Are you aware of how your solution has unintended consequences?

Posted on October 8, 2012 by lawrence serewicz
Listen, Understand, Act

Listen, Understand, Act (Photo credit: highersights)

In trying to manage, it is important to start by understanding the issue or the problem before trying to solve it. As Peter Drucker wrote, an effective executive asks, “What needs to be done?” Often times, a manager may believe they have the solution before they understand the problem. The critical lessons to learn are to understand what the problem is before you start trying to solve it and to understand the solution before you apply it. On the surface, this may seem a simple and obvious lesson, but in management, it is one of the hardest to accept and apply. I call this the full cup problem.  The problem can be seen in three different ways.

First, a manager may be presented with a “problem” that is not theirs to solve because it is not a problem or it can be only be solved by someone else. Second, a manager may be carrying around their own problem and see your problem as a way to solve theirs.  Third, you may need to consider whether your proposed solution is solving the problem or is the solution a way to avoid the problem.  In each case, the two approaches need to be considered.  You need to understand the problem, as a problem, before considering what you are going to do.  Then, you need to understand your solution, a solution, before you consider applying it. The issue, though, is more than defining the problem or framing it.  Although these are important problem solving techniques, see end of the blog, the underlying issue is how we approach problems.

 

A well-known story illustrates the point that we need to understand the problem and the solution before we can solve it.

The Japanese master Nan-in gave audience to a professor of philosophy. Serving tea, Nan-in filled his visitor’s cup, and kept pouring. The professor watched the overflow until he could restrain himself no longer: “Stop! The cup is over full, no more will go in.” Nan-in said: “Like this cup, you are full of your own opinions and speculations. How can I show you Zen unless you first empty your cup.”

Are you arriving with a solution before you have a problem?

In many cases, a manager may arrive with a solution before they even know what the problem is that needs to be considered.  For many organisations, this can be seen when the head office or the senior management team are remote from the problem. The problem may be on their radar, but without any formal structure.  As a result, they attempt to solve it without understanding it.  What needs to be done in this situation is that that the senior managers need to gather more information, perhaps have the problem framed in a way that they will understand.  Otherwise, the senior managers are using their resources ineffectively because they are trying to solve the problem they think they have rather than the one that is happening on the frontline.

When a senior manager assume that they understand the problem, and quickly latch onto their preferred solution, the Chief Executive has to rein them in by asking if they understand the problem and if they understand their solution.  As they are not familiar with the problem but they know their solutions, they then push for their preferred choice regardless of whether it is correct.  The underlying issue in this scenario is that either the senior management team have poor quality information or the problem is not framed appropriately. Too often, they do not probe the issue, or work up an understanding of the problem, before offering a solution.  Instead of embarking on a possible solution, they need to make the problem concrete so they can understand whether their solution will work.

One way to consider this is that the organisation has an old car that needs to be repaired.  If the senior managers come to the problem, understood as how are we going to get to work every day, with the solution that they need a new car, they have not understood the problem.  They are coming with the solution; get a new car, rather than understanding that the problem do I need to travel to work and if so what is the best way to travel. The question can be seen differently by asking, “Do I still need to go to work every day?” “Can I work from home?”  “Is public transport available as a solution? Could I rideshare?”  If the company has many cars, then they may even assume that a car is the solution.

When a problem is used to solve a problem

In other cases, the senior management team may have a problem they want to solve and the issue that is raised becomes an opportunity to solve their problem.  For example, the problem that is presented is that the more goods need to be delivered.  The senior managers, who have too many cars, may come to the problem, propose that all salespeople be given cars, and deliver the goods.  The senior managers are solving their problem, the need to use more cars more effectively, instead of understanding why or how more goods can be delivered. To the senior managers, the delivery problem becomes a solution to their problem of having too many cars.

The Chief Executive needs to understand what they are trying to solve and what the solution will do.  If salespeople are also delivery people, can they still be effective salespeople? Can they be effective delivery people?  Moreover, the Chief Executive has to consider whether the senior management team is only solving the delivery problem to avoid the excess car problem.

Solving a problem by starting a different business?

In the third scenario, the manager may have a problem, such as too many cars around the building.  The senior managers who are far away may assume that the issue can be resolved by building a car park.  They may even visit the site and believe that building a new car parking structure is the answer.  They see the problem as parking and not having too many cars or understanding why there are too many cars.  If they decide to build a car park to store the cars, they are getting into a different business. Should they be building car parks? Perhaps they could look at companies who are already in the car park business. Instead of solving the car parking issue, the company is trying to decide whether it needs to go into the car parking business.  Instead of trying to understand the problem, their preferred solution is taking them into a different line of business. Do they need to build a car park? Could they park their cars with a private car park?

What these issues show is that senior managers need to have more information before they decide whether they understand the problem.  If they look at solutions, then they need to have enough information to decide if their solution solves the problem.  There are many solutions to problems, but none will work if you do not know what the problem is that needs to be solved.  Therefore, it is important to empty yourself of solutions before you look at a problem.  Otherwise, you will find the solution you brought because you are bringing a full cup to the table.

Here are some resources on how to reframe the problem so that it can be solved. These sites are mentioned to illustrate the issue not as an endorsement.

http://www.wikihow.com/Define-a-Problem

http://litemind.com/framing/

http://blogs.hbr.org/cs/2012/09/the_power_of_defining_the_prob.html

 

Related articles
Posted in change managment, culture, leadership, management | Tagged , , , , , | Comments Off on Are you aware of how your solution has unintended consequences?

The rise of the networked managers: sense making in the social media age.

Posted on September 27, 2012 by lawrence serewicz
English: Burkle Building, Peter F. Drucker and...

English: Burkle Building, Peter F. Drucker and Masatoshi Ito Graduate School of Management, Claremont Graduate University (Photo credit: Wikipedia)

The manager’s role is changing. The new organisation, connected and networked,  requires managers to deal with internal and external issues.  The required skill set is changing.  In the past, the focus may have been on service delivery based on top down management. The work would have been in silos. Today, social media and the increasing emphasis on interconnected work place means those work silos are collapsing.  Instead, the managers are now more “sense makers” within the organisation.  Their work requires an enhanced understanding of what the organisation is doing, the context within which it works, and how the work relates to the customers across the organisation.

Middle managers but not as we know them.

Within the organisation, the middle manager will continue to connect the senior management’s vision and plans to front-line staff delivering the work.  In that role, they will work increasingly within an explicit network.  They will be expected to have networking skills to share ideas and information across their networked.  Information hoarding and need to know information systems will not succeed.  Just as in the past, the manager will translate the senior management’s work into action plans and work packages that will guide the organisation’s daily work.  However, what is different now, in the social media age, is that the manager will increasingly have to “make sense” of the strategic plans provided by the senior management against the internal and external events and information.  The middle manager will not be able to wait for the next corporate management team (CMT) meeting to deal with an emerging situation. Instead, they will have to “make sense” of the senior management plans and act accordingly. At the same time, they will also have to make sense of the work for their teams.  They will not be able to cascade the CMT briefing and expect their work to be done.  Instead, they will need to translate it and help their teams make sense of it against the current corporate climate.

In a hierarchy the middle manager is a link between the strategic objectives and the daily work that delivers a service. The networked middle manager has the same role, but it is different. As a “networked sense maker”, they translates visions and priorities into action plans. They are not passively receiving the plans or ideas. They are “making sense” of the plans and translating them into work. They will make sense of external events and deal with external actors without waiting for the CMT to set a corporate line on the idea. The new middle manager will have to make sense of the situation. To make sense of the situation, they will rely more on the network than the hierarchy.

