Why Vince Cable is Wrong About the Impact of Excessive Pay

Vince Cable warns firms on the dangers of “excessive executive pay”  by highlighting the dangers to their firms of a “loss of public trust” but it seems they and, more importantly, we don’t actually care enough for that threat to hold water. Until we do nothing will change, but what if anything will spark that revolution?

I like Vince Cable. I find myself more in agreement with him than disagreement but his recent pronouncement about the dangers presented by “lost public trust” through excessive pay settlements at large corporates - notably Banks - will fall on deaf ears. The truth of that is entirely apparent. If Banks, for example,  really did believe a loss of trust was in any way a threat to them they would have acted long ago to actually enact meaningful change to address it. Trust was destroyed in Banks and financial institutions a number of years ago when their giant ponzi scheme and unfettered hubris caused the meltdown in a financial farce that we have all suffered the consequences of. I see no evidence that trust has recovered in any shape or form since.

But we didn't act back then. The opportunity to truly make a change was then and despite the activities of the Occupy movement, some street protest and and much vitriolic comment our actual appetite to suffer the inconvenience of bank failure, loss of savings, and a more radical form of unrest coupled with a monumental lack of vision, courage and leadership from the left meant that the chance to bring about radical change was missed. The threat of a loss of trust to banks passed. There is, and never has been, such a thing as “too big to fail”, its just a matter of your stomach for the consequences and challenges of surviving that failure. Of course politicians have little appetite for it and, so it seems, neither do we anymore.

Since then we have seen a prolonged attritional period in which the more lowly bank staff, along with many others, have lost their jobs in order to reinstate the system that produced the problem in the first place. This year bonuses on Wall Street are reaching pre crash proportions, Barclays are awarding themselves huge bonuses despite a massively under par performance despite being called (accurately) “Greedy Bastards” by one investor at their last AGM and the tokenistic vote by Standard Life to not support the bonus award this year. The parting on the left has indeed become a parting on the right

And why do we not act? Why do we not desert banks? Why do we continue to buy the products and services from firms with ghastly levels of inequality in their pay structures between the self serving and mutually self justifying stratospheric pay club of these serialy failing top executives hoping from one corporation to another, and the shop floor?

Well in part we are lazy and unwilling to be as courageous as Samson and push the pillars aside and brave the falling masonry.

Another reason is a our willingness to embrace debt. Debt makes us slaves which is why the institutions, banks - and particularly the Governments love us to take it on. Debt encumbered wages slaves are much more passive and far less troublesome. Marx described religion as the opium of the poor. Well debt is the cudgel.

I am also of the view that many of us are disengaged from the reality of this inequality, thinking that these excesses exist a long way from us whereas in fact they are in organisation that we encounter and transact with every day. To that end I believe in total wage transparency at every employer so that everyone knows how the money gets spread around. At a stroke it would enable us to identify and address gender inequalities in pay, but also it would expose the monstrous them and us distribution in even mid sized firms and make us clamour for a fairer share.

There is also in many cases a lack of alternatives - but that may be changing.

I think Vince knows that his threat of “loss of public confidence” rings hollow as the rumbles of potential other legislation to tackle the situation.  It may be more of a threat to him than the business he aims it at,  

No the answer lies with us to act and until we do nothing will change

Being of a certain age I am perhaps more wedded to the notion of revolution than a modern western generation. And having grown up under the shadow of nuclear conflagration I have always embraced the possibility and prepared for the process of starting again in the ashes of a post apocalyptic world.

But maybe I am un reconstructed and perhaps the brighter future is less born in fire and more in triangulation. The empowerment of social and collaborative publishing and sharing technologies provide us with mechanisms to by-pass institutions by constructing alternatives, and it brings the possibility of greater transparency. And so it is that we see new digital currencies emerge, crowdfunding democratising investment and releasing new capital, and wikis transforming how we create and share information and I am proud to play my small part in using these tools for change and helping these ideas to develop.

