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

RickardsRead.com

email: Alastair.Rickard@sympatico.ca