Three reasons why Bob Diamond will stay and lessons in crisis management

Posted on June 30, 2012 by lawrence serewicz

This blog post has been overtaken by events. Bob Diamond resigned on 3 July 2012.

It is unlikely that the LIBOR scandal as described in the FSA report is going to be enough to remove Bob Diamond from Barclays. There are three main reasons why he is going to stay. From these three reasons, we can see important management lessons for leaders facing a similar crisis.

He has the support of the Board

First.  He has the support of the Board for the following reasons.

  1. He has not done anything wrong personally. He can say, as far as we know, he has not done anything wrong.
  2. He cooperated with the FSA investigation and save a drawn out litigation and will be in the clear when other banks are penalized.
  3. He paid early on the fine and saved almost £30 million pounds for Barclays on the deal.
  4. He gave up his bonus to reduce the scrutiny. (He understands the PR value.)
  5. He has seen Barclays Capital through some tough times and he has a vision for the future that the Board support. They were not looking to oust him before this scandal.

He has a history of success that made money for Barclays.

Second. His history of success has made a lot of money for Barclays and positioned them for the future. The Board and stakeholders will remember he avoided the fate of RBS and Lehman Brothers by taking risky moves against the market. Diamond understood the need to go to external investors to get support. This gives him leverage. Yes, it was a sign of weakness, as Barclays was not strong enough to go it alone in the turmoil. However he was able to get Lehman Brother’s one profitable part.  Although the UK government stopped Barclays from taking over Lehman Brothers completely, it was probably better than the other offer being considered which saw RBS rescuing Lehman Brothers.  This is like a sinking ship trying to save a drowning man.

Diamond picked up the profitable parts of Lehman Brothers at a discount.  The move gave Diamond a foot in the United States and it solidified his place in the market. In effect, it secured his flank. When he had to face the head on decision about a bailout, he took another risk and went to the external investors. A risky move, but it worked. Of the British banks, Barclays has come out of the crisis relatively safe.  They avoided nationalisation and constraints.

A vision for the future is set with no successor in site.

Three. The Board are relying on Diamond. There is no successor in place or even being considered.  If Diamond had made previous mistakes or successors were in place, the situation might be different. However, the Board understand that their current market position is based upon Diamond.  In the short and medium term, they would suffer more if he left than if he stayed. What remains to be seen, though, is whether he can repair the damage.  If his past success is to be considered, then there is a good chance he will succeed. Diamond knows he has a strong hand to play against his board and stakeholders. He acted by forgoing his bonus. In effect, he has pre-empted the critics.  He is a smart and perceptive operator who knows how to work the system, which is why other leaders should consider the lessons he is teaching.

Management Lessons

First, Diamond’s quick letter in response to Andrew Tyrie shows that he is well prepared.  He was not on the back foot with this issue.  He was prepared for the announcement and he expected Tyrie’s request to come to the Committee.  His letter is an excellent example of crisis management. Admit mistakes, vow to fix it, make an act of contrition (forgo a very large bonus) and show that it was not his fault.  The only weakness was his insistence on “rogue employees”. His stance makes him vulnerable to the potential counter attack on his leadership and the culture that is his responsibility.

Second, he understands the timing is critical in such situations to reassure the market and put the attackers on the defensive.  By agreeing to such a quick timescale, there is less time for the Committee to prepare.  He will have an advantage.

Third, Diamond knows he has the Board’s backing. He could not write the letter or agree to see the Committee if he had any doubt over the Board.  What this shows is that he has kept the Board involved, to an extent, so that they are not surprised by the FSA news nor are they surprised by the Committee request.  What this shows is that he has good communication within the organisation on issues that matter.  In other words, his boss is not out of the loop.

Fourth, Diamond has a good story to tell to the Committee. He can claim he is fixing the problem and changing the culture.  He has a vision for the future, which will make it harder for critics to undermine his position.  He can say he has a solution that needs time to work so why change horses in mid-stream.

Unless other revelations emerge that show widespread cheating or show that Diamond was directly involved, he will survive this crisis. To put it differently, but directly, why should he go?

 

 

 

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Thoughts on Barclays, Diamond, and a corporate culture in crisis

Posted on June 29, 2012 by lawrence serewicz
Barclays Bank PLC world headquarters

Barclays Bank PLC world headquarters (Photo credit: Wikipedia)

As I read the report published by the Financial Services Authority (FSA) for the fine of £59 million against Barclays Bank for the recent LIBOR fixing scandal, I was struck by how Bob Diamond’s letter to Andrew Tyrie seemed to confuse and avoid the issues.  In a sense, what Diamond letter shows is the flawed culture.  His letter does not show a corporate culture that will obey the rules and build trust.  The letter instead shows a near pathological inability to reflect the reality of the situation and accept responsibility for what is wrong.  Instead, the issue is downplayed.  The contrast between the FSA report and Bob Diamond’s letter raised three distinct points. The first is the apparent cause of the issue. The FSA and Diamond point to different causes. The second is the importance that Diamond and the FSA give to Barclays’ cooperation with the FSA. Instead of reassuring us, it raises questions about both parties. The third is about the failure of Barclays’ culture. The fine and Diamond’s letter to Andrew Tyrie undermine the claim that Barclay’s is a good corporate citizen with a robust corporate culture.

 What caused the Barclays’ LIBOR crisis?

The first issue is the apparent cause of the LIBOR manipulation and the associated crisis.  The FSA report seems to accept the claim by Barclays (paragraph 13 and in more detail paragraphs 108-128) that senior managers were concerned with negative media coverage during the financial crisis.  They then instructed junior managers illegally setting the LIBOR bids lower. Senior managers feared negative media comment on the bank’s LIBOR position would damage the bank.  We do not have any explanation for this or have any assessment of this risk. We are given this explanation at face value.

The argument is that the lower bids would improve Barclays’ LIBOR position. The lower bids would support its reputation for liquidity at a critical time. The claim itself is striking. One would not expect senior managers as sensitive to media comment. What is also striking is that the FSA report could not find the origin of these important (illegal) instructions.  What is clear from press reports is that unit making these decisions was in the department (Barclays Investment Banking) for which Bob Diamond had overall responsibility.  This leads us to the other problem within the cause of the crisis.

In the letter to Tyrie, Diamond has blamed the problems on a few “rogue employees”. We return to a theme seen in the News of the World scandal.  We are now to believe rogue employees were responsible. Yet, if anything, the rogue employee defence is a managerial failure. In the FSA report, the rogue employee defence is not sustainable. The report points to the failure of controls and systems for checking the LIBOR rates process complied with market rules (paragraphs 146-161) In many cases, the FSA report contradicts Diamond’s view by showing that senior manager were actively avoiding compliance issues (see paragraph 172).  When compliance did meet the FSA, they avoiding telling the FSA that Barclays submissions were false (see paragraph 173). In the face of the FSA report, we can see that Barclays’ culture was fundamentally flawed.  The ethos was to protect Barclays, and not comply with the law, and senior managers were complicit in the decisions.  The issue is not isolated but cultural.

The senior managers were sensitive to negative media, which also reflects the culture within Barclays. On one level, their sensitive to negative media coverage makes sense.  The market is volatile and rumours can quickly turn into a reality when markets believe and act on negative news.  Yet, the underlying reality, the truth of Barclays situation seems to have been overlooked.   Either Barclays was sound, and could prove it, or it was not sound and no amount of manipulation would change that fact.  If Barclays was sound, why was it concerned with the negative media to the point it would undertake illegal activity.  We can see through the FSA report that Barclays was not sound when it claimed to be in 2007 and 2008.  Instead, if its LIBOR rates were correct, it was under the same or more stress than its cohort.

In many organisations, especially political ones or ones that rely upon public confidence, there is sensitivity to the media’s messages.  Yet, in healthy organisations, the leadership can separate the noise, the general comments about the business, from the clear signals, what the market is telling them through their share price.  They have integrity and do not bend to the pressure.  The leaders can keep their word despite the negative media speculation.  When Lehman Brothers collapsed, it was because no one would take their word for what they could deliver in their deals.  They could not keep their promises so any promise their valuations, for market assets, were no longer believable.  By contrast, we are led to believe that Barclays was not in as serious trouble at that time.  If Barclays was not in serious trouble, why was it unable to convince the market? Why did it have to act illegally?

