“Trust in Me”
from Walt Disney’s The Jungle Book
Trust in me, just in me
Shut your eyes and trust in me
You can sleep safe and sound
Knowing I am around
Slip into silent slumber
Sail on a silver mist
Slowly and surely your senses
Will cease to resist
Trust in me, just in me
Shut your eyes and trust in me
People ask me why it’s so hard to trust people,
and I ask them why is it so hard to keep a promise. – unknown
I was at Royal St. Georges in Sandwich on Saturday attending The British Open. A friend (someone I don’t do business with) generously invited me. I was lucky to receive a clubhouse pass. Having gone to school in Sandwich, it was a childhood ambition to visit this famous sporting venue. I duly wore the required jacket and tie and ventured into the clubhouse to find some people tie-less, wearing shorts and sweaters. “Oh well”, I thought. “They know the unwritten rules”. I kept my tie on. I wasn’t confident enough to break the rules my hosts had asked me to follow. This clubhouse is a microcosm of the bonhomie, hospitality and ‘friendships’ that can be found across political, social and corporate institutions in the Global Village. Membership or access to these institutions is similar everywhere; Invitations are a gift and dress codes varies. But the rules follow a familiar pattern. Punishment for rules broken are set by members . Criminal laws are rarely broken. Committees write rules and set membership criteria to ensure decency is maintained.
The clubroom is the type of place where the behaviour of Kaa, the huge and powerful 100 year old Python in The Jungle Book who sung the song in the Disney film quoted above, is observable. It is easy to see how those invited to attend or seconded to become members (Decode: ‘I put my trust in this man [it is usually men]; he is one of us’) are seduced to believe they are being offered this privilege because they:-
1. deserve it because of educational/employment/ historical family endeavour.
2. believe they will fit in well as they share similar values and mix in the same social circles as others attending.
3. Sing from the same hymn-sheet/play by the same rules. Even these phrases evoke social etiquette.
It is therefore all too easy to draw analogies with schooling. Many of the privileged who are destined to lead are birthed through a system that developed in English Private schools centuries ago. They begin by being subservient to prefects. When the victim (or Special Adviser as they are known in Politics today) eventually became a prefect it was a rite of passage. They hadn’t enjoyed being bullied. But when you finally become a prefect, you’d earned the right to behave in an unwritten yet authorised manner. Most found it a rather nice club to belong to. Fellow prefects support you when questioned by authority particularly if you’ve held a minors head down the lavatory pan for a little too long. Or worse, as the late John Peel the hugely respected DJ told of his own school days, you had to give prefects manual relief and accept forcibly buggery. Those are the rules.
Similar tribal corporate behaviour can be recognised in many Institutions past and present, though the buggery is unlikely to be literal. Whilst Enron published all the data in their Financials prosecutors later relied on for legal discovery in the Enron trials, their auditors, Arthur Andersen, chose to shred information claiming it was routine and denied criminal activity. Probably no similar to what it is claimed News Corporation have allowed to happen to email correspondence. However, information now being discovered in the News Corp hacking case went undiscovered by the Metropolitan Police phone hacking case for years even though it was under their noses. They claimed they had more important things to focus on, a most remarkable claim. The thing is though, it wasn’t necessarily in the interests of the overseers to find the information. Who wants to hear bad news from someone you’re paying? So more dangerously, it was in the interests of the prefects to cover it up. This highlights what many call a ‘Systemic risk”.
In the 1970’s and ’80’s, the entitlement culture was knitted into the British social fabric and epitomized by the Lloyd’s of London scandal. Many people were encouraged to use their assets to become an individual Name, underwriting risk in exchange for a share of the profits in the Lloyd’s Market. Many were allowed to bet their homes believing their returns would be even higher; to squeeze the pips as they may say. Membership of this exclusive wealth creating institution would be an investment Wonka golden ticket nurtured and shared at social events. The tickets became a badge of honour. “Made a bit of money at Lloyd’s. Paid for our holiday villa. If you want, I’ll put you in touch with our Managing Agent. You can trust him. He’s a member of our club.” Stresses within the Lloyd’s of London insurance market increased as asbestosis losses mounted. As the insiders knew, many outsiders weren’t aware of the accounting treatment called “Incurred But Not Reported” being used to estimate losses. This was a creeping and growing long-tail liability enabling industry insiders to exit their positions on Syndicates with heavy asbestosis exposures as fresh outside money poured in following a recruit to dilute campaign. Some may now call this a Ponzi scheme. Families lost their homes because they trusted like-minded people. The Old Boys Network had failed its own. Well the Old Boys Network has been democratized. It no longer guarantees trustworthiness or proper behaviour as Royal Ascot recently proved. Not, of course, that it ever did.
