Tuesday, 23 September 2008

Apologists for Free Market Economy- Should we Listen to Them?

'On balance I think it would be a good idea, you know, if we did not repeat the Great Depression all over again. What's more most people agree with me,' said Roger Bootle, Managing Director of Capital Economics and an economic adviser to Deloitte in yesterday's Comment in the Telegraph Business Section.

While Mr. Bootle's sentiment is exactly right and his eloquent comments do consider that the real economy is about engineering and social organisation while finance is just applied mathematics and human nature, he takes the tack that most economists and banking people are taking - that we have found out the limits of the system but the system is good, so we should bail it out as the alternative is not every nice. As history shows.

As History Shows

The very fact that such an article mentions the Great Depression as a good excuse to stump of $700bn in the US to attempt to rescue the banking system is perverse. Is it just me but The Great Depression was something we all should have learnt from, just as we all refer to The South Sea Bubble, another great scam about debt?

Mr. Bootle and even that poor chap, Andy Hornby who has just lost his job at HBOS and has to make do with his £2m shares and bonuses, refer to the root cause as the 'febrile' housing market (yes that's the one, Andy. You know the one that you had 20% of the mortgage market in).

You see, why is that the ordinary man in the street or propping up the bar in the pub could actually see the over-heating in the housing market was going to blow up our faces and the collective genius of the world banking system and jokers like Roger Bootle could not? It does not take a genius to work out what the consequences would be but we sure knew it would mean lots of zeros in the sums. I mean, when banks start doling our ever inventive ways to buy houses so that low earning first time buyers can get 125% mortgages on multiples of 3-5 of their earnings, you knew this had to end in tears.

The history of the greedy road to fast millions and billions was there for everyone to see. In The South Sea Bubble episode, mere footmen and servants became richer than their patrons overnight. Today, average earning people have second properties on foreign shores, great holidays, fast cars and houses bristling with all the latest electronic wizardry. As the property market recedes like the tide going out, how exposed will those people be? How exposed, as a result, will our pensions be?

Bail Out without Controls

As the bail out begins, the real problem for everyone is that the UK cannot survive as a dominant economy without a thriving financial centre. London is the largest financial market outside of New York and today its own economy props up the UK as we have no real manufacturing base and base commodities to export such as coal and steel, just a few years left in our oil and gas reserves. The reality is, if we stifle the City, Britain will lose its special status and there is a massive risk that Frankfurt or somewhere else could take our status. There is a reason beyond getting Non-Executive roles in the future that Gordon Brown and Tony Blair gave special tax havens to Private Equity and Hedge Fund Executives - you know the ones who have been making the billions in the last few years - and that's because our markets could not function without them.

So if we put tons of regulations and controls down in the New Banking Era, then Britain stands to lose out.

And Your Point Is?

Such an argument may well be true and a real threat but in reality Britain has become way to reliant on financial markets and the City to be a healthy economy. Balance of Payments, Budget Deficit, our currency, the Service Industry, Employment have all become dependent on the City's performance and there is no underpinning economy which supports the UK. Lose the City and Britain is lost.

Well perhaps it is time we understood that the Golden Goose cannot last forever. It is right to regulate and control the finance markets. People are gambling with our money and the country's wealth and when they get it spectacularly wrong they carry on as if nothing has happened and wait for the Treasury to bail them out while earning fabulous wealth on the way. It's a no-lose poker game.

Roger Bootle's closing comments are symptomatic of the world of finance. He believes if we shore up the financial system from within then the outside will not get effected too much - in fact he does not see any signs that outside the financial world there are any effects to be seen. So why is it that home builders are going to the wall, that the number of bricks made in the UK this year dropped to below 1945 levels, that unemployment rose to the highest level in 11 years to 1.75m and that inflation rose to 4.7%, again the highest in at least 10 years? The economy is in slowdown, a brink of recession and generally economic conditions are the worst for 60 years according to Alistair Darling while no less a sage than Alan Greenspan calls what we are observing as a once in a 50 or 100 year event?

The fact is that the world of finance makes all other things possible. Lack of credit will meltdown the housing market and in turn curtail rampant consumer credit which has fuelled a materialistic boom across all levels of society that has been unprecedented in world history. What is happening in the world of finance will have a profound effect on our savings for retirement and or prospects for jobs.

The reality is that people like Roger Bootle are part of the problem yet they will be the ones fixing it. So you can bet your fake £1 coin that it will be fixed so that the same can happen again and again. And while the 'Big Boys' play with the system and get rich, it is we the tax payer, pensioner and investor who gets walloped every time.

