A discussion on Corporate Governance

An interesting MIT video on the topic of Corporate Governance.

Stewart C. Myers, Robert C. Merton (1970) Professor of Financial Economics,; MIT Sloan School of Management ; William F. Pounds, Professor Emeritus of Management; Dean Emeritus, MIT Sloan ; Adam Emmerich, Partner, Wachtell, Lipton, Rosen & Katz

Description: While they won’t directly address headline-grabbing corporate swindles (Enron! Tyco! WorldCom!), these speakers are well aware of the turmoil roiling away in boardrooms these days. William Pounds, long an insider within the top tiers of corporate life, makes a case that improving governance means having “the most appropriate and effective chief executive officer in place in every corporation.” All the things we’re concerned about, “integrity, transparency, high quality professional performance,” will fall into place if the right person occupies this central role. And don’t count on regulations and hard work by committees “to protect shareholders and employees from disappointment if the wrong person sits on top,” says Pounds. But the process of attracting the best candidate, the job of corporate boards, is tricky. Plus, says Pounds, we don’t really understand how boards work as organizations, so establishing best practices for recruiting and evaluating CEOs will require some serious research and data collection _ a good assignment for business students.
In Adam Emmerich’s very long view, which begins as early as the British East India Company, today’s business scandals represent mere bumps in the road for corporate governance. The modern corporation got its start in the 17th century, according to Emmerich, and the key notions of corporate governance have been in place since around 1911. There’s “an economic logic to corporate organization,” he says, which makes it a “very good system,” and one that’s been very stable. The most recent changes in governance emerged as reaction to the takeover wave of the 1980s, when courts compelled boards to take a more active and restraining role with CEOs. And the Sarbanes-Oxley law accelerates the trend of more active boards. But, wonders Emmerich, “does the enhanced degree of interaction between a board and CEO lead to a more effective CEO? Currently, the zeitgeist says we’re not worried about an effective CEO but about a dishonest CEO.” Emmerich conjectures that greater board activism might lead to less efficient public companies. He also notes a corollary trend of activism among large shareholders, including, hedge fund managers, and he perceives the possibility for conflicts of interest.

Host(s): Sloan School of Management, MIT Sloan School of Management

Worth looking at for anyone interested in this subject

A new computer

After some years it is apparent that I need to retire my trusty Inspiron 9400.

The question is with what to replace it?

I am tempted to a Dell XPS 15 with lots of memory and disk, following my philosophy of over spec now, but get long life!

Communication problems

My longtime friend and former colleague Richard Cheeseman sent me his latest promotional email today.

Richard is one of the good guys.

He may be able to help you in the increasingly complex telco space.

Richard believes in telling the truth.

Check Richard out. Let me know if he fails to deliver. I have a piece of 2X4.

 

Steve Jobs

Steve Jobs is dead. A great shame for his family, friends and colleagues.

Yet I confess I find the outpourings of grief by so many somewhat OTT, and much of the media coverage equally so, for example the front page of the Dominion Post here in Wellington this week.

Jobs was a great businessman in many ways, but he was not a saint. In many ways he had the instincts of a monopolist given Apple’s success at creating a walled garden for its offerrings.

SCF:David Cunliffe continues to seek enlightenment

As I suspected David Cunliffe has embarked upon the ritual of using Question Time to raise a series of questions re SCF, no doubt hoping that the constant drip, drip approach will over time wear down his opponent and/or gain him a breakthrough – if of course there is one to be had. Plus of course trying to cause the Government pain and distress.

Today’s skirmish in the struggle between Cunliffe and Bill English can be seen here:-

Today was about when the view was reached that SCF would fail and whether statutory management as an option was explored.

Russel Norman of the Greens joined in as a player today.

My initial thoughts, based on a first viewing and reading of the material follow.

This extract was an interesting exchange:

Hon David Cunliffe: Approximately how much extra taxpayer liability would the Government have avoided if it had intervened in June 2009, and what was the rationale for incurring the additional taxpayer liability after that date?

Hon BILL ENGLISH: The first point I make is that even as late as early 2010 no one really had a good grip on the assets or liabilities of South Canterbury Finance. In fact it became clear, with KordaMentha’s involvement, that the Government had a better idea of that than the company itself did, until Mr Maier came on the job. The kind of calculation that the member is postulating never really occurred. The Government’s approach was, knowing that there was potentially a very large liability, to make sure the company had every opportunity to succeed so that there was no taxpayer liability. We made decisions along the way that did not, in our view, increase the taxpayer’s liability, yet gave the company the best opportunity to succeed. In the end the company did not succeed.