The entitlement behaviour exhibited by those who have had a taste for power is all-pervasive. It no longer matters what your background is. It is the destination that’s shared. When people are promoted to the Institutional equivalent of a prefect they begin to enjoy dinners and lunches at fine restaurants, special hotel rates, invitations to corporate functions and to speak at overseas conferences. As the executive slopes are climbed, the stakes increase; trips on yachts and private jets, the use of acquaintances holiday villas, invitations to Davos, newspaper and magazine profiles, Restricted Stock Units, executive pension schemes ; in fact benefits that are argued by many to be a sadly necessary entitlement for those at the top. For some, this lifestyle becomes impossible to disengage from and encourages risk myopia.
Of course, not all executives play this game. There are plenty of good, quiet people at the top of private and public institutions who eschew much of this behaviour and fly below the radar because they have true competitive advantages the rest don’t have; so the rest rely on spin. So emphasis on the rules becomes particularly important in exclusive clubs. Moving in those circles, you learn how to shortcut and interpret rules and become aware of rules that can be overlooked or carry small penalties. This ensures entitlements continue to roll as long as members understand committee rules and play by them. Seeking the truth and unearthing risk become secondary issues.
However, the law in finance, business and politics are complex. It would be cynical to suggest they have been constructed to be so. Yet this is the only clear outcome of opacity. And this complexity no longer offers the automatic defense those on the inside have been able to rely on. Nor are other members able to back up those who have failed to comply with the big rules. The world is increasingly embracing social networking and transparency. The genie is out. This is shaking to the foundations those who have benefited from the entitlement culture to the core and relied on personality. This culture has been encouraged over many years within social systems. The cult of personality is a phenomenon cultures have been built on. Whether it is bankers, Members of Parliament or corporate executives, legal compliance used to be sufficient and personality would do the rest. No longer. Reputations no longer correlate with legal heuristics. A legal opinion can be sought that offers whatever outcome is sought as defined by the carefully drafted frame of reference. Lehman’s repo 105 was a classic example of legal arbitrage. The confluence of US GAAP, IFRS, English and NY law created opacity. It was legal. Just as everything Enron declared in their financial releases was legal. Supposedly.
Boards or Committees must now re-balance control in boardrooms filled with powerful and well remunerated characters. They must prove to shareholders they have strong governance structures. Progressive Boards understand good governance creates economic advantage. Strong controls ensure outcomes follow documented decision-making procedures if the company is to minimize reputational damage from errors that are a necessary and everyday part of business. These governance structures identify, quantify, monitor and control adverse events. They clarify how decision-making processes are escalated through the corporate hierarchy when events crystallize or exposures grow. Such processes enable losses to be minimized. They ensure executives responsible for taking risk-related decisions that influence their key performance metrics are accountable.They do not allow payments of £700,000 to be paid without thoroughly checking the veracity and legality of the payment. At AIG, expense management was forensic. £130,000 to an external agent such as Glenn Mulcaire would have been authorised by someone within their expense authority limits. Sadly, at AIG non-insurance underwriting was not so forensic.
Good governance will increasingly require better disclosure. This isn’t an issue for legislation; it is an issue of reputation. Disclosure should include corporate hospitality received by Key executives identified as such by Boards. If they’ve nothing to hide and hit targets legitimately and without threat to the corporates reputation through exceptional performance, no-one should deny them high levels of remuneration. However, governance should uncover those being carried and who use a big spade to bury. Only this level of transparency can begin to rebuild trust with investors in publicly-listed companies and many other types of public institution.
