Tuesday, 29 September 2009

The Post Office Strikes...

The country's postal workers have come out on strike again against the "modernisation" currently being undertaken. Right or wrong?

Arguments are going back and forth about whose "fault" the current state of affairs is. It appears that management may have reneged on an agreement signed in 2007, in which the unions agreed to the loss of 40,000 jobs and management agreed modernisation, enhancement of pay and that future modernisation would be agreed with the unions.

Fast-forward two years and to where the UK is struggling to exit the worst recession for some time. No doubt, the 2007 agreement was negotiated in good faith, but as the recession took hold and demand for the Royal Mail's services plummeted, that agreement looks irrelevant. Most businesses are now fighting to survive, and frankly, an agreement negotiated under very different economic circumstances must be questioned, hard as that is.

Our postal system was designed when people and businesses communicated only by letter. This infrastructure still exists and is becoming more expensive as prices, wages, and the costs of regulation all rise. Management and workers both have a responsibility to recognise the ever-changing landscape and do their best to ensure that the service offered is both competitive and relevant to modern demand. The advent of fax, email and cheaper mobile phone tariffs have cut the need to send the good ole fashioned letter. In somes cases, the law requires that written notice is sent to a recipient, so we have no choice, but more and more people these days are making use of email.

Businesses rely heavily on the postal service. As we come into the Christmas season, internet gift catalogue companies must be worried that they will be unable to deliver on time. This must be of concern, as the UK struggles to tear itself free of a recession that has gripped us for almost two years.

Equally, bank and credit card statements may not be delivered, thus causing people to miss payments or to go overdrawn through no fault of their own. Notices of action required will be delayed (or never delivered) resulting in action not being taken, to the detriment of someone.

An efficient and relevant postal service is, like an efficient and relevant banking system and an efficient and relevant transport system, part and parcel of an efficient economy. Strikes help noone, and may even harm those whom they have been orchestrated to protect. Strike action, whilst effective in the short-term, results in disaster in the longer-term, as demonstrated by the miners, the car workers at British Leyland and the dockers at Southampton. These people refused to see that the world was changing and refused to adapt to the new reality. Where are they now?

Management and unions need to get round the table again and work things out. If the 2007 agreement is no longer relevant, a new agreement has to be signed. Understanding is needed on both sides, and a compromise (defined as an agreement acceptable to noone) will have to be reached. We are talking about having a first-class (excuse the pun) postal service that meets modern needs and is sufficiently flexible to change in the years ahead without resorting to agreements negotiated when circumstances were different. In the end, Royal Mail is run for the benefit of the users, not of the unions. The sooner they realise this, the better.


Wednesday, 23 September 2009

Regulating The City

At last, some sensible comment on moving forward with regulation of the UK financial services sector.

The FT has at last pointed up where we should be heading in terms of regulating banking in the UK without the usual baying for blood that seems to accompany every other article or speech made by those who feel that they must be "seen to be doing something".

The FSA was established in 1997 by the then Chancellor of The Exchequer (Gordon Brown) with four statutory objectives:

•Market confidence: maintaining confidence in the financial system;
•Public awareness: promoting public understanding of the financial system;
•Consumer protection: securing the appropriate degree of protection for consumers;
•The reduction of financial crime: reducing the extent to which it is possible for a business to be used for a purpose connected with financial crime.

Recent events suggest that the first, second and third need more focus. Focus seems to have been mainly on the last in the wake of 9/11.

So why is it difficult to change at the FSA? The answer lies in the FSA's own website where, if you look closely, they state that their senior management are government appointees and that they are "accountable" to Treasury Ministers and to Parliament (i.e. to those who appointed them) but in the next sentence, they state that they are "operationally independent". They are "independent" in that their funding derives from those whom they regulate, rather than from the government but if they are government appointees, this will inevitably drive their actions. Equally, if the heads of the FSA were to be critiqued too much by their government masters, it would be tantamount to said masters admitting that they had got it wrong - something politically difficult to do.

On Friday 13th February (ironically), the FSA announced salary increases and bonuses, and yet there seemed to be little or no fuss made about this, in comparison to the hysteria that has surrounded compensation to the bankers who (single-handedly and without interference, connivance or encouragement from government, central banks, regulators or an over-spending public) caused this mess in the first place. In the past, when the FSA attempted to sound a warning, they were ignored by their masters as times were good, the boat shouldn't be rocked.

