A return to ‘old fashioned’ values is required

Another banking scandal, another conspiracy unmasked. Executives at an investment company, it seems, forged documents to help their firm secure $2.6 billion in loans to which it was not entitled. The money was used to buy property and assets belonging to the government, allegedly at knock-down prices. At least some of the money also seems to have stuck to the fingers of the parties involved. Thirty-nine people have been tried and convicted for their role in the affair, many have received lengthy prison sentences, two have been imprisoned for life and four have received the death sentence.

 Hang on – the death sentence? For bankers? Of course, this isn’t just any old banking scandal. This affair, as reported by the international press in late July, happened in Iran. Now, amongst our many images of Iran, international financial scandals do not usually figure. But it seems no country is immune to the wave of financial scandals that have swept around the world. Indeed, less than a month later Iran featured in a second banking scandal, this one involving Standard Chartered.

 It was the imposition of the death penalty that caused this story to stand out, though. While it is true that the scale of the fines imposed on institutions guilty of transgression has been shooting up, it is still relatively rare for top executives to pay a personal penalty, much less the ultimate penalty. The news provoked the usual knee-jerk reactions from bank-bashers – “string ‘em up, it’s the only language they understand,” and so on – but there has been a growing and much more serious trend of opinion in this direction for some time. Quite respected people are now openly saying that the only deterrent to bad behavior in the financial services sector is to make sure that guilty people do some serious time.

 “The only way to get the bankers’ attention,” said one American analyst in a recent radio interview “is to take anybody who is found guilty of rate fixing or fraud or false accounting, put him in an orange jumpsuit, and lock him in a ten-by-ten cell with a guy with tattoos on his neck called Marvin. Do that enough times and the rest will get the message.” Statements like this always find a ready audience – including among bankers. A recent poll in London found that more than two-third of bank employees do not believe the banks, including their own employers, are trustworthy. There is an increasing desire to see heads roll.

 I am not convinced. I don’t believe in the deterrent effect, for a start. In the eighteenth century in Britain you could be sentenced to death, or exile to Australia, for stealing a loaf of bread. It did not stop swindlers from venturing some amazing frauds during the time of the South Sea Bubble. A lot of them were caught, and many did indeed do long stretches in jail; even the Chancellor of the Exchequer was incarcerated in the Tower of London where he died while awaiting trial. But enough people did get away with their frauds to lend encouragement to others, and so it has been and always will be.

 People who commit financial fraud may be clever, even ingenious, but they are not rational. Any rational person knows that Ponzi schemes cannot go on forever and will eventually collapse. That did not prevent Bernie Madoff from trying it on. Others will try again in the future, convinced that they can succeed. A few will succeed, once again, just enough to encourage others to follow.

 Whilst discussing the fixing of interbank lending rates, I argued that we need a change in the culture of the financial services industry. Too much of the sector is dominated by what our colleague and friend Marianne Jennings once referred to as the “yee-ha! culture,” the culture of rough and ready enthusiasms, bandwagons and gold rushes, heroes and zeroes, a culture not really so far moved on from the old days of Ivan Boesky and “greed is good.” This is a sector where, perhaps above all others, rational thinking should hold sway, and yet it does not. We tried inventing tools to bring in greater rationality, like modern portfolio theory. Investors and bankers pay lip service to MPT, but the truth is that many, if not most, ignore it because they don’t think it is relevant to them. We tried importing mathematical tools and concepts through the quants, but a lot of those turned out to be useless too, some even downright dangerous.

 And even if those tools had been sound, what is the point of giving rational tools to people who behave irrationally? You might as well give an iPad to a fruit bat and then expect him to use it to write War and Peace. We do need rational tools (preferably ones that work, please), but we also need rational thinkers in charge of them.

 Back in 2008 there was a great outcry when it emerged that some senior figures in failed banks did not hold any formal qualifications in financial services. That is to entirely mistake the nature of the problem. A lot of those people knew a great deal about the financial services sector. What they don’t seem to know very much about is life. They don’t seem to understand the code of rights and responsibilities that hold our civilisation together. They don’t seem to understand basic concepts such as entropy and evolution, natural forces that work upon us all and upon all of our works. They don’t understand that what goes around, comes around, that every action has consequences. They would know all of these things, if they knew how to think logically.

 Few people involved in these scandals are amoral. There are some, and they should be weeded out. Most are subject to the same human impulses as we all are: greed, of course, but also fear, pride, ambition, desire for status and esteem. We have two choices. We can say, this is the way things are and always will be, and go on down the same path while public trust in us and our institutions continues to erode. Or we can accept the need for change. We can adapt, evolve into higher order thinkers who accept our responsibilities to our colleagues, to our clients, to the world around us. We can put trust back at the centre of our agendas because we recognise that without trust, no lasting or meaningful relationship of any kind is possible. That is the only truly rational view of the world. That is logical.

 This of course brings me back to one of my pet subjects, the lack of fitness for purpose in our system of education particularly when it comes to matters of ethics and governance. I still recall the reaction of one my colleagues, a veteran economist and observer of human affairs, during a discussion concerning the need to teach ethics in business schools. After listening to the debate for some  time he rose to his feet and thundered, “If we have reached the point where we need to teach ethical behavior to MBA students, then the world is in a bad way indeed.” Well, here we are. It is, and we do. Not normative ethics, not ethics based on the need to behave well or else be struck down by a lightning bolt, but practical, pragmatic ethics with commitment to understanding how and why honesty and trust are actually good for business. Trust creates wealth. There is the bottom line. We need to teach that mantra, over and over again, until the lesson sinks in.

Information vs knowledge – what do we really need?

We call it the Information Age. Information comes at us in tidal waves, from the media, from social networks, from business networks, from colleagues and from casual conversations. Information comes from formal sources such as data monitoring agencies, market movement updates, the business press, and from informal sources, blogs, Twitter feeds, casual conversations overheard around the water cooler. But what does it all amount to?

Like many others doing jobs like mine, I subscribe to a number of news feeds that send out press releases about the world of business. I probably see a couple of hundred of these in an average week. Another lot landed on my desk this morning. Mr X has just been made CFO of company Y. Company Z has announced a dividend increase. Company A, on the other hand, has issued a profits warning. Company B is confident that its new Widget 2.0 is going to become the standard widget technology of the new generation. Company C has just struck a deal with a sovereign wealth fund to bring in a couple of billion in new investment. And so on, and on.

I used to read all of this stuff with great interest. I engaged with it. Wow, I thought, good for Mr X! What a great job, and Company Y has really landed a catch there. Poor old Company A, what went wrong there? Company B, that really is a triumph. That should give them a firm position for at least, oh, six months, maybe even longer.

But after twenty-five years, I am starting to wonder if there really is anything new under the sun. These events are clearly highly important for the people and companies evolved. They are also important for the communities in which these companies operate, which need the jobs and the economic growth that successes like those of Company A and Company C will hopefully generate.