Monday, 22 September 2008

The Jean Charles De Menezes Inquest - Will it Achieve Anything?

Today sees the opening of the Inquest into the death of Jean Charles De Menezes, the Brazilian electrician who was shot dead by special officers in the wake of the failed 21/7 bombings in London.

After all the cover ups regarding the David Kelly death, the legal decision for Britain to go to war in Iraq and others, do we really expect anything of use to come of this inquest? Should there be some sort of retribution for the neglect and incompetence that led to Mr. De Menezes death in any case?

In Favour of the Police

It has been argued the the UK was in a state of high alert after the bungled attempt by would-be Terrorists to again bomb the Tube Network on 21 July 2005. Mr De Menezes had been living at a block of flats which were under surveillance by undercover officers who believed one of the terrorists was indeed hiding on the premises.

Mr De Menezes, with his South American looks, was mistakenly identified as the terrorist in question and this was not corroborated by video as the person holding the camera was taking a 'comfort break'. From there a whole series of events went unchecked before Mr. De Menezes was finally shot while boarding a tube at Stockwell Station by two specially trained firearms officers acting under orders.

With the nation and authorities in a state of high alert, Mr. De Menezes was an unfortunate victim in the war against terror.

The Case Against

Chalk one up to the Terrorists after all, without even firing a shot or letting off a bomb. Britain throws caution to the wind and gun-toting, trigger-happy officers kill a man in cold blood in front of the public.

Reality and Myth

In the Independent Police Report several myths and pieces of disinformation were reviewed and explained and the worrying issue of a police cover up was raised. In fact all the officers who were to be named in the Report got lawyers paid for by public money and got an injunction against any of their names being mentioned. In the fall out, the police have shuffled shoulder to shoulder offering just one sacrificial lamb since the Report who was fired.

  • At the time we all believed what we were told. Mr. De Menezes was behaving in an odd manner having boarded a bus to a tube station, got off and immediately got back on the bus to ride to Stockwell Tube. A cursory glance would have revealed what most saw, the tube station at which he originally disembarked was closed so he immediately got back on the bus.
  • He was wearing a padded jacket. In fact it was a warm day and Mr. De Menezes was not wearing a jacket and indeed did not have the appearance of a man carrying explosives under his clothing.
  • Mr. De Menezes vaulted the ticket barriers and fled from police. In fact Mr. De Menezes did not vault any barrier and no time did he break beyond walking pace. Video footage clearly sees him making his way to the train platform as any other commuter.
  • Mr De Menezes was warned by officers they were carrying weapons but he still got on the train. In fact at no time did the special officers challenge Mr. De Menezes until he got the train, no warning was given and he was bodily pulled to the floor and restrained by one officer and then shot by the other officer a total of 7 times in the head.
  • Mr. De Menezes was an illegal immigrant in the UK. It is true Mr. De Menezes was a foreign national in the UK under a visa to work as an electrician. To this day, being in the UK beyond the length of your visa is not a crime punishable by death.

The reality of that terrible day was that Mr. De Menezes was killed by serving officers who were acting on the wrong information that no one decided to corroborate and confirm and now people are trying to distance themselves from the command to kill without warning. The two officers who killed Mr. De Menezes and all the team involved that day except one still serve in the same roles and not one of them has been disciplined.

Subsequently, and perhaps this could only happen in Britain, the Metropolitan Police, were collectively found guilty of breaches of the Health and Safety Act.

Why is This Still Important?

Are we raking over this terrible affair just to give some semblance of closure to the parents? Are we doing it in the public interest - after all these police were only doing their job and sometimes you have to expect casualties?

Perversely, some have argued that as it was foreign national and one out staying his visa, then he deserved to die.

The simple fact is that a man was gunned down in cold blood having not had the courtesy of a warning at any point before he alighted the train or chance to explain who he was. And the only crime punishable by death in this country is treason and for that you require a trial and conviction. In reality, he was restrained and shot 7 times in the head in front of passengers. He had no bomb, no suspicious clothing, he was not even properly identified and it is not clear on whose orders he died. At no time, even though he was using public transport to get to Stockwell Station was Mr. De Menezes intercepted and detained when there was ample chance in the open air to do so, particularly as he was under suspicion? Why was he allowed to even enter the station let alone alight a train if he was deemed dangerous?

Subsequently, the police used the camouflage of myths and misinformation, never moving to quickly identify the man shot, what he was wearing, how he behaved even though the officers involved recovered Mr. De Menezes' wallet at the scene and knew within minutes that they had shot a Brazilian citizen. Since then, at the highest level, Sir Ian Blair even, have tried to distance themselves from the bungling incompetence and negligence that brought about Jean Charles De Menezes death that day.