Lord Turner has suggested Tobin taxes on banks' transactions and caps on compensation to senior bankers as a means of regulating excessive behaviour. That there is a link between taking excessive risk and the "telephone-figure" bonuses of top bankers seems to be in little doubt. The "fiduciary" duty to banks' customers was swallowed by an avalanche of sales culture which demanded exponential yearly revenue increases across the board to satisfy shareholders and analysts. Credit was cheap, risk was lower, the chancellor had claimed to have "abolished boom and bust" so more risk was taken until...

So where do we start? As the Financial Times suggests, we recognise that the UK has both a domestic and foreign element to the financial system. The risks associated with domestic institutions' management of public funds, lending and payments are borne by the UK public and it is up to the FSA to ensure that those risks are properly managed. They have not been, and this is the fault both of bank management and those who regulated them (i.e. the FSA).

With regard to the "foreign" element of the UK financial sector, the FSA's role should be to ensure that foreign institutions operating here abide by international and UK rules, that any failure do do so should not harm the UK and that appropriate penalties are levied.

In short, the FSA's job is to represent and safeguard the public interest. To do this, it needs to understand the products/risks, devise rules to manage these, monitor their implementation, review their effectiveness and penalise transgressors (as recently happended with Barclays). It also needs to be taken seriously; it has notbeen in the past and this must change.

The FSA's role is not to make pronouncements on compensation or taxation, these being the purview of the market and of the Chancellor respectively. There are signs that bankers have woken up (belatedly) to the fact that high bonuses are politically unacceptable at the moment. Whether this will result in lower bonuses is for the market to decide. The fact is that "clever" people employed by the banks (who can afford to pay them) will devise ways around any restrictions that are imposed - so the compensation consultants, lawyers and accountants stand to do well as banks scramble to retain their top performers.

The FSA's regulatory tools are: to ensure that banks maintain suitable capital in relation to the risks undertaken, that suitable regulations are in place and enforced and that transgressions are penalised. The FSA is not here to be popular. It is here to protect the public.

This means that the FSA charges appropriately for banks to operate in the UK and if this means charges rise, so be it. Call it the cost of financial security. Those who take the higher risks should pay more for supervision than those who don't. Equally, those who are seen as riskier due to inherent lack of adequate controls or management weakness should also pay more.

The UK needs to remain competitive and a world leader in financial services. Has the recent crisis had a serious impact on our reputation as a quality financial services centre? Yes, it should have. Our bankers, regulators, government and the general public have all fallen down on the job. The lessons of excess must now be learnt.


Thursday, 17 September 2009

The EU Steps In

The Times has reported that the EU Commission is likely to insist that Lloyds Banking Group hive off HBOS, which it rescued at great cost to the taxpayer. Should we be surprised?

There has been much discussion of Lloyds' takeover of HBOS with government support. Whatever one's views, this was a deal conceived under pressure and driven by forces of which we have yet to hear a full account. In "normal" circumstances, it would have never been allowed on competition grounds. However, with the government keen to avoid a repetition of Northern Rock-like queues with the attendant damage to Britain's reputation as a financial centre and beset by the worst economic and crisis for at least 20 years, it is little surprise that the deal was "waved through".

Prior to this, there were hints that Lloyds Banking Group would have to restructure to avoid accusations of being in a dominant position. Indeed, LBG announced on 18 May that the EU COmmission woudl be taking a close interest so the latest rumours should not come as any great surprise. What will be more difficult now is to unravel the work done and to manage the uncertainty that a disposal may create for both customers and staff. The EU needs to take here that it does not make the situation worse...

Whatever happens, assuming that HBOS can be spun off as a separate unit, any buyer will also have to repay the UK taxpayer's "investment" in it. This will already make it less attractive, but this is not to say that it might not attract buyers looking to build a long-term stake in the UK high street banking market. Already, Tesco has been named as a possible interested party, and it would indeed be a feather in Gordon Brown's cap if he could negotiate a sale at a profit to the taxpayer before the next General Election.

The EU Commission has one month left before it changes personnel, and there must be some question over whether it will manage to put anything through in this time. What is clear, however, is that LBG will have to shrink in order to avoid accusations of using government funds to gain a dominant market position. What this "shrinkage" will look like has yet to be decided, however, and we do not want to end up with the split costing even more than the merger!


Thursday, 10 September 2009

I Went Sailing...

This is not a rip-off of the Rod Stewart classic, but rather a review of a valuable learning experience.

Toward the end of last month, I had the chance to go for a weekend's sailing instruction thanks to a good friend and former colleague.