But for most of us, in the long run, what really changes? The point is that these pieces of information that come in are, in and of themselves, largely meaningless. Mr X has been made CFO of Company Y. Should we shout yay! now? Or should we wait a couple of years and see what he makes of the job? He might be the best CFO since the invention of money. Or he might have been promoted on the basis of the Peter Principle – whereby people are promoted to the level of their own ineptitude, or to put it another way, ‘the milk rises to the top’ – and make a complete pig’s ear of it all and send poor old Company Y scuttling for the protection of Chapter 11. Right now, we don’t know. I can recall many, many cases of companies trumpeting the announcement of a dynamic new director or chief executive, only to see it all go horribly wrong a few months or even a few weeks later.

Here is the problem. What we are receiving through all these various conduits is information. But what we actually need is knowledge. We have the information that Mr X has been promoted, but what we lack – and will lack for some time to come – is the knowledge of whether this promotion was a good move. Of course we cannot know for sure whether it is a good move until we get down the road, but we can certainly analyse the circumstances and try to determine what the consequences will be. But that kind of analysis is sadly lacking in most of the information we receive.

Most people will be familiar with the difference between information – facts, or things that purport to be facts, ideas and opinions served up raw – and knowledge – information that has been processed in such a way as to make it meaningful. The fact that Company C has struck a deal with a sovereign wealth fund is information; the understanding of the consequences of this deal for both parties and their respective economies is knowledge. Of the two, knowledge is incomparably more powerful and more valuable. And yet we continue to live in an Information Age, where quantity of information is seen as more desirable than quality of knowledge. But I would trade all those two hundred pieces of information I receive each week for just one good valid piece of knowledge about the future.

For there are problems with knowledge too, and here the financial sector is particularly prone to using the wrong knowledge in the wrong way. The financial sector persists in looking at past performance as if it was somehow meaningful. As Tom Fitzgerald points out, this is akin to driving while only looking in the rear-view mirror. Performance data tells you where you have been, but it does not tell you where you are going. And sorry, trends analysts, but I simply do not believe in what you do.

We need knowledge about the future as well as knowledge of the present and past, and here of course we run into a paradox because there is no such thing as certain knowledge of the future. (Sorry, makers of financial forecasting models, but I do not believe in what you do either.) But we can put together likely scenarios of what might happen in the future. Used with care, scenarios can help us to come to terms with the future, so long as we do not regard any given scenario as certain. The most important thing that scenarios do is help us get used to the fact that the future is uncertain. By coming to terms with this we develop the requisite flexibility of thinking and preparedness for the unexpected, Andrew Grove’s famous “organisational paranoia”, that will help us think on our feet and react fast when circumstances change. Personally, I would like to see finance officers and those involved in strategic financial planning do a lot more scenarios and a lot less modelling. Models are based on information; scenarios are based on knowledge. The latter will always be qualitatively superior to the former.

It seems clear that we can no longer rely on information feeds alone. We need, more than ever, higher-order knowledge. We need wisdom, we need meaning, we need understanding and tolerance of ambiguity and paradox. Information, raw and unprepared, does not help us to achieve any of these things.

So, let us bring the Information Age to an end, and embark on a new age, the Age of Knowledge. Let us start privileging higher order thinking and passing over the ephemera of who has been appointed to which job or who has just struck which deal. Good for those guys; let them and their colleagues and families celebrate, but the rest of us should just get on with it. We are looking for bigger things, the ideas and concepts that will fuel growth and sustainability and help us to avoid at least some of the pitfalls that have beset us in the past. And then when we have achieved a sufficient level knowledge – why then, we may indeed move on to the Age of Wisdom, and wake up and realise what it is all for and why we manage our great enterprises and to what end. Then the world will truly be a better place.

Good heavens, is that the time? How long have I been asleep? I really must try to stay awake at my desk. Ah, here is an e-mail; I see Mrs F has just been appointed director of strategic finance for company G. Goodness, how exciting. I wonder what it means?

There’s no such thing as society – why Mrs Thatcher was wrong

People who know much more about these things than I do told me back in January that the actress Meryl Streep was a hot tip for an Oscar for her role as former British prime minister Margaret Thatcher in the film The Iron Lady. Sure enough, she went on to win. Ms Streep is of course a very fine actress, but I don’t think I will be watching her film. I’ve never been a big fan of Mrs Thatcher, not for ideological reasons but just because I think her reputation is pretty overblown. For someone who was supposed to be so smart, she said some awfully stupid things.

One of the more stupid, in my view, is her famous remark that “there is no such thing as society”. Her argument, derived in part from a mis-reading of economists such as Milton Friedman and Friedrich von Hayek, was that it is the individual that matters most, not society. Implicit in this is the view that we should put ourselves first, our responsibilities to others (sometimes a very distant) second.

I was reminded of this when looking at the latest unemployment figures. Some commentators saw grounds for optimism, as the figures were not as bad as expected. But the figures still mean that millions of people are without work, without a chance to advance themselves or their families, often without homes, sometimes without enough to eat. We have to face that reality, and that is why I think Margaret Thatcher was foolish to pretend that we could ignore it. It is there, and it affects our institutions and businesses and how they behave and what they do. That is part of the environment in which we operate.

Yet in my conversations with business leaders and chief financial officers, I find that there is often little recognition of this. Too many people are still in thrall to the ideas of the late Milton Friedman, who argued that the only duty of a business is to return profits to shareholders. It is then up to the shareholders to decide how to spend their earnings; if they want to spend it on projects to create jobs and alleviate poverty that is up to them, but there is nothing to stop them from hogging the lot to themselves and spending it all on caviar and champagne if they want to. It is their money; they can spend it how they like.

Margaret Thatcher took this view too, and reportedly claimed that she took her inspiration here from that last great figure of the Austrian school, Friedrich von Hayek. In The Road to Serfdom, Hayek describes state socialism as akin to slavery. But at no point did Hayek endorse the policy of selfishness argued by Thatcher and Friedman. That policy, carried to its logical extremes, is one that could well lead to the end of our financial system. That way madness lies.

And I say this not from any reasons of ideology, but for entirely practical reasons. There is such a thing as society, and what is more, businesses – especially financial institutions – are connected umbilically to that society. Back in the mid-thirteenth century the Catholic theologian St Thomas Aquinas in a famous passage espousing the cause of free markets made the point that markets should be free because free markets are better at responding to the needs of society. But he made the point too, very strongly, that the only reason why markets exist at all is because society needs them. Business is there to serve the needs of society, not the other way around.

Exactly the same point was made by the Muslim traveller and philosopher Ibn Khaldun in the following century, and again three centuries later by the sage Ishida Baigan. In fact, this same point occurs over and over again in the writings of people from every culture and across all time, from Plato and Confucius to the present day. This is one part of the bedrock of human civilisation: business serves society.

And what happens when businesses stop serving society? What happens when the controllers of capital and the creators of wealth put their own interests first and ignore the eight per cent or more who exist without jobs and without hope? What happens is that the eight per cent become desperate. I am reminded of a story in Barbara Tuchman’s The Proud Towers where an out of work man in New York attacked the carriage horses of a wealthy woman with a knife. When arrested and asked for his reasons, he pointed out that the cost of feeding and stabling those horses for a week would have fed his wife and children for a month.

