Flickr version here.
Rethinking corporate governance
One thing that’s been obvious at least since Enron is that our model of corporate governance is broken. In particular, non-execs have not been discharging their responsibilities. In the case of RBS, for example, it’s abundantly clear that the Board members were terrorised by ‘their’ CEO, now Britain’s most famous pensioner, Fred Goodwin. Mark Anderson’s written a very good ‘open letter’ on this subject in which he puts forward some useful ideas about how corporate governance could be rebooted.
We can blame the regulators who really came from industry, we can blame the bankers and CEOs and their lobbyists, we can blame the politicians who pretended that no regulation was good regulation, we can blame co-presidents George Bush and Dick Cheney. But, with the exception of the last two, there is another layer of governance that should take most, if not all, of the responsibility: the board of directors.
Too much is made of the symptoms of bad management, and much too little is made of those really responsible for the quality of this management.
At different times, I’ve written open letters to specific boards, but today I wanted to write an open letter to all boards. If you are a corporate board member, please read this carefully; I’m betting that, after reading it, you’ll agree: you were probably not doing your job.
Let me start by breaking the neck of the good-old-boy scheme: most board members are friends (or even relatives) of the CEO, or work for him or her. Those who are not – even the most independent “outside” directors – tend to be selected on a rank of the CEO’s ability to direct, manipulate, or intimidate them; OR because they are guaranteed not to look too closely at the company.
This formation step is the first place where things go wrong.
A good board of directors should number 9 to 11, and have the following composition:
The Chairman, often the past CEO, and certainly NOT the current CEO.
The CEO.
The CFO. This will surprise most readers.
At least half the directors should be “outside” directors.
There may be a rotating spot for one or more employees (the German model).
The General Counsel.
The CTO or CIO should also be considered, since most strategic decisions involve technology inputs that others may miss entirely.
Outside directors should be just that; not just golf cronies or the targets of interlocking board favors. Rather, they should bring strengths from areas of current or planned company operations.
Manufacturing bank ‘earnings’
Terrific rant by Russ Daggatt on Mark Anderson’s blog.
You may have noticed that the big banks have been reporting upbeat “earnings” figures in recent days. Just yesterday, Bank of America reported a staggering $4.2 billion in first quarter “earnings.” But it’s share price declined by an also staggering 24% What’s up? Surely investors saw the impressive “earnings” numbers. Of course they did. Which is why Bank of America’s share price went down. Those “earnings” are just more of the financial gimmickry that got us into this financial crisis. Bank of America’s deposit base (excluding acquisitions) actually declined and defaults on every kind of loan increased sharply. Its credit card division lost $1.8 billion; it’s mortgage division lost $500 million. But it resorted to every trick in the book to manufacture “earnings.”
Can anyone explain to me why Ken Lewis is still chairman and CEO of Bank of America?
Great piece, worth reading in full.
Rules of engagement
Lovely post by Eric Raymond setting out the ground rules for commenting on his blog.
I have banned people for attempting to masquerade as other commenters. I will ban for sock-puppeting if I discover it. But I will not be more specific about the sorts of things I will or will not ban for, because I have discovered this: when I try to be open, fair, judicious, and balanced, there is a category of troll that will constantly push my limits and attempt to use my own scruples, sense of fair play, and respect for the norms of civilized debate as a weapon against me and against the health of the community around this blog. Coping with this sort of thing is a waste of my time.
Therefore, remember that this blog exists for my purposes and not anyone else’s. I reserve the right to be unfair, obnoxious, arbitrary, tyrannical, and ban people at my whim. Protesting this will get you banned, because I will interpret it as yet another attempt to jerk me around by my sense of fair play.
If you have been warned that you are trolling or that you are in danger of being banned, you can move back towards good standing in one of two ways: (a) By making me think, or (b) by making me laugh. Don’t repeat yourself, that won’t help. Flattery won’t help either, as I find fanboys nearly as annoying as haters.
Finally, I note that if you ever succeed in changing my mind about something, I will cut you large amounts of slack for a long time afterwards even for behavior that would otherwise get you banned. Not many people ever manage this, and I value the few that have accomplished it quite highly.
Great stuff!
The Twitter book
Coming soon, apparently. Hard copy not yet in the shops, but you can buy a pdf download for $15.99. Seems a bit steep to me, much as I love O’Reilly’s stuff. Besides I’m saving up for a really good book on Drupal.
So where’s the value-added?
I’m getting bored with reporters who do very little real reporting complaining about how the Internet is destroying journalism. So is Jeff Jarvis, who’s been on the road for two and a half weeks and I guess is fed up watching CNN. Here’s a terrific blast from him:
Every day, with everything they do, the key question for journalists and news organizations in these tight – that is, more efficient – times must be: Are you adding value? And if you’re not, why are you doing whatever you’re doing?
Sitting in a hotel room, cruising by CNN the other day, I caught a behind-the-scenes segment that wanted to show us just how cool it is to be a reporter dashing from story to story. It did the opposite for me. I was disturbed at the waste.