The future of the middle manager is also the future of work.  In that sense, the hierarchy will remain, but it will only have a specialised function and not a central role. Instead, the manager will work within a networked hierarchy. As work is changing so is the future of the organisation. In the past, we may have been comfortable with a centralized command and control decision-making process. Today, the work environment has changed.  Middle managers have to deal with unpredictable situations.  In this role, the manager’s everyday experiences of the actions and behaviours of others will shape their understanding of what needs to be done.  The stories, gossip, jokes, conversations and discussions we have within our network, our peers, will shape our understanding of what we should be doing.  In that sense, the network is also a conversation. The networked conversation turns the top-down intended change, the hierarchy, into an emergent and unpredictable (networked) process. The manager work creating a coherent set of structured conversations within teams to explore and harness the opportunities.

The networked organisation does not have information gatekeepers.

The networked organisation uses information sharing to succeed. By contrast, a hierarchy is marked by information hoarding and a need to know culture. The gatekeepers hoard or control information. They act as institutional chokepoints.  They limit the information being shared in the organisation. They also control access to senior managers.  The senior managers become reliant on the gatekeepers because they are the only source of information. Frontline staff will not understand the senior manager’s vision. The frontline then depends on the informal network controlled by the gatekeepers. The senior managers will become frustrated because they will not understand why their change initiatives are not working as intended. They know something is wrong on the frontlines. They will see more complaints. They may even reorganise fix the problem.  They will not succeed because gatekeepers will remain. The senior managers will not realize that the lack of information encourages passive management and passive employees.  The frontline officers will have to rely on fractured information networks controlled by the gatekeepers.

In a networked organisation, the middle manager shares information. They are a conduit not a chokepoint.  In this role, they will help people “make sense” of the organisations’ vision. They will not hoard information because their success comes from sharing.  They know they need to share information to translate the senior management’s vision into a work programme. At the same time, the networked manager will have a different view of managing staff. They will not rely on passive management.  Unlike a hierarchy where passive management is encouraged, a networked organisation requires information sharing and active management.

The networked organisation uses active managers.

An active manager will use constructive conversations to challenge staff.  The goal is to create collaborative solution so that staff understand what they are doing and why they are doing it.  Active management skills are in high demand by public and private sector organisations because active managers set targets and follow up with their staff.  The study showed “passive management” wasted resources and opportunities. Hierarchical organisations were more likely to use passive management.  Most organisations, in particular public sector organisations, are hierarchical. They rely on passive management.  In the time of austerity, they need to develop networked active management. The active management style is distinctive. The active manager will establish clearly what type of performance is required from each team. An active manager will confront under performance.  They will have the conversations need to improve performance. When they find unproductive activity, they will challenge it and change it. An active management system thrives on objective performance reporting. The performance figures are not massaged or managed.  Instead, performance and productivity information is shared so that everyone understands why decisions are being made.

Two tasks to create the active networked manager.

For an organisation to develop middle managers, they will need to complete two interrelated tasks. First, the middle managers have to know and understand the senior management priorities. The senior managers cannot simply set a plan and assume that it will be followed. Instead, they have to develop the plan with a networked conversation so that the middle managers understand what they are doing and why.  Once that is done, the middle manager, as a networked manager, can translate the understanding into work for our teams and units.  Second, middle managers will require training in active management skills.  This is more than being taught “performance management” or being told what the organisation’s approach to performance management.  Instead, it is teaching managers to be sense makers and understand how and why they need to make networked conversations. The networked conversations will help managers to work closely with their teams.  Through active management, managers can adjust their work programmes to improve performance and deliver against the agreed goals and targets.  At the same time, we can make sense of, and therefore manage, the change and uncertainty that comes with the future of work.

Work and organisations are changing.  The future is networked. A networked organisation will rely on active managers.  They will succeed with networked conversations that challenge and change performance.  If an organisation relies on passive management and hierarchical communication with fractured information networks, it will fail.  If you cannot change the organisation from within, the market (or the government) will change them from the outside.

Is your organisation active or passive? Is it networked or hierarchical?  Are you ready to have the constructive conversation to make the changes in your organisation?

 

 

Related articles
Posted in change, change managment, knowledge worker, management | Tagged , , , , , , , , | 7 Comments

Are you a filer or a searcher? Did your organisations teach you to file?

Posted on September 15, 2012 by lawrence serewicz
Change Management process ITIL

Change Management process ITIL (Photo credit: Wikipedia)

I know the title of this blog sounds like an obvious question and it may be a basic one. However, I wonder how many companies start from that basic level when developing their staff.  How many teach their staff to file? How many teach them how to search?

In the age of the personal computer, we almost take these skills or questions for granted. Everyone knows how to name documents, name files and store documents in proper files.  We seem to take it for granted that everyone is their own records manager.  Yet, learning to file, learning to use an organisation’s systems and rules, which was the mainstay of all organisations 50 or even 20 years ago, has been lost. Despite that, we seem to forget that finding information and records is the basis upon which most organisations will succeed or fail.  The issue of filing and searching is more than one related to organisational culture even though that may have an influence.  Instead, it gets back to how an organisation teaches its staff and how they learn.

Have we reached an inflection point where we no longer teach filing because everyone knows how to search?

I worked on a change management project that merged several units. The project succeeded but it showed a serious vulnerability within the organisation.  As a change management exercise, it has been fascinating to experience and see.  You learn more by doing these than a textbook can tell you.  What the change also revealed was that an organisation may learn in different ways and that will be reflected in how the staff are taught and learn.  We saw that different units had different ways of work and different ways of teaching their staff.  What we realize in theory (everyone has a different culture and that leads to different practices) we saw in practice (everyone does the same task differently).

What was most surprising, in relation to the question, was that the exercise revealed a generational issue about ICT and records management. Staff who had experience with consistent and agreed filing systems maintained them.  Staff who had less (or no experience with filing systems) but used PCs more often, were less likely to use a consistent and agreed filing system.  What became clear is some units had a consistent and agreed filing system and others did not. Moreover, some allowed staff to organise their systems as they pleased while others set out the principles and guidelines that gave staff a consistent approach across sub-units.

In nearly every single unit, filing was taken for granted.  In the same way, we take it for granted that everyone knows how to use a computer in the same way. What we found was that some people stored everything on their desktop because no one had shown them how to file.  For others, everything was stored on the personal drive because they were never shown how to develop the shared drives.  What was consistent among those who were poor filers was that they became, by default, excellent searchers.

The basic question taken for granted in the age of filing has changed into the belief that filing less important than searching. Instead of just taking filing for granted, we now seem ready to take searching for granted.  Just as we may have assumed 50  years ago that staff would know how to file papers the same way, the computer age assumed that everyone will follow a consistent approach to document names, file names and drive names.  Instead, everyone did it differently with mixed results.

In our unit merger example, the inconsistency in filing and storage showed that the organisation was not joined up or ready to exploit its intrinsic or innate knowledge.  As files and documents were not named consistently or coherently, no one could work effectively across teams or units. A lot of time would be wasted trying to find the documents or information.  If someone left, then it became uncertain what was contained in a person’s computer or their account because there was no way to search or find the documents.

What is the solution? Become a better filer or a better searcher?

For some organisations, the answer may be to constrain the service users’ choices in creating a document. The staff are required to become better filers because the technology forces them. We then rely upon technology to avoid any managerial issues with making sure a member of staff knows how to file.  The software package limits how any document can be created and maintained within the system.  For others, the answer might be to create general guidelines to instruct staff and let each service or section develop their service or section specific systems.

