Sir Fred Goodwin and the toxicity of guilt

March 3, 2009

sir-fred-goodwin

Sir Fred Goodwin’s payoff has filled the Nation’s headlines. Popular opinion in the UK has developed into an outburst of rage against those guilty of triggering financial losses for others and yet who seem to have escaped relatively unscathed themselves. But can guilt and blame be disentangled so simply?

A public fury rages on over fat cats responsible for our economic woes. Someone must be responsible. Someone must be made to pay. A culprit must be found, and quickly to make an example to the others. As Richard Donkin also noted, it was the libertarian philosopher Voltaire who satirised the strategy of finding a culprit for public execution when things went wrong. Candide learned that killing an admiral from time to time is good, ‘pour encourager les autres’. More recently the theme was reworked in an episode of Blackadder, a much-loved TV series in Britain, where a senior officer announces to a hapless aide that the time had come for a futile heroic gesture.

Sir Fred seems a suitable culprit for the moment, although rather like Blackadder, he is understandably reluctant to participate in the gesture. The case for the prosecution before the high court of public opinion runs as follows: Goodwin (almost always referred to at present as Fred the Shred) was in charge of Royal Bank of Scotland (RBS) which carried out a takeover (ABM Ambro) which eventually went very badly wrong. There were financial commentators at the time suggesting it was a risky strategic move. The kindest explanation on offer was that Sir Fred had acted out of megalomania. He was at the time considered a brilliant financial leader a reputation earned particularly during the earlier successful hostile bid by RBS for Nat West (National Westminster Bank).

Hero to zero and leaders we deserve

That was then. Somehow public mood swings have a symmetry to them. The greater the hero, the more a subsequent judgement swings to the opposite extreme. Sir Fred has more recently acquired the epithet of the worse banker in the world. Perhaps worth mentioning. If so, there are very interesting questions also worth considering about how such a specimen went from strength to strength over such a long period of high office.

Tempted though I am, it is too great a leap of explanation to wrap it up in the bald statement that we get the leaders we deserve. On the other hand, that notion makes at least a reasonable point from which to get beyond the assumption that public opinion once duped has now discovered its previous blind spot regarding towering imposters such as Fred Goodwin.

The toxity of guilt

Here’s another idea. It is, at least, a new way of looking at what might be going on. The current explanatory vocabulary of the credit crisis repeatedly relies on the metaphor of toxicity. Like many figures of speech, it helps us dress up a strange concept in familiar garb. Yes, toxicity. That’s what it is. The economic system has gone toxic.

But as with risk, the systemic toxicity is hard to isolate and destroy. It ducks and weaves. It is distributed and embedded in countless subtle ways. Wait a minute – who signed off the loan? Where were the directors. Why didn’t the Government know. And Robert Peston. Surely he must have known. Then there’s Gordon Brown. Not enough, then, to encourage the others in future. We must act promptly. First Sir Fred, but then the others. And (lest I forget) what about all those Business School Professors who taught all those finance courses, and dreamed up the modern theories of derivatives? That’s more like it. Drastic action is called for. How else can we save the body economic?


Alistair Darling plays Chess at Northern Rock

January 14, 2008

chess-players-daumier.jpg Alistair Darling has developed a counter-gambit in the chess game for the future of Northern Rock. The threat is to nationalize the company and to bring in Ron Sandler, former head and rescuer of Lloyd’s of London, to run it

The shareholder meeting is scheduled for Tuesday January 15th 2008. Shareholders have signalled their intentions of opposing plans to find a private owner at a price unfavourable to themselves. They intend to seek motions to prevent the board acting against the interests of shareholders.

These moves are understandable in view of the Treasury’s position, which seems to be committed to recouping as much as possible of the billions ‘invested’ in rescuing the back since the crisis days since September 2007.

The Treasury counter-gambit, if successful, is good for tax-payers, and also protects Darling and chums from accusations of incompetence and worse by that sharp-tongued Mr Osborne.

The Chancellor, while preferring the sale into private ownership to go ahead has to demonstrate that the Treasury is perfectly willing to accept the nationalisation option.