Whether it was Greenberg’s or Murdoch’s wish to hand control of “their” companies to their children, the challenges (beyond clear and ironic in Murdoch’s case inheritance tax concerns) for both were/are the same. Both octogenarians had a strong Wall Street following. Both talked of employees as members of The Family, treating them as such when misfortune struck. Both men railed against traditional establishments. However, both pleaded ignorance of illegal acts carried out under their watch within a corporate culture they built in their lean image. Their networking skills were legendary. Their relative positions in China evidence this. But question a decision they make or methods they employed and their irascible characters emerged. They understood The Law. Their fingerprints were never on the paperwork involved in illegal acts. They sought to crush political opposition. There is nothing inherently wrong with this when you have right on your side. However when you are wrong, continuing to claim you were right in light of clear governance weaknesses is damaging. Covering up these weaknesses devastates economic value as people begin to ask “what next?” Reputations, that took years to build can be destroyed in weeks. Share prices slump. Powerful CEO’s are hard to remove. Whilst moving your ball illegally on a golf-course means you are a cheat, few CEO’s are ever accused of cheating. However, shareholders are cheated out of economic value through the damage done to corporate brands and share price as the search for yield encourages risk-takers to push the boundaries of legal acceptability.
It should be sufficient to influence policy responsibly through transparent and observable channels. But developed societies haven’t been built that way. Social events are the convivial meeting places for club members. See and be seen; have a quiet word. Network. These two extraordinary men and their lieutenants ignored the ambulances picking up victims as their limousines traveled along the global superhighway.
The last three years have undermined these club rules. There has seen a massive loss of confidence in political and institutional governance processes that shows little sign of returning. Social networking is dissipating fear amongst the hitherto silent majority. They are no longer willing to trust those who simply ask for it. Now, they are asking their political and corporate leaders “how aligned are our mutual interests?’; “How accountable are you?”. The discount required by shareholders for the gap between what companies say in their Corporate Social Responsibility program for example and what they actually do is growing. Boards who ignore this gap should do so at their peril not just their shareholders. In News Corporation, they call it the Murdoch Discount. AIG too had a Greenberg Discount during the Spitzer investigations. There’s a trend…
Let’s be clear. Trust developed between the public, the traditional media (for years an establishment conduit) and the political and corporate establishment has been knocked in many areas. We were taught to believe that those at the top were exceptional, worthy and either altruistic (public servants) or wealth creators (corporate leaders). Reversion to mean has begun. CEO’s pay grew to ridiculous levels of 100, 200, 300 times employee average earnings. Middle ranking employees were paid well to not point out risks. These may have meant earnings targets were missed and CEO key performance indicators like Return on Equity or Earnings per Share weren’t met. Promotion would not happen; “keep your powder dry” was a common phrase shared with the conscientious. We’re back to prefects and the bullied.
Yet what the last few years have uncovered is how easy it was for those at the top to make decisions that risk other people capital before their own entitlements. Even now, I question the settlement offered by UK politicians to the Metropolitan Police Commissioner and Assistant. Those with power find their remuneration senior to shareholders, voters or those who fund their lifestyles. Without clear accountability for financial and reputational risk and governance overall, pleadings of ignorance no longer hold weight. It is irrelevant when the Murdoch’s knew. They knew there was an adverse event crystallising as soon as Brooks opened her mouth in the Select Committee hearing in 2003. Legal compliance is no longer enough. The question is not “Did you know this was happening?” but “what did you do to stop laws from being broken and adverse events escalating? Please provide the written controls in respect of expense authorisation”. Maybe too mundane for a red top headline where things are black and white.
Greenberg/Murdoch wrote the rulebooks that helped them grow complex and diverse organizations and change their respective corporate landscapes. The control they had – like those of financial wizards in the build-up to the global financial crisis – was based on the club membership illusion policymakers bought into. Like Enron, they were all within the letter of the law. They were Masters of The Universe. The lawyers ensured this.
This is no longer the case. Trust can only be restored by continuing to draw back the curtain on wizards insistent on hiding behind. This should not reduce their accomplishments. But it s essential for Boards, committees and Judicial reviews to address clear flaws in the policing of institutional governance and executive accountability that are the are fundamental to so many recent systemic failures. We can no longer rely on club committees to decide the application of rules or membership when Society is forced to pick up the cost of their failures.
Oh, and as Darren Clarke proved, good guys do win.