The answer in recent years flips the question. Instead, the focus now seems to be to make staff better at searching.  Recent developments in algorithms allow full text and concept searching across full systems.  The systems allow staff to find material no matter how it is filed or named.  In effect, the age of the filer is past.  Instead, people become better at searching.  In a sense, the dream of the semantic web is being realized inside organisations that use the smart algorithms to find documents and information.

What does the future hold?

If we have moved from being filers to become searchers, what is the next step?  Is it that we no longer require the basic skills because we assume that technology will help us overcome the skills shortages?  If this continues, is there a point at which we no longer need a filing system of file names, documents and drives, which is the fundamental filing system within computers?

What will this do for records management?  If we no longer need classification schemes or file plans, what is the point of the records management function?  Even then, we may have feet of clay.  By that, I mean, we still face the issue that staff are not being taught to file, or search, and by relying on technology to solve the skill shortage, we simply perpetuate the underlying issue.

What we may see is that organisations that can teach their staff and have staff that are willing to learn will have a comparative advantage.  In effect, the knowledge workers will be successful because they understanding the intrinsic skills sets, which help them succeed.

I would be interested to know how your organisation teaches its staff to file. What does this tell you about their approach to learning? Are you a filer or a searcher?

Here are some references that proved interesting as they addressed the file naming issues.

http://www.mnhs.org/preserve/records/electronicrecords/erfnaming.html

http://www.nationalarchives.gov.uk/documents/information-management/naming-rules.pdf

http://www.microsoft.com/atwork/productivity/files.aspx#fbid=c9UIk6gpeQR

I would be interested to know what you do on this basic question. Is it something that is no longer considered?

Related articles
Posted in Uncategorized | Tagged , , , , , , , , , , , | 8 Comments

What you allow to interrupt you defines your priorities

Posted on August 24, 2012 by lawrence serewicz
English: Seal of the President of the United S...

English: Seal of the President of the United States Español: Escudo del Presidente de los Estados Unidos Македонски: Печат на Претседателот на Соединетите Американски Држави. (Photo credit: Wikipedia)

We often hear management gurus advising us that effective and successful leaders know how to prioritise their work and the work of their company. To an extent, they are correct. What is left unsaid and not discussed is how those priorities are interrupted. By that, I do not mean the strategic opportunities that arrive, which need to be considered so they can be accepted or rejected.  Instead, I mean the more practical issues that occur day to day.

You can see this in senior management meetings.  When the Chief Executive or a corporate director is interrupted from the meeting, consider the issue that requires their meeting to be interrupted.  What is so pressing that it cannot wait until the meeting is over to be considered? Moreover, do they take time out of the meeting to deal with the interruption? I was once part of a high-level strategy team, which included several top managers.  During the discussions, which were going to decide the company’s fate, the senior managers continually checked their smartphones. In the end, the plan failed and the company collapsed.  I could not understand what could be so important on an email that could not wait for the hourly meeting to finish. What this told me was that whatever was in the email was more important than the company’s future.

What is more important your inbox or the presentation?

By looking beyond those senior managers, I noticed that the senior manager’s direct reports were doing the same with their meetings.  If you look down the levels of the organisation, middle managers take their signals from senior managers. In meetings, are the middle managers checking their smartphones for the latest emails?  By doing this, they are signally what their priority is. The email is more important than the presentation.  They may need to do this because their senior managers expect them to be on call.  To an extent, this cannot be avoided.

Is it the meeting is boring or the email is exciting or both?

At the same time, when managers are checking their smartphones, it may be because the presentation is poor, off target, or simply not of interest.  In other words, the manager is prioritising the time differently because the meeting is poorly designed.  In that case, you have a different issue. The meeting, its agenda, and its content can show that not enough care has been given about why it is being given, what the agenda has, and how the presentations (or discussions) that make up the meeting are designed and delivered.  I am not talking about these interruptions, as they are symptomatic of the context.  Instead, I mean the interruption that CEOs or senior managers allow.

The topic tells a story.

When the CEO or senior manager is interrupted, they are sending an indirect signal that the issue, which interrupts, is more important than the one being discussed.  I have focused on this issue because of a story that Peter Drucker told in the Effective Executive.  He said he had a weekly meeting with a CEO, which covered Drucker’s management project.  The meetings lasted exactly 90 minutes, only focused on one topic, and ended on time with no interruptions. Drucker asked how the CEO was able to achieve this feat.  The CEO said, “I instructed my secretary that only two interruptions were allowed.  The first was if the President of the United States called. He does not call.  The second is if my wife calls. She knows not to call me at work.”  With that simple story, Drucker showed that the CEO could focus because there was no higher priority for those 90 minutes He would not allow himself to be distracted during the meeting. He also knew there would be no problem that could not wait for 90 minutes.

One could argue that this story is only valid for CEOs who are in a business that does not have breaking news, or immediate updates.  Yet, very few CEOs are dealing with those types of operational issues.  If they are, then there are issues that need to be considered. Why can’t the CEO delegate those decisions? In some cases, you may have a CEO who personally edits any press release. When you see that type of interruption, you begin to see what the organisation prioritises.  What is it about editing a standard press release that makes it the job of the CEO? Why are they unable to delegate to their Head of Communication, the Senior Press Officer, or their spokesperson?  When you start to see these patterns, you realize that what distracts the leader is what guides them.

 

The person who is allowed to interrupt tells another story.

Just as the topic, which is the basis for the interruption, can tell you about what is a priority, so does the person who is allowed to interrupt.  The status of the person who is allowed to interrupt tells you how the senior manager or CEO delegates and prioritises.  If they allow junior officers to interrupt, then it is likely the topic. If it is a senior officer, or a colleague, then it is their status and not the topic.  In either case, the CEO or senior manager is telling the participants at the meeting, what is more important: the meeting or the interruption.  If this happens regularly, such as, senior managers allow (or are required to let) junior finance officers (press officers) (health and safety officers) (corporate governance officers) to interrupt, then finance (press, health and safety, corporate governance) is the priority for the organisation despite what may be stated by the company’s public statements.

The analysis does not work for middle managers or junior managers because they cannot control their time or their meetings in the same way as a CEO or a senior manager.  However, the next time you are at a meeting where the CEO or a Company Director is interrupted, take note of the topic and the person who is interrupting. Both of these will tell you more about what the organisation’s senior leadership, and by extension the organisation, consider a priority.

 

 

Related articles
Posted in culture, learning organisation, management | Tagged , , , , , , , , | 5 Comments

Three reputation management reasons explain why Penn State and the NCAA settled so quickly

Posted on August 17, 2012 by lawrence serewicz
NCAA 2006 championship banners hang inside the...

What price glory? (Photo credit: Wikipedia)

In the United States, the Jerry Sandusky scandal has gripped college sports unlike any scandal it has ever faced. The story centres on his criminal convictions for sexually assaulting young boys when he was a coach at Penn State and after he retired.  The crimes alone were terrible. What made it a crisis for Penn State was that top university officials are alleged to have covered up the crimes.  The crisis has led to a severe penalty against Penn State.  What has surprised some observers is how quickly the NCAA applied the penalty and how willingly and quickly Penn State accepted the penalty

As one observer noted, the NCAA process would have normally been the following.

Consider what the NCAA did not give Penn State. Normally the association notifies the school that an official inquiry is going to be held. Notice is followed by an investigation and, if the NCAA finds fault, a written explanation of the allegations is given. The school has 90 days to respond, after which it may request more time to respond or schedule a hearing before the NCAA’s Committee on Infractions.