So it came about, that on the Saturday preceding the meeting, the news became public that the Treasury had a well-worked out plan for nationalisation. Why?

Demonstrating that you are serious

Darling has to demonstrate a convincing threat to the shareholders, the group he has identified the biggest threat to his own position, at the battle of Northern Rock. Threats are effective only if they are taking seriously, and not taken as evidence of bluster and weakness. We have written of how the most potent threats are like unsung melodies, shaping events but remaining in the background.

So Mr Darling does not want to nationalize Northern Rock. Neither do the shareholders. But if The Chancellor can convince enough shareholders that he might be forced into a nationalization by their further opposition, it may help avoid the outcome none of the main players really wants.

The threat

The threat involves several elements. A signal of intent. Evidence that it is not a shallow move or an idle threat. The signal deliberately leaked is necessary to convey the seriousness. It can be backed up in chess terms (and in military and political terms) if it can be shown that recent moves by Darling have been played to strengthen the impact of the threat if activated.

Once again, the intrepid financial journalist Robert Peston continues his high profile scoops.

So Mr Peston gets his story for the BBC. Mr Darling gets his signal accurately and prominently reported.

According to bankers close to the Rock, the Treasury has a fully developed plan to own and manage the bank, should a commercial solution be impossible.

The BBC has learned that Mr Sandler would become executive chairman of Northern Rock in the event that the troubled bank is fully nationalised.

The former boss of Lloyd’s of London is well known to Prime Minister Gordon Brown, and worked for the Treasury in developing the so-called stakeholder pension and investment products that were intended to help those on lower incomes save for retirement.

Mr Peston, through a leap of imaginative journalism, or perhaps through the way in which he had been briefed, then links the news with the upcoming shareholder meeting:

The coming week will be a crucial one for Northern Rock. On Tuesday, shareholders will attempt to restrict the ability of the company’s board to sell assets without seeking their permission.

Robin Ashby, of the Northern Rock Small Shareholders’ Group, said he would not welcome nationalization …

The shareholders’ action is regarded by the Treasury as potentially hostile to the interests of taxpayers.

Taxpayers are exposed to the Rock to the tune of £55bn through direct loans made by the Bank of England and guarantees to other lenders made by the Treasury.

A decision will also be taken imminently by the Treasury on whether to pursue a proposal by the investment bank Goldman Sachs to convert up to £15bn of the taxpayer loan into bonds, for sale to international investors.

If that proposal to raise new finance for the Rock flops, it is likely to undermine attempts to organize a commercial rescue of the Rock by either a consortium led by Virgin or by the Olivant Group.

[See how Mr Peston was also struck by the chess analogy in his recent blog where he enlarges on nationalization and partial nationalization options and implications.]

The Chess Game reaches a critical middle-game position

The chess game is reaching a critical position, rich in possibilities. To press too hard risks losing the entire game. Darling has shown he is willing to accept a gambit, and now offers a counter-gambit himself, using the Bank of England to capture Northern Rock for the nation. Making such a move may be risky to the Treasury, but it is even more damaging than other possible outcomes, for the shareholders.

[A counter-gambit: your chess opponent makes an offer as a gambit, which is expected to give you short-term gains for which you risk longer-term losses. You reply with your own gambit, which agagin offers your opponent short-term gains and for which there are the risks of longer-term losses. Playing a gambit often complicates a game. Playing a counter-gambit tends to lead to even more complex positions and greater uncertainties]

That is why I like the efforts made to demonstrate the seriousness of the threat to the shareholder forces. The announcement that Mr Sandler has been lined-up is excellent. Easy to check up on, little lost if nothing further happens. That’s what makes it quite a convincing move.