I find the comment about the Government having a better idea than the company of the position, quite fascinating. It suggests at the very least that governance was severely lacking. It calls into question the quality of fundamental business processes and basic internal control, when one hears/reads:-

Hon BILL ENGLISH: The first point I make is that even as late as early 2010 no one really had a good grip on the assets or liabilities of South Canterbury Finance.

Indeed, one might wonder just what the board of directors was doing to fulfil its stewardship role, if Bill English’s statement is correct. How long had that been the case is a question that also comes to my mind.

The statements made today, certainly seem to lend support to the comments I expressed the other day, some of which are below:-

To me, and in my opinion based on reading the article and other prior ones, plus other media comment, it reveals a pattern of:-

1. Lax or lacking governance

2. Poor internal control in certain areas

3 Dominance of process by one person, which is normally seen as a control weakness and business risk

4 Business processes inadequate for the scale of operation undertaken

5 Management weakness, as it could be inferred that to an extent lending operations were the province of individual fiefdoms, especially given Mr Maier’s comment on Lending Officer control.

The points above leading to a personal view that business risk was being incurred which was capable of being reduced and or avoided.

These thoughts are to my mind borne out by the comprehensive revision of past financial statements by Ernst & Young after their appointment – plus the fact that they queried whether SCF was a ‘going concern‘. It would be fascinating to know what was contained in any post audit letter on suggestions for improvement.

I tend to wonder about the role of the board of directors in all this. Just what reports and information were they receiving?

Russel Norman’s exchange with Bill English did bring out a couple of interesting points:-

Dr Russel Norman: Given the level of what we could only describe as fundamental uncertainty concerning some of the basic facts—that is, about whether the level of risky borrowing increased after the guarantee—why will the Minister not support having some kind of select committee inquiry or public inquiry into the events surrounding South Canterbury Finance’s failure, given the amount of public money involved?

Hon BILL ENGLISH: In the end that is a matter for the select committee. The Government will, when we have the time and the resource, issue all the documents related to the scheme that we can. That will give the member, along with anyone else, the opportunity to scrutinise all the relevant information and decide which further questions need to be answered

This seems to suggest that whilst at this time Government is not proposing to hold an inquiry, a mistake in my view, as I think a wide-ranging inquiry performed by appropriately qualified persons outside the political process into the whole finance company mess not just SCF would be best, there is nothing to stop an appropriate Select Committee undertaking an inquiry. However, as we saw with US Congressional Hearings into the Gulf of Mexico oil spill such inquiries tend to be more of a political grandstanding opportunity than a reasoned and objective look at the facts. Hopefully, any inquiry by a select committee in NZ would not degenerate into a partisan mud-slinging contest.

It was heartening as well that Bill English is on record regarding the making available of all information, albeit with a caveat which might cause restrictions on availability in due course.

I look forward with interest to the next instalment . Watch this space as they say!

Peter in Auckland 27-30 September

I will be making another foray to Auckland on the above dates.

Please let me know if you would like to make contact. Happy to discuss anything and everything with no obligation on either side.

I will be downtown in Auckland CBD in early afternoon on Monday 27, leaving on evening of Thursday 30 September.

You can contact me either by commenting on this post, or on Facebook, or the old fashioned ways email or telephone

Email:– manning.charles.assoc@gmail.com

Phone:- 021 533 651

Look forward to hearing from you

More on the Bank of Allan

Rebecca Macfie, Listener writer and author of two previous articles on Allan Hubbard – A South Canterbury Tale and Counting the Cost has  another article on the Bank of Allan in the new issue of The Listener, not on line as yet.

This article entitled – A law unto himself – has the lead in:-

Allan Hubbard thought only he could save South Canterbury Finance, but insiders had been challenging him for years. Rebecca Macfie looks at what was really going on.

Interestingly as the Hubbard saga has progressed the tone of Macfie’s articles has become more questioning of the Hubbard myth.

Macfie’s article leads me to think that Hubbard ran SCF very much as a personal fiefdom. These comments in the article certainly seem to suggest so:-

extract #1 Rebecca Macfie - NZ Listener 18 - 24 Sept 2010

This relates to 2004 after the departure of his partner Mr Rolleston. Now why would the controlling shareholder and key director come in and open all the mail? It defies logic, especially given that SCF was not a small operation by then.