What also indicates the flawed culture is how the senior managers behaved.  The senior managers were constantly checking to see if Barclays was an outlier.  The behaviour raises further unsettling questions about the culture about the organisation’s response to regulations.  Do we see, in effect, the fixing of regulatory behaviour?  The larger question is whether this happens in all regulated industries.  Are the companies actively cooperating or colluding to avoid the regulator? Is there a natural instinct to collude and cooperate against the regulator, the customer, or the public?

Is the FSA a weak regulator trying to recover from past mistakes?

The second point that is striking within the report is that the FSA compliments Barclays for extremely good cooperation (paragraph 21).  On the surface, this makes sense. The FSA, as would any regulator, wants to encourage companies to cooperate.  The level of cooperation will be considered a mitigating factor when the penalties are to be assessed.  By encouraging cooperation, the FSA can make be a more effective regulator because cooperation reduces the resources it has to commit to taking punitive action.  However, a deeper issue emerges when one considers this investigation against the previous investigation by the FSA into the Royal Bank of Scotland (RBS).

In the RBS investigation, the FSA highlighted a number of flaws within its regulatory approach.  What one has to consider is whether the same regulatory issues that limited its ability to oversee RBS contributed to its inability to oversee Barclays.  In that scenario, the FSA, already stretched by having to deal with Northern Rock and the RBS, would find it useful to have Barclays cooperate.  The FSA would not want to have a drawn out investigation given the fallout from its RBS report.  Moreover, it would not have seen a need to do that, given that the political direction that it followed was for light touch regulation. (See paragraphs 682-690 of the RBS report).

The deeper issue reminds us that the problems in Barclays were happening at the same time as Northern Rock, and RBS were falling apart.  The LIBOR crisis was not an event that happened afterwards.  In effect, we are seeing a shambolic regulatory system.  The fine gives the appearance that the FSA has improved and it is now a robust regulator, but that only masks the underlying issue.  The fine is large and appears at an opportune time, to reassure the market that the regulator is in charge. However, does it demonstrate that the FSA has moved beyond the shambolic regulatory framework that contributed to these problems?  In a word, is the FSA now a better regulator or is it still cleaning up the mess from the previous 10 years?

 

What one has to consider a deeper problem presented by the eagerness to cooperate? Barclays may have cooperated with the FSA to avoid greater scrutiny.  The regulatory subject will have an incentive to appear as cooperative as possible to avoid greater scrutiny.  One has to consider that Barclays showed an ability to manipulate the regulators in the past.  If they could do once, they would certainly have an incentive to do it again. They may be showing their eagerness to cooperate to keep larger or more intractable issues from being seen or investigated.  At the same time, one has to ask, as above, whether the FSA has the regulatory capacity to dig deeper into Barclays given the size of the problems across the industry.

 Would you want Barclays’  corporate culture?

The third problem with the report is how badly it reflects on the culture at Barclays. Bob Diamond reminds us that culture is what sets Barclays apart from its competitors.  In 2011, he gave the Today Business Lecture in which he claimed that banks could learn the lessons to be good citizens. He claimed that they needed to rebuild the trust.

And to rebuild trust, in my view, three things must happen.

First, we have to build a better understanding of how businesses and banks work together to generate economic growth; second, we have to accept responsibility for what has gone wrong; finally, most importantly, we have to use the lessons learned to become better and more effective citizens.

In professing that Barclays was a good corporate citizen, trustworthy, and honest, he was describing an illusion.  The culture within Barclays was not one that would engender trust.  Aside from the various examples within the FSA report of the lack of corporate controls and the almost non-existent concern over the illegality of what was being done, the following example is indicative of the culture.

Three Money Market Desk managers were asked who was responsible for having adequate controls in place to avoid the problems seen.

149     In addition, during the Relevant Period, there were no clear lines of responsibility for systems and controls on Barclays’ Money Markets Desk. The FSA interviewed three different managers with some responsibility for the Money Markets Desk. Each gave a different answer when questioned as to who was responsible for ensuring that there were adequate systems and controls on the Money Markets Desk. None of these managers accepted that they had responsibility.

The gap between Diamond’s public claims and the private reality within his organisation is stark.  Managers did not know who was responsible for having systems and controls in place to avoid illegal activity. In such a situation, the gap between the rhetoric and reality raises the question whether Bob Diamond knows what is happening and only says publicly what will improve Barclay’s reputation.  The other option is that he does not know what is happening within the bank.  Either position undermines his leadership and his claims regarding the corporate culture.  What should concern investors, shareholders, and customers are his repeated claims that Barclays is a good corporate citizen.

Bob Diamond’s focus on corporate culture and good corporate citizenship is more about the appearance of the issue than the reality.  A robust corporate culture would have seen the issues would have been reported sooner.  In robust corporate cultures, rogue employees are rare. Where the culture works, the systems, the procedures, and the underlying way of working stops rogue employees.  Instead of taking responsibility and explaining that the culture failed and his leadership failed, Diamond looks for scapegoats.  His behaviour bears an uncanny, and unflattering, resemblance to Fuld and Goodwin He has justified or explained the scandal by arguing that it was employees trying to protect the company at a critical time. Alternatively, rogue employees created the problem. His behaviour revealed more about his leadership, corporate citizenship, and integrity than any speech.

A corporate culture reflects how people do things within an organisation.  “How do you get something done?” is the question that reveals the culture. At Barclays, the way to get something done appears to act illegally so long as it protects the organisation. Even in his letter to Andrew Tyrie, the Chairman of the Treasury committee, Diamond is intent upon confusing the system.  At one level, the crisis was simply about traders seeking to improve their own trading position.  Yet, he claims this is a separate issue form the LIBOR manipulations which were only done to protect the Bank’s liquidity position. Yet the reality is that they are connected by the culture that Diamond and others created at the bank.

 

The question we are left with after these episode is this: “Why would you want to do business with them?”

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RBS vs. Lehman Brothers failures in leadership, culture, and regulators.

Posted on June 26, 2012 by lawrence serewicz

In January 2012, the Financial Services Authority published its report on the Royal Bank of Scotland’s (RBS) failure. The report is surprisingly candid. It is also a rarity.  The FSA does not usually publish its regulatory reports. However, the size and scale of the RBS failure made it a requirement.  The governance and regulatory issues it raised had to be addressed publicly. The final public report was needed to explain why the initial regulatory investigation had not identified any wrongdoing.  By contrast, the 2011 March Lehman Brothers (LB) bankruptcy report by Anton Valukas is clear and direct in assigning culpable blame.  Despite this initial contrast, the reports have important similarities.  In particular, what they show problems with the leadership, culture, the regulators. What connects all three is the same approach to risk.

What is clear in both reports is that neither organisation could survive without a government bailout.  Both failed because senior management took too great of financial risks.  The senior management teams demonstrated poor judgement with financial decisions.  For RBS it was the ABN Amro takeover decision. For Lehman Brothers, the fatal flaw was not a takeover. Instead, it was the increased holdings of sub-prime mortgage assets.  As the sub-prime mortgage crisis unfolded, LB could not sell its assets as they continued to lose value.  In the end, both were undone by the sub-prime mortgages but in different ways.

What is common to both organisations is how they arrived at the crisis point.  In both cases, we see the same failure of leadership and the wider failure of the corporate culture. What makes them interesting is that they both had the same weaknesses, with the same toxicity, in the same industry, with the same effect. Yet, they were different business models, in different market, in different organisations, and different regulators.  They should have had different approaches to financial markets, risks, and management. Yet they were overburdened with debt.  Their approach to risk proved catastrophic.

