Hanging together?

Does the notion of collective board responsibility place an impossible burden on those it involves?

Members of BP’s, Shell’s and Statoil’s boards, Google’s and the boards of nine FTSE companies alleged by Action Aid as illegally failing to disclose their ownership of “almost 150 offshore subsidiaries based in tax havens” might be wondering how effectively they carried out their duties.   

Could they have prevented the embarrassing situations that their companies now find themselves in?  What should their actions now be to mitigate corporate trauma?  

Classic risk management teaches that boards should establish their risk appetite and tolerance and ensure the board has adequate oversight of risk.

But what if the board, or its non-executives, is simply not aware of critical company actions?  What if, despite the best skills and efforts, information regarding questionable corporate activities never reaches the board?

It seems likely from the examples above that many boards simply do not understand fully the environment in which they operate. Information asymmetry can be a real problem.  So are unknown knowns.

Assuming that problems will be prevented by the risk management team is simply not adequate. Senior risk professionals now openly discuss the warning signs, “that the risk management profession itself is in danger of being computerised”.  And they can’t be expected to seek out risks that have their origins with the boss: they don’t want to be out of a job.  Board performance evaluation, as it currently stands, also appears not to address such problems.

If Boards are to exercise control, and so be able to take collective responsibility they need new tools, a new lexicon and, probably, a fresh approach, otherwise this is indeed an impossible load.  If they don’t they may find themselves hanging together.

Jane Howard
Reputability LLP

London

www.reputability.co.uk

Gamekeeper turns poacher

Nathan Bostock, RBS' talented Chief Risk Officer, finally decided to stay with RBS. His reward is to become its Chief Financial Officer.

Is it a good idea for a CRO to become a CFO or Chief Executive at the same company?  Apart from knowing where all the bodies are buried, they should also know everything about how risk is monitored and (hopefully) kept under control.  They probably know more than anyone else about the system's weaknesses.  And they have been the boss of everyone in the risk control system except, if an outsider, their successor.

That kind of mix is filled with potentially lethal behavioural and organisational risks - though of course the loss of such a knowledgeable and experienced individual would be a serious blow to RBS. 

So to the question: as RBS' CRO, should Nathan Bostock block his own promotion to CFO? A tricky one.


Anthony Fitzsimmons
Reputability LLP
London
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Shooting Messengers Kills Patients

It's bad enough when an organisation doesn't act on or learn from bad news.  Shooting messengers who bring bad news makes things worse.  The organisation can't learn from the mass of mishaps with minor consequences that vastly outnumber mistakes ending in disaster.

That's what is going on in the NHS, according to the results of a survey in Nursing Times. 

"84% of [nurse] respondents had previously raised concerns about a colleague’s practice or attitude – of which 23% said they had done so “several times” or “regularly”, and 23% “at least once”.
But of those who had raised concerns, 52% said there had been no appropriate outcome as a result of speaking up and a similar percentage said doing so had led to negative consequences for themselves.
Almost 30% of nurses said being viewed as a troublemaker was the biggest barrier to speaking up, with inaction by managers cited by 23%. "

Organisations that don't learn from their own experience suffer calamitious reputational damage when the public learns that they don't systematically learn lessons from experience.  Their leaders are branded as incompetent at best.  More important, their customers suffer the consequences.  In the NHS, that means avoidable harm to patients, as those so disastrously served by the Mid-Staffordshire Hospitals have learned. It's been estimated that between 400 and 1200 unnecessary deaths occurred there between 2005 and 2008.

This is a deep cultural issue, reinforced by incentives and a long history.  In the past it's been reinforced by government set targets and the systematic  gagging of those who alleged bad practice.  Following the Francis Report, the Department for Health says it want things to change, but changing such a deeply embedded, longstanding and seemingly ubiquitious bad practice is exceptionally hard to achieve.

Anthony Fitzsimmons
Reputability
London
www.reputability.co.uk

Ethical taxpaying

Starbucks has had second thoughts.

Starbucks has UK sales of £400m annually but arranged its affairs so that it paid no UK corporation tax in the last 3 years.  It paid £8.6m over the last 14 years.  In contrast homegrown Whitbread's Costa turns over less but pays about £15m annually.  It's was all legal but the questions was: was it right?   Neither UK politicians nor UK public opinion thought so.

Now Starbucks has changed course.  It will pay about £10m UK tax in each of the next two years by foregoing tax deductions on coffee purchases, inter-company loans, royalty fees and capital allowances.  In other words it is abandoning widely used, generally legal, strategies designed to shift profits from  higher tax countries to lower tax countries.

Three questions:

First, who will follow Starbucks?  Amazon?  Google?

Second: Does a system that encourages corporation tax avoidance overlaid with voluntary tax donations make sense?

And third,  will the Chancellor now consider dropping all corporation tax deductions (except perhaps bad debts) and setting an ultra-low flat rate of corporation tax?


Anthony Fitzsimmons
Reputability
London
www.reputability.co.uk

BBC loses its Director General

Just when you hoped it couldn't get worse, the BBC's crisis just did.  It's new Director General, hit by two scandals since he arrived on 17 September, has resigned.

The first scandal was inherited - dating back decades; but the second one, a badly misjudged editorial decision, was ultimately his responsibility as BBC Editor in Chief.  An honourable man, he decided to resign.

This leaves the BBC and the BBC Trust in quintuple trouble.

The BBC has lost its DG partly as a result of poor crisis management which has left it rudderless in a hurricane.  Its many enemies will be rejoicing.