The correspondent – I won’t pick on him; it was just his turn to play show monkey – stood in front of the new Mets’ stadium to tell us that there’s controversy about naming it after a sponsor. It was just a stand-up. There was no evidence of reporting as he was standing alone in a parking lot. The knowledge was a commodity. Anybody could have read it. But they wanted to scene and invested a correspondent and crew to get it. Then he dashed to the UN because there was a vote happening. But he didn’t run to report. He ran to the bureau to do another stand-up with another background. Again, what happened in the vote was commodity knowledge. Anybody could have read it.
So there is a reporter not reporting. But, of course, that is hardly unique to CNN. How much of the dwindling, precious journalism resource we have – on national and local TV, radio, newspapers, and magazines – goes to original reporting, to real journalism? How much goes to repetition and production?
Spot on.
Models of the banking crisis
I’m an engineer. I don’t understand finance, but I know something about how systems work, about feedback and complexity and emergence. And when I watch or read media ‘explanations’ of the banking crisis I invariably find that some aspects of the story seem to be missing.
All open dynamic systems, for example, have inputs which they transform into outputs — like so:
We know that the global financial system went into overdrive creating products that turned out to be unbelievably toxic. So an obvious question — to an engineer at least — is: where did the money come from to make these dodgy loans possible? What were the inputs to this crazy system? The answer turns out to be incredibly cheap money from China and the oil-rich Middle Eastern countries:
So: cheap money in, dodgy financial products out. As the Greenspan-sponsored post 9/11 economic boom gathered pace, China found itself running an enormous balance-of-trade surplus. So, to a lesser extent, did those countries which produce crude oil. They all found themselves with huge revenues and nowhere to put them to productive use. So they lent wholesale — at very low interest rates, because after all the supply of funds outstripped demand, thereby driving down interest rates — to Western banks and financial institutions. These, in turn, finding themselves able to obtain vast quantities of money cheaply, looked for ways of turning a profit on it. They could — and presumably did — lend some of it to credit-worthy institutions. But that was a finite market. So they looked around for a marketing opportunity — and found it in all those hard-up folks who aspired to buy a house but had hitherto been unable to obtain a mortgage. As one banker said on Dispatches the other night, it got to the point where “if you could breathe” someone would offer you a mortgage.
Now you might argue that these simple input-output models are too crude to be taken seriously. And perhaps they are. But I’ve just come on an interesting paper by an American economist, James Hamilton, which he presented at a conference organised by the Brookings Institution, a very fancy Washington-based think tank. Professor Hamilton is a student of oil prices and their impact, and he had previously published some stuff about the long-term impact of the oil-price rises in 2003. On his blog he wondered what the recent spike in oil prices might mean.
One of the most interesting calculations for me was to look at the implications of my 2003 model. I used those historically estimated parameters to find the answer to the following conditional forecasting equation. Suppose you knew in 2007:Q3 what GDP had been doing up through that date and could know in advance what was about to happen to the price of oil. What path would you have then predicted the economy to follow for 2007:Q4 through 2008:Q4?
The answer is given in the diagram below. The green dotted line is the forecast if we ignored the information about oil prices, while the red dashed line is the forecast conditional on the huge run-up in oil prices that subsequently occurred. The black line is the actual observed path for real GDP. Somewhat astonishingly, that model would have predicted the course of GDP over 2008 pretty accurately and would attribute a substantial fraction of the significant drop in 2008:Q4 real GDP to the oil price increases.
He goes on:
“The implication that almost all of the downturn of 2008 could be attributed to the oil shock is a stronger conclusion than emerged from any of the other models surveyed in my Brookings paper, and is a conclusion that I don’t fully believe myself. Unquestionably there were other very important shocks hitting the economy in 2007-08, first among which would be the problems in the housing sector. But housing had already been subtracting 0.94% from the average annual GDP growth rate over 2006:Q4-2007:Q3, when the economy did not appear to be in a recession. And housing subtracted only 0.89% over 2007:Q4-2008:Q3, when we now say that the economy was in recession. Something in addition to housing began to drag the economy down over the later period, and all the calculations in the paper support the conclusion that oil prices were an important factor in turning that slowdown into a recession.
This is intriguing, but it’s also another black-box, input-output model. In Professor Hamilton’s case it’s oil-shocks in, economic downturn out.
Deep waters, eh, Holmes? But wouldn’t it be funny if we could predict large-system behaviour with such crude models.
Cabinet Office’s IT pushes out 401 tonnes of CO2. No figure for the hot air
Interesting story in The Register.
Tom Watson Civil Service Minister at the Cabinet Office outlined his department’s efforts to reduce CO2 emissions in a Commons answer yesterday. He said the department last year used “929 000 kWh of electricity at a cost of £61 000 for its IT Services”. This equated to 401 tonnes of CO2. Desktops accounted for 420 000 kWh, printing 195 000kWh and the rest was down to its datacentre. Asked what the department was doing to reduce greenhouse emissions, he reeled out a series of stock measures including reducing the number of printers and replacing them with greener multifunction devices, putting monitors into standby, shutting down PCs after hours using power management kit, offloading redundant kit and “starting to replace existing servers with storage area networking devices that implement storage virtualisation.”