I compare the reports to draw lessons for leadership, culture and regulatory action.  Each investigation approached their respective problem differently. They created different reports.  They provided different lessons to learn.  The regulatory outcomes show the political and business establishments in each country. The leadership failures show what can happen to effective decision making when “wilful blindness” towards risk is reinforced by a corporate culture corrupted by an appetite for increased risk.

What is particularly revealing, and not well researched or analysed, is how the investigations worked.  For RBS, the United Kingdom’s Financial Services Authority conducted the review.  They were the industry regulator responsible for supervising the bank. They were responsible for the regulatory framework within which the RBS collapse occurred.  One has to read the report knowing that the FSA have an interest in how it portrays the FSA. Even though it accepts a fair part of the blame, one cannot see this as a neutral or independent report.  In many ways, its work is as much to defend itself, as it is to find out what went wrong with RBS. The FSA was explicit in criticising its approach to regulatory involvement.  (See pp 253-294). However, the FSA report cannot be considered an independent assessment of the FSA’s work. They were candid in their own failings, and the wider failings of the regulatory framework, but this has to be balanced against the political context of such remarks given that the future of the FSA as an institution was in question.  One cannot avoid the element of special pleading that hangs over the report.

The same candour is not found from the United States Security and Exchange Commission (SEC) about LB. Yet, unlike the RBS report, the LB report is explicitly independent because it serves a different purpose. The LB report was commissioned by the bankruptcy court to find out what happened and whether criminal charges are justified for any parts of the LB failure. As LB had disappeared as a viable business, the “political” pressure was not the same for the investigation as it was for the RBS and for the FSA.

1.Scope of the investigations.

The FSA, according to their statements, are limited about what they can publish about such Board Reports.  The RBS report came from an first regulatory investigation.  After the first report found that no legal action would be taken against RBS management, the larger report was prepared to explain that decision and then made public.

By contrast, when Lehman Brothers went to bankruptcy court, the court appointed an independent investigator.  The investigator was not the regulatory body, in this case it would have been the SEC. Instead, his remit was to look at the books to find out what went wrong. The report by Anton Valukas was published after it was seen by the court. In the investigation he was given the legal power to subpoena witnesses. However, he was able to get interview officers informally, rather than using an oath and transcript approach.  (Valukas report Volume 1 pp 35-37).  Every person asked for an interview, accepted, except Hector Sants of the Chief Executive of the UK Financial Services Authority. (Valukas report Volume 1 p.37), the FSA did provide a detail written response to the questions.[1]

2. Who has a stake in the investigation?

As the court appointed investigator, Valukas had no stake in the outcome.  By contrast, the FSA investigation was not intended to be made public. Although the enforcement team within the FSA were looking for activity that could be brought to court, the final report did not find any activity that could meet the legal threshold for litigation.  Both were interested in what went wrong and in doing so, they reflected their respective political, economic, and corporate establishments.  What is particularly noteworthy, as mentioned above, is how the RBS report reflected the political context created by the furore over Sir Fred Goodwin’s pension decision.  Despite the FSA having a direct stake in the investigation, unlike the SEC in the United States, neither report could be considered a political report.

3. Political context was not a major factor

Neither report was shaped directly by overt political considerations.  Although both were published within a political context, where their conclusions would be politically useful, neither appears to have been shaped political needs. In the RBS case, the controversy over the decision to grant the former CEO of RBS, Sir Fred Goodwin a large pension, had political consequences.  A less dramatic political issue, although more serious, can be seen in the LB report.  To date, no criminal charges have resulted from the report. However, what is clear in both cases, at least on the surface and within the reports, was that neither the RBS nor LB failure was the direct result of politicians or government policy decisions.

4. Size, scale and intent differentiates the reports.

A further contrast, between the LB report and the RBS report was how the reports unfolded.  The RBS report was considered by the Board in November 2011 but the first announcements that no legal action was to be taken against RBS management was made in 2 December 2010. Then, in April 2011, further specialists were added to check the report. The final report was submitted to the FSA Board in November 2011.  Although experts were added to increase the investigation’s rigour, the context does give the appearance they may have been added for “political” reasons. The situation with Sir Fred Goodwin’s pension would not be raised in the report.  The LB report was submitted to the Court, then a redacted version, before the final deadline for creditors to initial legal action, and then a final unredacted version the next month.  The LB report did not receive additional experts.

The difference is that the LB report is nearly 2200 pages long stretching over nine volumes.  The RBS version, by contrast, is one 452-page volume even though both firms were roughly the same size financially when they failed.

5. Finding blame: a key difference (perhaps cultural)

The RBS report contrasts with the LB report on the blame or colourable claims. The RBS report does not find any colourable claims.  In many ways, the final report was made public to explain why no one has been charged or found to have committed anything legally wrong. (p.6-8). There are plenty of failures but no one is to be blamed.  The approach is similar to the report into the 7 July 2005 bombing where a list of failures is noted but no one is blamed.  By contrast, the LB report sets out the colourable claims for investors and regulators to take legal action against the LB directors.  The report is designed to point fingers and assign blame. The LB report, by contrast, centred on specific colourable claims that could lead to criminal charges. In effect, there was enough evidence to suggest that LB had acted inappropriately to the point where criminal charges could be brought.

The LB report focused on near senior managers to get the inside evidence against the senior management team.  They worked with people to get their help in identifying the evidence needed to go after the senior figures.  By contrast, the RBS investigation seemed at pains not to take an overly aggressive approach, and sought to review the decisions within a different context, which may have hampered its ability to draw out the wider possibilities.  Although, here we need to understand that RBS was rescued so a viable business needed to be sustained. There were no point finding skeletons if the goal was to keep RBS going.

6. Identifying regulatory shortcomings reflects different terms of reference.

The FSA report is more robust in identifying its regulatory shortcomings. The LB report does not explore that regulatory framework as it was outside the terms of reference.  However, after the report was published Valukas did give testimony to Congress about what the LB report indicated about regulatory activity. The SEC has published its own accounts of its role in regulating LB. As the Valukas report was not focused the regulator’s role, there is little to compare the reports in this area.

Leaders: taking us to the peak or over a cliff?

The RBS investigation is noteworthy for its willingness to explore the leadership, culture and governance issues that contributed to the failure.  By contrast, the LB report refers to these issues in passing so we do not have a full understanding of why things went wrong.  We know what went wrong, but we do not know, yet, if ever, why it went wrong.

In both cases, the leadership of the organisation failed in their role.  For different reasons, both organisations became loaded with debt and toxic assets that could not sold to raise capital.  Even though both had severe exposure to the sub-prime mortgage crisis, how they came to that place reflected their leadership (and respective regulators).  In the RBS report, the message is that CEO became more and more dominant as the firm succeeded.  The report explains the firm’s success increased the appetite for risk.  One could look at this issue in terms of personalities, but that would overlook the cultural and organisational issues.  The Board, and the Regulator, were willing to overlook the issue because the company was successful.  What was missing was a strong analysis, within the organisation, or regulator, to challenge the fundamental business strategy against the emerging financial system.  For example, the FSA was concerned about the RBS leadership approach back in 2003 (see paragraph 608 on page 233).  The concern, in hindsight, was that the focus on incentives that benefitted the CEO, rather than the company, might have skewed the appetite to risk.

In the LB report, the focus is less on leadership and management team. The reasons for the crisis are not explored as well as the immediate cause.  What is clear, though, is that the business context, seeking larger deals to maintain status within the field, fuelled an appetite to risk. The market is competitive which means that each firm seeks an advantage, but most importantly, the appearance of advantage in landing clients. The concern for appearance drove much of the LB leadership decisions, especially when the financial crisis became publicly clear in 2007.  LB found it increasingly difficult to sell its inventory of assets because their value was substantially less than promoted.  As a result, the firm turned to Repo 105 transactions to offset this problem and maintain the appearance of its poor inventory of financial assets.  (See Volume 3 of the LB report).

