsibility whatsoever.

Who is morally bankrupt here?

How Select should criticisms of banking culture be?

It appears that everyone is running around shouting about the latest financial services scandals (Libor/Euribor, Interest Rate Swaps).  Heads are being demanded on the proverbial platters but that seems to me to miss the underlying issue.

Questioning Bob Diamond (late CEO of Barclays) in front of the Treasury Select Committee, Mark Garnier MP [Conservative, Wyre Forest] highlighted that owing to the culture of Libor Rate Setting within Barclays for years prior to 2007 Rate Setters were not reporting attempts by traders to fix the reported rate (on behalf of the bank).  This depicts a cultural mismatch between attempted criminal behaviour and reporting to senior management or Regulators.

In the USA the Federal Reserve had noted that banks on average were reporting their borrowing costs some 36 basis points below what was being signalled via other measures.  A number of Regulators also noted in various reports at the time of the Financial Crisis in 2008 that there was a mismatch between the reported rates of interest being paid by banks and independent measures - indicating that something was amiss.  However nothing else ensued to ascertain whether something was wrong.  This led Andrew Tyrie MP, the Chairman of the Treasury Select Committee to hint that the Regulators "were asleep at the wheel".

Diamond has acknowledged that the problems (at Barclays and in other Financial Services scandals) have arisen due to the culture in place - but nothing has been said about how that might have been made more robust.

Regulators banks and politicians have missed the fundamental issue that how we allow people to manage culture in large corporations is the seat of this type of problem.  More to the point, there are no natural checks and balances that make it easy for employees (whatever organisation they belong to) to point things up as being adrift from an acceptable standard.  John Mann MP [Labour, Bassetlaw] highlighted that Diamond and his senior team apparently had not even attempted to question the possibility that things might not be OK despite the reports that had been floating around since around 2007.  A teflon response indicated that Diamond and those of his ilk simply don't want to step up and recognise that they have a responsibility to ask questions before things are highlighted as having gone wrong.

The pressure to ask such questions would be more acute if the organisational culture had a clearer set of benchmarks for end-to-end impacts on all stakeholders.  This, in turn, would put pressure on other organisations to behave better.  Transparency is a huge incentive to be seen to be doing things right.  Transparency, however, requires effort to be maintained.  It seems, for the past few years at least, that hasn't been the top priority of those in charge.

When is Co-operative Compleat?

Moving along from the basic discussion about shareholder involvement I notice that David Cameron is now promoting the idea of Co-operatives as part of moral capitalism. Is this really (as he says) historic Conservative Party policy?

Well I think we can leave that question unanswered - the more important point is that fundamentally the political argument is shifting in favour of models that are more integrated with overall societal needs. In general they are becoming more Compleat.

What is missing from all of this is any thought-through guidance as to what that actually means. The Compleat Biz remains one of the few works out there that provide the answers.

I was engaged in dialogue last week with someone who questioned whether it is possible to construct models of business that make the shareholder community more responsive rather than merely being the providers of capital. The answer seems to lie in the political will-power to change the paradigm of the last 60+ years.

On that basis lobbying of politicians should continue unabated to make sure we seize the current opportunity to build a better society for everyone by restructuring the prevailing model of capitalism. (Coincidentally it is likely to be far more profitable as well.)

Is the world waking up to shareholder power?

As readers will know - I've been recommending for years that shareholders should be given a statutory role to get more involved in companies' activities. Prime Minister David Cameron and Business Secretary Vince Cable are now talking about making it a legal requirement for shareholders to have mandatory oversight on directors' pay.

However the time it has taken for emergence of this level of interest in changing the free market model is frankly a disgrace. The prevailing idea that somehow allowing the status quo (on the basis that top talent would walk elsewhere) was blind stupidity. The so-called top talent is often nowhere near as good as the huge salaries that they command appear to state.

The reasons are fairly obvious - big corporate doesn't have any binding requirements to engage with the wider community and the impersonality of size obscures the ground-level impacts of executive management behaviours. Only now are people beginning to make the connections between the free behaviours we have been brainwashed into seeing as acceptable.

The question for the moment is whether this awakening will spread to other areas of corporate activity. Shouldn't there be greater oversight and wider stakeholder involvement in more than just executive pay? The Pension Funds have not done society a huge service to date by their silence in the arena of corporate governance and it would be useful to have rather more critical voices aired.

Time to push the Compleat Biz agenda a little harder - the politicians appear to be starting to listen.

Well-Being in the corporate world

Things have been changing this year. Not only is society coming to terms with credit crunch and eurozone crises, it is also beginning to challenge some of the traditional approaches to running things in general.