Sounds like a beanfeast for government suppliers — except that at the same time he announced that “the lifecycle of all end user devices has been extended to five years” and “the number of PCs and laptops will be reduced to as close to one per person as possible”. At the same time “thin client technology will be used with low-power consumption CPUs server technology that complies with the recommendations in the Greening Government ICT Strategy.”
Actually, this Parliamentary Answer sets a helpful precedent. It’d be good to see companies as well as public bodies starting to account for their carbon footprints. And even if I were an accountant who’s entirely unmoved about climate change I’d be very interested in the fact that my organisation used nearly a million units of electricity in a year.
Farewell my Darling: the fall guy’s final budget
The Economist thinks that it was a dishonest, politicking effort. It’s hard to disagree.
The wheel of fortune turns swiftly in politics. Gordon Brown pulled off the G20 meeting in London on April 2nd, emerging with a plausible aura of global statesmanship. After a handful of Labour sleaze stories and a misguided statement on YouTube, the prime minister looked more like Richard Nixon: shifty, angry and with a list of enemies to smear. And that was before a downright dishonest budget on April 22nd.
The budget was a crucial one, for two reasons. First, Mr Brown is running out of time—he has to hold an election by June 2010—and Britain seems increasingly fed up with him. The public regards his party with distaste (see article). That’s partly because a dozen years in power tends to tarnish: when the home secretary’s husband charges the taxpayer for the porn he watches, one gets an inkling that a government’s time is up. But it’s also because of Mr Brown’s character. His strength, which the G20 meeting displayed, is dour pragmatism. Too often, though, he resorts to tribal politics, in a way that seems both scheming and incompetent.
Second, the budget marks the government’s attempts to deal with the fiscal consequences of the worst slowdown since the second world war. Mr Brown is partly to blame for this mess, but crisis management should have played to his strengths; instead, it revealed his worst side…
I’ve always thought that the key factor has little or nothing to do with politics. The British electorate isn’t much interested in politics, but when a regime has been in power for a while the public simply gets bored with it. And when that happens, the game is up.
Tony Blair always thought that Brown would be a disaster as Prime Minister (see The Homburg Factor), and in that at least he turns out to have been right. I’ve never met Brown, but he’s always seemed fishy. What’s especially creepy is all that sanctimonious crap about being “a son of the Manse”, as if somehow that elevated him onto a higher moral plane than the rest of us — not to mention the rest of the political class. The Damien McBride episode exposed this moralistic posturing for what it was — hypocritical baloney. McBride has been close to Brown for years. Everyone who ever came into contact with McB knew what he was like. Brown not only knew, but obviously approved — otherwise why would he have kept him on (and brought him with him to Number Ten)?
The ubiquitous commentator Will Hutton has done a two-part TV documentary for Dispatches on how the financial crisis happened. The first part was screened last night, and although it’s clear that Hutton is riding his own hobby-horse (i.e. the view that the British government and regulators proved deeply incompetent when it came to the crunch), his film did include three toe-curling video clips.
The first shows Brown, newly-installed as Chancellor, explaining smugly to the House of Commons how his shiny new tripartite system for ‘light’ regulation of the banking system was a world beater — while, behind him, Tony Blair smirks complacently on the government front bench. The second clip shows Brown giving his first speech to the Lord Mayor’s Banquet and sucking up in a nauseating way to the assembled members of the City elite. The final clip shows him opening the London office of Lehman Brothers: he unveils a plaque and then begins fawning on Richard Fuld, CEO of the bank and arguably the creepiest-looking dude since Boris Karloff hung up his mask. What these clips illustrate above all is the extent to which Brown was in awe of the soi-disant ‘masters of the universe’. They should be on a permanent loop. Perhaps they already are — on YouTube.
Forty years on
The Open University, where I’ve worked for most of my career, is 40 years old today. It’s come a long way since it was known as “The University of the Air”, when academics at other universities made sniffy jokes about our students getting pass degrees if they had black-and-white televisions and honours only if they had colour sets. I came here from Cambridge via a series of improbable coincidences and vowed to myself that I would leave when I got bored. I’m still here — though to be honest there are times in committee meetings when I have temporarily lost the will to live. But that’s true of all universities, nowadays. At its best — when it’s innovating — the OU is still the best place in the educational world to be. And I have some really terrific colleagues here. Also we have more iTunesU downloads than almost anyone else in the business. And there are some Very Big Developments in the pipeline — though you can’t hear about them yet unless you sign an NDA. Patience, patience — all will be revealed in a few months.
So now the OU is big and successful — and entering early middle age. And you know what that means. Ask Microsoft, which is currently trying to recover its lost youth. So maybe it’s appropriate that our next Vice Chancellor, Martin Bean — who takes up his post in the Autumn — is currently a Very Senior M$ executive! The old Chinese curse still applies: may we live in interesting times.