John Davis, the corporate governance lawyer and historian of the American railroad industry, pointed out in 1905 in his book Corporations that civilization creates markets and businesses because it believes that these are the best way of ensuring society’s needs are met. When society begins to think that its needs are not being met, then it discards those institutions that it regards as redundant. Davis draws a parallel with the decline of the medieval monasteries. In the high Middle Ages these served a valuable social need. But as piety declined, the monasteries were perceived as redundant. When the state closed them down, in Germany and England and later in France, few lifted a finger to defend them. And, a few years after Davis was writing, the state did indeed move against the markets, abolishing them entirely in Russia and China, restricting them severely in many countries of Europe, particularly Germany, Italy and Spain.

Hayek remarked that totalitarian governments reduce people to a state of serfdom, but increasingly there are voices telling us that they would prefer to be state serfs than in thrall to the market. I do not refer to the harmless zealots of the Occupy movement, or the left-wing tax and spend economists. I refer to the intelligent, thinking people whom I encounter in many walks of life who tell me, quite seriously, that they believe the financial system is failing the people, is letting them down. They point to Greece and Italy and Spain and Ireland as examples of this. They point too to China and India where, especially in the former, there is a close and symbiotic relationship between the state and the market, and ask if this is the way forward.

I reject this point of view, in part because I agree with Hayek and in part because there is a third way. There is a way of running a business that does not put profit maximisation first.  I refer to the example of companies such as the Tata group in India, who regard society not as nuisance but as “the sure foundation of all our prosperity” and whose guiding ethos is that “what comes from the people goes back to the people, many times over.” In other words, they invest in people, rather than leaving them to the dubious charms of the government safety net. If we really are going to turn the economic corner, then the time has come to invest in the future of those millions of unemployed, right now.

This first appeared in an edited form in Corporate Finance Review.

Where are the visionaries of the future?

I am sitting at my desk, a few hours before departure on holiday, knowing I have an editorial to write but completely obsessed by the idea of seeing some sunshine before coming back to a new term of teaching and writing, knowing I will be chained to this desk through another long, dark, bleak winter. I know I must get this piece out now, I cannot let my colleagues down, but all I can think of is sunlight and swimming pools. Must focus, must focus. Let’s have a look at financial pages of the newspapers; perhaps some wonderful topical subject will jump out at me and I can dash this off before I get into my car and drive away.

 No luck. The papers have been tossed aside in disgust. They are either reminiscing about decade-old events because they are old, or analysing decades-old events as if they were brand new. Where are the penetrating insights? Where are the big new ideas that will take us into the future? I pick up several academic journals, edited by people with impressively named professorial chairs and each with enough academic advisors to start a university all on their own. Some have Nobel Prizes for something-or-other. I flip through. Every article sounds like every other one I have read before. No good. I look around the blogs. Everyone is blogging about the same things they were blogging about last week, last month, last year. This is going from bad to worse. (Sunshine… Swimming pool… Rambling again. Focus, focus.)

But…this is troubling me. Where are the big ideas, the revolutionary ideas that our troubled society and economy need so badly? Where are the visionaries who are going to lead us into the future? I cannot find them. I look back to the revolutions in finance and management thinking of the 1900s, the 1920s, the 1950s, the 1980s and I see giants of thought. Where are they now? Where are the bold central bankers, the idealistic economists, the visionary merchant bankers who foresaw change and moved to meet it, the outspoken academic critics who kept everyone else up to the mark? Where are the likes of Ida Tarbell, Louis Brandeis, William Zebina Ripley, Montague Norman, Friedrich von Hayek, Milton Friedman? Like them or loath them, they were people with big ideas and they had impact. They changed the world.

No one wants to change the world any more. Most people, it seems, are too frightened even to try. Most of us hug certainty, or what we think of as certainty (and probably isn’t), convinced that the devil we know is safer than the demons we don’t. And that seems to be a very modern attitude. Had that attitude prevailed in 1492, Columbus would probably have stayed at port in Seville, preferring to sit in the cabin of the Santa Maria and update his Facebook page to doing anything so dangerous as put to sea. Had that attitude prevailed in the 1980s, the financial industry and financial markets would still be strait-jacketed by regulation. The concern now is that unless someone steps up and breaks the paralysis of thinking that grips us at the moment, we will remain in this slump for longer than we need to. Did I say we are naturally optimistic as a species? We are; but we are also capable of deep gloom when we can see no reasons to be cheerful.

We don’t need heroes, but we do desperately need thought leaders who can point the way forward. And when I look around at the Federal Reserve, the European Central Bank, the IMF and the World Bank, the heads of our large banks and financial institutions, the chief executives of the NYSE and the Nikkei and the LSE, I see good competent people – but not greatness. I do not see the thought leadership we so desperately need.

I repeat, we need visionaries. We need people who will reshape the financial landscape in the way that has been done before, re-craft our financial institutions and markets so that they are fit for purpose in the twenty-first century. And we need them now, before it is too late and before any more damage is done.

 

This blog first appeared as an article in Corporate Finance Review, Sept-Oct 2011

Europe and Russia; Historical Links and the Future

I am going to present the history of Russia in 10 minutes, hoping to get a prize for that. In fact, the purpose of this piece is to talk about Russian leadership. I will not limit myself to the Russian context but will also look at how Russian leadership is perceived in the West.

 I grew up in Canada and the only Russian leader that I knew was the coach of the Russian ice hockey team. Of course, we all knew that the Russians were the second-best ice hockey players in the world. Today, I am going to pick four people who probably defy the existing stereotypes about Russian leaders. They will give us a slightly different view of Russian leadership.

The first one is Prince Alexander Nevski. He is best known to many people from Sergey Eisenstein’s film. Alexander became prince of the city of Novgorod at the age of 18 at a time when that city was threatened from the West. Sweden had pushed into Finland and had an eye on Novgorod. The city was also threatened by the Teutonic Knights who had recently established a base in Latvia and Estonia.

Alexander took the bull by the horns and exercised the leadership that was required. He defeated the Swedish army of Prince Birger at the battle of the Neva in 1240. He also crushed the Teutonic Knights and Estonians at the Battle on the Ice in 1242. However, Alexander did not only engage in conflicts with the West. He signed the first official Russian treaty with a Western power – Norway. He maintained a dialogue with Rome and tried to keep communication channels with the West open as much as possible.

At about the same time as Alexander was defeating the Swedes and the Teutonic Knights, a Mongolian army was sweeping across Asia. By 1240 virtually all Russian towns had been either captured or destroyed by the Mongols. In 1241 they rode across Poland and Hungary and even reached Slovenia. There was very little left of Russia; yet people urged Alexander to fight and resist the Mongols. However, he felt that he was not strong enough and managed to make peace with the Mongol invaders and befriended their leaders in order to save Russia. This lay the foundation for rebuilding Russia. Then, 140 years later, Prince Dmitri Donskoi defeated the Mongolian army and liberated Russia.