Acknowledgement

The Chess Players image is of Daumier’s masterpiece. It can be found on an excellent site on Combinatorial Game Theory


Celebrity journalists as thought leaders: The case of Robert Peston

December 7, 2007

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The Australian journalist Mark Day argues that celebrity journalists today follow far earlier examples. We examine the cases of Mark Twain, Charles Dickens, and Winston Churchill. Parallels with Robert Peston’s role in the Northern Rock drama can be made

Mark Day is the doyen of Australian journalists. He recently raised concerns about the rise of the celebrity journalist, citing cases from Australia, from Rupert Murdoch’s father at Gallipoli to the notorious New York night club story which did the aspirant political leader Kevin Rudd no harm at all. Day suggests TV journalism is continuing the tradition of the celebrity journalist.

It was Mr Day’s reassuringly sage and bewhiskered visage which first grabbed my interest. This, I thought, is the face of someone who speaks with the wisdom of the ages. A role model more callow bloggers. Perhaps it was his headline: Journalists become the news.

Day has his say

Mark Day argues that journalists have always been tempted by celebrity as a route to career success. He cites the example of Keith Murdoch, father of Rupert, and war correspondent at Gallipoli, as well as confidant of the Australian Prime Minister Billy Hughes. Murdoch ’s capacity to become part of the story is famously illustrated in an incident in which he was charged with delivering a letter from Gallipoli to authorities in London. When ‘Intercepted and relieved of his letter’ he wrote his own extended version, handed it over, when it appeared to have had some influence on British understanding of the unfolding military disaster.

Another time, another land. He might have mentioned the rise of Winston Churchill, already famed as war correspondent, and by then heavily involved in the Gallipoli campaign.

We can stretch things even further in considering the merging of journalism and social comment. Take Charles Dickens, for example, who would have been a great TV personality born a century later.

In these enlightened times

Has much changed from the days of Dickens? Not a lot, according to Day. He gives various contemporary examples from political life in Australia. One interesting one is the incident in New York some months ago, involving the youthful Kevin Rudd, at the time a wannabe Prime Minister. The story was internationally covered.

According to The Daily Telegraph

KEVIN Rudd’s hopes of becoming Prime Minister have been rocked by a visit to a New York strip club where he was warned against inappropriate behaviour during a drunken night while representing Australia at the United Nations. Mr Rudd yesterday issued a statement to The Sunday Telegraph, confirming he went to the club. But he said he could not recall what happened at the night spot because he had “had too much to drink”.

Rudd’s embarrassment was short-lived. He went on to victory a few months later.

Day introduces a further twist to the tale suggesting that the incident which had occurred four years earlier, had been rather sleazily treated by the journalists, who had persuaded the notoriously high-minded Rudd to loosen up a bit. But that’s another story. He concludes that the journalist as part of the story is inevitable, and that blogging is an even more exaggerated process in which each blogger seeks to place themselves right at the heart of the story. I plead the Fifth on that one.

The campaigning journalist

Charles Dickens began his journalistic career reproducing the speeches in Parliament for his readership, a feat requiring phenomenal powers of recall. In the meanwhile, he was churning out hugely popular fictional tales which made up an outstanding social commentary of the times. Dickens as performing celebrity became even more the centre of his stories.

Then there was young Winston, whose exploits seem to have had some parallels with those of the first of the Murdoch dynasty, Keith. Churchill’s reports from the Boar war made him famous and wealthy. His fame outlasted his periodic bursts of affluence. But fame and wealth came from his creative tales in which we wrote himself as the central character. And what about Mark Twain, yet another itinerant journalist whose genius with words excused him from proximity with factual reality as he reported on his journeys?

These were early celebrity journalists. They were at times hugely influential. Another example this time from France, is Emile Zola in exposing the Drefus scandal, In this case, the author used his fame to help promote the story, rather than use the story to promote his fame.

Back to the Rock

All of which takes us back to the still smouldering case of Northern Rock. This appears to have acquired its own celebrity journalist in the shape of the BBC’s Robert Peston. It The story continues to run. Now the BBC is able to maintain a stream of exclusive scoops by interviewing someone right at the heart of the story, namely their very own Robert Peston.