Then comes the hearing, which resembles a trial or arbitration hearing. If the school is found to be at fault, it can appeal to the NCAA’s Infractions Appeals Committee. Penn State did not receive 90 days to respond, nor did it get a trial or an opportunity to appeal.

 

What most observers do not realize is that the NCAA and Penn State (PSU) had mutually reinforcing reasons to apply and accept the penalty quickly. The three reasons relate to their organisational needs as well as their approach to reputation management.  The episode has important lessons for reputation management.  However, each lesson has risks, which require an organisation to consider their own situation before attempting the same approach.

 

  1. PSU avoids the drawn out process where the media cycles continued to rehash the allegations, accusation, and lurid details.
  2. Both organisations reduce extra or secondary scrutiny on their work.
  3. Both organisations can move beyond the crisis to the penalty and recovery.

Stop the media cycle I want to get off

Point 1. By settling quickly, the PSU avoided the continuous media cycles that would follow the decision to contest the penalty.  The NCAA also avoids a protracted review and appeal process where their work as a regulator, and potential enabler, is under a national media spotlight.  The NCAA and PSU, already reeling under the Sandusky allegations would not want the issue to fester.  One could see the leaders in both organisations looking at similar high profile cases, like the BP refinery disaster and the Simpson trial to consider the media frenzy that would be generated by 90-120 days between the start of the process and the final ruling from the NCAA.

If the normal protocol had been followed, the hearings and motions about the hearings would have occurred (90 days from July) in the middle of the NCAA football season.  Every Saturday when PSU was being shown, the announcers would remark, “Penn State, as you know, is still awaiting the outcome of the child sex abuse scandal”.

 

The NCAA also understood that every decision, motion, and statement in the process would be put under intense scrutiny.  They would be analysed and reviewed by all the media outlets interested in the story.  If the problem continued, then the NCAA would become the story.  As Taylor Branch’s Atlantic article pointed out, the NCAA does not want to be the story and will do what they need to protect their cartel. They understand what the scrutiny of a child rape scandal would do to their organisation.

 

By acting quickly, the NCAA avoids the extended media circus.  By accepting the penalty, PSU avoids the same media circus. Together, they have taken the scandal off the front page.  They have replaced the storyline with something else, which is less problematic. What is now being discussed is whether the penalty was fair and what it means for PSU. We are not seeing media cycles rehashing the allegations, the accusations, and the lurid detail.  Instead, we have people looking at secondary issues like picking holes in the Freeh report and considering the possibility of a rebuttal.

The approach is risky as it can raise as many questions as it resolves.  However, the risk that the penalty and its acceptance seems problematic is a secondary to the immediate and real problems, let alone risks, created by having the scandal being rehashed in fresh and self-sustaining news cycles.

Where there is smoke, there is fire; so go smokeless

2.         Both organisations avoid extra or secondary scrutiny

By resolving the crisis quickly, the story loses its appeal for regulators, the public, and politicians.  The story turns to a related secondary issue: the penalty and the recovery.  The NCAA and PSU can focus on the future. They shift the story from the past to the future.   Neither organisation wants to be subject to a sustained forensic analysis by other regulators or by the press.  By reducing the story and changing it, they become a secondary news item. Other headlines dominate the public imagination.

 

When the public’s imagination moves to other events, the press, regulators, and politicians will change as well. There will be residual amount of scrutiny.  However, that scrutiny can be managed within the existing media management framework.  To put it in context, undercover FBI agents are not going to the NCAA or Penn State as they are for Wall Street brokerage firms.  By avoiding the extra scrutiny, the NCAA and PSU are able to gain some space within which they can resolve the crisis.  They also reduce the possibility that secondary scandals can reignite the original scandal.  The approach is not without its risks. Secondary scandals could emerge.  For example, the university’s accrediting body is reviewing PSU’s academic accreditation. The decision is more routine than a new scandal.  Any secondary scrutiny can be addressed differently than the original scandal.

Change the story from the past (crime) to the future (clean up and recovery)

3.         Both organisations can move from the crisis to the clean-up.  The quick settlement changes the focus. The BP oil spill story lost the public interest once the wells were capped.  The story changed to the relatively mundane story of cleaning up the mess.  Soon we were hearing about people complaining about their reimbursement payments rather than continual coverage of black oil coating dead birds and sea life.

What can be forgotten in this decision is that the Board has protected the football programme.  The Board have shifted the blame and the attention to a dead man’s legacy.  The focus is on the penalty and the way the university is handling it and not what caused it.  By putting the focus on what Penn State is doing to rebuild its culture and reputation, the Board are moving the public’s attention to the future.  The issue is now how they are acting going forward and not what they failed to do in the past.

 

From a management perspective, the short-term problem is that the Board has used Joe Paterno’s legacy as a shield.  However, the fundamental point remains that the Board protected what mattered most to Penn State: its football programme.  The Board has done everything it needed to do to protect its most valuable long-term asset: the football programme.  Moreover, they have set their decision within a longer-term strategy, which is needed for moving on from the scandal.

Three lessons not without their drawbacks

The PSU Board of Trustees and the NCAA may have made some tactical mistakes in the process. However, they have made strong strategic decisions.

First, they have changed the story so the media cycle is under better control.

Second, they have reduced additional or secondary scrutiny that would have accompanied a protracted story.

Third, they have set forth a vision for the future in which the football programme is protected. The price has been high for PSU, but they can afford it.

A case study in what not to do and what may be best bad choice

We will have to wait for the secondary lawsuits and prosecutions to be resolved before the scandal can be assessed. In the meantime, the scandal remains a good case study of what to avoid, how PSU handled the first crime, and what to consider for reducing the scandal, the NCAA and PSU collaborating and accepting a quick penalty that protects a long-term asset.

***One important warning to this blog is that the Board of Trustees may still doing something silly like contest the penalty and re-open  scandal so that it can re-ignite the media firestorm.  They should take a page from Paterno’s playbook and stop shouting at the referee. The other team is scoring touchdowns not the referee.

 

Related articles
Posted in change managment, coruption, culture, management | Tagged , , , , , , , , | Comments Off on Three reputation management reasons explain why Penn State and the NCAA settled so quickly

Are we all managers now?: the rise of the self-organising organisations.

Posted on August 4, 2012 by lawrence serewicz

The future of manager is connected to the future of work.  There has been talk of the self-organising organisation, which would cut or end the need for managers.  Instead, we are all managers now. The future of work will be dominated and driven by the opportunities that social media offers. The opportunities will create organisations without formal or set hierarchies.  In this way, the manager’s role becomes the future of work.

The manager’s role is changing. Managers are becoming “networked sense makers” within an organisation.  The manager will work with various teams and team members to create the products or services.  Their role is more than conducting an orchestra or leading.  Instead, it is a way to making sense of what the organisation, or team, is trying to do and translating that into action.  The manager translates visions and priorities and turns them into practical activities, plans, and goals for the team, unit, or division.  In this regard, the manager has an active role as well as a passive role depending on where they are operating within the organisation.

To harness the social media opportunities, organisations have to harness the talent and ambitions of their workers.  In this, the workers have more initiative and freedom to act.  They are no longer tied to an assembly line.  Instead, they and their managers will need to work in ways that allow them to coach (and be coached) and actively manage staff (who need it) to success.  The manager work creating a coherent set of structured conversations within teams to explore and harness the opportunities.