According to the Chronicle of Novgorod, the epitaph on Alexander’s tomb read: “Grant him, O merciful Lord, to see thy face in the future age, for he laboured for Novgorod and all the Russian land.” I think that this is a very befitting epitaph for a man who sacrificed his life for his country. He was regarded as a hero in Moscow but in Novgorod they would spit at the mention of his name. They regarded him as a traitor as he sold out to the Mongols. He did not care because he knew what had to be done.

Let us move to the end of the 17th century. At that time, Russia was still very much the same country. Instructing soldiers how to use Western weapons was considered a crime punishable by death. Peter the Great ascended the throne in 1682 at the age of 10 and became the sole ruler of Russia in 1694. He embarked on a modernisation of Russia in the teeth of fierce opposition from his nobles. To prove his authority, he cut off the beards of his own courtiers. He faced down several major rebellions and had to fight the Church as well. It was Peter who turned Russia into a European state. That is his main achievement and legacy.

He traveled to the West on several occasions in order to learn and gather information. He fought against the Western forces and defeated Sweden in the Great Northern War but he also westernized Russia. He built Saint Petersburg as a showpiece and reformed the army, the civil service, the provincial governments, the treasury, and the education system, which showed that there was more to him than just war, power, and empire.

A century later, Napoleon regarded Russia as a threat to Europe. He felt that the continent would be safe only if he conquered and subjugated Russia. The man who stood in his way was field marshal Mikhail Kutuzov. He had studied the art of war under Frederick the Great who became his personal friend, and had served under the famous Russian General Suvorov.

Kutuzov was appointed commander-in-chief on 17 August 1812 despite the tsar’s objections. He unwillingly fought the battle of Borodino on 7 September 1812 and then sacrificed Moscow to preserve the army and by so doing, saved the country. People defamed Kutuzov for many years after this, despite the fact that he saved Russia by that act.

Tolstoy may have had some first-hand information about Kutuzov as his uncle was on Kutuzov’s staff. Tolstoy portrayed Napoleon as a person who tried to control events, whereas Kutuzov believed in waiting on events. He tried to persuade the Allied Commanders to wait before attacking Napoleon at Austerlitz. Napoleon believed that his army followed him; Kutuzov thought that he followed his army. Napoleon was sure that he could win every battle. Kutuzov sought battle only when he knew that he could win. Tolstoy defines Kutuzov’s leadership as servant leadership. He was well aware of the constraints on his actions: there were things that he could do and things that he could not.

 The last leader that I am going to present is Mikhail Gorbachev. He became Politbureau member in 1979 and General Secretary of the Communist Party of the Soviet Union in 1985. He sought a rapprochement with the West that same year and urged reductions of nuclear weapons stockpiles. He is the man who reached out to the West and said to Ronald Reagan that it was time to talk. Remember that Reagan had called the Soviet Union an empire of evil. Gorbachev knew that he had to make a courageous first step. He could not wait for the West; it had to be him. He made that step.

Gorbachev refused to intervene in Eastern and Central Europe in 1989, stating that “this is a matter that each people must decide for themselves. Any interference in the internal affairs of another state … would be inadmissible”. According to Ronald Reagan, Gorbachev deserved most of the credit for bringing peace. Nikita Khrushchev had told Kennedy, “We will bury you”. When Reagan died, Gorbachev attended his funeral but as a mourner, not as a victor.

What do these four leaders have in common?

All four were strong leaders who recognised the limits of their authority. This is known as situational leadership. All four took a long-term view. All four were at times in opposition to the West but at other times were prepared to make peace and exchange knowledge. And all of them respected Western Europe.

When we talk about the baggage of the past, that last point is particularly critical. It is not just a history of antipathy and conflict. It is also a history of mutual respect, admiration, and learning.

I asked my colleagues if they recognised these four leaders and what they knew about them. They all knew Gorbachev, which is not a surprise. They were also familiar with his achievements. Everybody had heard of Peter the Great, too. They knew that he built Saint Petersburg and that was about it. About one in five had heard about field marshal Kutuzov because they had read War and Peace. Only one had heard about Alexander Nevski. This is quite shocking because without him there might not be a Russia today. He is probably the most significant of the lot. We in the West know precious little about Russia and Russian leadership. Therefore, I suggest that we take a look at that front page of Time magazine that shows pictures of Reagan and Gorbachev and says, “Let us talk”.   

 

This blog is based on a paper given at the European Leadership Centre’s 9th Annual Conference, ‘The EU and Russia: Business Opportunities and Leadership Challenges’, held at IEDC-Bled, 2-3 June 2011.

Is your business set up to succeed?

blog_filingAs a species, we like to create order in what we see and experience. Astronomers gaze at the sky and note patterns in the stars which they call constellations, and give them names. Mathematicians look at the natural world and note the presence of recurring phenomena such as Fibonacci numbers. Chemists and physicists make sense of the way the world is constructed by referring to the periodic table of elements. We do this ourselves in our daily lives too. How many of us arrange things in our homes or offices so that they are just so? A place for everything and everything in its place.

Businesses are just the same. Every well-run business – note the qualifier, though – has systems and frameworks for doing things. Sometimes these are tacit routines which everyone understands but no one writes down. In other cases there are formal procedures manuals which recount, often in daunting detail, how tasks should be performed. Large businesses will have dozens of these, even hundreds. There will be frameworks and systems for IT management, for financial and accounting procedures and compliance, for ordering and sourcing materials, for monitoring employee performance, for reporting up and down the chain of command, and on and on.

On the face of it, these businesses are very well ordered and structured and thus very well run. But this is not always so. In the first place, these dozens or hundreds of frameworks and systems sometimes clash with each other. Take the case of an American firm which wanted to measure the productivity of its employees. It found that its financial reporting and HR monitoring systems were not compatible; each had been designed at different times by different people for different purposes, and the firm simply could not access the information it wanted – not without designing a completely new system for doing so.

Second, the sheer weight of these systems can be overwhelming. I was once called into help simplify the procedures manuals of a British investment bank. I was shown a stack of papers more than three feet high. No one at the bank, including senior executives, had read them all. Yet they were all required to comply with the procedures given therein. As a result, when people did not know what they legally could or could not do, they chose the safest option: they did nothing.

Quite often too, there is no single overarching framework which knits all the others systems together. My colleague Jacques Kemp, a former senior executive with ING Asia-Pacific has often puzzled over this. Why, he asks, do companies invest millions in getting systems and frameworks in place for IT or purchasing or manufacturing, but neglect to invest in the most important area of all, which is management? As a result, we often have highly sophisticated technical systems which we then manage in an ad hoc way. It does not make sense.

The origins of management frameworks

You will have noticed by now that I have been using the term frameworks and systems interchangeably. This is not uncommon in the literature on this subject. The distinction between a ‘management system’ and a ‘management framework’ is quite a hazy one. For the sake of this discussion, let me suggest a couple of firm definitions:

  • A management system is designed to aid and enable the management of a particular task or function. Thus we might have a quality management system which is designed to ensure product/service quality, or a purchasing system which is designed to ensure that materials are purchased efficiently and are available in a timely manner.
  • A management framework is designed to assist management to run the whole enterprise.

Even this distinction is not black and white, and there are plenty of shades of grey, but it will do for the moment.