The fact is, we the public, have placed our trust in the authorities to protect us. All we seem to get in return is spin, lies and incompetence. That a report which was plagiarised from an old PhD Thesis could be the basis of the dossier that took us to war with Iraq is mind blowing considering the loss of life to our troops and its cost, yet the Chair of the Joint Chiefs of Intelligence, John Scarlett, was never questioned why he signed it off but instead was promoted.

So when an innocent person is killed by authorities in full public view, without challenge, then we really ought to know why it got that far and how everyone plans for it never to happen like that again. Only when we know the full facts, who did what and how the two officers came to fire the shots in a desperate attempt in their eyes to stop a suicide bomber, will we feel confident that the Police will act properly next time around. The only thing the daft HSE case against The Met proved is that review of process is critical when someone has died.

Jean Charles De Menezes could have been your son - the incompetence and negligence was that great.

Sunday, 21 September 2008

Banking - A Culture of Greed and Impunity

I make no apology harping on about this, but I live in a world where if you take stupid risks in business, you pay the price.

Why? Because generally you are playing with other people's money and most certainly with the jobs of others. I believe there should be moral and commercial responsibilities in business and that in this era of spectacular boom there has been a vast disconnect between Senior Executive sense of responsibility and their Accountability.

The Financial Crisis

If you knowingly run a company into areas of immense financial risks knowing that at some point the risks will catch up with you spectacularly and along the way you simply take the 'upside' and 'reward', then surely that has to be culpable 'Corporate Homicide'.

The mess the Banking System is in, the so-called Credit Crunch, is talked of as some sort of global economic malaise that was unavoidable if you had read books by long-dead economists. Not so - it was a massive explosion made by the people who worked in the financial sector.

Panic Over, Everything Back to Normal

This week, George W. Bush and his faithful henchman at the Treasury, Paulson, drummed up a package to buy back $800bn of mortgage bad debt. The stock market responded in stoic form and rose nearly 9% in the UK alone. Crisis over, let's get back to normal.

As Lloyds TSB avoided all competition scrutiny to become nearly 30% of the UK mortgage market, the former CEO of the newly merged HBOS, Andy Hornby, was given £2m for his troubles in driving a successful business down a toilet and get rescued by another company.

Adam Applegarth at Northern Rock, the poor lamb, was given just enough to get by a while as the UK Government stepped in to rescue the company he had busted to the tune of over £100bn of liabilities to the tax payers. But at least his batting average is looking better without all that worry.

In the US, Bear Stearns went into meltdown and was bought for a song by JP Morgan Chase, Merrill Lynch suffered spectacular losses and fired its CEO with massive payouts and then got rescued by Bank of America. Citigroup's CEO was fired after massive losses with a huge payout and then a huge chunk of equity was given away to foreign investors to save the bank. Freddie Mac and Fannie Mae, the lumbering giants of US mortgages with over 50% of the mortgage market in the US went bust and were rescued by the US Government and the poor CEOs were thanked spectacularly for their troubles. AIG was bailed out with $85bn and as far as I can see, not one Executive got fired. Lehman Bros has gone belly up and I am sure the Executives and Board will be be no worse off which is more than can be said for investors and staff. As we speak, Morgan Stanley, another great bastion of the banking sector, is rumoured to be in talks of merger and rescue with Wachovia and China Investments.

The Common Link

So if you take idiotic and mindlessly spectacular risks with other people's money in the banking sector, instead of being held accountable and being charged with 'Corporate Homicide', you in fact get paid off and allowed to walk away scot-free. Those poor executives at Tyco, Parmelat, Enron and NatWest must very browned off about it all. After all, they are paying the price in prison for their comparatively minor misuses of shareholder funds.

When you think about it, what is the point of an Executive trying to make long term honest return for shareholders and get 'compensated' for it when the person could get the same amount of 'reward' in less time and have a new job by failing spectacularly? You would have to be stupid to do it the right way.

This goes across many industries and not just banking and even into sport as two successive England Football Managers failed and got just as much money as if they had won a major trophy by being severed from their contracts early.

It's a Culture of Failure

While what the US Treasury has done, which will likely be matched by something equally expensive in the UK, is in the National Interest and so saving individuals from the potential fallout of a financial meltdown, it really is a parachute for the Executives and Officials who allowed this situation to develop.