What is clear, though in both cases is that the leadership was not exercising a wilful blindness to the risks and problems in each firm.  Instead, they understood the risks, to some extent, but ignored them or believed they could overcome them.  In this regard, the leaders were different from a Rupert Murdoch or a Tony Hayward seeking avoid what was evident to everyone else.  In the News of the World, the ethos created the phone-hacking scandal.  At BP, the wilful blindness was to the safety concerns raised repeatedly. In RBA and LB, the issue was more than leadership. The leadership flourished within a culture culture that allowed their views to be challenged or assessed against an external standard to regulate their behaviour.

Culture: profits before prudence means risk can never be avoided

The leadership issues exist within a culture that encouraged risk taking and reinforced the leadership style.   What was going wrong at the end was the culture that created the problem could not fix it.  The problem is that the leadership rewarded and created in both organisations a culture that accepted risk beyond what was prudent.  In LB, this is understandable, to an extent, given its business as a deal maker.  What is not as understandable, though, is how this same culture emerged in RBS. One could simply explain this by saying both firms suffered from the successful market syndrome. As long as the market improved, their failings, the underlying performance issues, and their culture, were not a problem.  As such, that becomes a truism that does not help us to understand the deeper issue.

The deeper issue is that both firms reflected their leadership and embodied and encouraged a culture that embraced more and more risk. At the same time, they did not develop a culture that looked at the fundamentals to argue against the grain. Instead, the leadership encouraged a culture where employees were encouraged to go along to get along.  The same approach was working across the industry as the market continued to improve with each year.  Why oppose what appeared to be working?  Yet, even the regulators in 2003, according to their claims, were concerned about the leadership at RBS. (One wonders how much of this is based on a defensive hindsight.) If the regulator could see the problems, and yet not do much beyond report their concerns, it makes sense that others across the industry had the same concerns.  Although the FSA was quick to accept that its voice was not heard and it could have done a better job, it does not reflect adequately on why its regulation failed.  What remains unanswered is why the regulator was not heard in 2003.

The reason the regulator was not heard was that it could not use risk to its advantage.  For the same, but inverted reasons, the market sputters because it cannot use risk to its advantage.  What this means is that the market still does not understand risk, what causes, and how to cut its effect.  Instead, the industry believes, quite incorrectly, that risk can be conquered and if not conquered managed through exotic and complicated financial instruments that “insure” against risk.  The culture that created RBS and LB was (is) the false belief, the dangerous belief, that risk can be conquered. The mind-set towards risk that created the culture at RBS and LB is still dominant in two different but related ways across the industry. The first way was the belief that riskier and riskier situations can somehow be saved with an amazing long-shot success. In 2008, it was the idea that somehow the market will rebound.  The second was that risk cold be calculated and managed through complex mathematical formulas that “removed” risk.  In this approach, almost the micro version of the macro long shot risk, the companies believed that risk could be managed by effective mathematical modelling. The problem, though, was that this only displaced the risk, it shifted the consequences to someone else.  In effect, they externalized the risk. In doing so, they made the system riskier. The other firms sought the same solution so that when the risk had to be paid, the system unravelled.  Firms sought to cash in their insurance only to find that everyone else was cashing in at the same time.

What is needed is for regulators to have a stronger belief in risk. They need to remember the aphorism Naturam expellas furca, tamen usque recurret (You can drive nature out with a pitchfork, but she always comes back).  The regulators need to use risk to their advantage to restrain the companies and avoid the same mistakes.  The challenge though is that the market perpetuates the consistent belief that risk can be conquered so even greater risks can be taken.  What is needed is to learn the fundamental lessons of the market and not attempt to avoid them. Only then will we begin to develop cultures and leaders that can work within risk and not try to conquer it.

Postscript: As I just finished this post, after 3 weeks, I came across this link to a report by Kerr and Robinson on RBS leadership, in particular Fred Goodwin, and the management style of fear which contributed to the collapse.  Although they raise interesting points, I could not incorporate them into my piece.

http://www2.le.ac.uk/offices/press/press-releases/2012/june/rbs-mangement-style-used-2018economic-violence2019-to-wield-power-that-led-to-banks-failure-new-study-suggests

[1] The unasked, and unanswered, question is “Why was the Chief Executive of the UK financial services authority made unavailable for such an important interview?”

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Leadership is not a conversation

Posted on June 23, 2012 by lawrence serewicz
Black civil rights leaders including (left to ...

Black civil rights leaders including (left to right) NAACP’s Roy Wilkins, CORE’s James Farmer, SCLC’s Dr. Martin Luther King and Urban League’s Whitney Young were welcomed to White House by President Johnson in 1966. (Photo credit: Wikipedia)

Despite the claims of Groysberg and Slind at Harvard Business Review, leadership is not a conversation because staff do not listen. The staff do not listen because what is being presented as a “conversation” or a “dialogue” is instead a monologue. On the surface, the idea that leadership is a conversation is interesting, logically seductive, and well intentioned.  The danger is that this can be misleading, misunderstood, and be potentially dangerous.  When I say dangerous, I mean that in some situations, there are no questions to ask or to answer because the commands need to be followed.  To put it bluntly, leadership in a war zone is not a debating club.

The article misses two fundamental points about communications and leadership.  First, good communications systems work because people listen and redistribute and respond to the ideas being presented.  To the extent that the officers can make sense of the plan, they can follow it and, most importantly, they can repeat it.  The less it makes sense or is understood, the less it is repeated or followed.  Instead, the middle managers, in particular, will try to make sense of it and translate it into what they need or simply ignore it.

 

Second, the article overlooks what leaders do and how they do it.  They may need conversations to work, but that does not mean that leadership is a conversation.  Instead, it is about extracting as much information as needed from the organisation to generate plans, respond to problems, and maintain the business.  At the same time, leaders need to organise internal communication systems to make sure critical (negative) information (the bad news) is communicate upwards.  Without such a system, the conversations will be like those with a tyrant, always telling them what they want to hear and not what they need to hear.

 

Leadership is about decisions and decisions are about an uncertain future.

Leaders have to decide. To decide they need information, analysis, and evidence for deciding between options or alternatives.  In many cases, they are deciding against potential outcomes and alternative futures for the organisation.  They have to make decisions based on past situation (path dependency) that weave together current projects, each going at different speeds and complexity, to achieve possible outcomes.  Leaders need to weave together opportunities, threats, and capabilities to move an organization forward.  They need information, drawn from various sources, to decide a course of action that will bring forth a new future state for the organization.  They are like a weaver or a midwife in developing and delivering these plans.

 

To improve their decisions, leaders need the critical information to help them see what is wrong.  They can see what is right about an organisation. If what is wrong is obvious, and then the priority is immediately past the point where conversation will serve a purpose.  One does not have a conversation when the boat is sinking.  What leaders often lack, for effective decision-making, is what Denis Tourish calls critical upwards communications.  In organisations, critical upwards communication is the “bad news” or the “negative” news about what is not working.  For example, widget X is not selling, or project Y is late, or performance target Z is not being met.  Due to human nature, bias, and the wish to be the bearer of “good news”, people avoid communicating critical information.  The staff will more often than not, privilege the good news over the bad.

 

For leaders to work, they need decisions to be operationalized.  What this means is that organisations need hierarchies.  Leadership is not a crowd sourced function.  If anything, a crowd is a leaderless, instinctual group, which will follow a sub-optimal decision process.  Leaders provide a decision hierarchy to allow good and bad or sub-optimal options to be ranked and chosen.  Even then, leadership is not simply decision making based on a criteria or a pre-set algorithm.  Instead, it is closer to the weaving. The solitary weaver, though, will not work because they have to work within the organisation.

 

Staff want leaders that are worth listening to

If a leader tries to hear bad news from a conversation, they will hear noise and not clear signals. Lyndon Johnson was quite effective at talking to junior officers in the United States government to verify information.  However, he was not having a conversation; he was verifying what was being said. The approach was effective for what he needed.  By contrast, conversations only work if someone says something that is worth hearing.  To have those conversations, you need openness and information sharing to be encouraged and rewarded.  Senior managers will have to trust their staff.  On the surface, this seems obvious and easy in theory, yet in practice, this proves extremely difficult.  As an aside, political organizations, such as the public sector trust is even more difficult to develop. In these organizations, senior managers are responding to the public and politicians.