Take the third sector. Lots of well-intentioned and enthusiastic people who are trying to make a difference but the old models of individual charities are starting to come unstuck as the sources of funding from the public purse dry up. It is carnage in some areas but there are a number of leaders who are looking for alternate routes to sustain their operations. Great opportunity to influence them to become more compleat in their thinking - and hence better fitted to meet the challenges they face.

With colleagues I've been looking at some new models of support that would share costs, increase professional inputs to management and help these bodies get themselves into shape financially. Can't say that it is fully-functional right now but there is clear demand from the charities for professional help.

If you want to know more - then drop me a line. After all, best practice is there to be shared.

Thanks, Sir David ...

Yesterday I was among the audience listening intently to Sir David Attenborough as he gave a lecture entitled People and Planet. The thrust of much of his argument is that we need to deal with the taboos surrounding the issue of ever-expanding population growth and the impact on planet earth. Given that the lecture was chaired by HRH Prince Philip KG KT, neither speaker pulled their punches.

This has left me wondering whether in fact the same taboos are affecting business? The reality of never-ending expansion is clearly unsustainable. So what if, following the opening of the population debate in such eloquent fashion by Sir David, discussion starts around ways in which we can operate that do NOT require ever more resources and continual growth to deliver meaningful employment? We should be able to employ people and give them a good standard of living without at the same time vastly increasing their resource consumption.

There seems to be a lesson for business here based in the Natural World. Populations that overreach themselves collapse (like the Arabian Oryx) and even Man is not ultimately immune. As Attenborough pointed out - there are two alternatives. We can stop the expansion by Contraception - which in business terms means developing models that don't require being ever-bigger in business. The alternative is an increased Death Rate - through famine, disease or predation. For Famine we can insert more bankruptcies due to inadequate markets to support the underlying businesses. For Disease we can expect malfunctioning businesses that are increasingly unable to serve their customer base. And for Predation we can - in Sir David's words - insert War. The latter may be commercial or the rather more traditional sorts of outbreaks of fighting that have plagued mankind throughout history.

So what - if anything - does this tell us that's new? Well maybe nothing other than that, at last, some well-respected voices are being raised to question the sense of humankind's behaviour. The Compleat Biz has advocated that this should be an inherent part of business thinking. So I'm pleased to say that - in the business world at least - we got there before one of the world's great naturalists. However we cannot rest on our laurels. The real test is to see just how far and how fast the message can be spread before it is all too late.

Who pays for incompetence?

Round 1:
A friend from Germany was recently applying for British Citizenship and - being a diligent individual - had followed the instructions to the letter. All the appropriate forms were completed and the whole lot sent off with instructions to pay the amount listed on the Borders Agency Website.

What my friend did NOT know was that the amount payable had been changed a month earlier. Nobody at the UKBA seems to think that they should have updated their website at the same time. Consequently the whole bundle of papers was sent back with an instruction to pay the correct amount.

Now if this was a retail business the Trades Descriptions Act would apply and the supplier (in this case UKBA) would be bound to provide the service at the advertised price. Try telling that to someone who simply follows their internal rules and has no sense to see the issue.

Round 2:
Having decided that there was nothing for it but to pay the revised fee - all the papers were repackaged and sent off with a NEW payment instruction for the higher amount.

Of course that should have been the end of it and a new British Citizen would shortly be celebrating the fact.

Needless to say further incompetence has intervened. UKBA seem not to have received the payment instruction because the whole pile of papers came back again, with a letter telling him to pay the correct amount and minus the payment slip that had been included two weeks previously.

You would think that in this day and age that a Government Agency was capable of opening its post without losing stuff - especially when it is sent Special Delivery.

Overall my friend is no further advanced with his application and has so far spent £5.50 on each occasion with Royal Mail and UKBA are incurring courier fees with DX for sending the papers back again. And all because someone in their administration cannot (a) update the marketing material in a timely fashion; and (b) cannot open the mail without losing slips of paper.

Given the focus on cost saving in Government - it is about time that this kind of incompetence was eradicated. Ultimately the British Taxpayer is footing the bill at both ends. I suspect that the issue here is far from uncommon and in most instances the recipients of this treatment are hardly in a position to make a complaint. They simply have to shrug their shoulders and go round the loop again and again ...

The problem ultimately stems from building rigid systems that have not been thoroughly thought through and tested. There can be no legitimate complaint from the Civil Servants that they are overworked. This is a foolhardy approach to procedure that is costing everybody time and money.

If YOU were hiring people to operate a business for you - would you let this type of attitude prevail?