The necessity for management frameworks had become apparent by the end of the nineteenth century. Businesses were plagued by inefficiencies, which meant that many were unable to compete successfully and were losing money. Here is how one observer, the management guru Herbert Casson, described what he found at one factory in 1917:

On all hands I found guess-work and muddling…A mass of incorrect operations was standardized into a routine. Stokers did not know how to stoke. Factory workers did not know how to operate their machines. Foremen did not know how to handle their men. Managing directors did not know…the principles of organisation. Very few had LEARNED how to do what they were doing.

The first attempts to create management frameworks were made in France and America in the first decade of the twentieth century. In the former case, the French engineer Henri Fayol tried to lay down a series of general principles by which companies should be run and gave managers a simple checklist of tasks: planning, coordinating, controlling, reporting and so on. Much more detailed was the scientific management framework which emerged in America. This used time and motion studies to re-define and re-engineer the individual tasks of each worker, initially on the shop floor but later in all parts of the business, and establish standard times and routines for each task. Scientific management tried, not altogether successfully, to knit these individual routines and systems into an overall framework for performance management.

Other frameworks have followed, such as PIMS (profit impact of marketing strategy) which despite its name offers the opportunity coordinate managerial work in various parts of the business in order to achieve greater profitability; the various strategy frameworks offered by the likes of Igor Ansoff and Michael Porter, which again attempt to coordinate all parts of the business and get everyone in line behind the strategy; and Kaplan and Norton’s balanced scorecard, about which you will read in much more detail elsewhere in this issue of The Smart Manager.

Companies and managers wanting to adopt management frameworks have plenty of options. They can research frameworks like the balanced scorecard and implement these themselves; the concepts are quite simple. They can go one of the big management consultancy companies and ask them to design a framework, which the consultants will be glad to do (for a price). Or they can do what Jacques Kemp did at ING and sit down and design one from scratch. Jacques found that none of the bespoke options on offer did exactly what he wanted in terms of coordinating all parts of his diverse business, so he created his own framework. It can be done, provided one has sufficient knowledge of the business and how it works.

Yet, as Jacques and others have found, despite the plethora of options on offer, very few businesses use overall frameworks that embrace the entire firm. Why? To perhaps understand the answer, let us look at some of the advantages of frameworks and then at some of the problems associated with their use.

Advantages of frameworks

Frameworks hold things together. When we think of common frameworks in ordinary use, we might think of the skeleton of a body, or the walls and roof trusses of a house, or the chassis of a car, or the trunk and limbs of a tree. They provide a unifying element around which a number of other things can cohere, and thus can interact and function as a whole. Thus the skeleton supports the body’s organs and the circulatory and nervous systems, all of which work together in order to support life. The walls and roof trusses of house support the roof and the plumbing and electrical systems and so create space for living, and so on.

Now take a schematic diagram of a business. It consists of a number of different parts: finance department, marketing department, sales teams, production facilities, distribution chains, R&D teams, human resources department, perhaps legal and technical advisors, and of course, top management, which is supposed to be controlling the whole enterprise and pulling it all together. The larger the enterprise, the more geographically diverse it is, the wider its product and services range, But when you look at the diagram, you see an assortment of parts. Each of these teams and departments appears to operate on its own. What stops them from pulling apart, rather than pulling together?

Some readers will remember the diagrams we had as children, in puzzle books and so forth. What we saw on the page was a random assemblage of dots. When we drew lines between the dots, however, a picture emerged. Similarly, if you draw lines between the different parts of the business, we see a picture too: a picture that shows us how the organisation reports, transmits information and is controlled. We call the process of linking all the elements of the business ‘connecting all the dots’, because the process is much the same; a group of apparently disconnected elements is transformed into a single unified enterprise. The lines that connect all the dots represent the management framework that enables this unity.

The Chartered Quality Institute in the UK has identified some of the advantages of frameworks. A good framework should:

  • reduce duplication and therefore costs
  • reduce risks and increase profitability
  • balance conflicting objectives
  • eliminate conflicting responsibilities and relationships
  • diffuse the power system
  • turn the focus onto business goals
  • formalise informal systems
  • harmonise and optimise practices
  • create consistency
  • improve communication
  • facilitate training and development

These goals are achieved through better sharing of knowledge, better operational control, greater flexibility and, in the end, better decision making.

Problems

But, as some readers will know from practical experience, frameworks can also be constraining devices. Rather than being an device that enables better and more flexible management, a framework can become a strait-jacket that restricts managerial freedom and encourages conformity at all costs.

Two problems routinely present themselves. The first is that the framework itself is badly designed and implemented, and is not fit for purpose. Flexibility has to be built into any framework, but too often this element is ignored. When this happens, the framework refuses to allow people to make decision that do not conform to the framework. This can in turn choke the life out of attempts at innovation and creativity. Even frameworks like the balanced scorecard, if used improperly, can result in this happening. I have seen cases where managers who did not fully understand the balanced scorecard or its purposes used it as a kind of blunt weapon to enforce conformity on others around them. It did not work.

Second, and related to the above, there has to be the managerial will to make the framework work. Ultimately too, there has to be leadership from the top, to enable the kind of coordination which is needed to pull both the framework and the company itself together. If these are lacking, then the framework turns into a kind of tick-box exercise. People are judged on how well they have conformed to the framework’s requirements, rather than on productivity or value creation or other contributions to the business. In this case the framework once again becomes a strait-jacket – or in the case of the business, a coffin.

Frameworks can be very powerful management tools. They remind people of what they need to do and when. They enable senior management to assess what is going on within the company at any time, at a glance. They enable the sharing of knowledge that is so important to innovation and creativity, themselves powerful sources of competitive advantage. And on another level, the presence of a framework is itself a reassurance that these things will be done. In an ad hoc system of management, managers are often left wondering when they will hear the information they need and what is going on around them and what will happen next. Frameworks help to provide a degree of certainty.

The challenge for managers is to come up with frameworks that will provide all of thee benefits without being constricting. How does one build a framework that is both holistic and pays attention to detail, is systematic and flexible, gives efficiency and control without stifling innovation and creativity? The answer lies in a thorough knowledge of one’s own organisation, its values and purpose and mission, its strategic intent and its capabilities, its knowledge needs and the areas where control is most essential. After learning all of these things, managers should find it relatively easy to implement frameworks that will help them to guide and shape the organisation. Lacking this knowledge, they will be designing the framework while partly blind, and will have no idea of whether the framework is suited to the organisation’s needs.

Quiz

Do your organisation use management systems and frameworks, or is it managed in an ad hoc way? Unlike some of our quizzes, there is no ‘right’ or ‘wrong’ here. It may be that yours is a business which benefits from a more ad hoc style. Try the quiz anyway, though. Rather than identifying areas for improvement, the purpose here is to make you think more about the issue of frameworks and systems. In particular what kinds of frameworks and systems may – or may not – be appropriate for your business? I have included more simple management systems, as defined above, in this quiz as well.

Read the statements in each section, then decide the extent to which each applies to yourself, using the scale below:

5 = definitely yes
4 = yes, although with some qualifications
3 = to some extent
2 = to only a small extent
1 = no, or don’t know/not sure

Are systems and frameworks in place?