 

To develop trust, the organizational culture needs to be changed and this is where leaders need to be saying things that will make the staff want to listen and respond. Too often, monologue is the operating mode rather than listening needed for a dialogue.  In this Greysberg and Slind’s other article on the interactive leadership is helpful.  The conversation within the organization needs to be changed.  However, this is not about leaders have “conversations” with the front-line staff or sitting down with them for lunch.  These are listening exercise for the most part.  The authority and responsibility status of each party creates a gap that makes it difficult to have a meaningful work conversation.  To put it differently, how many junior employees are going to tell the CEO what they think is wrong with the company, their service, or their product line?  Will they trust their own line manager even if they trust the CEO to have the conversation?

 

Leadership and the Involvement effect

If a leader gets involved in internal communication frameworks, it distorts the purpose. Like the Observer Effect, the involvement of a leader will influence the conversation. People will have conversations, pose ideas, and suggest things to gain favour, impress, and create influence instead of creating an open communication process.  All of these approaches will distort what needs to happen. What needs to happen is that the staff need to be able to share information, have the wider conversations so that the good news and the bad news can be draw out by the senior managers. For Yammer, or any other internal communication system, to succeed you need more than interactive leadership. All leaders are already interactive in their own way. Instead, you need the leaders and senior managers encourage and reward a culture of sharing information.

 

Do you have enough trust to have Yammer? Will conversations change that?

A system like Yammer requires a high level of organisational trust and staff that are willing to listen and share, without fear.  To test if you have a good internal communication system with the necessary trust, consider whether your organization is willing to Yammer. Their response will tell you what type of internal communications culture you have.  What you will find though is that in some organizations that information and knowledge are power to be hoarded.  These organizations will not have a culture that shares information.  “Why do you need to know that? What is it your business how my unit works?” In these situations, communication is simply on a need to know basis.  A conversation will be unlikely to change that culture.

 

Leaders may want to exclude rather than include others in their decisions.  They may believe that the fewer people who know, the more effective their decisions. In such a culture, power and status are reinforced and conversations will not challenge or change that culture. In these organizations, a hierarchy of information and communication are controlled to maintain status. A conversation will become window dressing to show that the leader and senior managers are “engaging” with staff.  As a result, they have sub-optimal decisions. The staff will not want to interact because they know that they are being told what has been decided and not being involved in the decision.  Instead, they are kept in their own ponds (their own department) and within those ponds, they communicate on their own lily pads. As a result, communication across the organization is informal, incomplete and more likely based on rumor and incomplete and inaccurate information.

Leaders may use conversations to achieve their ends. However, leadership is not a conversation. A conversation is an unguided exchange between equals.  Leaders, by their nature, are unequal within the organisation and they must not confuse their organizational or work persona with their private or informal persona.  Leaders who believe that conversations are a destination, or believe that they are leadership, will find they hear less of what they need to hear and more of what people think they want to hear.

 

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Thoughts on Managing America’s renewal: educating ourselves to live within our means.

Posted on June 20, 2012 by lawrence serewicz
A solemn crowd gathers outside the Stock Excha...

A solemn crowd gathers outside the Stock Exchange after the crash. 1929. (Photo credit: Wikipedia)

The financial crisis has shown that the economic growth over the past 20 years in the United States has been based largely, but not exclusively, on personal and corporate debt.  The debt dependency has weakened the fundamental financial systems within the United States both corporate and personal.  The financial system developed ever increasing financial tools and products that did not add to productivity or worker efficiency.  The American genius has been turned to a financial gain that is hollow.  The hollowness can be seen in what the huge consumer credit binge.  The vast swathes of empty homes symbolise how empty the American dream has become. These homes were built upon credit and debt and not savings.  In a reversal of the American idea, credit, debt, and consumer spending replaced thrift, savings, and hard work.  If America is to reform, it will need to return to an earlier understanding of the American idea one built upon hard work hard, savings and most importantly livings within our means.  The problem, though, is society and the American dream has been perverted so that everyone can believe that they can live beyond their means, governments as well as individuals, without facing the consequences.

For the past 20 years, our appetites, across America, got the better of us.  The reasons for this are many. In this election season, we will see many solutions offered. Many commentators will use the crisis to promote their political agenda.  What I propose here is something different.  I want to recommend two things that the average American can do to return to the American idea. The average American can help reform America and return to the American idea.

Two ways to reform America

The two interconnected areas that this essay considers are those that the average American can influence directly and benefit from immediately.  The first is the need to reform the American education system. The issue, though, is not what many political pundits want us to consider.  The issue is not unions, home schooling, or public vs. private education.  Instead, it is about something fundamental.  To put it theoretically, it is about education’s role in our society. To put it directly, it is about your school teaching kids to be good citizens by learning to manage their money.

The second area goes beyond the education system.  It is about our relationship with credit and debt.  The one area we can all control is our use of debt and credit. We may not be able to control directly the government’s budget. We may not be able to control directly how the financial firms, banks, and hedge funds speculate with credit and debt.  What can control is how and why we use personal credit and debt. The average American has to get their personal credit card and consumer debt under control.

Education about money

We need an education system that can teach our children about basic finance.  We need an education system that teaches what it means to have financial self-control.  We need an education system that can tell young people why they need to save money and how to do it.  The proposals are not radical. They are not a return to some forgotten past populated by Ben Franklin.  Instead, it is the basic goal of what it means to be an educated citizen.   Our education system has failed generations of Americans because they cannot understand or resist the lure of easy money, credit, and debt.  Instead of seeing that the credit splurge, the demand to have 0% financing is fundamentally unsustainable, the American consumer has been educated and habituated to believe that financing, and easy re-financing are within their reach. They have been raised to believe that such financial irresponsibility is without risk.

The financial education has been sadly lacking within American schools from kindergarten through to the MBA programmes regarding risk, reward, and living within means.  The MBA programmes encourage this financial perversity. The goal is not to teach students to balance their books. Instead, it is to teach them to leverage the books. Students are not rewarded for their ability to save or live within their means.  Instead, the focus is on elaborate and exotic financial instruments that allow, and encourage, the excessive risk taking needed for corporations to live beyond their means.  Research has shown that how the CEO views debt will be the way the company views debt.  Perhaps we need the average person to stop using firms that have risky approach to debt.

Has academia become a business in love with corporate sponsorship?

Our education system, intentionally or unintentionally, teaches our children that public service is not an ideal.  Instead, they are being taught to pursue money, celebrity, and status without consider the risks or what purpose lies behind the goals.  Instead, they are encouraged to pursue wealth without regard to its effect. No matter the risk or consequences, complex financial products can be used to hedge it or offset it. Yet, the complex financial tools and products have proved unable to deliver what they promised: control of risk. What has happened on Wall Street regarding risk has infected academia.  Academia has become an industry. However, the problem is deeper than its structure.

Gain is good but greed is bad.

The issue is not about capitalism.  Instead, it is about how the financial system and the political system have become mutually dysfunctional.  Wall Street has become infected with an unhealthy approach to risk. The belief they can control risk and avoid any consequences has allowed Wall Street to infect Main Street. We see the average citizens taking financial risks, leveraging their mortgages, in speculative ventures. They pursue such risks without the knowledge or resources to sustain them.  What was not communicated was that a risk by Goldman Sachs may be manageable with their scale, knowledge, and resources. By contrast, the same approach to risk by an individual would prove catastrophic. Research backs this point up when looking at subprime mortgages. The loan companies and banks were preying upon people with poor financial literacy.  Research on the mortgage defaults showed a strong correlation between poor financial literacy and an increased mortgage delinquency on subprime mortgages.

At the same time, people saw sub-prime mortgages as a way to refinance for consumer debt. In doing this, they may have thought they were saving money, but they were only increasing their financial burden with greater risk.  People accessing sub-prime mortgages were using them consumer spending or other short-term debt like car purchases.  They had neither savings nor income to justify neither the long-term debt (mortgage) nor the short-term debt (consumer spending). They were living beyond their means.