Active management is needed because staff are not being challenged to be their own managers.  A recent study, by the management firm Knox D’Arcy showed “active management” is in high demand. The study showed “passive management” wasted resources and opportunities. Active management was the ability to set targets and follow up with their staff. However, organisations that relied on passive management would find active management difficulty.

“An active management style is clearly a more difficult way to manage because it requires the clear establishment of performance expectations and boundaries, the confrontation of underperformance, the denunciation and elimination of unproductive activity and the objective reporting of performance and productivity to drive decision making.”

I suggest that we are moving beyond that stage.  Organisations can no longer tolerate or allow passive management.  We are moving beyond active management to the extent that we are all managers now.  Where active management will be needed is in those areas or types of work where workers cannot or will not be their own managers.  To the extent that they are their own managers, the active management is internalized.  When this happens, we can see a self-organising organisation.

Before we reach that stage, managers in the social media age will still be needed to make sure the work is organised appropriately. At the same time, human nature, being what it is, means that some work will need more active management than other types of work. They can harness the work to meet the goals.  The managers will increasingly be more like entrepreneurial work.  However, they are not entrepreneurs in a strict sense because they work within a framework.  In effect their success comes from making the framework, the organisation, work.  We are on the cusp of the self-organising organisation to the extent that we are all becoming our own managers.

Related articles
Posted in change managment, culture, learning organisation, local government, management | Tagged , , , , , , , , | Comments Off on Are we all managers now?: the rise of the self-organising organisations.

Why do regulators fail to regulate?

Posted on July 21, 2012 by lawrence serewicz
Seal of the U.S. Securities and Exchange Commi...

Seal of the U.S. Securities and Exchange Commission. (Photo credit: Wikipedia)

When people hear about regulators failing to spot problems, they often think the regulators are incompetent.  The headlines around these cases present a picture of regulators unwilling, unable, or unprepared to do their jobs.  Even though regulators may have flaws, what the headlines miss is the pressure that regulators face from the industry they regulate.  When a bad report comes through, it is rare that the offending company accepts the report. Instead, like in sports, they start arguing with the umpire to change the result.  Even if they do not change the result, they know they are “softening up” the regulator for the next visit.  We can see this in sports such as football (soccer), basketball or baseball where managers play “mind games” with referees and umpires by questioning their decisions. They put the referee’s performance in the spotlight and not their own team’s performance.  In extreme cases, we can see the players “hounding” or “mobbing” the referee.

The same approach happens in the corporate world.  There are many techniques. Some are subtle and some are overt.  For example, the industry may hire former regulators to lobby the politicians who control the regulators.  At the same time, they may hire former regulators to find out the best ways to influence the regulator.  The former regulatory officer will know the system, know the people, and know the issues.  Alternatively, they may use overt pressure such as public campaigns or, in extreme situations, lawsuits against the regulator.  In some cases a company, or an industry group, may blend both actions by lobbying the politicians who have legislative control over the regulator.  In some cases, it is not unheard of for a company to use personal information against the regulators.

An extreme example of this approach could be considered the way the Audit Commission in the United Kingdom was abolished.  The Audit Commission, the main regulator for local government, was often painted as ineffective or out of control. The new coalition government disbanded the regulator when they assumed control.  They promised to arrange a different form of regulation in its place.  By abolishing it, they send a subtle, but chilling, message to other regulators.  If you push too hard, you may be abolished.  The regulator will realize they have to protect themselves politically.  However, the more political they become, the less independent the regulator will be because they will have to take sides to survive.

In the United States, we can see the strong political pressure on the regulators. Congress is putting pressure on the Securities Exchange Commission and the Commodity Futures Trading Commission as they attempt to regulate the financial industry regarding derivatives. The derivatives were unregulated and their excessive use contributed to the financial crisis of 2008. The banks and commodity firms have been using lobbying firms to exert direct pressure on these regulators.  The danger then is that the regulators will start to “work with” the industry they are trying to regulate.  They will be “captured” as described in the term regulatory capture, which seems endemic in the American regulatory framework.

When the regulator is under overt, public pressure, it will have an effect on the frontline staff. Despite their best efforts, regulators will find it difficult to resist the pressure.  Human nature tells us that people react to this pressure to find ways to remove it or reduce it.  As such, their approach to difficult cases will be weakened.  The staff know the headlines and they carry that into their work, even if only sub-consciously.  Even the most experienced regulator will find it difficult to push borderline cases, or take on powerful targets, when the political pressure is clear.  What is less well known is that the same pressure can exist institutionally beyond the headlines.  An organisation can resist institutional pressure from the companies if they have a strong Chief Executive and a strong organisational culture.  In addition to these strengths, they also need to connect to their stakeholders.

The regulator’s stakeholders, their ultimate audience, can help them to resist the pressure.  In most cases, the audience or the stakeholder for a regulatory is another institutional body. For example, Parliament or Congress may be the main stakeholder or audience for government regulators.  For institutional bodies, lobbyists and other methods can be used to influence the regulators.  Instead of attacking the regulator directly, they go to their boss.  In other cases, it may be the public.  When it is the public, it is harder for the companies and organisations being regulated to influence them in the same way.  However, it can be done by using the media to present a picture of the regulator to the public.

In some cases, the regulatory framework may prove problematic by its own nature. Financial regulators face a particularly difficult task because there is a strong belief that markets can regulate themselves through openness and competition.  The laissez-faire attitude is strongly entrenched and that means the regulators face an immediate uphill battle.  Although the logic is not sound, it is clear and seductive.  The market, between sellers and buyers, will regulate itself, as their respective interests will ensure the market creates regulations to protect and promote those interests.

If we look at a number of regulators in the UK, we can see how they confront these problems, how they have responded, and whether they can succeed. The regulators that have been in the news recently are Care Quality Commission (CQC) and the Information Commissioner’s Office (ICO) and the Financial Services Authority (FSA).[1]  Although other regulators could have been considered, all three have similarities that allow us to understand the issues. What connects them though is they have been put under intense pressure, as regulators, by the bodies they regulate and their statutory supervisors.  Their response has been mixed.  The CQC and the FSA are struggling and the ICO appears, relatively speaking, to have responded best to the pressure.

All regulators rely upon their statutory authority, but this leaves them vulnerable to political influence.  Their strength is drawn from their ability to leverage their constituents to give them the freedom of action needed to succeed. Regulators need to find a way to triangulate against the pressures by connecting to their constituents.  Of the three, the ICO appears best able to leverage their constituents.  If a regulator can leverage their constituents, they can resist the pressure.  However, it does not make it disappear.

CQC

The CQC faces particular problems because of its history and its stakeholders.  The CQC was formed out of three previous regulators and has increased responsibility even though its resources are being reduced.  A recent parliamentary report makes a stark conclusion.

The Care Quality Commission (the Commission) is the independent regulator of health and adult social care in England. It was formed in 2009 from the merger of three previous regulators. It currently regulates over 21,000 care providers against 16 essential standard of quality and safety. The Commission plays an absolutely vital role in providing assurance to the public, both by ensuring appropriate quality standards and by deterring poor quality and unsafe care. The Commission takes action where it finds standards are not being met. To date, however, it has failed to fulfil this role effectively.

 

The claims are that the CQC was more concerned with reputation management and not transparency regarding its regulatory work. At the time, it seems to lack a strong client base for pursuing regulatory action.  The people needing protection are usually the ones least able to ask for it. The people in care are not organised, powerful, or resourceful, to influence the regulator.  By contrast, the organisations, such as care homes, or care home providers, are better placed to resist the regulator. They have the resources, the organisations, and the power, to resist regulation.