If we can perhaps couple this change with the growing interest in circular economics and collaborative consumption models we can perhaps look to a less debt ridden, consumption dependant  future where the corporate monolith and bank dependency is reduced. Here we may not have to desert them we simply never engage with them.Then perhaps a loss of public trust might truly have an impact and focus minds. But, till then, I think Vince is wrong. 

The end of year and maybe the end of banks?

Antony Jenkins, CEO of Barclays, thinks that banks lost their way by becoming too focused on short term profit and now need to reconnect with long termism. Perhaps banks did focus on short term profits but the fundamental problem  is their misunderstanding of their purpose and the environment the operate in. Consequently, in an individually empowered world, they are in danger of being bypassed.

I am a great fan of the BBC Radio 4 Today programme. It both infuriates and entertains me, but the now annual Yuletide happening of inviting in guest editors can be doubly interesting ( I cant wait for PJ Harvey on Thursday!). Today's Today editor was Anthony Jenkins CEO of Barclays and a man who, it seemed to me, was on a mission to try to present a human, reconstructed and penitent face of banking. Getting into the detail of how well that was achieved and how much it was heartfelt or so much  flummery would take too long so I won't begin to try here. However, in the course of the programme he introduced the idea that the primary issue with banks and, by extension, the root of the collapse of 2008 was an obsession with short term profit. This, he appeared to argue, blinded the banks to risk and incentivised immoral behavior - I paraphrase of course.

It’s a convenient and not unreasonable assertion, and one that is commonly advanced post crash. I am a constant critic of shortermism but on this occasion I think he has missed his mark.

Its not that I don't believe short termism was/is present and that it is very corrosive its just that, for me, the key underlying issue with banks is the decline in there understanding of what they are there to do. Banks are a service and they asses risk and this is a complex undertaking with a mutual power relationship between the banks and those they serve.

On a personal and business level I deposit my money with them and instruct them to disperse it as I see fit, when I see fit. For that they can, and should, charge me a fee. I use their service because, in theory, it frees me from having to guard my money personally, and it is convenient. I may also borrow and I pay for that too. These are mutually beneficial and supportive relationships but it is also a complex relationship.

Banks thought this was purely transactional and a simple or complicated relationship. They commoditised the transaction to drive down cost, used money to make money to no particular end (still do), and we each became a number - not a person. In commoditising the transactions they introduced unnecessary and new risk and the lack of autonomy for local decisions meant they had no ability to make sensible logical service driven exceptions. The relationship was broken and unequal.

I have little doubt that this approach was aggressively promoted by consultants who did binary sums showing how by systematising things they could strip out cost. The banks drank freely of the koolaid and bought all the hardware that the consultants could sell.

But as Peter Drucker and others have pointed out there is a world of difference between complex and complicated and ability to truly judge risk was gone, as was the visibility of the risk. We all know the outcome.

But the problem for the banks is that changing back takes a lot of time. The reintroduction of "relationship managers" does not change it. They have neither the necessary experience nor heuristics and they are lacking in autonomy being bound by the same system let strictures that have cost billions to put in place and cannot be undone by bankrupt banks.

No doubt the banks hope our appetite debt will hold us and buy them some time. I wont get into the issue with our relationship with debt at any length here but suffice to say whilst I accept that some debt is some circumstances may be necessary debt does make us slaves and both governments and banks encourage us to have it in order to pacify and chain us.

However, times are changing. The digital revolution is founded in the notion of empowerment for the individual and alternatives are emerging and some are already well established. Alternative payment schemes like Paypal, stripe, Google wallet and Bitcoin are operational and increasingly accepted. Alternative finance options exist with the emergence of crowdfunding in its various forms and particularly P2P lending.
Of course the institutions and vested interests will close ranks to defend their pals and endeavour to reign these innovations in, no doubt on the nefarious excuse that "criminals might use them". It’s a line harder to hold when not only have criminals both robbed and used banks, but all the more hollow when we know that some banks have been/still are operated by crooks!