Wall Street’s excess where bad gain has replaced good gain

The financial crisis revealed a pursuit of profit has become shockingly immoderate on Wall Street.  For the firms operating within the financial system, there is no deal too big, there is no profit too large, there is no financial instrument too complex to pursue. The financial instruments were designed on Wall Street for Wall Street because of the need to deal with risk.  We saw financial firms creating financial instruments to use with other financial firms to avoid suffering a lost yet neither side willing to explain the risks. They were both entering the exchange believing they had placed the risk on the other. All that matter was the belief they had passed the loss to someone else.

Have we lost sight of the common good?

The financial crisis goes beyond unemployment, jobs, or economic growth. America’s belief in the common good is in crisis.  As Montesquieu warned, Republics fail when they become gorged on luxury and consumption in which status is related to celebrity and measured by wealth.  We can see this as the political system rewards excessive risk, excessive financial contributions, and require excessive resources.  Americans have become dependent upon a political system that depends upon the financial system.

Our future, our choice, our children.

To reverse the crisis we need reform.  We need to change the education system so that we change our relationship with the financial system. If we cannot sustain these reforms, we will lose the fundamental principles of the regime.  Educational reform is the only way to change America’s future because it is what shapes the young and they will be the ones to change America. Perhaps there are signs of hope as we see Americans continuing to pay down their credit card debts. If this signals a new political and economic relationship, then America may yet renew itself.  If it cannot, then it will surely decline.

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Has horizon scanning failed the public sector by its inability to scan the financial crisis?

Posted on June 13, 2012 by lawrence serewicz

In 2008, I attended The February meeting of the FAN Club (Future Analysts Network).  This was a meeting jointly hosted by Foresight Horizon Scanning Centre and the Cabinet Office’s Strategy Unit. The meeting was there to discuss the horizon scanning work Realising Britain’s Potential: Future Strategic Challenges for Britain,

I look back on this document, and the discussions, and realize that no one was talking about the pending financial crisis. The obvious signs of that crisis were only emerging, yet horizon scanning should have been picking these up.  In addition, one could argue that a horizon scan is looking to 20 or 30 years, when the current situation is a distant memory.  [For the purpose of this post, I am using horizon scanning both as a specific tool and as description for any futures work.]

The future is not already here!

What it taught me is that William Gibson’s statement “The future is already here. It is just not distributed evenly”, does not apply to all forecasting because so many aspects of the future were still to unfold.  The financial bubble had just broken but people did not realize how far it would reach, its depth, or its full effect. In that sense, the future was not yet there nor was it ready to be distributed.  What had horizon scanning had failed to was to fulfil Gibson’s remark.  The horizon scanners, especially in public service, had failed to see the signals and understand the possible futures it was suggesting. For me, two fundamental questions emerged from this episode.

Why did public sector horizon scanners miss the crisis?

First, why were the antecedents to this crisis not picked up within any horizon scanning or forecasting by the public sector?  For example, on the Sigma scan site at that time the financial crisis and its effect on public service within the UK was not discussed. The Sigma Scan is a searchable repository for horizon scanning papers, designed for government users. It was created by the Horizon Scanning Centre with interviews, studies, and questionnaire of top thinkers condensed into 250 short papers to challenge assumptions and spark ideas.

To be sure, if no one is looking for it, it will not be found. In one sense, an emergent crisis falls between short-term analysis (the next 3 months or less) and long-term horizon scanning (20+ years) financial firms may be looking for such signs and indicators with regard to the markets or their share prices.  However, they may have a short-term focus and not a proper horizon scanning approach.  What this may show is that horizon scanning, by its very nature, will be blind to some topics.  One has to note that horizon scanning is not the same as forecasting and even forecasters are focused on a specific topic (weather, stocks, and technological innovation) and not a horizon. See for example Paul Saffo’s excellent article on six rules for effective forecasting.  Perhaps, the lesson is to consider forecasting tools with horizon scanning tools. For example, see the tools offered by the Horizon Scanning Centre.

Is horizon-scanning best left to people who use it?

The second question though is immediate and direct. Does horizon scanning have a role in government?  Aside from missing the largest crisis to face public service within the UK within a century, horizon scanning seems to be of limited use to politicians and other decision makers.  For example, one struggles to find any reference to scenario planning or backcasting, or the fifth scenario tool used with the UK government’s manifesto for example, its Big Society idea.  If such work has been done, it has not been published.  If it is not published, or is only available within the government, how can the public judge the potential of any proposed policy?  In effect, the politician makes promises about a rosy future (jam tomorrow) yet the basis for this is often assumed or rarely contested.  Was there a scenario plan done with different future societal outcomes for decreased public sector spending on the different strata in society?

In a sense, back casting should help us to understand the future because it works backwards and can help us forecast better.  For example, the extent to which the UK economy, and by extension, local government was dependent upon funding from the central government that was aligned to the growth of the City. To put it quite simply, the UK government tied its economic growth between 1997 and 2008 to the emergence of London as a financial centre and its revenue streams.  The increasing returns, as the city became more and more important to the GDP, allowed the Government to expand public sector spending including that of local government.

When the financial crisis, ruptured that relationship, it should have been reasonable to see that the funding streams to the public sector would change.  An immediate horizon scan would suggest that organisations should be doing scanning to consider the scale of the cuts and its effects. Here horizon scanning and forecasting would come into their own.  The question in itself was not surprising because all the major parties were talking about significant changes in spending (disagreements over the speed and depth aside).  Yet, the forecasts and the scans do not seem to have picked explored this although scenario planning may have had a good effect in sketching possible outcomes.

The ability to understand the future effects of current policy decisions is vitally important to all forms of government. For example, some councils in the UK had to restate their approach to the government funding reductions because they had miscalculated what the government settlement might be.  In those instances, one wonders if the Councils that performed better had better scenarios mapped out or whether they guessed right, or just had better political knowledge.  Although the LGA has done work in this area, there is no evidence that any of the successful councils used futures work to deal with reacting to the reduced public sector funding.

If that is the case, I wonder if any local government horizon scanners or forecasters had developed their own forecasts.  The LGA has done some work in this area with some horizon scanning work.

What do the current horizon scans tell us?

In 2010, after the election did anyone make a horizon scan or a scenario to answer the following question. “What is the future of public service in 5 years?”  If the politicians propose a potential outcome (paint a scenario), one would hope some sort of horizon scanning informs its.  What may be the case is that politicians are captive to the moment and cannot shape their futures as much as they believe they can.  What is particularly interesting is that UK government policy is supposed to be guided, or at least informed, by strategic futures analysis.

Does jam today trump bread tomorrow?

The middle ground between immediate policy demands and the horizon of 20 years is caught by politics.  In other words, there is too much noise to filter (politics and political bias) to find signals.  If that is the case, then is horizon scanning and forecasting left to speculate and not inform? The counter argument would be that horizon scanning has never been tried because such analysis is always secondary to political concerns.  What is certain is that the tools for forecasting and horizon scanning are important. What remains to be seen is whether political judgements can ever attain the wisdom needed to use them appropriately.

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Are online adverts being pushed so that we choose pay walls to avoid them?

Posted on June 11, 2012 by lawrence serewicz

In the age of the internet and kindle, this sounds like a strange claim. Yet, I think the use of advertisements, links, pop-ups and other attention grabbing devices has reached the point where we are being conditioned to accept pay walls. I am seriously considering a return to the printed subscriptions to avoid the ads, the gimmicks, and the plethora of extraneous information provided on web pages.

What brought me to this point was an article in Forbes magazine. I like Forbes magazine and have read it for over 40 years.  I grew up with it and a variety of other magazines. Our local library had a good choice of magazines.  What I really enjoyed was reading he articles that I understood and trying to decipher the pictures on the ones I did not understand.