To overcome this dynamic, the CQC needs to leverage its relationship with the people in care.  To this end, the increased transparency about complaints and regulatory scores for care homes can help the CQC in its regulatory work. In effect, the transparency agenda allows the CQC to triangulate, use the clients and the system against the care homes and care home providers, in the middle. A regulator who does this well is the Information Commissioner’s Office (ICO).

ICO

The ICO has been effective in regulating the Freedom of Information Act and to a lesser degree the Data Protection Act.  An important part of the ICO’s success, despite, its limited resources, is its use of the public and political events to give it leverage.  For example, the HMRC fiasco gave the ICO increased powers. At the same time, the ICO has a system that allows it to triangulate effectively against the organisations it is regulating.  Moreover, it can resist regulatory capture, to some degree, because it is working on behalf of the public.  The public have a voice, they are increasingly aware of their rights (the ICO works to educate the public) and the work is transparent.  The weakness, though, is that the ICO does not have the institutional resources to deal with large organisations who will use the legal system to resist the regulation.  For example, the ICO faced pressure from the News of the World in large part because the threat of extended litigation. The ICO only has a budget of about £15 million, which can be less than the legal budget for some global firms

 

The ICO, like any good regulator, has demonstrated, largely, its prudence.  Prudence is a key skill for regulators. One regulator, by contrast, has shown a lack of prudence in its work.  The FSA has been unable to leverage its power for three main reasons.

 

FSA

Who are their constituents?  The question shows their challenge.  The answer is the public are their constituents.  Yet, one is hard pressed to see how the FSA connects to the public directly to the public.  They work for the public, but the connection is so vague that it is hard to gain any leverage.  Instead, they are closely involved with the organisations that they regulate.  In many cases, the FSA were embedded in the banks they regulated. In effect, they are captured by their proximity.  To a degree, the FSA has suffered from reverse triangulation.  They have staff inside the banks and they feel the pressure at that level. They face pressure through a bank’s political connections or the wider political lobbying powers of the City. The regulatory system is changing but its effectiveness will depend on their ability to resist the pressure.

At the same time, they their most powerful ally, the regulatory framework set by the government, was undermined when light touch regulation was required. The FSA is trying to catch up, with the new regulatory framework, but it destined to be superseded by a new financial regulatory body.  The Northern Rock failure, RBS failure, and now the LIBOR failure have provided an opportunity reset the regulatory framework. However, that will not be enough.  What the FSA, or what succeeds it, needs is a way to create leverage against the industry.  They have not found a way to connect to the public.  They have not found a way to use transparency to their advantage.  The CQC seem well placed to rely upon complaints in care homes or a league chart of inspections. The ICO rely upon the public and they too benefit from transparency. For the FSA, the problems seem institutional and therefore potentially intractable.  Can the FSA find a way to reverse triangulate against the banks?  Even changing the regulatory framework away from a light touch approach or philosophy will not be enough. They do not have a way to counter the continued ability of banks to game the regulatory framework and risk fines that amount to a fraction of the bank’s profits.  What they need is to find a way to create, or strengthen the direct customers of the banks.  The CQC has the people in care.  The ICO has the public.  However, who do the FSA have?  Therein we see their dilemma.

 

[1] The Press Complaints Commission (PCC) could be included but it cannot sanction the press. The other regulators have the statutory power to impose sanctions, which is a reason for companies and organisations to pressure them.

Related articles
Posted in Uncategorized | Tagged , , , , , , , , , | Comments Off on Why do regulators fail to regulate?

Do corporate integrity programmes work or does culture eat them too?

Posted on July 10, 2012 by lawrence serewicz

 

English: Thomas Hobbes Македонски: Томас Хобс

English: Thomas Hobbes (Photo credit: Wikipedia)

The Barclays fine for the LIBOR scandal and Glaxo Smith Kline (GSK)’s massive fine by regulators raises the question whether corporate integrity programmes work. All major firms have the programmes in some form either as a corporate social responsibility programme or as an explicit corporate ethics.  The corporate integrity is supposed to be the ethical structure within an organisation to keep it acting legally and ethically.  The CEO and senior management are responsible for ensuring the ethical code is followed. When the company fails to meet its corporate ethics, depending on the size of the breach, the CEO, as we saw at Barclays, will resign.  In Barclays case, the CEO stepped down because investors, regulators and politicians did not believe he was not the right person to change a corporate culture that had been weakened by scandal. Yet, in calling for his dismissal, the politicians, in particular, called for a return to “responsible banking” without explaining what that is except by its absence.

In the case of GSK, the company settled its lawsuits on fraudulent promotions of its products and paid nearly $3 billion in fines.  The company says it has learned from past mistakes and put in place a corporate integrity programme for the next five years.

GSK has also signed up to a five-year corporate integrity agreement that require the company to “implement and/or maintain major changes to the way it does business [and] implement and maintain transparency in its research practices”.

 Both incidents raise questions about the efficacy of corporate integrity programmes. On the surface, we can ask, “why if the programmes work, do we continue to have corporate scandals?”  If they do not work, what is the purpose in having the integrity programmes?  The surface questions show that the programmes have a punitive as well as a preventative element.  The programmes show staff how to behave and they are a standard for punishing breaches. The programmes serve other goals because they can reassure investors, customers, and, perhaps, future employees, that the organisation follows an ethical code. Yet, the deeper question remains: do they work?

Any code can be subverted so why have them?

The codes exist and people may follow them, but they can be subverted.  If the company’s code becomes a servant of the company’s goals, then it has lost its purpose.  In the case of Enron, senior management subverted the elaborate management controls.  The management pursued larger and larger deals to enrich themselves and not the company’s shareholders.  In effect, the ethical code was used to benefit the senior managers.  As the former Chief Financial Officer said, he thought he was protecting the organisation by what he was doing. He thought he was a hero for creating the financial instruments that hid the losses and enabled further illegal behaviour.  What is particularly chilling about his belief was that it reflects the idea that the company or the organisation has to be protected. Instead of obeying the law or the company’s ethical code, he believed and accepted that he had to “protect” the organisation.  In effect, the organisation became the ethical horizon and his place within it became the dominant criteria for assessing the ethical standards to be followed.

Is an MBA too late to learn ethics?

We can look back on Enron and think that things have gotten better; after all, we have more corporate integrity programmes.  Yet, we have to ask whether MBA students as well as the people being hired understand what corporate integrity means.  In one example, a professor recounted how in an MBA ethics class, the professor had an assignment where students were given the following scenario.  The FDA had identified their company’s product has serious side effects and will kill 20 people a year.  The MBA students discussed it and decided to fight the FDA and not pull the product. Even though they knew it would kill 20 people a year, they would fight the company.  In that scenario, the company had to be defended at the cost of any ethical considerations.  Even though this was from 1987, the issue is timeless.

We can see that recent research from MBA programmes shows that students with higher ethical standards earn lower salaries. We are supposed to be reassured that ethics are receiving an emphasis in MBA programmes. Yet, illegal and unethical behaviour is being reported regularly.  A recent National Business Ethics Survey showed employees are feeling pressure to compromise their ethical position more than at any time since 2000.

Is corporate ethics simply about survival at any cost?

If a company’s ethics is reduced to doing anything to survive a corporate integrity programmes will not work. In such a situation, pace Thomas Hobbes, there are no ethical standards because the company becomes its own ethical standard. The company will do what it must do to survive.  There is no question of whether it should survive, despite acting corruptly or being corrupted by the senior management. Instead, the highest view for an officer becomes “I must protect the organisation”.  The ethical horizon is limited so the officer does not ask whether the company is acting appropriately, is just, or noble, in its behaviour. 

