Tuesday, February 23, 2010

(No.80) London Life blood-letting & other emails

Below are several recent emails to RickardsRead.com in response to my comments in column No. 79: "Pt.3 - Financial services deficits: a screed".

Column Nos. 76 and 78 provided email comments from readers on Parts 1 & 2 about the "accountability" and related "deficits" in the financial services industry, particularly involving the life insurance business.

For reasons of privacy I have withheld the email writers' identities. However in order to provide some context for the views expressed I have preceded each email with a brief reference to the writer's role or business connection.

Words with square [brackets] and italics are mine.


Ref. column No. 79 on RickardsRead.com:
"Pt.3 -- Financial services deficits: a screed"

1. from a former longtime London Life person who remains active in the life insurance business:

I was [..] years with London Life when I was terminated, along with a 1,000 plus others in 1996. I had an experience a year ago that speaks to the deficits you describe -- and then some!

The blood-letting I was part of was [London Life] cleaning house before they absorbed Pru [i.e., the Canadian retail operation of Prudential of America]. The second was was when GWL [Great-West Life] took over.

I still have some inside contacts and they tell me as you outlined in your blog [column No. 79] (1) it's not the same company I remember, e.g., you can shoot a cannon through the place at 4:35 p.m. and not hit anybody and (2) there are a lot of 35 and 40 year employees now retiring -- the big brain drain we read about.

2. from an American of long experience in the life insurance business:

Well said, as always [ref. column No.79]

I believe that a well run mutual life insurance company should in the long run do a better job for policyholders and employees than a stock company. A few mutuals in the States refused to unduly enrich management by turning stock (in whatever form).

I believe that these [mutual companies] will show their heels to the stocks when it comes to individual life sales in the future. Of course management is aware of this but temptations are too great.

3. from a Canadian life insurance executive with extensive international experience:

Once again you are right on the money [ref. column No.79].

Right now many very disgruntled employees at all levels want out of the [life] insurer they are currently working for but the economy is keeping them tied. Once the economy returns to some semblance of order the exit for the doors of the best talent will be a major blow to the big [life insurance] companies who right now rely on "money" to tie their staff down. Since most staff want more than money they will leave for environments that are more employee friendly.

Right now many [life insurance company employees] hate to go to work every day which, to me, results in a quality of work that is far from stellar and more importantly an attitude to service in particular that is felt by the customer -- be that advisor or consumer.

The days of an insurance leader preaching successfully the mantra of "we are all in this to protect the well-being of the company and the policyholder long after you have retired" are but memories for those of us who cannot shake those all too true words.

The downside is we sit helpless as the modern reward junkies get their next fix at year end.

4. from a former senior executive of a Canadian life insurance company:

Excellent article [No.79] and so very true.

Another aspect of the devaluation of the "currency" is the increasing emphasis in [employee] recruiting on experience with several companies over relatively short time periods compared with extended work experience with one or very few employers.

I was increasingly convinced that a choice between two equally competent candidates (experience, age, etc) applying for a position would favor the one who had experience with several companies rather than those who had been a long time employee of one or two other employers.

Loyalty was viewed [by company management] as less valuable than multi-company exposure.

5. from a life insurance sales person of long experience in Canada:

Nice job of articulating my feelings [ref. column No. 79].

I rather think that it is a shame that people are talked about as company "capital" or "assets". [It] changes the game and makes them "commodities" that can be bought, sold or traded. I rather resent that. Wonder when someone will clue into the fact that it takes all of us-- management, employees and customers -- to keep the place going.

Being an optimist I hope there will be enlightenment or perhaps legislation. Don't think they can do the latter as it's hard to legislate stupidity.

The sad part is that it takes the customer a long time to clue in; the good part is that they sometimes do and they have long memories.

Alastair Rickard


email: Alastair.Rickard@sympatico.ca

Monday, February 15, 2010

(No.79) Pt.3-Financial services deficits: a screed

In Parts 1 & 2 of my screed on financial services deficits (see RickardsRead.com, column nos. 75 & 77) my focus was on accountability deficits, moral deficits and promotion process deficits in financial services companies, deficiencies exemplified at dangerous levels in the financial scandals associated particularly but not exclusively with the Wall Street meltdown of 2008.

Much time has been spent in the media on the subject of this stain on the 'free enterprise' system, an icon worshipped with too much faith for too long by too many financial services executives and politicians in Canada as well as in the U.S. and elsewhere. One subject too often ignored is the impact on and role of what used to be an important currency in the financial services business: loyalty to one's employer. This is an area of steadily increasing deficit in financial services -- and for good reason.