Then Ms Macfie reveals later in the article:-

extract #2 - Rebecca Macfie - NZ Listener 18-24 September 2010

So as late as the end of 2009 Hubbard was controlling loans and accounting for them in a ledger he kept personally. This seems to somewhat contradict an impression put about by Mr Hubbard’s supporters that all the problems were down to someone else. Though at this time we do not know whether the Hubbard ‘hard ledger’ was where all the ‘good loans’ were.

Hardly sound governance I would suggest, nor normal business practice. The term ‘hard ledger’ suggest to me that it was hand written. Furthermore, questions arise in my mind as to how it was integrated into the enterprise’s overall books of account and whether best practice internal control was exercised. I wonder what the auditors made of this practice?

Then Ms Macfie turns her attention to the question of Aorangi Securities, on which the statutory managers have had quite a lot to say. So has Mr Hubbard who refutes their statements. Yet, Ms Macfie writes:-

extract #3 - Rebecca Macfie - NZ Listener 18-24 September 2010

This seems to be in conflict with much that has been said by Hubbard in more recent times.

The article repays reading.

Some Thoughts:-

To me, and in my opinion based on reading the article and other prior ones, plus other media comment, it reveals a pattern of:-

1. Lax or lacking governance

2. Poor internal control in certain areas

3 Dominance of process by one person, which is normally seen as a control weakness and business risk

4 Business processes inadequate for the scale of operation undertaken

5 Management weakness, as it could be inferred that to an extent lending operations were the province of indvidual fiefdoms, especially given Mr Maier’s comment on Lending Officer control.

The points above leading to a personal view that business risk was being incurred which was capable of being reduced and or avoided.

These thoughts are to my mind borne out by the comprehensive revision of past financial statements by Ernst & Young after their appointment – plus the fact that they queried whether SCF was a ‘going concern‘. It would be fascinating to know what was contained in any post audit letter on suggestions for improvement.

It would be fascinating as well to know what KordaMentha had been reporting to Treasury in respect of the way in which SCF had conducted business.

I tend to wonder about the role of the board of directors in all this. Just what reports and information were they receiving? After all as Cadbury stated in 1992 (Sir Adrian Cadbury’s seminal report on corporate governance in the UK):-

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.  The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.  The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.

It has been axiomatic for some time, I believe, that this means ensuring that there is an appropriate level of information for the supervisory role to be effectively performed. In addition that management must have put in place the processes which are appropriate to enable informed decision making to take place. Such processes would not, I suggest, include the chairman opening the mail and keeping a hand written loan book, which it would appear he kept very much under his close personal control.

In my view, there is much to suggest that Corporate Governance as defined by Cadbury was not as rigourous as it should have been.

I suspect that there is much more to emerge as to how SCF conducted business and how decisions were made.

China – the new dominant economy?

Update: The video appears to have gone walkabout. It was playing OK this morning -14 September. I will try and get it back when I have time to fiddle around with things.

Vodpod videos no longer available.

China – the new dominant economy?, posted with vodpod

From the WSJ – Managing Director of The Carlyle Group, David Rubenstein, predicts that China will surpass the U.S. as the dominant economy by the year 2035, in a ViewPoints interview with Deputy Managing Editor Alan Murray. Another example of the views now held by many in business as to the way the world economy is going and the emerging dominant force. Consequently we in NZ need to handle our relationship with China very carefully

A concern I have is the apparent negative attitude of many in this country towards people from China. We have, as John Key has identified a major opportunity with China through the FTA put in place by the previous government. We should not allow domestic prejudices to sabotage our position.

In the video Mr Rubenstein addresses some of the aspects of economic nationalism. In that regard the attitudes being expressed by some here re land purchases are part of our own NZ economic nationalism.

The video is worth listening to, there are some useful pointers to pick up on.

The dangers of dabbling in social-media for promotional purposes

The other day I posted on the Power of Social Media and cited the case of Busted Blonde, NBR and the Veuve Cliquot competition. Yesterday I drew attention to the publication of guidance by ISACA on Social Media Risks. One factor identified by ISACA was the need to:-

Include social media training in the organization’s regular awareness communications or information security training curriculum. Users need to understand what is (and is not) appropriate and how to protect themselves and the organization when using social media.

