Who Regulates The Regulators?

You know one of the big problems with the whole concept of regulation, whatever it may be for, is that it is a fat cat job with virtually zero responsibility and no accountability.

Of course, Lord Adair Turner of the FSA may tell you otherwise but let's face facts, on his watch 5 high street banks went belly up and more had to be bailed out as he presided over the worst financial disaster since The Great Depression. As if that was not bad enough, he gets to write and implement the new regulatory plans, called Macroprudential Regulation to help us understand it more easily, and these are little different to before.

Meanwhile, some £17m in bonuses have been paid to the 2,500 staff of the FSA while they have also received substantial pay rises of up to 10%. It is a huge price for abject and total failure to the do their jobs.

And while their own snouts are in the trough, the City is right back to its old habits. Not only has the issue of massive profits from high risk deals already raised its head as we still dole out more money for the whole collapse of the little game last time, but also we are actually talking of paying incredible bonuses to City staff just a few months after we all thought the whole concept was both wrong and risky. In fact, it's worse.

The bounce back to profitability by banks was inevitable - they couldn't go down again after we propped them up. So the banks and their traders are actually taking profits on a massive scale on the back of our money, lent to them at virtually no cost, with a blank cheque underpinning any losses they may incur in the future.

In that environment, they cannot fail and they still have the chin to ask for bonuses and the regulator stands back as if this is the way it should be. It is still paying for failure, as some take their employer's to court for bonuses they think they should have earned when they clocked up the losses. We are paying for failure and the bounce back - we must be absolutely stupid. We are - in fact, the City relies on it.

It seems crazy, yet when you delve into what the regulators get out of keeping their heads down and saying nothing in their part time jobs, you get a sense of why it is not good practice to stick your neck above the parapet and criticise the obvious. For one simple reason, other than the obvious rewards, is that each and every one of them are part of the same fabric and system. Lords, Dames, Sirs and the right education and backgrounds and the single biggest qualifier of all, a portfolio of Non-Executive Directorships to prove you can stand the heat and pressure of part-time jobs and know how to make a few bob out of them.

And they do. Lord Turner is on umpteen quangos and whatnot as well as boards - at the FSA alone he earns over £200,000 a year for a few days a month and he even gets that unbelievably wrong. Then you have the other regulators like Lord Mogg at Ofgem where he does a marathon at 3 days a week regulating the energy market. He claimed over £35,000 in expenses last year to do that job alone and that included a £5,300 plus for a first class season ticket and a £5 canteen meal as well as a subscription to the Financial Times. His CEO, Alistair Buchanan, lives in Egham just a few miles from London and the office but he managed to clock up £5,700 for 23 overnight stays in hotels in London amongst his £28,000 of expenses. Lord Mogg gets £145,000 a year for his part-time job, of which this is only one, while Buchanan gets a derisory £260,000.

The story is not pretty at Ofgem as they all are at it. Mogg managed to do £18,765 in travel in 14 months on 30 trips abroad (why??), and that's going some as I travel almost every week to somewhere in Europe and can't challenge that spend. Buchanan's curious 23 nights in London hotels included £826 for just a single two night stay.

The point here is that these bodies are there to supposedly protect us from these industries but in both cases all they do is to consume money and we foot the bills - and they are huge. There seems to be no rules by which they have to work and they can clock up vast expenses, salaries and bonuses without a jot of accountability as there is none required. The FSA stands watching as the City again squabbles over headhunting and acquiring staff with vast new salaries, bonuses, golden handshakes, earn-outs and guarantees to bolster the 'talent' in their trading areas while they cull vast swathes of staff in the only consistently profitable parts of their businesses.

And, yes, we pay for it as it is all funded by taxpayers' cheap money, capital and guarantees and, of course, new cash from Quantitative Easing.

If someone had said 6 to 9 months ago that we would allow all this to happen again then they probably would have got lynched but thanks to the regulators once again being unaccountable and standing to one side to let the industry get on with getting back to normal, we have just let all happen again.

And it may just get worse when it collapses next time. Not until we get wholesale reform and proper regulation in with the right people at the top, who are not part of the system and not just cash sumps, will we actually get some change. And, boy, do we need it.

A Few Honest Words

'A few honest words were spoken,' said John Smits, the South African Rugby Captain when asked about his side's second half performance to beat the British & Irish Lions in the 2nd Test at Loftus Versfeld, Pretoria recently.

He was referring to what his team did at half time when they had been comprehensively taken apart by a stunning Lions performance in the first half. They sat down and talked honestly to one another about their performances. For all the training and experience these guys had in winning the World Cup together, they changed their game profoundly by doing just doing a simple thing like talking to come back and win the game. Egos were forgotten. There were no prima donnas there despite the roll call of famous names - they collectively and individually took the criticism and made a commitment to one another to put it right. The results were spectacular.

That's what makes good teams become great - the ability to analyse themselves honestly and collectively agree to put it right. Smits had captained his side on no less than 56 occasions previously and he did not need to berate them - they knew that they had let themselves and their team down.

Fast forward to England's cricket team who pulled off an amazing draw in the First Ashes Test at Sofia Gardens, Cardiff last week and everyone is pussy-footing around the likes of Kevin Pietersen and Andrew Strauss. You can imagine what was being said - but for one bad shot KP would have scored a 100 while Strauss unlucky despite being guilty of a poor shot and poor captaincy. They will not change anything - they will just play the same and likely get beaten by an ordinary Australian side, not a patch on the 'Incredibles' of 2005.