Brown and Darling's first reaction to the Credit Crunch was to try and kick start the asset-backed securities markets with funds and so keep the 10 year boom that has seen the UK housing market rise 160% going. Like a pair of dummies, they were trying to add fuel to an engine that had ground to a halt because the oil had been spent. It did not matter how much fuel they added, the engine was going nowhere. Brown's current crisis of popularity and leadership would never have arisen had his follies as Chancellor for the last 10 years never been exposed.

Blair must have had an inkling but maybe his God whispered to that 'pure heart' of his and told him to let go, run, take a fat salary at Morgan Stanley for helping them go down the toilet, go support Team GB cyclists and go lecturing; when you get a moment, pop by the Gaza Strip and say hello to all those people you have no idea or intention of helping as you always were and will be a US puppet.

For Brown, he may suffer with his job. Blair has skipped away from the Labour car crash very much better off. The whiffs of scandal have blown away, Party funding is back on the straight and narrow thanks to the Wizardry of Harry Potter - that crisis is over.

The taxpayers and voters stand a little bemused as the numbers are rolled out. Perhaps the odd one might just think, so these guys royally blow up their companies and remain rich? So why doesn't that happen in the real world?

Thursday, 18 September 2008

Banking Rescues - Necessity or Baulking Free Market Capitalism?

The feeding frenzy begins as Lloyds TSB has successfully taken over HBOS for around £12bn and Barclays have bought some of Lehman Bros' assets like it's former prestigious New York headquarters and a couple of data centres for around $1.75bn.

Meanwhile, rescue efforts are coming in thick and fast. Last week, the US Government moved into to rescue the mortgage giants, Freddie Mac and Fannie Mae while this week it has bailed out AIG to the tune of $85bn. In the UK, Northern Rock was saved by the UK Government who took it into public ownership exposing the UK taxpayers to over £100bn of liabilities and clocking up massive consultancy fees as the 'experts' fight to reconstruct the failed bank.

The alternative to such rescues is pretty unpalatable, yet it it poses some big questions. For instance, why did the US Government step in to save Freddie, Fannie and AIG yet let Lehman Bros go down the swanny? I am sure many US mortgage holders sighed a huge breath of relief when the rescues took place, but what of those holding investments in Lehman Bros?

It has emerged that many foreign banks across the globe were very exposed to Lehman Bros and this may hold the key. To some extent, the US Government and public may not quite care so much if a Chinese or Swiss re-insurer ends up losing a few hundred million dollars but when taxpaying voters in a run up to an election are hit financially maybe it's just good politics.

What of Competition?

Most financiers, if asked, would be whole-hearted supporters of free market enterprise and capitalism and in the same breath they would certainly say that some win, some lose as a result. So it may be surprising as we see these rescue deals coming in and saving daft Executive Teams and Boards of Directors from their mis-management that there isn't a massive outcry. Surely, it's just a consequence of free market enterprise or are these guys just keeping quiet as their jobs may be on the line next?

One area of concern in the UK with the rescue of Northern Rock is that it can put the newly rescued bank in a strong position competitively. While all other banks have to rethink their low cost products, the argument was that Northern Rock could effectively act with abandon as it was underwritten by the public and so offer ultra-competitive deals.

But perhaps the merge of Lloyds TSB and HBOS is of more concern. Suddenly two of the giants of the UK mortgage business have combined and now jointly account for over 28% of the UK mortgage market, HBOS having already been the market leader. For Lloyds TSB it seems to have been a cheap and fast method to expand and become a much bigger player. And how sweet - none of it gets referred to the monopolies commission and I dare say, to the same at European level.

In fact, as the crucial hours closed in on the struggling HBOS, Gordon Brown himself stepped in to persuade the CEO of Lloyds TSB, the aptly-named Sir Victor Bank, that a merge would be in the nation's interest. In doing so, the Government used a 'National Interest' clause to waive scrutiny by the competition watchdogs. The CBI, rather curiously, stepped in to support this move.

Yet not many hours before, we were being told that HBOS was rock-solid, well funded and not at risk. The only reason that it was allowed, inferred Mr. Brown, was to prevent a run on HBOS, Northern Rock-style. Whichever way you cut it, the newly combined Lloyds TSB-HBOS Bank now has 22m customers and by a mile the largest chunk of the UK mortgage market. If that's not anti-competitive, then what is?

Tear up the theory of free market enterprise - if a bank fails, all rules are forgotten.

Ah, but for the cynics, the newly combined mortgage giant will not be allowed to offer ultra-competitive deals or else those boys in the competition commissions will be on their backs like a ton of bricks. Yes, those same eagle-eyed chaps who have been told to turn a blind eye to the merger - right.