  1. We manage our organisation in a structured manner.
  2. We have firm systems and frameworks which guide managers and staff when performing key tasks.
  3. We expect all staff and management to use the systems and frameworks we have, rather than going off in an ad hoc manner.
  4. As well as individual management systems, we have a common management framework which spans the whole company.

Are systems and frameworks well designed?

  1. The systems and frameworks in our organisation are fit for purpose.
  2. The systems and frameworks in our organisation are flexible and capable of adaptation as the business grows and the environment changes.
  3. The systems and frameworks in our organisation encourage creativity and enable innovation.
  4. The systems and frameworks in our organisation are designed to fit the specific needs of our organisation, not simply applied from a template.

Do systems and frameworks enable better control?

  1. We find that systems and frameworks allow us to control the organisation more effectively.
  2. Systems and frameworks ensure prompt and timely reporting, meaning that knowledge is more widely shared.
  3. Systems and frameworks give us up-to-date information about organisational personal performance.
  4. Systems and frameworks mean that managers feel they have a higher degree of certainty about what is going on in the organisation.

Do systems and frameworks enable better decision making?

  1. We have found that systems and frameworks enable better and more accurate decision making.
  2. Because the systems and frameworks provide us with the knowledge we need, we are able to make decisions more quickly, this in turn leading to greater organisational flexibility.
  3. The systems and frameworks enable us to consult with the relevant managers and staff and get their views quickly before making a decision.
  4. The systems and frameworks help us to feel more confident when making decisions.

Now total your score in all four sections above (maximum 80)

61-80: it would appear that your organisation has a number of management systems and perhaps even broader frameworks in place, and that the organisation knows how to use them. The critical area to pay attention to, though, is the issue flexibility and creativity highlighted in the article above. How did you score on questions relating to this issue? If you find 2s and 3s cropping up, then it might be worth looking again at how your systems and frameworks are performing. Always beware of the strait-jacket.

41-60: this suggests a mixed picture, in which a number of systems may be in use but there is no over all framework. Examine the pattern of your answers again and look especially at any scores of 1-3. Why did you answer as you did? If the reason is that your organisation does not use frameworks in this way, and if that suits the needs of the organisation, that is absolutely fine. But if you are getting low scores because you have systems in place that are not performing well, then corrective action is going to be needed.

40 or less: here there would seem to be one of two possibilities. One is that yours is a free-wheeling organisation that thrives by doing things in ad hoc manner, thus gaining the maximum creative leverage. If that is really true, good for you; you have a dynamic and successful organisation. But if it is not true, then there is a strong possibility that either your organisation has systems and frameworks and is using them badly, or does not have them at all and quite likely needs them. Now is the time to sit down and examine the situation more fully, determine what the organisation’s control and reporting needs are, and then start working on an action plan.

Case study: Tata

The story

The Tata group is India’s oldest and largest private sector business entity. Founded in 1868, the group now consists of over a hundred companies, with a turnover of more than $70 billion. The group has a wide range of interests, companies trading in fields as diverse as steel, automotives, chemicals, IT consultancy, retailing and hotels.

The Tata group is highly decentralised, and member companies are allowed much autonomy in terms of strategy and operations. The main instrument for unifying the group is the Tata corporate brand, which embodies the values that are shared by all the companies of the group. However, not all companies in the group use the corporate brand in the same way. Many, like Tata Beverages and Tata Motors, use the name and logo explicitly. But even in India, some companies in the group, such as Trent and Taj Hotels, do not use the Tata name, and Taj Hotels also has its own brand mark.

This inconsistency is seen by the Tata group as less important than adherence to the group’s values, which are extremely strong. The group was originally founded for the purpose of creating and spreading wealth in order to strengthen the Indian nation and economy. ‘What comes from the people goes back to the people, many times over’, is an often repeated phrase in Tata’s values statement. These values help to make sure that all the companies in the group pull in the same direction.

The challenge

Prior to 1991 the Tata group had few interests in the world outside of India. Its brand identity was very strongly Indian, rooted in India’s culture and history. But as economic reforms began to open up Indian markets, the group’s leader, Ratan Tata, knew this had to change. He believed that Tata’s future lay outside of India, and that it should aspire to become a global company.

But this posed a serious challenge. Could a company with such a strong Indian identity succeed in establishing a global brand? And if so, at what price? There were (and still are) many in India who believed that the process of globalisation would change Tata and damage its powerful values, turning it into ‘just another big company’ concerned only with profit. Others outside of India wondered (and still do) if Western consumers in particular would really accept the Tata brand.

Stepping out of India

Individual Tata group companies began making small acquisitions outside India in the late 1990s. The first major acquisition was that of Tetley Tea, one of Britain’s leading tea brands, in 2000. This acquisition went almost unnoticed. Later acquisitions, such as those of steelmaker Corus in 2007 and Jaguar Land Rover in 2008, were much more high profile. Since 2005 there has been a steady stream of acquisitions in Europe, Asia and North America.

The pragmatic approach

Tata’s approach to handling these new acquisitions has been entirely pragmatic. Conventional corporate branding theory suggests that all acquisitions should be branded with the corporate brand name and mark. GE, for example, applies the GE brand to all new ventures and all new acquisitions across the board. This is usually seen as best practice.

But Tata faced different pressures, and had to respond in a different way. As noted above, the group had to simultaneously reassure its stakeholders in India that it was not about to abandon its traditional values in favour of global growth, and reassure stakeholders outside of India that their favourite brands would not become tarnished.

In some sectors, Tata follows conventional wisdom. In 2010, after some hesitation, Tata Steel finally rebranded Corus as Tata Steel Europe. By common consent, Corus was not a particularly strong brand, and few mourned its passing. Even so, there was concern at Tata Steel as to what impact this rebranding might have on Corus’s reputation – and on that of Tata Steel in India, where there was grave concern over events such as the mothballing of the Corus plant at Redcar, some observers asking if Tata Steel was turning its back on its reputation as a caring employer. Only after long thought did the move go ahead.

Tetley has been part of the Tata group for ten years, yet the Tetley brand remains independent in terms of its identity. A single discreet line on the packaging reminds consumers they are buying a Tata product. It might be thought that tea, being Indian in origin, could benefit from association with an iconic Indian brand. But Tetley’s customers resolutely see their brand as British, and rebranding might compromise its image and reputation in their eyes.

The same is even more strongly the case with Jaguar and Land Rover, where Tata Motors has bluntly rejected even the notion of rebranding either with the Tata name. These are old and iconic brands in their own right, and Tata Motors believes that rebranding would destroy value.

Tata only rebrands its acquisitions when it is clear that such a rebranding would add value. Where it is clear that it would not – as in the case of Jaguar and Land Rover – or where there is doubt – as there was for some time at Corus – then the group steps back and lets its new acquisitions proceed with only a very light hand of guidance and direction.

This is not what conventional wisdom suggests should be done. But a look at the Tata Group’s performance, even through a deep and biting recessions, suggests that the pragmatic approach has worked in this case.