The hurricane is also a sign of failed crisis strategy.  That reflects badly on the BBC.  It ought to understand crises since it analyses the crises of others daily.  But it's not the only organisation that routinely deals with the crises of others but turns out to be unable to handle a crisis about itself. 

Third, the BBC now has only an acting DG, the no doubt talented Tim Davie.  His last role was head of Audio and Music.  Leaving aside the problems of being an Acting DG parachuted into a crisis, he appears to have an English degree and a career spanning brands, marketing, music and drama - but never to have been in charge of news.  That isn't an obvious pedigree for an Editor in Chief taking office during a potentially existential maelstrom unless it partly reflects Tony Hayward's comment that he needed an acting degree to handle the Deepwater Horizon crisis.  I wish him good luck, excellent judgement and a solid constitution.

Fourth, the DG's manner during both crises, particularly the second, suggests that the he may have been an example of the Peter Principle and promoted one level beyond his natural level of competence.  If so that explains the personal tragedy for the now ex-DG; but it has also put in question the judgement and reputation of the BBC Trust as well as the BBC.  The Trust appointed him.

And fifth, there is of course the question of the degree to which the BBC's organisation is, to use a phrase the BBC often uses, fit for purpose.  The structure that the DG inherited clearly did not serve him well.  Lord Patten seems to accept that the organisation needs a "radical structural overhaul".  That may well be part of the problem - an easy part to solve.  But to judge by the evidence of 'events' so far it's far from all that's needed. 

As I've written before, the BBC must find and fix the fundamentals.  Whatever the constitutional niceties, Lord Patten will have to take the lead in these exceptional circumstances.  He has every incentive to do so since his personal reputation is now at risk.

But he won't succed in fixing the fundamentals unless he finds them all.  Fast and systematically.  As I've also written before, the current enquiries won't find them.

If the BBC doesn't find the fundamentals, it can't fix them.  Which will leave the BBC teetering on a cliff edge, no place to leave the nation's favourite Auntie.  The BBC is much too important an institution to be allowed to collapse or be dismembered.


Anthony Fitzsimmons
Reputability
London
www.reputability.co.uk

Outsourcing the BBC's reputation?

The BBC is in deep water again.

On 2 November, a flagship news programme 'Newsnight' carried allegations that an unnamed "leading Conservative" was a paedophile.  A media frenzy identified the alleged perpetrator.  On 9 November, his accuser, apparently shown the alleged perpetrator's photograph for the first time, sorrowfully announced that this was not the right man.  Result: an abject apology by Newsnight and discussion whether the BBC's Director General's head should roll.  In true BBC style these included an interview with the BBC's Director General on 'Today', BBC radio's flagship news programme.

The BBC is still reeling from a second recent 'Newsnight' scandal, in which another paedophile investigation, into the former BBC star Jimmy Saville was canned - only for its commercial rival ITV to broadcast the allegations. As I wrote here, many of the issues are shared with the Jimmy Saville episode, but a new one has emerged.

It seems that the latest Newsnight debacle emerged from a "collaboration" with the Bureau of Investigative Journalism. To what extent, and why, the BBC outsourced or subcontracted its investigation to outsiders is not yet known.

One of the many lessons of lessons of the Deepwater Horizon explosion and the UK rail crashes of 2000 and 2002 is that outsourcing and sub-contracting are more risky than leaders recognise.

There is little doubt that outsourcing can save money.  But particularly if it involves 'core' operations, outsourcing often saves money now at the cost of increasing risk for the future.

This is not only risk of those core operations causing harm to the outside world.  Outsourcing puts the risk of causing severe reputational damage to the company into the hands of its sub-contractors and outsourcers. But particularly where core operations are concerned, the public never allows an organisation to outsource its responsibility if things go wrong.

This trade-off is often overlooked and too infrequently discussed by leaders under pressure to 'save money now'.

Outsourcing is fashionable and can save money.  But poorly managed it can led to short term gain at the cost of long term pain.  The  wise prefer short term pain for long term gain.

Anthony Fitzsimmons
Reputability
London
www.reputability.co.uk

Teachers aren't the only cheats!

Are teachers cheating when marking public examinations?  Ofqual, the UK exams regulator, thinks so - though it invented the term "overmarking" to describe the phenomenon.  It ranged from giving pupils too much  'benefit of the doubt' through to giving pupils marks calculated to lead to the highly coveted "C" grade.  The full report is here.

This is a classic case of incentives positively encouraging unacceptable behaviour.

In England, there are very strong incentives for schools to have as many students as possible get at least a Grade "C" in the English GCSE exam.  In interviews of about 100 schools, Ofqual's press release reported:

"While no school interviewed considered that it was doing anything untoward in teaching and administering these GCSEs, many expressed concern that other nearby schools were overstepping the boundaries of acceptable practice.

The report states: “The pattern of marks – the unprecedented clustering around perceived grade boundaries for each whole qualification – is striking”."

Cheating is far more widespread than you think.  We don't recognise much cheating because we rationalise it into 'normal' or 'acceptable' behavour. 

Dan Ariely, a behavioural psychologist/economist, has made a special study of the subject.  He has summarised the core of his findings in an entertaining short RSA Animate.  For more read his book "The (honest) truth about dishonesty".  It should be compulsory reading for business leaders and regulators.

So watch  out!  Teachers are far from the only people who cheat!  Most people do it to levels they rationalise as 'acceptable'.  But there's no need to design incentives that positively encourage cheating.


Anthony Fitzsimmons
Reputability
London
www.reputability.co.uk