corporate governance

Private parts…

/ Lisa Bondesio / 2 Comments

The term ‘privatisation’ was originally coined by management guru, Peter Drucker. In the UK, privatisation is commonly associated with the sale of nationalised industries to the private sector – a process that began in the 1970’s and one that still continues today – as evidenced by the proposed sale of Royal Mail, and more recently – the frankly bonkers scheme to sell off publicly owned woodland in the UK.

Privatisation gained dominance in liberal market economies such as the UK and the US, because the growth in private sector ownership of former state-owned enterprise coincided with regulatory shifts in the existing institutional framework for corporate governance in these countries. This changed both the way the capital markets and investors behaved.

In the UK, the process began with deregulation that removed statutory restrictions on competition in both the public and private sectors. Huge flotations of public utilities such as Water, Electricity and Rail were subsequently legitimised by the proposition that private ownership was a more efficient option, because market discipline can provide the primary regulatory mechanism that reduces agency costs and increases competition.

The ‘market’ is usually cited as the primary justification for privatisation programmes. Increasing efficiency is nearly always viewed as the primary objective for governments pursuing privatisation. The UK government of the early 1980s saw privatisation as an important means to raise state revenues and bridge fiscal deficit. But it is fair to say that other criteria such as the reduction of government interference in the economy to promote competition or encourage wider share ownership are also factors here. For exponents of privatisation, such programmes have many benefits. Competition created by privatisation is seen as driving development and innovation, creating growth and cost efficiencies.

But pursing this policy has not always been successful. Railtrack, the company responsible for the running of the UK’s railway system is a prime example of the failure of privatisation. Not only was there a mass exodus of senior staff as a direct result of the sell-off, the loss of skills and subsequent fragmentation of work led to uncontrollable costs, and a decline in safety standards that caused several fatal accidents and the ultimate re-nationalisation of the company a mere 5 years after it had floated on the London Stock Exchange.

But was privatisation to blame? To my mind, the events which unfolded at Railtrack prove the falsehood that large and complex public utilities can be managed like private sector companies, in other words by putting the profit motive first. By the same token, we cannot assume that innovation, adaptability, productivity and cost control – seen as characteristic of private sector enterprise – will automatically embed into the organisational psyche when transferring ownership of public sector utilities into private hands. Care needs to be taken in setting appropriate governance structure and balancing the tension which inevitably arises between short term profit and long term sustainability. 

This blog is an excerpt from a larger case study on privatisation. If you would like to know more, please contact Lisa Bondesio via lisa@chiridion.com

The Offside Rule…

/ Lisa Bondesio / 3 Comments

So, FIFA have chosen Russia to host the 2018 World Cup.  In a voting process that eerily resembled the Eurovision Song Contest – block voting and nul points – the UK’s hopes of hosting a premier global sporting fixture have been dashed.

Post-mortem wringing of hands, shredding of kit, and blaspheming of the BBC will do little to assuage deep cynicism about an organisation linked for some time to allegations of corruption and shady dealings. I know more than a few people who think a well aimed kick at Sepp Blatter’s head would be an expedient solution!  Brain-injury aside, at the very least, questions should be asked about the governance practice within such an influential regulatory body.

It seems, the recent expulsion of two of senior FIFA officials for breaching ethics rules is nothing new. The BBC’s Panorama programme offered evidence that as far back as 1995, FIFA vice-president Issa Hayatou, of Cameroon, had taken a kickback of £10,000 from the organisation’s marketing arm, ISL. If unethical behaviour is tolerated, questions do need to be asked about the professional impartiality of FIFA.  No doubt, more revelations will emerge as 2018 draws closer.

In principle, the UK bid was strong. A FIFA-backed study by McKinsey supports this. The McKinsey report examined five revenue areas (ticketing, TV and media rights, sponsorship, hospitality and merchandise/licensing) and rated the economic value of the UK’s bid at a joint 100 along with the USA, and well ahead of Russia’s score of 56. But technical excellence can only take you so far. There is of course another dynamic at play here…money.

While the actual FIFA World Cup Trophy is estimated to be worth a trifling $194,285.85 (based on the current troy ounce value of 18K gold) you only need to add several zeros to the end of that number to calculate the Croesus-like revenues from the rights, merchandising and business opportunities brought by a World Cup. In prize money alone, FIFA set aside £250 million for the SA World Cup in 2010. If Football revenues represent the GDP of a small African country, why then should we be surprised that their secretive ExCo demand emoluments for favourable votes?