Peston’s influence on events these has been mentioned in Parliament. An overview can be found in a newsletter within which the following quote summarizes the impact of Mr Peston’s journalistic activities

The following press release was issued as Update No. 5 on 18/10/2007: Press049_Northern_Rock_Value (mainly to try and stifle some inaccurate press comment), together with the following notes: Some of you may have seen Matt Ridley and Adam Applegarth responding to questions from the Treasury Select Committee on TV news on Tuesday. Not a lot new was learned from the session except that both the Chairman and the rest of the board had volunteered to resign if required. It was also clear from the evidence given, and comments by Robert Peston of the BBC later that evening on BBC TV, that the BBC announced the rescue by the Bank of England in advance of it being issued in a Regulatory News Announcement based on a leak from someone. I have so far heard three different versions of who leaked it so am not sure which is a rumour and which is the truth. But it would appear that this premature announcement stampeded the company into making the announcement and we know that it was not possibly as judiciously worded as it might have been – the end result was an unexpected rush of depositors to withdraw their cash.

Truth, rumours and Robert Peston

The thought expressed in the above had been nagging away as I followed the Northern Rock story. Clearly, The BBC’s Robert Peston was leading the pack. He must have been the envy of less well-connected political journalists around the land.

But how much is straight reporting, how much highly personalized story telling? He is clearly very much part of the story. Peston is doing no more than the heroic journalists from bygone days, who thrilled the public by not just witnessing the story, but by playing a starring role in it. Not so much communicators as creators.

Stop Press

I was about to publish this post when I heard of a story breaking, on BBC’s radio four, related by a familiar voice, that of Robert Peston. The story? A member of the third generation of Murdoch, young James, is making his mark as celebrity journalist. He becomes head of the Dynesty, and heir apparent.


Message from Northern Rock: Telling it Like it Is?

September 21, 2007

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In a message from its CEO Adam Applegarth, Northern Rock communicates with its customers. The one substantive item is an offer to refund all penalties imposed if they re-invest within two weeks. The message is as revealing for what it does not say, as for what it does

Northern Rock for the moment is the safest Bank for investors in the country. The website, much maligned as an indication of the Bank’s inability to respond swiftly, shows signs of recovery. (Although that side-bar graphic of a deep-sea diver gently descending offers a rather unfortunate image of the company’s future …)

Mr Applegarth’s message suggests just how little wriggle-room there is for a leader in these adverse circumstances. Every scrap of information will be scrutinized minutely. A minimum requirement is the avoidance of any factual inaccuracy. I read it carefully, and was left with the impression of a company doing its best under exceptionally difficult circumstances.
One dilemma is how much honesty there should be about the future. Should the message tell the truth, the partial truth, and only the truth that encourages investors to return to the Northern Rock’s offerings?

It is a dilemma, because the marketing and PR impulse is to create the simple brand message. That is the brand imperative. The conventional wisdom is to draft and redraft until the final version has eliminated all traces of ‘off-message’ signals. In this instance, the short-term need is to get some cash back in.

But we know that these are exceptional times, and there has been plenty of evidence in the last week of the difficulty of finding a way of reassuring customers. Thanks to the actions of the Bank of England, in coordination with the Financial Securities Authority and the Government, Northern Rock can say without falsehood that

The Chancellor has made it clear that all existing deposits in Northern Rock are fully backed by The Bank of England and are totally secure during the current instability in the financial markets

But that truth is unvarnished, and yet carefully polished in the posting. Polished to remove any hint that mistakes might have been made, or that changes will have to be made that will be unpleasant for investors. The dilemma is the inclination to be honest about such matters. To treat people frankly. Doesn’t that help build trust? And is it really the case that it will be pretty much business as usual in the future?

A mischievous suggestion

Sometimes it helps to face reality by acknowledging what can’t be said. Suppose the reality is that Northern Rock has been in a near fatal accident? At the moment it is presumed to be wrapped up in a financial security blanket and unlikely to return to full health. No-one will turn the life-support system off until arrangements have been made for donation of the various organs. A first message is received from the bedside of the patient.

There has not been much time to reflect on how I arrived in the Accident and Emergency Room of the Financial General Hospital. I suppose I had been feeling a bit off-colour for quite a while. But I had always been in such good health before. Maybe that had prevented me from seeing those symptoms that something was going wrong.