Employee loyalty is an asset although one of declining value in many large companies. In the past one found it commonly in terms of employees' attitudes to their longtime employers. To go the extra mile, to act in the larger interest of the company were characteristics one used to see among employees who felt a loyalty to 'their' company. How naive this seems in 2010.

Before and especially after the recent Wall Street debacle, the longer term employee in financial services and even more so the younger, shorter service employee will typically wonder why they should feel loyalty to their employers. Consider as an example a company with which I am familiar -- Sun Life Financial. Indeed a major attitude/satisfaction survey of Sun's Canadian employees done not all that long ago produced a far from stellar result -- from Sun's perspective. [I will comment on Sun's 2009 results in a future column.]

Of course such surveys reflect a variety of factors influencing employee attitudes and morale. For example, what does it do for the morale and loyalty to the company of employees in Sun Life's Canadian operation to accumulate an understanding (since the takeover of Mutual/Clarica) embracing factors such as these?

-- after Sun's takeover of Clarica 1800+ Clarica Life and Sun Life employees in Canada were put on the street to help Sun pay for a high-priced and -- outside Canada -- not always well thought out growth through acquisition strategy [q.v., Keyport Life in the U.S.],

-- Sun senior management chose to terminate in 2009 at least 10% of staff in its Canadian operation (still the fountainhead of Sun's profitability, accounting for 82% of Q4 2009 net operating profit) in order to help company finances under the guise of greater efficiency when its self-evident purpose was to contribute to the offset of huge losses in the U.S. resulting from (to put it charitably) flawed investment and operational decisions,

-- having listened to the sound of hundreds of millions of Sun dollars in the U.S. flushing down the porcelain convenience, Canadian employees experienced the continued squeezing of Canadian operational budgets and employee compensation as well as career agent commissions while senior management continued more than generous compensation for themselves; less than positive for employee morale (to say the least based on comments to me from Sun Life people),

-- a very recent example: Sun just committed $40 million to putting "Sun Life" on a Miami stadium, a move of more than questionable value to sales through its U.S. distribution system since Sun is not in the business of buyer-initiated purchase over-the-counter of branded products like beer or cell phones or even the opening of bank accounts. However the Miami move should delight Sun Trust, a retail financial services company operating 1700 branches in the U.S. southeast, a company which will now receive the benefit of a free PR ride on this SLF effort at high profile 'Sun' branding in Florida, and

-- the as yet unpublicized decision to close out the Mutual/Clarica (now Sun) operation in Ottawa with its 600+ jobs, an operation whose origins lie with the decision and the commitment by Mutual Life to keep jobs in Ottawa when it took over the Canadian operation of Metropolitan Life whose Canadian head office had been in Ottawa for a century.

Employee loyalty is not only misplaced but regarded as foolish by employees themselves if it is betrayed by the employer; loyalty is a two way street for company and employee no less than for company and agent. Unearned employee loyalty benefits the employer only in the short term.

Of course if the employee is a member of a company's senior management group then even though the company may have lost ship loads of money (or, in the U.S., may have had to be bailed out by taxpayers) they are likely to remain happily over-compensated.

When I worked for Canada's first mutual life insurance company and the only one operating like a genuine mutual company (The Mutual Life Assurance Company of Canada) I gained more than a little job satisfaction as well as morale support from knowing that my efforts were serving the interests of the company's par policyholder owners.

After the company demutualized, became Clarica Life and soon thereafter the inevitable happened (takeover by another company, in the event Sun Life), I and more than a few of my colleagues found that there was very much less job satisfaction to be derived from working to enrich institutional investors, to trying to please stock market analysts on a quarterly basis and to enlarging the size of the bonus and stock option purse dedicated to senior management.

In the wake of the recent financial crisis and scandals it is beginning to dawn on more Americans and some Canadians (although not nearly enough) that the first purpose of much of today's financial services industry is to make a great deal of money for a distinct minority of those who are associated with it.

In terms of this, the third part of my screed, with its focus on the loyalty and morale deficit, the reality is increasingly not being lost on the employees of financial services companies. It will take rather more than another serving or two of warm and fuzzy senior management rhetoric to regain the sort of employee loyalty and morale that once played an important part in the past success of so many organizations.

[To be continued]

Alastair Rickard


email: Alastair.Rickard@sympatico.ca

Tuesday, February 9, 2010

(No.78) More about financial services deficits

Below I have selected several responses to Parts 1 & 2 (column Nos. 75 & 77) in my series "Financial services deficits: a screed" on RickardsRead.com.