The NBR/Veuve Cliquot incident illustrates this well. There has been considerable media comment in NZ both online and in the MSM. Much comment in NZ, often negative, was directed at NBR.

In addition there has been considerable overseas comment. Apart from press comment such as this piece by Anthony Rose in The Independent – When cliquot lost it’s Veuve, this item in a trade journal caught my eye.

Marinel FitzSimons – The Drinks Business described the situation and concluded thus:-

But the ever-effervescing temper of the bloggers has not been calmed, as the current quarrel is that she is not receiving her weight in Champagne, but in Champagne bottles.

As one blogger puts it: “[NBR] had a com­pe­ti­tion, they enlisted social media, they changed the rules and got smashed via social media. It isn’t good enough to get away with­out a penalty pay­ment, and I say they should pay her weight in Cham­pagne, as per the terms and con­di­tions, with­out the bottle.”

This tale is yet another example of the dangers of dabbling in social-media for promotional purposes.

Ms FitzSimons makes a very good point. If you are going to use Social Media, make sure you know what you are doing and why. Develop a clear strategy and understand the risks.

In this regard, I found this article- When A Social Media Campaign Goes Bad –  by Dr. Colin N. Clarke, who is a senior strategist for The Flint Group; he studies how and why people choose to consume information to be of considerable interest. At the beginning he writes:-

An interesting case study has recently emerged in New Zealand that underscores the power of social media… and how it must be wielded CAREFULLY.

Dr Clarke then backgrounds the whole affair, including some quotes from bloggers. He suggests that the original premise to harness Social Media was sound, but it failed in the execution. Indeed, just like many business projects do.

He comments:-

What is one of the most important elements of a social media strategy? TRANSPARENCY. And this is where NBR failed.

The fallout is beginning to reach a fevered pitch in New Zealand as bloggers and mainstream media are now berating NBR for its lack of transparency. True to the nature of social media, the court of public opinion is speaking out and it’s not pretty

So now a lot of media coverage, but not favourable coverage.

Dr Clarke highlights how Transparency is critical when using Social Media and concludes his piece with this:-

NBR and Veuve Clicquot opened the social media door when they created the campaign. The best move they can make now is to create extra space on the podium, include the popular vote winner and celebrate. Maybe next time they will plan their social media strategy more thoroughly, and make sure that the rule of TRANSPARENCY is heeded.

What failed social media campaigns have you experienced? How did they fail you?

EDIT – Five days after the social media eruption occurred, NBR posted this apology and awarded the popular vote winner a grand prize as well. A graceful apology with a bit of humor, it is interesting that NBR states it did not intend to “compromise transparency.” No doubt a lesson learned by NBR in how to properly engage in the social media environment.

The bold text is inserted by Dr Clarke.

This media coverage and the comment piece by Dr Clarke vividly illustrate what happens when media campaigns go wrong. When a good idea is poorly executed!

Some Thoughts:-

This case brings out a number of key issues.

1. Using Social Media not only potentially incurs technology and  related risks, but as with other initiatives incurs Business Risks. In fact in some instances, such as this one the Business Risk may be the greater risk run.

2. Social Media inititiatives should, in the same manner as other business projects, be subject to a Business Risk Assessment as part of the proposal for the project

3. Social Media campaigns must be run by people who understand the nature of the media being harnessed; or with input from same

4. The rapidity with which issues/problems can spread due to the nature of the Social Media world means that risk planning and mitigation strategies are essential.

5. As with all initiatives an appropriate governance framework should be in place, one that is flexible and responsive, with appropriate underlying processes and policies

A last word from Anthony Rose:-

It may yet well be a win-win situation though if you believe that all publicity is good publicity (ask Max Clifford). Remember when the champenois sued Yves St Laurent for calling its fragrance Champagne? It may have cost YSL a packet in legal fees, but it was nothing compared to the profits reaped from worldwide sales of Champagne, the fragrance, and publicity for the brand. Could the last laugh belong to the marketing-savvy Widow after all?

Call me cynical, but?

Some Thoughts on SCF

Today I have been trying to absorb all the material that has become available. It keeps increasing all the time.

This affair is going to run and run as they say.

Recriminations all over the place.

I will be posting on SCF, but it will take some time to work out what I want to say.

Also it appears that some are rushing to get their viewpoint out there.