I particularly liked Foreign Affairs and Foreign Policy because they had lots of text, large print (Foreign Affairs) or a easy to read column (Foreign Policy).  I also liked to read Vanity Fair and leaf through the dozens of advertisements at the front of the magazine.  The photos and advertisements were works of art in their own right.

What has made me pine for these simpler times are pages such as this from Forbes. Privacy Quiz: Are you a Mark Zuckerberg Or a Marc Rotenberg?  The page displays everything that is wrong with electronic media and right about paper based media. It also reflects the inherent tension with online advertisements.  People do not want them, but will accept them to keep content free.

 

First, I cannot read the article on one page. I am forced to read it over two or more pages.  In the paper based version, this story would be done in less than a column or maybe two columns

Second, the number of advertisements is distracting.  I cannot tell where the story begins or ends and the advertisements start and finish.  There is just too much information being provided when 90% of the page is of no interest.

Third, the formatting of story is, well, poor.  I appreciate that writing has changed on the internet because people skim read. They also jump to various parts of the text.  However, the change in technology does not give licences to poorly written text, poorly structured grammar or logic, poorly thought out questions, or poorly considered article ideas.  Compare and contrast the story with this one or this one from Forbes.

Fourth, the structure of the page seems to follow recommendations from the Poyntner eye tracking study.  The study tracked how people read online newspapers and paper newspapers to understand they responded to different layouts. Despite the structure of the page, it misses the fundamental point.  The reader is inconvenienced. The page looks like it is set up for the advertiser and not the reader.  Most of the page tells me about something other than the article. What makes this worse is that it is stretched over two pages.

Fifth, the article tries to impart a lot of information without actually resolving the central question. We do not know how Marc Rotenberg would answer the questions.

You might say at this point, “Print the document to avoid the advertisements and the annoying graphics.”  Alas, I tried that and the dreaded “Page not Found” launched instead.

The increased advertisements and gimmicks seem to move us to accept the need for pay wall. In the past, we may have suffered from link bait. Now we seem to be suffering from content bait.  I had hoped the article was an aberration in its set up. Yet, it seems to a standard template followed on a number of sites.  One hopes that when we are forced to go to pay walls that the content, which is what we want, is made available, clearly, directly and without gimmicks.  Just like in the magazine.

 

 

 

 

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The new renaissance paradigm: dream or nightmare for technological talent?

Posted on June 6, 2012 by lawrence serewicz

Within the social media revolution an idea has developed that we are seeing a new Renaissance.  The idea is that a New Renaissance Paradigm in which those who create content can avoid the middle man that traditionally help them to reach their audiences. Social media technology allows artists and technological talent to decide their own success. The technological talent no longer has to rely on corporations; they can do it for themselves. Like the old renaissance, the new one has wealthy technological patrons, individuals, or corporations like Google and Facebook, who can nurture technological talent. However, the focus today though is not on the art, the literature, or the politics.  Instead, the renaissance is based on technological innovators. In turn, their creativity and their ability to create creative networks make it possible for other talent (media based artists (especially musical) to follow the same path to economic freedom and control.

The social media economy relies upon technology and content.  Their relationship is at the heart of the new renaissance paradigm.  How they work together challenges the economic hierarchy.  Customers and content can meet through social media. There is no need for an organisation to act as an intermediary. For customers, they receive lower prices, a wider choice, and a chance to influence content.  For talent, the new renaissance paradigm means that the patron-artist relationship has changed.  Now money and political power are chasing talent.  As an analysis of the future of work, it presents a compelling story.

 

Without intermediaries, talent can be in charge. The talent can work directly with its clients and it can decide what is best for itself and the client.  Unlike the original renaissance, the new renaissance has the talent as patrons.  Zuckerberg, Brin, Schmidt, Ellison and others commission work and develop the talent.  Unlike the financiers or industrialists of earlier years, today’s patrons understand and reward technological talent.  For many, talent will welcome the fact that social media economy allows a patronage economy to return.

Talent can control its product and its destiny. They can leave the corporation, where what they created was the company’s property.  They can control their intellectual property rights.  The intermediaries are removed or reduced and there is no need for the corporation to be given a share. Talent is paid directly. Within this system, patrons pursue talent. Talent receive the commission and they work independently.  For example, musicians can work independently because they can release their music directly to their audience.  Instead of relying on a large music corporation, the musicians can work with social media talent to promote their music to their audience. In sum, the networked economy, the new renaissance paradigm, allows talent to benefit from shifting between companies, collaborators, and contracts.

 

If only it were so.

 

Instead of a dream, a patronage economy is potential nightmare for talent. The renaissance was not a halcyon period where artists were in demand and dictated the terms to enrich themselves and unleash their creative genius. Instead, it was a period where the artist was at the mercy of the patron, be it a prince or a city, and the relationship favoured the patron. The patron dictated the terms, they dictated the topic and if they were displeased, you were not paid.

We may hope that the new renaissance has arrived for the “artists” and the “talent”. Yet, there remains a need for enabling organisations to achieve their success.   Even in a networked era, we still need an organisation.  We need it to distribute our product or manage our supplies. We can automate our individual work, leverage our individual technological creativity by sharing, but what we add, our specific creativity or judgement, cannot succeed without an organisation.

What the new renaissance may be ushering in is a new approach to work.  Work is changing within companies. Work is also changing as organisations are still figuring out the best ways to manage talent inside the company or the relationship with it externally. Talent management is a key challenge for any organisation and will be an important comparative advantage.  Broadly speaking, I see two conflicting, but potentially reconcilable, futures for talent management within a new renaissance paradigm.  The first extends the earlier corporation but manages talent by creating tightly knit talent silos.  The second is about the networked company. In this vision, the network acts an organisation to support, or leverage, talent.

 

Apple networking talent silos with vertical integration

One view is Apple’s vision. In that organisation talent is kept in silos with creative conductors that enable the company to harness and leverage talent for success.  Apple focuses on a few products and has a seamless supply chain from innovators, to designers, to suppliers, to distributors all working together to deliver the product.  In a way, Jobs was able found a corporation on the principle of democratic aristocracy. Talent was connected to the same goal.  By being able to nurture talent and harness it to a goal, despite how it was organised inside, the organisation “disappears” as an agent and is there to support talent.

 

The talent network as the virtual organisation

The other view is the idea of a network as an organisation. In this, the approach is similar to the creative commons.  Across the network as an organisation, talent can coordinate, connect, and share the work.  Talent will join talent to provide the organisational leverage needed to flourish. In this system, the same pieces are in available, as in Apple, but other talent joins the network to deliver the outcomes.  Instead of talent being captured, it can enter or exit on its terms and it is free to move and take its intellectual property with it.  The advantage is that the organisation is created from the networked relationship.

The creativity is good, shame about the politics

The patronage economy of the renaissance cannot be understood without reference to the politics.  For talent (and organisations) to thrive, the political structures have to be support them.  Again, the reading of the renaissance politics does not present an ideal to emulate.  The art is nice and the politics are terrible. In some ways, the reverse is true today. The art is terrible but the politics are nice (that is we are not seeing political opponents killed in the street). The artistic exuberance and experimentation was joined to political innovation and creativity. By that, I do not mean to suggest that killing political opponent would be a way to unleash creative energy.  On the contrary, the talent-organisational dynamic is built upon a political stability drained of such threats.  Instead, it is suggest that a political renaissance is linked to any creative renaissance if it is to flourish.

The question, though, is whether the politics today is as creative as the social media innovations.  The question perhaps is whether politics today is becoming corrosive of creativity. If politics is reduced to a cost-benefit analysis where all political problems are reduced to technological ones, have we lost an element of creativity?  In that view, technological talent does not have a separate sphere because it is in service to society, the state, rather than remaining true to itself. A political landscape that does not reward talent nor allow it to be rewarded could be emerging.  The politics of social media, while based on a collaborative creative commons, has a hint of conformity that can stifle individuality.  To succeed, technology has to scale up.  To scale up, the technology has to fit within exist frameworks and organisations. Yet, that demand to scale and fit, means that talent has to be assimilated to the system.  In the renaissance, the political talent was an innovative as the artistic and technical talent.  Can the same be said today?