In hindsight, I suppose my lifestyle was unhealthy in some ways. I’m just thankful to all those who helped keep me alive. The doctors tell me that I will make a full recovery. I’m not sure. I’ll probably have to change my life style quite a lot. Still, must put a brave face on for the sake of the family. There’s a lot more like me. That A&E department is working 24/7. I think I’ll say it’s business as usual. Except I suppose it can’t really be the same business again. Can it?

If you want to sit in judgment …

A lot of effort is going into trying to establish ‘who is to blame’ in the declining fortunes of Northern Rock. I would prefer to see whether there is anything to be learned from what’s going on. Would things have been better, say, if Robert Peston had been in change of Northern Rock? Or Will Hutton in charge of The Bank of England? Or if George Osborne, or Roman Abramovich, or Warren Barton had … Enough of that. Let he who is without sin cast the first stone.


Sainsburys: A good leader in a bad place?

March 19, 2007

Predators advance on UK retailer J Sainsbury. The Private Equity army is on the march again. Commentators are already comparing the coming battle to the famous Green/Rose contests for Marks & Spencers. But who is playing the Philip Green role? Will Justin King star as Stuart Rose? Will leaders be seen as making any difference, or will the financials decide the ultimate fate of the retailer?

The City is expecting imminent news of a takeover bid for the retailer Sainsbury’s. Trading levels in its shares have been at roughly triple last year’s average levels over the last six weeks. Names such as KKR (if not Kohlberg Kravis Roberts) are becoming more familiar, even to folk who are not regular readers of financial blogs or pink newspapers. The UK takeover watchdog has set a deadline of April 13th for a formal bid by a consortium of four such financial hunters including KKR.

The BBC’s business editor Robert Peston is blogger and super-sleuth. He was ahead of the journalistic pack over the proposed Cadburys split earlier this week. And he takes an interesting line of the current Sainsbury story, finding parallels with Philip Green’s abortive bid for Marks & Spencers.

He points out that Green’s bid was heavily influenced by the M&S pension funding arrangements. The same now applies to any bid for Sainsbury’s. Peston shows that the critical pre-battle negotiations may be between the Private Equity consortium and the company’s pension fund trustees. He shows that the figures involved could be enough to hike the offer price beyond acceptable risk-limits, within a bid which would load debt on the company against its realizable (‘strippable’) assets. The point is a cogent one.

The Sainsbury story

John James Sainsbury and his wife Mary Ann opened a grocery story in Drury Lane London in 1869, and founded a dynasty which was to become the UK’s leading grocers

For much of the twentieth century Sainsbury’s was the market leader. Much of the credit in the years of growth occurred under the leadership of John Sainsbury. Its subsequent misfortunes took place under subsequent leadership, including his nephew David, and Peter Davis. Lord David was to quit industry retaining his political and charitable interests.

The decline of the group in the 1990s was during the spectacular ascent of Tesco. Then in 2003 it also dropped behind the Walmart-backed Asda, a marker that probably contributed to the boardroom moves in 2004 which saw the arrival of CEO Justin King, and Chairman Philip Hampton. Since their arrival, the company has initiated a range of moves to reverse its decline,

Justifying Justin

Leadership theorists (there are a still a few around) still acknowledge that there are uncertainties over how, when and to what degree a leader makes a difference in any specific situation. This justifies interest in new leadership stories, and in the search for comparisons with earlier cases. In the battles for Marks and Spencers, the story was as much as a clash of leadership wills as of financial ratios. M&S acted by bringing in a leader to help the company fight off the bid.

Sainsbury’s acted to bring in a strong leadership team in 2004 (or anyway, to replace a team considered to have been off the pace). Comparisons between Justin King and Stuart Rose were, perhaps, inevitable. Terms such as dynamic, youthful, able, well-qualified, appear in press reports. He ticked his CV boxes even including time spent at M&S, in his previous appointment, where he had been Director of Food. Since arriving at Sainsbury’s he has been active and visible in efforts to strengthen the company’s market position.