What is the point of an ethical standard?

If that is the case, then we have to ask, “What is the point of an ethical standard?”  Why do organisations create them?  What is it about the financial or business world that now requires them?  In having them, we see a problem within society. The question is no longer “Is this right”; it becomes “What can I get away with, within the law”. The corporate integrity programmes become a replacement ethical framework for what society used to provide.  Yet, if they do work, to what extent are they adding anything beyond what any decent regime would expect from its citizens?  Moreover, we seem to know that they work by the absence of scandal and not a positive action.  In effect, the corporate integrity programmes serve more as window dressing than as an actual check on unethical behaviour.  In a sense, they become an elaborate way to reassure people that the organisation acts appropriately.  They represent a further “hedge” that the organisation can be “trusted.” 

What sets the corporate integrity?

When we consider corporate integrity, we always have to start with the top.  The leadership set the tone.  They will set the culture.  In public sector organisations, that culture may be different because of the politics involved.  After the leadership, the next factor for creating corporate integrity is the people you hire.

Who is hired and why you promote will determine the rest.

What emerges from the corporate scandals is the consistent theme is who was hired and why. At Enron, Skilling focused on hiring people who would fit his model of aggressive traders or dealmakers. He would recruit from elite business schools.  He wanted smart people who would who were aggressive deal makers.  The people that could make deals were promoted and rewarded. Those who could not were transferred or released.  The focus in such situations was not on ethics or ethical behaviour, it was to make the deal and ensure the employee’s survival. If the employee survived, produced deals, then, according to the perverted logic within the organisation, the organisation would survive. 

If you hire people without a strong ethical tradition or approach, they are unlikely to remain ethical in difficult situations.  The question to ask is whether they, or the company, are willing to lose money to be ethical.  However, you soon face a difficulty, how do you reward people who may do the right thing for themselves and for the organisation but remain vulnerable to what the competitors are doing?

If you reward risk taking, then people will take risks.  If you reward for deals, people will make deals.  If people are rewarded for what they deliver to the bottom line, they will work to it.  Yet, what is missing in any rewards programme is whether any of this is ethical.  If organisations are not rewarding their employees for acting with integrity, ethically, then it sends an implicit message that behaviour that succeeds that is not ethical is ok.  If a deal maker cuts corners and succeeds, does his firm penalize him or reward him?  The argument, as in LIBOR scandal, is that everyone else is doing it. Yet, does that excuse or justify unethical behaviour?  The answer on Wall Street and in the City appears to be yes.  The question is how you change that approach.

What is to be done?

How do you check on your ethics or integrity?  Is integrity simply a function of risk? In the case of Enron, the leadership subverted the management controls.  The task is to build an internal culture that resists such pressures. The organisation, not just the individual employees, has to be ethically strong.  If ethics are just another risk factor that needs to be hedged, the organisation will fail.  The organisation will succeed to the extent that it, and its employees, acts ethically. However, the staff need to understand that ethics is more than following the rules.  Even though the current maxim is “what the law does not forbid, it allows”, that is not a sound basis for creating an organisational ethics.  What is needed, in these situations, is to remind staff that their personal integrity is linked to corporate integrity, which, in turn, is linked to a higher integrity. What this means is that the organisation has to reiterate there is a law higher than the organisation and the survival of the organisation is not more important than its ethical “soul.” If nothing is more important than survival, then the organisation will soon become corrupted because necessity then determines, and justifies, all behaviour.

Related articles
Posted in change managment, culture, leadership, management | Tagged , , , , , , , , , | 3 Comments

Are there Good Samaritans on Wall Street if you can be taken for 9 Billion

Posted on July 5, 2012 by lawrence serewicz
An assortment of United States coins, includin...

An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

When JP Morgan lost 9 billion dollars on a derivatives trade, many people saw it as the market functioning properly.  What made the story interesting is the scale of the losses, 9 billion dollars at last estimate.  Yet, the story contains a deeper concern for two reasons.  On the surface, there is the issue, not widely known, that another part of JPMorgan was on the other side of the trade.

That one hand of the bank was selling while another was buying is not uncommon in the dog-eat-dog world of Wall Street. Yet that trading is typically done on behalf of clients, not in a way that, inadvertently or not, undermines what the bank is doing for itself.

The point is noteworthy because even as one side of the bank was losing money, the other gained. The trade shows, to an extent, that the bank is operating separately in its dealings with its money and its investors’ money.  However, it does make one wonder of the point of the market, at all, with such transactions.  Even though the surface question is interesting, the deeper question is more troubling.

The deeper part of the story, though, is the mechanics of the trade itself. Therein we see the darker, more dangerous, side of Wall Street. What we have to consider is whether the market is really working in derivatives trading or whether something more sinister is at work.  Here is where the parable of the Good Samaritan becomes important because it shows us Wall Street in a different light.  Instead of finding out who our neighbour is, so that we may help them, the question at the heart of the parable, the goal of derivative trading seems to be to beggar our neighbour. More to the point, the goal appears to inflict a loss on our neighbour without any regard for the consequences. As long as we gain, it does not matter what happens to anyone else.

The trade in question was that JP Morgan was based on buying “insurance” to hedge against potential losses on another deal.  JP Morgan was using a hedge index, based on a portfolio of financial instruments (IG Series 9 10 Year Index CDS) (that does not mature until 2017) to deal with the risk of losses. If the fund increases in price, that is if the companies behind the index (of the default risk of 125 major North American companies, including Aetna, Walt Disney and Lockheed Martin (across 14 different industries) become greater, then JP Morgan, losses money. If the index goes down, the risk of default goes lower, those companies from the 14 different industries become stronger, and then JP Morgan makes money, which protects its other investment.  In that deal, JPMorgan’s trader was assuming that the economy, overall, would improve so the index would go down.  However, as the economy did not improve the index increased.  At the same time, the index increased because others were buying it on the belief that it would increase and JPMorgan would have to cover it.

What the hedge funds noticed was that the price appeared artificially low because JP Morgan was selling so much of it.

 With JPMorgan selling so much of this insurance, the price was artificially cheap. In buying it, the funds were betting that the cost would increase when the bank eventually stopped selling. Such a move would notch them a tidy profit while causing steep losses on paper for JPMorgan.

You will note that the hedge funds were not interested in what the 14 industries were doing, nor were they interested in what the 125 companies were doing. Nor, were they interested in the overall health of the economy.  Moreover, the index was not maturing until 2017.  Instead, they saw the JP Morgan was short on the deal.  In a word, they saw that JPMorgan was vulnerable, and they took advantage of JP Morgan’s need to insure against risk.

The deal itself was not to create a better product.  The deal was not to provide cheaper funding for other projects.  The deal was not to grow a company or an industry.  The hedge was against risk against other investments, the investments themselves were not necessarily in industries or services creating jobs or economic growth.

The issue, though, is not about derivatives or how they work. They are like any financial tool; they are neither good nor bad in themselves. They become a problem because of the intent for which they are used.  In this case, the goal appeared to be to reduce risk for capital invested in other more productive areas.

What the deal comes down to is that one party understood a way to take advantage of the other.  There was no mutually beneficial outcome.  The goal was not to find a productive use for the money aside from being in a position to take advantage of someone else.  The hedge fund profits by finding someone, anyone, else in a vulnerable situation and makes a profit from their vulnerability. The hedge fund is not interested in growth, productivity, or market share.  The only goal is to find the vulnerability that can be exploited no matter the consequence or cost to others.