Column No.76 also provided email comments from readers on the "accountability deficit" and related matters in financial services.

For reasons of privacy I have withheld the writers' identities. However in order to provide some context for the views expressed I have preceded each email with a brief reference to the writers' role or business connections.

Words within square [brackets] and italics are mine.


The corporate promotion process deficit (and other deficits) in financial services
ref. column Nos.75 & 77 on RickardsRead.com

1. from a senior life insurance industry executive with wide experience in Canada and elsewhere:

You write good stuff. It should be required reading by all new leaders but as we know those that need to know it best will ignore the truth since they cannot handle the truth!

The [life insurance] industry has continued down the road of competing on price here in Canada (both insurer and reinsurer) with price reductions rolled out last fall when what is needed is an increase in price to bring back service, training of advisors, more flexibility in risk taking and less claim adjudication nightmares.

It is like the governments: the federal government stops transfer payments to provinces (reinsurer lowers mortality charges), provinces push their services down to municipalities (insurers pass on lower prices to advisor/consumer) and in the end we have a consumer paying more for everything near and dear (advisor makes less commission on lower premiums, gives less service because [the advisor] gets poor service in underwriting, training and tighter claims adjudication.

And we continue to find ways to get the stuff to lapse before it becomes a burden on reserves and capital requirements. Round and round we go again.

The age of "me" is here to stay in executive lounges (they have grown beyond offices).

2. from a senior person in a provincial government:

Re No. 75 "Pt 2- Financial services deficits: a screed" --
This was probably one of your best columns so far... Keep going!

3. from a financial planner licensed in the life insurance business:

Re No.75 -- I have been reading with interest your columns on the malaise affecting our corporations, especially the financial services industry. They are as usual quite informative and thought provoking. Keep it up.

4. from an American experienced in the life insurance industry:

Re No. 75 -- On target, as usual. And it sparked a thought ....

Undoubtedly the demons in the recent (and, like the unwanted guest, lingering) financial crisis are (1) failure of boards to do their duty, (2) failure of regulation. Of course if boards did their duty the de minimus regulation of the Bush years probably would have worked. Unfortunately the incentives for boards are mostly to look in the other direction and hang on for the ride.

Still, I have a theory that there may be another more basic and human problem. I have the sense that selfishness, the balance of duty to self vs. duty to others, is a generational thing -- that it goes in fairly long cycles.

Most of the things that have been done to unfairly heap wealth on this generation could have been done in the past but there was something that kept it from happening. There was some sense of balance between personal benefit and the needs of others. Clearly the current leadership generation has no sense of proportion. Not since John D. Rockefeller or J.P. Morgan have we seen business leaders as indifferent to simple fair play as the bankers who just testified before Congress.

You'd have to go back to the post-Civil War period in the U.S. to find a period of similar selfishness and greed. Fortunately it started to end when Teddy Roosevelt became president and the reform movement began. That's not to say that there was no greed between 1900 and, say, 1982 when the new movement started -- it's just that the level was not as breathtakingly excessive. The WWII generation probably was the most balanced in terms of benefiting self vs. others.

Proving my thesis is a lot harder than stating it, and I'm not going to try. However, believing it as I do gives me some sense of hope for the future. I don't think the reform will take the same guise as the one that Teddy started but I hope that this tsunami of excess is running its course and the next generation of leaders, those now in the wings, will have a better equilibrium.


RickardsRead.com welcomes emails from readers whether they agree with views expressed on this blog or not. Emails may be sent to: Alastair.Rickard@sympatico.ca


Alastair Rickard


email: Alastair.Rickard@sympatico.ca

Wednesday, February 3, 2010

(No.77)"Pt 2-Financial services deficits: a screed"

In Part 1 of this screed (see " Financial services deficits", column No. 75 on RickardsRead.com) I commented on accountability and moral deficits in the financial services business, traits highlighted by the recent financial scandals associated particularly but not exclusively with the Wall Street meltdown in 2008.

Doubtless one question that many ponder is this: how could those executives whose principal business traits were so obviously a combination of greed and incompetence come to occupy and retain senior management positions in major financial services organizations?