From Sports To Business

It's a common held belief that charismatic, bigger than life characters lead businesses best. The most prolific companies, in our eyes, are those led by people who are household names, like Virgin or Ryan Air. If you read Jim Collins' book which maps out those companies that sustain greatness from being good, then you will see that often it is the most understated leaders who make companies truly great - and they are not afraid to have superb people around them. While Ryan Air debates whether it should have standing passengers and just stools to strap onto for landing in order to cram more people in with scant regard for comfort or safety perhaps their minds should be turning more to how they can make air travel more green and safe as record numbers of planes fall out of the sky this year.

'A few honest words..'.

It seems a simple remedy but regardless of who the people are in the team, no matter how experienced, no matter how good they think they are, no matter what their past deeds have been, if they cannot face honest words from others then they will ultimately walk into a failure.

Recent History

I would say that when the dust settles on what has been the most tumultuous times in business since The Depression, there will be many leaders who will finally limp out from their cowering positions hoping the worst is passed. These are the people who could not face honest words or straight facts and ran their companies into disastrous positions and then handed the whole lot to cost cutters to try and rescue the business. Many leaders cannot take criticism from their peers and certainly not from their staff - they see it as an affront but most have that unshakable belief that only they know best.

These are the people who walked their businesses into the mess. Take a look at Willie Walsh at BA. He has presided over a business that has gone from record profits to record losses in a single year. Yet common sense would say that premium customers would desert the business if there was a recession - no more Vodafone middle managers cramming Club Europe for one hour hops to Dusseldorf or Accenture Consultants going First Class to the US for a one hour meeting. The problem with BA was that their whole business was propped up by the profit they made at the front of the plane. When that diminished, they had no contingency plan to adjust the business as the low price airlines cut them to pieces. And here's the really stupid factor - they actually INCREASED their prices through the crisis and instigated more rigid rules about changing flights, taking away vital flexibility for travelling business people. Immediately, people like myself, swapped allegiance to other airlines and travelled with those who had the most flexible policy for the price - and I found it was just about every other airline.

'A few honest words.....'.

Leadership And Honesty

We talk a lot about honesty, particularly when it comes to Political leadership where there seems to be so little these days, yet we cling to their every word and believe most of the claptrap they come out with. Very few at the top accept the opinion of others unless it has a bearing on their popularity. Gordon Brown, as a for instance, truly believes he is an economic genius despite the disastrous outcome of his policies and he's hell-bent on repeating the mistakes of the past even before we have cleared the current crisis.

When you look at the facts about the wars we are fighting, as we tackle two separate and major engagements we are actively subtracting from our military resources and axing regiments, while we now know that not only equipment was woefully inadequate for the kind of warfare our troops faced, we now have to borrow helicopters from our allies.

A few honest words......

In business, it is absolutely critical to be able to engage with leadership and discuss ideas and thoughts. Specifically, in times of crisis, the last thing that firms should be doing is ignoring what its own employees know and can do rather than just cutting them to pieces - particularly when it was the leadership that led the company into the state it is in. Communication and the ability to talk openly and honestly to management at all levels is critical in all businesses.

What this recession has exposed is a layer of poor managers in business who rarely engage with their workforce and even more rarely take honest criticism and advice. We have also seen the role of the non-executive director being exposed for what it is. It seems to be a circuit of jollies for a preciously small band who butterfly-hop from firm to firm earning fat fees but having zero responsibility. It is time that Governance in companies was taken far more seriously and this needs to be a source of 'Honest words' into the executives that run companies.

British business and politics has a lot to learn from this crisis and we all need to take the opportunity it has provided us with. Honest words need to be spoken in business and leaders need to understand that they have a duty of diligence in their risk taking to their employees so it is as well to be more open and honest with them in the future.

It will take a long time to restore the reputation of British business - a lot longer to restore the reputations of the list of failed leaders.

A Nice Little Earner, Thank You Very Much

Have you ever thought of being a Non-Executive Director (NED) in the UK? It's tough as old boots to get in unless you are one of the old school tie brigade or risen nicely in a well named company.

Once you're in, it's equally tough to get back out and in fact many NEDs sit on the Board of between 7 and 10 companies while supposedly doing a day job.

It's little wonder that Royal Mail continues to languish in no-man's land when their sparkling Chairman, Allan Leighton, shuttles between 8 other companies and still gets home for tea each day.

Obviously, their roles are not day to day ones and usually require no more than 1 or 2 days a month if that, generally listening to well-prepared management-speak on the company performance beautifully phrased and presented to deflect any nasty questions about how the company is actually doing. The art of the NED is to look as interested as possible, ask a few non-specific questions, name drop some names you may or may not call in search of some contacts and have your free lunch.

And the money isn't bad. Depending on your 'glitter' factor you can command a very happy living as an NED - usually in the form of flat fees and some companies offer maybe a few shares or stock options.

So Get This

Electric power and fibre optic cable maker, Volex, has just proposed a long term incentive scheme for its NEDs. Principal beneficiary is the newish Chairman but a small host of other 'lottery winners' get at the trough and some with little or no experience of the power or cable market like an ex-HP UK Director who joined the Board last year. They stand to split a £2m pot if they can increase the share price more than eightfold in 3 years.

Quite how they are going to do this on a couple of days a month is very curious, but it may set a new pattern of NED bonanzas for those in the tight old network.

I am sure, in these austere times, the workforce will be delighted to hear that a bunch of well-paid NEDs will bear the fruits of their labours for so little commitment - but let's be honest, if there's no money in banking how else are the poor lambs going to earn their crusts