The deal is not about finding a mutually beneficial result. Instead, it is to find those results that are not only zero sum, but upon which the other party is so vulnerable that no matter what they do, they will suffer a loss. The goal, it would seem, is not so much to make a profit as to inflict a loss on the other party.  However, if a trade is supposed to be mutually beneficial, what is the purpose of a zero-sum trade?  We return to the question that is at the heart of the Good Samaritan: Who is my neighbour?   In the market, we have to ask whether we have a duty of care to the market to consider the result for the market on any trade.

The hedge fund has succeeded. They have their profit. Yet, JPMorgan could default and collapse. Some might say, “Well that is how the market operates, the weak companies need to be destroyed.”  Yet, are they being pushed out of business because they cannot compete nor are they being pushed out of business because someone saw their vulnerability and exploited it.  Does the hedge fund even consider what it is doing to the other company or the market?  If it has considered that effect, does it even care? If JP Morgan defaults entirely, and goes the way of Lehman Brothers, then the financial market cannot recover.

Here is the interesting thing about the behaviour in the market.  The hedge fund would not tolerate such behaviour within its company.  Could you imagine if the CEO had to be worried that his (or her) employees were trying to undermine the company at every opportunity without concern for the consequences?  The only defence against that fate is to take out more and more “risk” insurance.  Yet, what does that do?  What we see is that we are not dealing with risk. Instead, we are dealing with the absence of trust. The deals and decisions, which other celebrate, have dramatic and drastic consequences for the world.  Imagine if every industry in the world were run this way.  Why do we accept it in derivatives but no other industry?  Moreover, what is the larger social good from such a deal?  What does it benefit anyone, but the hedge fund and its investors, when a loss of that size is inflicted on a company?

The hedge fund has made its profit, but at what cost?  The next time we get on the other side of a “trade”, we may need to ask, “who is my neighbour?”  Perhaps, the deeper problem from this is not risk, but the lack of trust within the market that requires companies to seek someway to insulate or insure themselves against the inability to trust anyone else in the market (even their own company.)

Related articles
Posted in culture, management | Tagged , , , , , , , , , | 2 Comments

The Bureaucrat and the Banker: Bob Diamond’s downfall

Posted on July 4, 2012 by lawrence serewicz

Bob Diamond is a shrewd, powerful, deal maker who does not understand bureaucratic politics. On Wall Street, or in the City, your word is your bond. If you cannot keep your word, you cannot do business. Lehman Brothers collapsed in the end because no one could be believe their valuations on assets they were trying to sell. No one believed their word.

In bureaucratic politics, what matters is what is written down. Bureaucrats will say anything because they know what matters in Westminster or Washington DC is what is written down.  What Bob Diamond did not realize was that to deal with a bureaucrat you have to ask them to write down what they are saying to know that you have a deal. If they cannot or will not write it down, you know they cannot keep their word. What Diamond should have done, to protect himself, was to ask Turn to put his request in writing.  Had he done this, he would have immediately seen a different reaction.  Instead, he took Turner’s implicit message; keep Barclays in the LIBOR band, as their word.

Someone trained in bureaucratic politics would have quickly seen the three problems that emerged from the conversation between Diamond and Turner.  A bureaucrat would recognise these, but a banker would not.  The reason a bureaucrat would recognise the issue and a banker would not is that the two worlds work to different rules. The cultural context for how they work shapes how they understand the situation.  However, despite their differences, the approach to risk and risk management connects the two, which made it difficult for Diamond to see the problems. The first problem has to deal with how the Treasury reacted to being told other banks were not posting accurate LIBOR rates.  The second problem was with what the Treasury’s implicit message required.

If they are more concerned about image, you should be worried.

On the first problem, the banker was explaining that the other banks were not posting accurate (honest) LIBOR rates.  The other banks were putting in lower numbers to suit their purposes. According to Barclays, they were putting in accurate numbers.  In a sense, what makes the whole episode ironic, Barclays was more honest in their listings and have suffered the most outrage. What should have alerted Barclays to an underlying issue was the way the Treasury reacted to the news.  When the Treasury became aware of the discrepancy, they did not send in the FSA. Instead, they suggested, simply by noting their concern that Barclays was an outlier, that Barclays bring its rate in line with the rest of the LIBOR group.

The Treasury, like any image conscious or media sensitive management team, was more concerned with the appearance of the issue than the reality.  What they believed to be the reality was the appearance of Barclays’ outlying rates. The Treasury, because it was focused on the image, was focused on the appearance shaping the reality instead of the reality creating the appearance.  The Treasury, like mediocre managers, was concerned with managing the news rather than understanding and fixing the underlying problem.  They were more concerned with the appearance of where Barclays was on LIBOR rather than the underlying reason why the appearance was created. They were less concerned with the fundamentals, which is what is the business in finance.

The concern for image would have played into Diamond’s concern for risk management. Diamond would have realized that the appearance of being in need of money would have created the belief that Barclays needed money.  If unattended, the rumours would have created their own reality.  However, that situation is different from the image management that Treasury is alleged to have required.  They are linked, which made Diamond likely to understand the logic but not the intent, which is also likely why his subordinate would have misinterpreted the message.

 If it is in writing you have evidence of their complicity

The second problem was that the Treasury was intimating by its observation that Barclays was an outlier, required an illegal activity.  For Barclays to comply they would have to put their LIBOR numbers lower on purpose rather than reflect the reality. They would have to “fix” the LIBOR.  If this is what the Treasury wanted, Diamond should have had that instruction in writing. The reason for this would be twofold.  First, it would have made the Treasury stop and think about what they were asking.  The request may not have stopped them, but it would have made them take a different approach to the issue.  How the Treasury would have reacted to such a request would indicate how they viewed the conversation. If they were acting with integrity, they would have written it down. If they were acting without integrity, they would have become indignant, withdrew the request, or covered themselves by saying “the situation is clear enough without putting it in writing.”

If it is illegal they will not write it down (you hope).

The second point of putting it in writing was that it would have given Diamond the leverage necessary if things went wrong in the future.  What the Treasury was doing, as has been suggested by the telephone memo, is asking Barclays to fix their rates.  If that had been put in writing, they would be directly culpable for the outcome. In bureaucratic politics, the evidence and the audit trail are central to success.  If you cannot prove what was discussed, then it was never discussed.

 Who is asking? You or your boss?

The third lesson is that when dealing with bureaucrats, never accept their claim to be speaking for “senior figures in Whitehall” or for the “White House”.  As Dean Rusk pointed out, when someone said, “The White House wants this document”, the White House is not a person.  He said someone in the White House wants it.  The assumption they are creating is the President wants it.  If the President wants it, he will ask for it.  If someone less than the President wants it, they can ask for it in their own name. The key lesson from bureaucratic politics was that when authority was speaking it had to be made to speak in its own name. If Tucker were acting on his own, asking to know hear the request from the source would have revealed it.

 

Lessons to learn for dealing with bureaucrats.

  1. Always have bureaucrats write down their instructions. Like good leaders, if they have integrity, they will write down their words.
  2. If the bureaucrat (or anyone else) wants you to do something that may involve illegality, make sure it is writing and you indicate what they have requested is potentially illegal.
  3. If the other party can intimate that someone in higher authority is requesting the information, the person with either higher authority speaks openly or you refuse to respond to the lower level operative.

 

Related articles
Posted in coruption, culture, leadership, management | Tagged , , , , , , , , , , , | Comments Off on The Bureaucrat and the Banker: Bob Diamond’s downfall