Multi-millions attract mendacity, whichever way you look at it. But FIFA’s decision does put me in mind of the offside rule…you know, the one where the referee awards an indirect free kick to the opposing team!

For more information on the off-side rule, please see:

http://www.offside-ref.co.uk/

Trust me, I’m a banker…

/ Lisa Bondesio / Leave a comment

Our most recent financial crisis has brought the way in which the banks and financial markets operate into sharp relief.  Perhaps more significant is the amount of money it has cost to bail out the banks, as UK taxpayers underwrite levels of national debt which – depending on the election -could herald a new era of sluggish UK growth & relative decline, and strengthen the case for joining the Euro.

Many commentators have squarely laid blame at the door of financial innovation. But financial disasters are nothing new and they are not caused by a single event. They repeat with astonishing regularity, and often radiate from the center through commodity prices, capital flows, interest rates, and shocks to investor confidence.  This time round, cataclysm was closely linked to a series of economic circumstances – strong growth, low inflation and the increased flow of international trade and finance. And although the global financial crisis was not caused by these factors per se, they highlighted the vulnerabilities in the financial and regulatory systems of the UK and US – fundamental weaknesses that were exposed because they combined with a number of unsustainable trends such as rapidly rising property values, high levels of consumer debt and untrammelled bank leverage.

While financial innovation may have a role to play in fomenting disaster, it is likely to occur in combination with other systemic factors. Bankers are incentivised to penalise risks that can be seen and measured, but this time round they invented new and sophisticated financial products which generated added value and high profit, but which carried risk they did not see – or perhaps chose to ignore.

 In good times, the City attracts wealth, generates economic wellbeing and creates employment. In bad times, it can put our AAA credit rating at risk and prolong recession by limiting the flow of credit in the financial system. Still, financial services are crucial to the allocation of resources in a modern economy. We would be wise to realise it will be impossible to prevent future calamity – that is simply the inherent nature of the capital markets. By implementing a combination of regulatory and systemic changes, the UK may seek to retain its position as a leading global financial market. A successful outcome will depend largely on the appetite of the State to do battle with the bankers, and the motivation of investors to think intelligently about financial innovation.

The Ethical Imperative…

/ Lisa Bondesio / Leave a comment

As four Rio Tinto executives are jailed for bribery, and BAE Systems fined £30 million to settle further investigation by the Serious Fraud Office, it’s easy to be cynical about the ethical intent of large corporations.  Nevertheless, it is rare to find an organisation without a mention of ethical business in their annual report, but is this just ‘greenwash’ or ‘hogwash’?

Corporate Social Responsibility (CSR) is not a new concept. Business philanthropy existed as early as the nineteenth century with the development of model factory villages in the UK such as Cadbury’s Bournville and Lever’s Port Sunlight. What has evolved is how large corporations now respond to the challenges of a shifting and dynamic business environment. The way things were is not the way things are.  Chief Executives and their boards find themselves in a strange new reality – one where good corporate citizenship, stewardship of the environment and responsible business practice are no longer optional extras, they are ethical imperatives.

Today’s CSR landscape is often complex and multi-dimensional, involving diverse groups or individuals who may at times have contradictory or competing agendas which run counter to an organisation’s profit motives. And seismic trends such as globalisation and climate change have radically altered the role that corporations play in society. In counterpoint, the expectations that society has of these organisations has also shifted. We’ve moved on from Milton Friedman’s bold free-market view that ‘the social responsibility of business is to increase its profits’. In practice, the manner in which firms now conduct business cannot be disassociated from the perceptions of stakeholders – who may be impacted by such activities – nor can it exclude the judgement of stockholders – for whom financial performance is a key driver.  To put it another way…whether in Borneo, Beijing or Bradford, it is no longer possible for big business to operate independently of the society in which it finds itself, even if it wants to.

One of the most significant drivers in all of this is the transparency and immediacy of modern media. For the iPod generation, the sins of their corporate fathers can be streamed live via RSS feeds and mobile downloads. The inexorable rise of blogging and ‘tweets’ (via Twitter) means the battle lines for corporate reputation are being drawn virtually. Nowadays there is nowhere to hide CSR indiscretions, but doing nothing isn’t an option either. Errors can be costly in both financial and reputational terms. Corporations are primarily motivated by profit, so risk and opportunity also have a contribution to make in shaping CSR strategy and its eventual implementation. Wise organisations reach a compromise between ethics and economics.

This is an excerpt from a longer paper on CSR. If you’d like to know more about CSR strategy or implementation, please contact Lisa Bondesio via lisa@chiridion.com