Even if your sponsor is a tyrant, talent is in demand.

In the Renaissance, the Borgias were well known for sponsoring some of the best art of the era. Yet, they were a ruthless, terrible, and rather corrupt family.  Machiavelli saw Casere Borgia as an example of a prince.  Today’s sponsors are not as dangerous as the Borgias were, but the same dynamic exists. Then, as now, the question is the mechanics of the relationship.  Despite the changes, there is still a need for intermediaries.  Although the relationship is unfolding, it is clear that its role will be stripped down from the previous standard. The best-known talent intermediaries, such as media companies and music corporations are still profitable but their size and structure have changed dramatically.  For sponsors, talent is in demand. How it is managed and how talent manages itself will depend in large part on how companies respond. Companies are adapting either by providing the stripped down support talent needs (see for example blogging platforms or social media platforms) or providing innovative products that need their size and scale. In each of these, the company and the talent still have to work together.  However that relationship is resolved it will influence and show the future of work.

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Why change Management is hard: sometimes you have to make the bricks

Posted on June 1, 2012 by lawrence serewicz
Yeocomico Church south wall brickwork

Yeocomico Church south wall brickwork (Photo credit: Wikipedia)

When people talk about change management, they often focus on large issues, like strategy, vision, and culture.  All of these are important to setting the goals for the change management programme.  Yet, what is often overlooked is the mechanics of the change. What is often overlooked is what middle managers and frontline workers have to do to make the change happen.

In most organisations, the leaders set a vision, goals, and an action plan.  They communicate those plans, check the work, and follow-up on progress at regular intervals.  To deliver the work, middle managers have to translate that vision into reality against the competing priorities. The middle manager constantly has to balance the demands from the senior officers with delivering the daily work.  In this task, they may translate the vision into an unintended outcome.

The middle managers though face a brick wall, which is the existing culture. The senior managers have set the goal, which is either to tear down the wall (a complete change) or rearrange the bricks (modify the culture). The middle manager will see the wall, as an opportunity and an obstacle. Yet, what most senior managers do not see or realize is what that requires.

When the middle manager approaches the wall, they realize that it has wallpaper.  They know they will have to strip the wallpaper to get to the plasterboard that supports the paper and covers the bricks. Once they have removed the paper, they can get to the plasterboard and then to the brick.  In a light culture change, the wallpaper will be changed.  In a more advanced culture change, the plasterboard and the paper need to be removed. In a full culture change, the wall needs to be removed. In some cases, the middle managers start tearing at the wall only to discover that there is no plasterboard.  The only thing in place was wallpaper that looked like bricks.

Now what they need to do is tear down the paper and build the brick wall.  However, they realize that the culture was only papering over the issues.  Instead of having solid systems and processes, that only needed to be re-arranged, they need to build the wall.  They thought they could use the previous culture (the brick wall) and use it to build the new wall.  Instead, they find that the bricks have to be built.  The culture has to be built from the start, which requires more work than they realized.   The work is not just removing the previous culture; it is also creating the new one brick by brick.

The lesson here is that to change a culture, you need to be aware that remedial steps may be needed.  How much remedial work will depend on the original culture. If it is robust, then you may only need to rearrange a few bricks or add some wallpaper.  If the culture is dysfunctional or only works on appearances, then you may only have wallpaper that looks like bricks. In that case, you will have to make the bricks before you can make the wall.

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5 Reasons why Tim Cook cannot save Apple

Posted on May 27, 2012 by lawrence serewicz

Tim Cook has received a large amount of attention for his deft handling of the post-Steven Jobs era at Apple. He has produced excellent financial results and his approach while a contrast to Jobs, presents an important continuity for the company.  He is working well with investors and taking an interest in infrastructure needs to sustain Apple’s success.  However, the handwriting is on the wall.

Here are the five reasons why Apple will not be escape its decline.

1. The Headquarters curse.

What this refers to is argument that when an organisation completes its headquarters its purpose has changed. The idea is that once an organization achieves its first purpose, it designs a new headquarters, which suggest that its focus is changing.  As a symbol of the company achieving a certain type of success, the new headquarters symbolizes trying to control what cannot be controlled (for very long): ambition and creativity.

2.  Founding a regime is different from maintaining it.

The more the MBAs move in to Apple, the more it moves from a founding regime to a maintaining regime.  The transition will work to a point and Cook is demonstrating that it is possible. However, with each step that Apple becomes more “corporate”, the less it becomes Apple.  The less competitive it gets.  Will it stay successful? Yes.  It can continue to roll out Apple IPhones, IPods, and IPads for years to come. Over time, such success will be a diminishing return. The market and the consumer move on to the next innovation.  To put it differently but directly, how many Apple innovations came from MBAs?  The MBA is about procedures, efficiencies, and management.  All of these are important to fundamental success, but they will not, cannot, unleash the creative, innovative, cutting edge success needed.  In effect, Cook is saying that Apple will be like Microsoft because it will have to look externally for innovation.

3. After you go to the top 100, what is next for your ambition?

Apple relies upon creative ambition for its success.  The products it has created have been successful because they embrace and exemplify creative ambition. The people designing and developing these products really believe they are changing the world. They have egos and ambitions to match that reputation. So, the question is how do you reward that ambition?  Jobs has done that by the top 100. For a company, rather than a political society, it is an excellent device. You are chosen on what you have done and what the senior managers think of you.  Immediately, your ambition and ego are satisfied. However, what do you do after the first, second, or third time?  What keeps you interested?  Yes, your boss thinks you are great, but what if you think you need or deserve more (freedom, resources, creative control) than your boss can give you.  You either stay, with less, or go sideways (a bigger officer for example), or you go somewhere else where your ambition and ego can be nourished. What Apple faces is a problem that has endured since Thucydides reconciling individual ambition (love of glory) with the common (corporate) good.  Perhaps Apple has solved this enough to maintain its success.

4. Does Ive have anything left in the creative tank?

The question for Apple and Ive, in particular, is whether he has anything left in his creative gas tank. Ive remains a powerful force. Without a doubt, he has talent, skill, and ideas. However, does he have “the next big thing?”  At some point, the creative process slows to the point where it is a variation on a theme and not a new theme.  At the same time, will Ive be able to move aside and accept ideas, designs, and ambitions that run counter to his vision?  Like the earlier point about ambition, eventually, the incumbent has to step aside.  Perhaps Ive can, and does, nurture the talent within Apple.  However, there can be only one Ive.  Like Jobs, there can be only one.  As there can be only one, perhaps the ambition is to be the Ive at another firm.

5. Who runs Apple after Cook is the issue that haunts Apple.

Cook is living with a momentum he helped to create under Jobs. He is also adapting that momentum to the market. He is taking Apple in a new, if subtle, direction. The next big thing maybe Apple TV or some sort of home entertainment/business system (perhaps the mythical stim/sim idea can be an Apple product). However, who will lead Apple after Cook?  At that point, we will see a fundamental challenge to what Apple is or means for its workforce.  Do you get someone from inside or outside the firm? Are they pre or post Jobs/Cook? Do they have the same focus on what the Apple idea is for the company?

From these five issues we can see that Apple’s future is neither secure nor certain. To be sure, it is enjoying an excellent financial position.  However, the challenges and challengers are emerging.  One in particular to note is that Apple is doubling down with its manufacturing in China.  By relying on that manufacturing base, it will present an important advantage, which has sustained its ability to fend off larger rivals, but it presents a significant vulnerability.  How soon before China turns that reliance into dependence, and then subsumes it into compliance?  None of this is certain, but investors and Apple insiders are going to be concerned with the political and economic stability within China as it faces its own choices between its role in the international system.

If Apple is to survive, it must find the “next big thing.”  For Jobs, it may have been reinventing the idea of a corporation. Yet, that can only take it so far.  If the next big thing cannot be sustained with an Apple platform, the next 8 years will be extremely painful, and costly, for Apple.

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