Sailing is not something that you can learn only from a book or from a course filled with lectures, debate, syndicate work and dissertation. I found it a remarkable parallel to business life and realised how far we have moved from "hands on" experience to theory being the current driver.

If you want to be a competent yachtsman/woman, you will have to read books and go to classes as well as pass exams on the subject. However, you must actually get out, learn and practice before being allowed to take the helm on your own.

You need to understand how wind, tide and weather affect your proposed course. You need to understand what to do when the unexpected happens (man overboard) as well as how to avoid other craft on the high seas. There are "rules" of the sea that you have to obey to ensure that fatalities do not occur.

You also need to learn a new language (a "sheet" is not something you sleep on/under on a yacht, for example) and to be able to communicate effectively otherwise you may well end up with a big problem...

We left home with what we thought was plenty of time to get to our start point - and took two hours more than expected because of holiday traffic (it was a Saturday morning) and by the end, I was fuming! Thanks to the miracles of modern technology (mobile phones), we were at least able to let our hosts know of the problem.

We finally arrived and were given a quick safety talk, followed by a discussion of the plan for the weekend, and then we set off. All the way, we had to change course (literally) and even our destination in the end thanks to lack of available mooring there, but we were aware of the constraints and all were able to agree an alternative. Had we had more time/better weather/better luck with finding berths I have no doubt that the weekend would have turned out differently.

The lesson was simple: the sea, wind and weather (as well as weekend traffic) are not under our control and we can either fume about it or change course. Of course, we can do our research and prepare for problems (we had wet weather gear, lifejackets, etc), but in the end, it may take us longer to get where we want to go, we may have to divert along the way and we may have to change the original plan quite a bit to get there. No amount of fuming or criticism will change that simple fact.

Now contrast this with landlocked corporate life where you are expected to plan in detail and deliver without fail - otherwise there is something wrong with you. Insisting on all "deliverables" being met on time/budget without reference to external circumstances is simply unrealistic. However much you try to predit what will happen, you need to accept that your predictions could be rendered invalid by anything and that you will then depend on your natural experience and ability to get through. In the end, we end up "fudging" the results to make it look like we got it right.

I am not saying that we shouldn't plan - we need direction and measures to tell us if we are going off course. However, we need to understand that things can change very dramatically on the economic, regulatory and competitive landscape to force a major change in course (the present crisis is proof of this). As long as we know our direction, we may just take longer to get there, and there is nothing we can do about it. We plan for contingencies and this helps keep us more on course than if we had blindly hoped that all would go "according to plan", but in the end, experience and savvy will also play their part when the unexpected happens.

I know that I am not capable of getting a Feeling 39 from Dartmouth to Brixham on my own after one weekend's instruction. I have an appreciation of what it takes, but I would never have the temerity to tell an experienced yachtsman/woman how to do it, or to analyse their performance after so little time (no matter how many books I had read). However, current culture today suggests that a theoretical knowledge backed by case study has all the answers. It doesn't.

Yachtsmen (not the racers) have a lot to teach us, and I would certainly recommend a sailing course as part of any team-building exercise (starting at the top).


Bang Go The Bonuses??

Today's Financial Times reported that JPMorgan have produced a piece of research which states that investment banks will become less profitable due to the impact of new regulation. About time...

... that the regulators got a grip and that the investment banks (some of whom were responsible for the present crisis) also realised that stellar profits come at the expense of something else. If the extra costs of being regulated go direct to the regulators to pay for increased oversight, this must be a good thing. Sadly, it is not the case. By the look of it, the reason for reduced profitability is that banks will have to raise more capital as a buffer against further crises, thereby reducing their return on equity. In other words, regulators can remain less competent, bankers "may" be able to take the same risks, and we can bet that someone will find a way around the new capital rules.

Surely the simple answer is to reduce expectations all round? People borrow less, banks lend less, bankers rememebr their "fiduciary duty", shareholders and analysts lower their expectations in the hope that reduced profitability results in steadier economies, dividend streams and share price increases, and everyone is happy! This will require a massive "paradigm shift", but still lets central banks, governments and regulators off the proverbial hook.

We will still need competent regulators, and governments who are willing to do the "right" thing as opposed to the "politically expedient" thing. Central banks will have to look more closely at the results of credit being too cheap - a major cause of the current scenario thanks to the Fed flooding the market with cheap liquidity in the wake of 9/11.

Even more interesting was the report that various bankers are suing for bonuses that they claim they are owed... One wonders how much they can spend (or how much they have committed to spend). Surely this is the attitude that caused the trouble in the first place?