You can look at the progress of the company in two different ways. The company has reported modest but repeated growth in quarterly sales. Significant improvements have been made in logistics. Customers appear to like the affirmation of the company’s interests in supporting a healthy and ethical lifestyle.

But the killer facts remain. The supermarket chain that had held the number one position in the UK has dropped far behind beyond the mighty Tesco, and has failed to close the gap on second place to Asda. Even on his appointment, there were takeover rumours surrounding Sainsbury’s future. Allan Leighton, the current Royal Mail chairman was particularly mentioned. Coincidentally, Leighton was King’s mentor during their time at Asda. The rumours resurfaced recently.

On being a good leader in a bad place

In a leadership story, the company can’t play the move of switching from Justin King. Indeed we can make the case that Justin King was already brought in to Sainsbury in 2004, in a Rose-type move to protect the company from predators. Nor is it obvious what he might do to change the course of events once a bid has been made.

The King may rest uneasy, but on this analysis, it may be seen as a case of a good leader being stuck in a bad place.


Stefano Pessina: Friendly insider at Alliance Boots (update)

March 13, 2007

The friendly bid for Alliance Boots could hardly be friendlier. It is led by the company’s deputy chairman Stefano Pessina, in conjunction with private equity giant KKR. Friendly as in Cuckoo in the nest? (Updated).

Update

The Economist (March 17th 2007) examined the likely acquisition of Boots (as it described Alliance Boots). It noted the on-going debate on the merits of private-equity firms, pointing out that Boots was benefitting from effective management, and that the case for change was unconvincing.

It took its characteristic free-market stance to interpret the situation, accepting the story that Mr Pessina had been prompted to act by the sluggishness of performance post-merger. In short, Mr Pessina was not so much a cuckoo in the nest, as a rational agent responding to an entrepreneurial opportunity produced by sub-optimal performance. It added primly, that Mr Pessina might have been partly responsible in that he had failed in part of his well paid job to explain to the market its under-estimating of the value of the company …

My Earlier Post:

The leap in share price tells it all. This week the Alliance Boots pharmaceutical and health-care company was talking to itself. Part of the board considered a ‘friendly bid’ put together by the famed private equity company KKR. Another part of the board, led by its own deputy chairman Stephano Pessina, was spear heading the bid. The rest of the board faction has politely responded ‘thanks very much old friend, but do you think you could possibly find some more cash?’. The shares galloped up close to the proposed £10 level.

What’s going on?

Ambitious company insiders are increasingly aware of the potential of private equity support to mount a bid for ownership. The benefits of such a bid are obvious. The inside knowledge makes due diligence a rapid and relatively risk free process.

In this case, the historical events might almost have suggested that such a takeover was on the cards. It has been less than a year since Alliance Boots was created from the merger of health and beauty retailer Boots, and drugs wholesaler Alliance Unichem. After the merger, the new company retained a board strongly representing the somewhat larger Boots organisation, but with a curious-looking side-arm for deputy chairman Stephano Pessina.

Stephano Pessina

Although difficult to extract the information from the company’s official web-site, Stephano is a highly successful Milanese entrepreneur who in effect is the owner of Alliance Unichem, and thus, a thirty percent personal stake in Alliance Boots. He was the force behind the conversion of his family firm to an international organisation. A nuclear engineer by profession, he is believed to be disappointed at post-merger progress in the newly merged firm.

Cuckoo in the nest

The debate about private equity companies continues. Influential journalist and blogmeister Robert Peston of the BBC has been to the fore in bringing the debate to a wider audience. In simple terms, KKR is but one of a growing and influential group of financial consortia who have been developing innovative means of acquiring companies and capitalizing on their assets. (It is already in the news in the UK for part of a Consortium interested in the Sainsbury retailing organisation). Opponents of such firms portray them as asset strippers, impervious to human anguish and long-term social goals. Supporters argue that they rescue firms from flabby and ineffective management and return them to economic health. Examples of both kinds may be found. What is clear is that the ambitious entrepreneur within an organisation has a new way of seeking to achieve personal ambitions.


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