“Greed, Governance and Ethics”: a talk about corporate failures.

Stewart Hamilton spoke at the Business School on the history of economic bubbles and business failures. Unfortunately, he had a lot to go on. His main thesis seemed to be that we were incapable of learning from history: and governance and ethics were no match for greed…

I found four different kinds of failure in the sorry list of collapse that he ran through:

These are widespread market failures engulfing many organisations, often arising from speculative asset bubbles (in all those above, either commercial or residential property, but he could have included the 2000 dot.com bust, resulting from a bubble in internet company shares, or the Dutch tulip crisis of the 17th century, where the asset bubble involved the price of tulip bulbs – bizarre but true). In these bubbles, no one wants to be left out of rising asset prices, causing assets prices to rise further, pulling more buyers in – until something pricks the bubble and the asset prices tumble, leading to an economic crisis.

  • corporate malfeasance, such as
    • Enron
    • BCCI
    • WorldCom
    • Olympus (not mentioned by Hamilton, but a recent, agressive example)
    • Ferranti through its takeover of ISS (again, not raised by Hamilton, but one that affected a great many citizens of Edinburgh)

where illegal or unethical behaviour is widespread and systematic at a senior management and board level, with many people involved.

and perhaps RBS and HBoS – these last three all victims of the global financial crisis, but their collapse specifically related to bad management decision-making.

Not all of these cases resulted in the complete corporate collapse of the organisation in question – AIB is still going (albeit mired in tax evasion and overcharging issues), as is Olympus; RBS and HBoS survived thanks to government intervention.

Greed (from which stem fraud and other illegal and unethical behaviours) and incompetence are nothing new. The real problem is that corporate governance is no real counterbalance to them: similar issues seem to have affected UBS, which lost $2bn as a result of a “rogue trader” seems to have learnt nothing from the collapse of Barings, as a result of Nick Leeson’s illegal trading. Organisations have processes and controls in place to stop people exceeding their authority – and risking the bank. But these didn’t work at Barings or UBS, nor at any of the huge institutions like AIG, RBS or HBoS, nor smaller banks like Northern Rock. They didn’t understand the risks of the products they traded and held (and they weren’t alone – Chuck Prince, CEO of Citibank, said in early July 2007 “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing” – days later, the music stopped, and banks started to go bust – but not Citi (though it apparently came close).

Hamilton used AIG as an example of an organisation that was not only “too big to fail”, but more importantly too big to manage or regulate. He said AIG comprised of over 7,000 legal entities in 150 different countries, trading in countless different business areas. How could any one regulator – or the company’s auditors – know what was going on, and what or where the real risks were?

Hamilton reckoned the real problems lie when there is a combination of a dominant CEO and an ineffective board – the board failing to keep the CEO in check, particularly regarding the governance of poor strategy. (Of course, poor strategy may only be knowable with hindsight: Fred Goodwin was hailed as great leader after the takeover of NatWest by RBS, and it was perhaps only the timing of the RBS bid for ABN AMRO that was RBS’ undoing.) Large corporations attract strong leaders, though that might not be what they need. Strong leaders see attraction in growing their organisations – not least because, as Hamilton pointed out, the bigger the company, the bigger the remuneration (it doesn’t take long for greed to creep in!): and acquisition is the quickest way to grow. But maybe the least sustainable.

Throughout all this, I was unclear on the role of management education. Hamilton is emeritus professor at a management school, IMD; we were sitting in the lecture theatre of a business school. I have done an MBA; there was an ethics course, but little more – I don’t remember any specific teaching in, for instance, directors’ responsibilities. Anyone can become a company director. One cannot legislate for ignorance or foolishness; but requiring directors to be educated on their role might be a start.

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