As an account holder at HBOS I had a concern about their position and was relieved that something was done. However, from a neutral perspective, I watch the calamities in the banking sector unfold with some disdain. Serial mis-management, greed and hubris has created a financial market and system that was all built on the most fragile of materials that took just a few jolts to collapse. If that had happened in any other industry, no Government would have stepped in to save the companies from the mess they create. Yet Executives and Directors will walk away from the carnage with fat pay-offs and their reputations still intact somehow while their employees watch on confused and jobless. The shareholders pay the ultimate price.

As the whole mess unfolds it should be noted that in the last 18 months Lloyds TSB's market value has dropped around 35%, HBOS by nearly 75% while in the US Lehmans Bros dropped from $49bn to just $0.109bn, Citigroup from $270bn to $82bn and AIG's from £179bn to $5.7bn.

I understand that it's important to keep the capital markets functioning and to make sure there is confidence in the system, but that does not mean that the public should blindly trust the bankers to regulate themselves and create markets of such dubious fragility to make themselves fabulous wealth. Banking has become a world of its own, full of complexity and cross dealings that has spawned its own language such is its cliquishness.

Now when it fails, rules and regulations governing all other companies are forgotten in a mad panic to save the system and make sure the gravy train does not stop. If it was a major manufacturing or electronics firm, the same would not occur. As always, there is a parachute in banking - after all, you wouldn't want all those clever people having to go without their Porsches now and avoid paying taxes, would you? It's in the National Interest, don't you know?

Tuesday, 16 September 2008

Lehmans Bros - Should we be scared?

Lehman Bros was the world's 4th largest investment bank with liabilities running into hundreds of billions of dollars - it's demise is the single largest corporate bankruptcy in US history. Alan Greenspan has said this is 'a once in a 50 or 100 year occurrence' and has 'outstripped anything he has seen before' and 'has a way to go yet'. George Bush calls it 'an adjustment', Brown's spokesperson said 'The UK is better placed to handle this situation.'

It was announced today that UK inflation rose to 4.7% in August, the highest in 11 years, on the day that a single London employer laid off 4,000 staff without notice or money.

A Tale of Greed, Incompetence and Good Time Government

Lehman Bros had an average salary bill per person of $332,000 and this year paid out more than $4bn in employee bonuses despite racking up one of the largest losses in corporate history. In August, the credit rating agency S&P rated Lehman Bros A+; can you believe that?

While Bush describes the 'adjustment' as dealing with the 'excesses' of banks in recent times, there is zero doubt from people like Paulson and Darling that the root of the problem lies in the housing markets of the US and UK. Darling himself controversially claimed this was the worst financial crisis in 60 years.

So why did Governments allow this situation to happen?

As the housing market boomed to the tune of 160% in the last 10 years in the UK, Governments watched over as lender after lender battled to give away more money, more cheaply and less secured than ever in history. Deregulation of banks allowed each company to go into increasingly risky investment vehicles and offer them repackaged to customers.

At every point Governments could have stepped in to slowdown the growth. But the lure of higher taxes to fund Government spending meant that over 1 in 4 jobs in the UK is now in the Public Sector - it's bureaucracy for the sake of it. A foreign worker influx has created a time bomb as the the Unemployment Figures are forecast to rise to over 2m in the next few years, so the strain of an extra 1m extra immigrants per year on the Welfare State will break us. Just don't ask about the whole in your pension money. And all this while kids die on the streets.

Here is The Rub

As we are told Britain can manage this better, the fallout begins. A major financial services network has issued notes to its IFAs today detailing that investors who bought 'Structured Products' in things which had descriptions like 'Guaranteed Income' in their name and are linked to a Lehmans Bros subsidiary (which is not in liquidation so no protection from any authority of Government) in the UK which distributes these products which were in fact linked to derivatives, are warning that investors can expect lower returns and in worst case lose their investments in their entirety.

You see, we are inextricably linked by the fact as consumers we buy into the derivative and exotic products that banks have produced - they just sound like protected income or secure growth or guaranteed returns to make us buy them. If we had known the risk, for the wafer thin extra return on offer we could have put it into the Building Society. Ultimately, as the US Treasury has not guaranteed the investment base of Lehmans Bros and the FSA in the UK has not backed the Lehmans Bros Distributor/subsidiary, these investments may be totally lost.

Now Do We Get It

So when everyone talks of corrections, slowdowns, credit crunches and tries to down play the effect of a catastrophe of the magnitude of Lehmans Bros, it is because the fragile financial system hangs on a knife edge. The exposure of banks to these products is immense - the total derivative-based market is said to have over $900 trillion in outstanding positions.