The answer, an obvious one to many who have spent time working in large financial services organizations, is the fact that those promoted to senior rank often possess most prominently political skills which facilitate a climb up the greasy pole, including:

-- a convenient lack of firm principle (An implication? Think of a financial institution selling a financial product to its clients, a product on which the institution needs those clients to lose in order to enhance the institution's profits),

-- a career enhancing desire to please one's superiors, a talent often replete with the smug grin of the sycophant (An implication? Think of a financial institution's approach to risk management that places in danger the company's financial health but members of the management team do not speak in opposition since it is the CEO's view),

-- an ability to detect the slightest change in the direction of corporate winds (I can think of several financial services CEOs who, while they had developed a skill to sniff the political winds that bordered on the supernatural, once they made it to the top of the greasy pole displayed an insensitivity to the real world occupied by the company), and

-- a willingness to applaud or create ideas and plans that serve personal career management objectives, ones ranked far ahead of what may actually be in the longer term best interests of the company (An implication? Think of corporate financial risk that serves to increase the company's short term profits and hence senior management's compensation at the expense of the company's longer term financial health).

Of course to be merely an intelligent and effective executive does not preclude one from senior management but it is far from being a guarantee or even a career advantage in some cases. Far more helpful to this objective in large financial institutions may be the skills to 'manage upward' and develop politically adept career management tactics so that even in the absence of much real executive ability one is able to 'fail upward'.

To the extent that such people rise to senior and CEO ranks it should be no surprise these days to financial regulators that a financial institution has been managed in order to serve as a priority the cause of its senior management's own financial aggrandizement.

Can there be those in government or financial services who were genuinely puzzled about how and why those whose business advancement had mostly been about putting their own interests ahead of pretty much all else, including the interests of the employer, ran corporate ships aground?

Even among those financial services companies in which the financial self-interest of corporate leadership did not and does not (yet) threaten their continued existence, serious harm to an organization can be done:

-- to the morale of those in the company who see colleagues thrown onto the street in order to produce budget savings to help offset losses arising from poor senior management decisions,

-- to the motivation and retention of the members of the company's officer corps who see too many they regard as undeserving rewarded by promotion perceived to be based on their political rather than management skills, and

-- to the loyalty and ongoing efforts of company employees, especially those in core areas of middle management, who watch bloated and disproportionate levels of compensation paid to senior management under whose leadership company results have either faltered or suffered while their compensation is seriously restricted or frozen.

Consider Manulife, until recently the financial institution icon worshipped by so many of the Canadian 'financial services paparazzi' (see column nos.39 & 46 on RickardsRead.com). Its board happily awarded the departing CEO of this financial institution, one that ended up on the federal regulator's 'above average risk' watch list, compensation for 2008 of $13.25 million.

If you want to read an interesting and informative treatment of Manulife hitting financial and regulatory walls in 2008-09 under the now departed CEO Dominic D'Alessandro, and about the vital regulatory role played by OSFI as well as some of the shortcomings of Manu's senior management team and board, see the feature article by Theresa Tedesco in the Jan. 30, 2010 Financial Post.

During my years in financial services, both in the companies in which I worked and others of which I was a close observer, I was often reminded -- by numerous appointments/promotions of little or no objective merit -- of a comment by Winston Churchill. He compared the appointment as a minister to an inter-war British cabinet of a man (Sir Thomas Inskip) to Roman Emperor Caligula's appointment of his horse to the Senate.

It is increasingly evident that a good deal of what has gone wrong in financial services on Wall Street (and cousins elsewhere) has much to do not only with American deregulation and inadequate U.S. federal government regulation but also pathetically ineffective governance and boards of directors. Perhaps in no fashion has this result been facilitated more often than in the promotion to senior management of the unprincipled, the self-interested, the self-aggrandizing and the (too frequently) meritless.

For the sake of the public, the financial system and taxpayers it is obvious that serious examination is needed of the 2008 financial crisis and its causes as well as the financial system's inadequacies. That has already begun but it needs to go well beyond a facile focus on obvious topics like the ridiculous bonuses paid to senior managers which in turn helped to promote institutional activity that brought on the financial crisis (as important a factor as that compensation has been).

Both the record and the challenges involving financial services companies demand serious remedy to the system, remedy that addresses the accountability and moral deficits to which I referred in Part 1 of this series of columns. However to be truly useful such examinations should also include careful consideration of the role of the promotion within financial services companies of the unqualified and undeserving to senior decision-making positions.

I am referring here to a corporate process deficit, one that has not only allowed but encouraged the elevation of too many into financial services corporate leadership whose careers and actions have contributed to financial system inadequacy and default.

[To be continued]

Alastair Rickard


email: Alastair.Rickard@sympatico.ca