The author is honorary senior fellow at the University of Exeter Business School, and author of Tata: The Evolution of a Corporate Brand.

Corruption at work – the exception that proves the rule?

blog_corruptionThis is a post from a colleague of mine, Dr Katie Porkess, who’s recently completed some fascinating and topical research into corrupt behaviour amongst groups, particularly in the workplace. I hope you enjoy her ideas.

Recent media coverage has highlighted that corruption in groups of people is an on-going phenomenon. The reporters at The News of the World were put under extreme pressure to bring in sensational stories to boost sales, and a culture had developed in which they resorted to acts that most people would regard as unacceptable. Not only that, the culture permeated throughout the entire organisation, allegedly from the chief executive and the editor-in-chief down.

Many of us know of someone who has cut corners or broken rules to meet business targets, be they time, budgetary or quality control. Pressure does not inevitably lead to a corrupt culture, but if other conditions are right (or rather, wrong), it can be a critical first step along the way. Once such behaviour has taken hold, it is difficult to root out, and is very likely to have disruptive consequences to a business and may affect its brand values.

But, is such culture exceptional? Previous research suggests that corruption in the workplace can occur when employees are put under pressure to meet difficult targets. And my research has shown that given specific conditions, pockets of corruption that contravene company norms and codes of ethics, can happen in any organisation and so is an ever-present and real business risk. Corruption, group behaviour, leadership and stress have all been studied in their own right, but my research brings these concepts together and focuses on small groups within organisations and the relationship between their corrupt behaviour and stress. Social Identity Theory (SIT) with its focus on both inter-group and intra-group behaviour provided a framework for the work.

SIT suggests that to support their group at such times, individuals who identify strongly with it (high identifiers) may be prepared to modify their behaviour. Although, people may find behaving in ways contrary to their normal inclinations stressful, SIT also suggests that high identification with a group can lower stress levels. What was not known was whether these previous findings would apply in the case of corruption, and whether stress is a factor in these acts.

A series of experimental studies was conducted in which the participants had the opportunity to behave corruptly. The results demonstrate that in all cases, this opportunity was taken, whether the participants were students or senior business executives. High identifiers behaved more corruptly than low identifiers and they experienced less stress.

SIT also suggests that effective leaders identify highly with their groups, are considered prototypical members, and so influence their groups’ behaviour. An important finding from this new research was that a leader’s influence extends to corrupt behaviour, implying that where a group operates with norms that are unique to it, the leader must be a fully accepted member of the group. Thus, leadership is contextual and corrupt group behaviour depends on a corrupt leader.

However, it may also be the case that the formal leader of a group is not, in actual practice, the leader in specific situations. The findings of my research showed that appointed leaders did not always influence the behaviour of the team members: in such cases, the participants were talked into corrupt or unethical behaviour by another member of each group. Such leaders not only behaved more corruptly than non-leaders, but they also both influenced and encouraged such behaviour in their team members. Non-leaders followed leaders in corrupt behaviour, even against their personal inclinations.

Although in general women were found to behave less corruptly than men, the behaviour of women leaders was not significantly different from other participants under normal conditions. However, under pressure for their teams to do well, they cheated more, particularly where the issues involved were ‘soft’ unethical ones, rather than where the answers were clear cut: to cheat or not to cheat. Qualitative analysis showed that corruption in groups is accompanied by rationalisation, but that there is no gender difference in its use. Group members accepted explanations suggested by their leaders, in order to justify their choices and decisions.

Therefore, although the initial trigger for corrupt behaviour may be pressure, when group identification is strong in a team, and conditions present the opportunity, corrupt behaviour may occur even without pressure. My research shows that it may even be fun!

So, although The News of the World is in the media spotlight at the moment, as an example of corrupt behaviour in groups of employees, this will not be the last: we only need to think of Enron, WorldCom, Siemens, our own MPs’ excessive expense claims, to mention a few, to remember that such behaviour is not exceptional.

Blog posted by Dr Katie Porkess from the Centre for Leadership Studies

Rupert Murdoch – a strong leader who trusted too much?

Leadership and Trust

Leadership and Trust

Leaders are not all-powerful. Even the mightiest depend on other people to support them. And when those subordinates let their leaders down, disaster can swiftly follow.

The phone hacking scandal at News of the World illustrates this perfectly. In his testimony before the House of Commons select committee, News Corporation chairman Rupert Murdoch denied personal knowledge of events surrounding the scandal, and also denied personal responsibility. ‘I feel that people I trusted let me down’, he told MPs. ‘They behaved disgracefully and betrayed the company.’ Mr Murdoch made it clear that he felt he had been betrayed personally as well.

Setting aside for the moment the issue of whether ignorance of events absolves a leader of personal responsibility, let us focus on the issue of trust. Can leaders trust the people who work for them? Should they trust them? The News Corporation experience would tend to suggest that they should not. Without effective supervision from the top, a handful of employees seem to have taken the law into their own hands – with potentially catastrophic results for the company.

But here is the paradox. It would seem that leaders should not trust their subordinates; and yet they must. They have no choice but do so.

The reason why they have no choice lies in a fairly simple but often overlooked concept called the ‘span of control’. The notion of the span of control was first introduced by a British general, Sir Ian Hamilton, in a thoughtful book entitled The Soul and Body of an Army, published shortly after the First World War. Reflecting on lessons learned from that conflict, General Hamilton concluded that most leaders have no idea of how to exert authority over large groups of people. Apart from problems of communication, most of us are not able to manage continuous ongoing relationships with more than a handful of people at any one time.

Hamilton concluded that the maximum span of control – that is, the maximum number of other people over whom one person can exercise continuous authority and control – was about eight. Subsequent studies have suggested that, especially with the effective use of modern telecommunications, the span of control can be stretched to as many as twenty people; which is still not very many.

Therefore, once any organisation grows beyond the span of control of a single leader, then the leader must delegate some authority to subordinates. The leader is not, cannot be, omniscient and omnipresent. News Corporation employs 51,000 people around the world. It is simply not possible for Rupert Murdoch and his top team to monitor the actions of all of them on an ongoing basis. They had to trust other people; and the result, Mr Murdoch says, is that other people have betrayed that trust.

Here, then, is one of the dark aspects of leadership. Leaders are forced to delegate authority and place their trust in other people, but if they follow the logic above, they do so in the sure and certain knowledge that at some point in the future some of those subordinates will let them down. They may fail to act in the best interests of the company; they may fail to carry out essential tasks so that the rest of the company is affected and the overall strategy goes off the rails; they may engage in power struggles with other subordinates in order to achieve personal advantage; they may even engage in fraud or other forms of criminal behaviour, as for example in the ‘rogue trader’ scandals at Barings, Société Générale and other banks.

How does the leader prevent these things from happening? Perhaps the first step is simply to recognise that the problem exists. Writers on leadership today – perhaps overly influenced by scandals such as that at Enron, where it was the company’s leaders who betrayed their employees rather than the other way around – often talk about the need for leaders to inspire trust in other people and to motivate people so that they will work towards a common vision. The danger here is that too much responsibility, and too much expectation, is placed on the shoulders of the leader.