It is a pack of cards just waiting for the waft of a door shutting to collapse.

Bear Stearns and Lehman Bros have fallen, AIG's future hangs in the balance, Merrill Lynch has been gobbled up - these are not two-bit alley shops knocking out junk bonds these are the pillars of the US financial system; the bastions of corporate America. In the UK HBOS shares dropped by 17% as the UK's largest mortgage provider became the panicked focus of the sheep who run the computers in the financial market - the very people who benefited from the extraordinary boom period of the last 10 years.

Vote With Your Pocket

At the next elections in the UK and US, many voters will be significantly worse off financially, some may have vast portions of their savings literally worth nothing and even may be sitting on negative equity or worse having had their home prepossessed.

We are in the confluence of slowing economies, rising inflation, two major wars, a credit crunch, corporate failings. management incompetence, Government incompetence, the rise of the committed fanatical and the threat of a renewed Cold War.

This is not an adjustment - this is the consequence of monumental hubris, greed and mismanagement.

Saturday, 6 September 2008

Are you swimming naked? Lack of Strategy in a Slowdown exposes your business

'It's only when the tide goes out that you learn who's been swimming naked,' so says a letter by a Chairman to his shareholders this year.

No it's not an Eric Cantona-ism and yes if a guy in the pub said this you might want to shuffle away muttering you want to be closer to the peanuts. However, you may be mildly surprised to know this was an extract from a letter to the Berkshire Hathaway shareholders from none other than the 'Sage of Omaha' himself, Warren Buffett.

Has Buffett Lost the Plot?

I picked this out of an article in this month's Director Magazine by Jane Simms entitled 'An absense of strategy'. The article rightly points out that around about now there will be a lot of questions being asked in Boardrooms as the slowdown in the economy bites, profits are squeezed and the awful spectres of cost-cutting and redundancies loom. The questions will relate to how on earth did they not see this coming and what are they going to do to get out of this mess?

Buffett's reference makes a little more sense in this context. As the good times recede, now you will find who has not planned properly within their business to be left exposed to the vagaries of the slowdown.

'It's the Global Economy, stupid'

So cries Alistair Darling and Gordon Brown. Right, that same economy you said Britain was resilient to because of our wonderous fiscal policies masterminded by you. And so in the Boardroom - blaming an economic slowdown isn't an excuse and it is hardly likely to help resolve the situation. The fact is, you should have seen this coming. In previous blogs I have argued that despite eminent opinions by gurus like Taleb and his Black Swans, the Credit Crunch was a foreseeable and avoidable situation and individual, corporate and government greed chose to ignore the obvious and allow it to develop into its inevitable collapse.

Many companies, as in previous times, just kept on believing that the boom years would continue and so plans were always looking for expansion and more of the same. No one really plans for a downturn, do they?

Setting aside the people who run banks who for the life of me I just don't understand why people still employ the idiots who behaved like slathering sheep, those companies who actually have a strategy for a downturn may not only survive this mess but actually be ready to ride the wave back up long before others have finished cutting costs, restructuring and re-focusing on core competencies and other management-speak for manning the pumps while someone looks for a plug.

93% of Statistics are Rubbish

In the Director article, Jane Simms quotes Cranfield research that 85% of Non Executive Directors (NEDs) lack a shared view of the vision and competitive advantage of the companies they are on the Board of.

Frankly, whoever paid for that research may as well have looked into the fact that ice melts 100% of the time when exposed to temperatures above 15 degrees C. Nobody for one minute believes that NEDs are anything more than just names to put on the Annual Report and possibly turn up once a quarter for a cursory meeting with well manicured pseudo Board resolutions based on glossy Powerpoints and then get their free lunch, early-doors shares and 'expenses'. Look at Tony Blair on the Board at Morgan Stanley advising about 'Globalisation' for an alleged £million fee - why?

Sadly, even small companies do it, packing their websites and prospecti with the names of successful entrepreneurs, politicians or peers. I have sat in on 'Board' meetings where we have had pre-Board meetings to 'sex-up' the figures and reality with Campbell-style skills to make sure the NED does not start questioning things.

When Enron went into meltdown, Lord Wakeham was not only on the Board but also on the remuneration committee. Nothing to do with the power station in the North of England which was installed when the Tories were last in power, I suppose, but he easily proved he had no knowledge of any of the wrong doings because no one did tell him anything. We have had the Blunkett saga and many more.

NEDs are a fiasco in the UK and it is only when the slowdown bites that people look are around the Boardroom and realise the chap eating all the biscuits saying, 'So things are going as well as the last Board Meeting, are they?' is about as useful to them as a bubble-blowing machine.

'Serial or Professional NEDs'

It isn't any surprise that Cranfield also noticed that one of the reasons NEDs are ineffective (academic speak for useless) is that they are so busy. That's because they have to juggle so many Board NED appointments while making enough time to supervise their portfolio of fees. Again, there are actual agencies who place NEDs almost like after-dinner speakers. You try getting your name on the list and you realise it's run by a person who is one of crowd of 'names' who crop up on multiple Boards. It's a closed shop unless you sell your business prominently and make millions - then you are awarded honorary membership.

The research shows it is not uncommon for NEDs to have as many as 7 to 10 NED appointments. I am no genius but what possible value can such an NED give to any of the Boards it is on while getting paid more than the average wage of the emplyees of that company to be in the Annual Report?

The code for appointing NEDs was supposedly updated but the reality is that little has changed. As Michael Grade quipped, the difference between a supermarket trolley and an NED is that the trolley at least has a mind of its own.

What Are NEDs Supposed to do?

Well take the Banks for instance. If they had NEDs on their Boards who a) turned up to Board meetings and b) actually asked about the strategy rather than what was for lunch, someone at say, Northern Rock, might have noticed the management had quite literally mortgaged the company and that they had a massive liquidity problem. All it needed was........... no that will never happen.

Time for Change

It really is time for companies to change and get in NEDs in who not only have some experience in their market place but can contribute actively in developing the strategy of the business, and have enough time on their hands to do so. That means someone who is prepared to educate themselves as to what the business is about, the value proposition, competitive advantage, the competition and how the market is developing. Then they can apply their experience to understand what are the pitfalls, pose potential issues, help develop more resilient plans and still have a free lunch once in a while.

And smaller companies should not fall into the same trap in getting big named, serial NEDs onto their Boards to make the letterhead look better. It really does not help your business while the investment community really are focusing on you as executives. It's a frivolous expense at best - much better you find individuals who have real management background that can help and there quite literally are thousands of well-qualified retired, semi-retired or even still employed managers who have a wealth of experience but no peerages who would love to help.

Personally, I believe that there should be a limit to the number of Boards any one individual sits on in any capacity, but what do I know.

Appointing an NED

The traditional way is an invite onto the Board. How daft is that? Surely, there should be an interview process which at least tests whether the person has the latitude to afford the time as well as possibly contribute. And their contribution has be worth those free shares, fat fee and free lunches.

After all, you really do not want to be caught swimming naked.

Thursday, 4 September 2008

US Emerging Hi Tech Firms - Is now the time to invest in International Expansion to the UK?

'Sterling slumps to lowest in 16 years,' was yesterday's Business headline in one UK broadsheet as the value of the pound against the dollar plunged to just $1.7863. A far cry from the heady $2.00 to the pound experienced not so very long ago.

Lower Value Sterling Presents Opportunities

Over the last year or so, emerging US Hi Tech firms have shown a distinct ambivalence to investing in expanding into the UK and Europe markets as the value of pound and Euro have made the spending power of the dollar weaker. In my own survey of US Hi Tech firms in the last year, I have found that CEOs of emerging US Hi Tech companies concerned at all levels about the cost of entry into Europe. All costs are escalated from recruitment, salaries, fuel, overheads, office rentals - everything appears expensive plus there is the psychological problem that particularly UK salaries expressed in dollars may actually exceed those of the executives hiring them - a mental blocker if ever there was one.

Now sterling has swung the other way. Partly, it is because the OECD (Organisation for Economic Co-operation and Development) believes that the UK is already in recession though strictly speaking growth has ground to a halt in the last quarter not yet receded according the the Treasury, but also the OECD was concerned about the UK's pledge of £600m to bail out the housing market. It has been housing, with over 160% growth in the average price of a UK house, that has pretty much fuelled the boom in the UK in the last 10 years as house-owners leverage equity for cheap money to fuel the spending boom.

The interesting prospect for emerging US Hi Tech firms is that now Europe is looking much better value as the currencies move downward and the UK in particular is offering some unique opportunities to act as the launch platform for European Expansion.

Market Conditions

A recent survey by the KPMG and the Recruitment & Employment Confederation showed that the number of permanent jobs available has fallen at the sharpest rate since late 2001.