In the book The Human Side of Enterprise, Douglas McGregor argued that leadership is not something that is done by leaders to other people. In other words, it is not a simple matter of giving orders and having them obeyed. The real essence of leadership, said McGregor, lies in the personal relationships between the leader and others. People will behave and respond according to how that relationship is managed. For example, if you are a leader who is respected by others, and if you demonstrate to other people that you are trustworthy, there is a greater likelihood that other people around you will behave in a trustworthy manner too. Not a certainty; but a greater likelihood.

But here we come back to the span of control. If we can only manage about twenty personal relationships at a time, how do we control an organisation of 50,000, or even more? The answer requires us to redefine what we mean by ‘relationship’. Instead of direct face-to-face relationships at a personal level, good leaders try to build more subliminal relationships by creating an image in the minds of other people.

Jack Welch, the former chairman of GE, spent much of his working life on the road travelling around to the company’s many subsidiaries around the world. He also visited every intake of new people at GE’s management training centre and spent a good deal of time, often a full day, with new recruits. His purpose was not to control his subordinates or even to get to know them personally. His purpose was to let them get to know him; to understand what he stood for, what his personal values were, what his expectations of them were. By the end of these visits and training sessions, Welch might not know his employees, but they certainly knew him.

Welch and other successful corporate leaders try to create a culture in which it is expected that people will do the right thing. In these cultures people know, often without even thinking about the issues consciously, what is right and wrong and where the boundaries are. India’s Tata group, which employs about 300,000 people around the world, achieves this result in part through training and in part through a steady stream of corporate communications, videos, ‘values days’ and the like, all of which emphasise one concept over and over again: trust. ‘Leadership with trust’ is one of Tata’s advertising strap lines.

As a result, Tata has built a culture where trust is ingrained into people’s ways of thinking. Several years ago a young Tata manager was approached by two customs officers who asked for a bribe. Without hesitation, without even informing his bosses, the young man informed the anti-corruption police and helped them set up a sting operation in which the two men were arrested. The first his employers knew of this was when the affair was reported in the Indian press.

John Adair, the British professor and writer on leadership, acknowledges in his book Understanding Motivation that an element of control is necessary. It is important, he says, that leaders maintain standards throughout the organisation, and ensure that those standards are adhered to by everyone. We all know – many of us from practical experience – that rotten apples do occur, and that they must be identified and got rid of quickly before the corruption spreads. This means that it is not enough to simply inspire trust. Leaders also need control and compliance processes to make certain that trust is not being abused, and when abuses do occur they must act ruthlessly against those responsible.

Of course, the leader also needs to be able to trust those who run the compliance processes to make certain they are not covering up for others. When Rupert Murdoch spoke of being ‘betrayed’, he was not talking about the journalists who were involved in phone hacking. Almost certainly, he was talking about those whom he had trusted and promoted to positions of power and authority, and who had let him down. News Corporation’s tragedy may be simply that the wrong people were in the wrong jobs.

This article first appeared in FSN.  FSN Publishing Limited is an independent research, news and publishing organization catering for the needs of the finance function.

A case of collaboration and sharing

Collaboration

Collaboration

The story

Tetra Pak is the world’s leading maker of food packaging, with net sales of nearly €9 billion in 2009. The company has been operating in China since 1979. Tetra Pak China now accounts for nearly 10 per cent of Tetra Pak’s global revenue. In part, Tetra Pak’s growth has been driven by a huge growth in the Chinese dairy industry, which has expanded by more than 20 per cent in the last decade. Tetra Pak is a supplier to many of the leading Chinese dairy companies such as Mengniu and Yili.

The challenge

In 2008 the Chinese dairy industry was shaken by a major scandal when contaminated milk formula sold to infants led to the deaths of six children. More than 300,000 others became ill. Chinese consumers quickly switched to imported milk brands, which were considered safer. Though Tetra Pak China was in no way responsible for the contamination, which happed on the farms, the company suffered as declining sales of domestically produced milk led to a decline in demand for milk cartons, a major part of the company’s business. Tetra Pak China had predicted growth of 16 per cent in 2008; the final figure was 5 per cent.

An ongoing series of food contamination stories in the media has left Chinese consumers mistrustful of the food they buy unless it comes from known and reliable sources. At the same time, the Chinese government has taken steps to tighten regulations not just on food safety but also on environmental issues. The latest Five-Year Plan, promulgated in early 2011, has set tough environmental and safety standards. Pressure on Chinese food producers to deliver safe, healthy food from sustainable sources will only grow in future.

Taking the lead

It is clear that many Chinese firms, lacking the necessary expertise and technology, will struggle to meet these targets and cope with consumer expectations.  Accordingly, Tetra Pak China has decided to take the lead in improving food safety in the dairy industry.

For example, Tetra Pak China has begun to provide training to Chinese dairy farmers, advising them on management methods and on how to improve food safety. A training school for dairy farmers has been opened. The company also produced a DVD and books on improving farming methods. These have been highly successful – the DVD has been widely pirated, evidence of strong demand for it – and Tetra Pak China reports that more than thirty of the farms it works with have reached EU quality standards.

The company has also been working with dairy wholesale companies to help them improve standards and cut costs. There has been a major push for waste reduction. Following Tetra Pak’s own philosophy that ‘waste is resource placed in the wrong places’, Tetra Pak has been advising its customers on creative recycling programmes. For example, recycled cartons can be made into a tough and durable material with applications in the building industry. When Tetra Pak donated benches made of this material to Shanghai Expo in 2009, other dairy companies began to launch recycling programmes of their own. All of Tetra Pak China’s major customers are now asking the company for advice on recycling and waste management.

In collaboration with the WWF, Tetra Pak China has also been working to reduce carbon dioxide emissions. Here again the company has been ahead of the curve. When Tetra Pak China first began talking to customers about renewable energy and recycling in 2004, no one was sure what these words meant. Now, in the face of rising public pressure and tougher government regulations, Chinese companies are turning to trusted partners like Tetra Pak to help them improve.

Embedding in the market

Tetra Pak China received a shock in 2008, when the contaminated milk scandal led customers to migrate to foreign brands. If Tetra Pak China is to continue to grow it needs to ensure that it own customers, the dairy producers, are able to match foreign competitors not  just on price but on safety issues – and increasingly also on environmental issues. It also needs to ensure that its customers are compliant with government regulations. Rather than philanthropy, Tetra Pak’s efforts should be seen as a long-term investment in its own future in the dairy industry. Through its efforts , the company has built strong partnerships up and down the value chain. This in turn has strengthened its own competitive position as a leading producer of food packaging in China.

Lessons

Dynamic markets such as China appear to offer the potential for rapid growth. But they are also subject to sudden fluctuations and are highly risky. Tetra Pak’s response has been to draw on its own experience and skills to strengthen the entire dairy value chain. The case shows how collaboration, skills sharing and investing in partner companies can strengthen a company’s own competitive position over the long term.

Research for this case was carried out by University of Exeter Business School researchers Jeff Jia and Anna Triflova, as a part of a project sponsored by WWF. This case is based on an original drafted by Anna Triflova and Jonathan Gosling.