  • There will be a richer pool of executives and staff to chose from in the UK due to the slowdown of the UK economy
  • The average salaries of these people will be more affordable as the dollar gains strength against sterling

As the property market cools rapidly (average house prices in the UK fell over 10% in the last 12 months and analysts suggest a further fall of 18% or more is likely before the market bottoms out), so too will the average office space rental and lease costs ease. There is already an abundance of available office and warehouse space in the UK and as the economy slows or even goes into recession, the costs of office set up and rentals will fall also.

  • Available, high quality office space is widely available in major, attractive city locations throughout the UK and prices are coming down
  • Again the growing strength of the dollar to sterling will increase the effect

Some Great Examples

As the economy cools in the UK, businesses will be looking to save costs. This can be achieved in many different ways but companies offering innovative solutions in identifying significant revenue reclamation such as in Revenue Assurance or Billings Integrity will have a significant advantage, particularly if the solution is innovatively priced and easily deployable, making the benefits accessible faster - one way to get growth in a shrinking market is to identify what you are not billing today; it's simply lost money reclaimed. Telecom companies, insurance companies, the NHS - all are companies who miss opportunities to bill all their customers for all services consumed.

Companies with high productivity advantages such as eCollaboration which can dramatically reduce the need to travel, the cost of which has soured in Europe as fuel costs rise, will have a distinct advantage. Companies offering ways to consolidate compliance and governance for financial and safety regulations will look to use to tools to mitigate cost exposure in terms of insurance, fines and accidental costs.

  • Teleonto - A Revenue Assurance Solution aimed at Telecom providers and carriers of all categories which is Saas based, with no upfront costs or capital spend, helps fast identify all forms of revenue leakage and provides immediate and rich ROI
  • ActionBase - a clever Action Tracking solution which is tightly integrated with Microsoft Office helps companies translate (and track) paper based processes into Human Activity and have full audit trails for compliance and governance. The solution is gaining much traction in the Oil & Gas sector but also in Finance, Manufacturing and Telecoms increasing management efficiency but up to 30% and decreasing compliance issues such as HSE, SOX or FSA regulations.

Corporations will be looking to re-budget and re-plan as the markets change and they make sure they have anticipated growing costs and potential less revenue. Those who plan ahead will adapt easier, faster and not be surprised by 'holes' appearing in their forecasts. Companies looking to consolidate spend on services like IT, Telecoms and recruitment will look to innovative suppliers who can quickly identify and realise savings. Once again, outsourcers look like good value.

  • Intelligentcomms - an independent platform and consultancy specialises in helping companies identify and save costs across their entire Telecom spend, without a tie to any Telecom vendor to get impartial advice with a risk/reward method of payment to ensure fast win-win
  • Adaptive Planning - an innovative SaaS based platform which is easily deployable that can help organisations streamline budgeting and planning to ensure companies plan more frequently and deeper to anticipate changing market conditions and adapt quicker
  • Workday - a new SaaS based HR Management solution from the people behind PeopleSoft has already attracted the largest ever SaaS software order at Flextronics.
  • Taleo - another innovative SaaS based in-house recruitment management system that helps smooth the process of managing recruitment and contractors

Those companies who look to drive growth through other methods like the internet can take advantage by rapidly expanding their online activities by outsourcing their Ad and Media Operations to companies who have deep market expertise and scalability enabling fast market traction and negating the need to hire staff or expensive contractors for peak requirements only.

  • Theorem Inc - is rapidly expanding its footprint in the UK and provides outsourced Ad and Media Operations to companies wishing to take advantage of market expansion via the internet without having to hire staff for peak periods only, providing an ongoing partnership for scalability

Outsourcing is again back on the agenda - as costs are of a concern and staff levels, companies are again looking to leverage clever offshore companies who are experts in BPO, application management, consolidating enterprise applications and data and customising applications.

  • Ephlux - is one a new generation of sub-continent based companies who are driving savings to companies by off-loading critical back office processes, applications and data
  • Accexperts - is a China-based outsourcing company expert in Finance and Accounting with deep technology experience and expertise in all aspects of accounting and financial governance across a wide range of markets

Now is The Time to Act

So if you are an emerging US Hi Tech firm and you have an innovative solution that can help companies mitigate costs or realise extra profits fast, then now is a great time to enter the European Market and specifically via the UK. There is a rich experience in the sales, marketing and technical workforce, costs are more affordable and the timing is just right. Calx Europe is the experts in the field in helping manage your expansion in Europe and driving sales.

For more information on any of the companies mentioned above or on how to enter the UK and European Market to expand, please drop us a line at info@calxeurope.com or call on +44 (0)207 193 2356.