But the global and virtual nature of the digital and crowd empowered economy, and the trust bonds that pervade it, means that a new generation is developing a taste for a world without retail or merchant banks, so hold onto your hat Antony - you might need that shipping forecast job after all.

Lets hear it for the Banks

There is still a good deal of bank bashing going on at the moment. Excessive profits, excessive bonuses – you know the stuff. However the main criticism being levelled at them at present Fleet St, politicians and society generally is that they are “not lending” most notably to small businesses. Now, far be it for me to defend the banks. I have a well known and very vocal disregard for most of those institutions but….I do think some of this is a bit tough and unfair at present. The reason for my unlikely defence of the banks lies in the idea that maybe, just maybe, they have woken up to what I have been telling them for the last few years. And that is that much of the financial crisis and the exposure of the banks was a result of the failure to understand the nature of knowledge in their business. Could it be that they have finally realised this?

Anyone that has attended one of my “Let me explain KM” presentations for the past few years are familiar with one of the metaphorical examples I use involving banks and my experience of using them over the past 40 years. I use samples of my correspondence with my banks to demonstrate how my relationship with these institutions has changed over that time and how their knowledge of me has declined to a point where it is simply not possible for them to:
a) offer a decent service and more importantly in this context
b) judge my potential as a risk.

In brief I demonstrate how the retail bank has sought to commoditise the relationship and reduce it to a simple transactional based relationship where the aim is to systematise and drive down cost as if the banking industry were some kind of Taylorist dream of simple causality.

My contention is that this is fundamentally un sound as this industry, and our interaction with it is, if I use the Cynefin framework, a Complex relationship. My early correspondence with the bank showed a real bank manager in place at my branch who knew me, knew my circumstances and could make decisions on my credit worthiness and how the bank could build loyalty by responding to me specific and individual needs. Fast forward to a point where I have no branch, the staff there are administrators with little or no autonomy to act, and so are left with blunt un satisfactory and in flexible transactional based interfaces. They don’t know me, can’t offer a service and, most importantly, can’t judge my risk.

The model can be extended to the commercial banks – with systematised lightning fast trading that is not intelligent enough to cope with the unexpected, and credit rating methods that are both flawed mechanistic tools run by organisations with very conflicted business models.

All a recipe for disaster and disaster naturally struck. Add to this an environment where personal debt was outright encouraged to fuel an artificial boom through consumer spend, and a business environment still foolishly wedded to the “wisdom” of running businesses on geared debt it is a potent mix.

Now that these models have been shown to be flawed and frankly dangerous we should hope that one outcome of the financial crisis would be a return to more human cognition in the banks when judging the risk profile of borrowers as a minimum.

But reintroducing a knowledge led environment in a bank – that is to say one routed in the intervention and application of the Mk1 brain - cannot be done quickly. Whilst proper KM practitioners can help here, developing the intuition, heuristics, and experience necessary to make this effective takes time. So perhaps caution being shown on the part of the banks is a good sign. Perhaps they have recognised that caution is a good thing and that they do need to develop more sophisticated approaches and that the process of doing that will take time. Weaning businesses with poor debt demanding business models will take a bit longer, but requirements on the banks to be less exposed and have greater capital seems also to be having an effect.

Reflective learning is all part of KM as well so I could even be encouraged to think that perhaps these mighty “masters of the universe” might have the humility to acknowledge their mistake and learn from it.

Perhaps I am just being naïve. Leopards rarely change their spots but can we not be hopeful that this caution on lending is actually a good sign?

Too Big to Succeed?

Governments continue to ponder the introduction of measures aimed at avoiding a repeat of the “too big to fail” scenario of insolvent financial institutions and It will be challenging to bring any such measure in. Lots of compelling argument will be introduced to oppose it and many vested intersts will lobby to stymie such changes.

The arguments for and against are relatively well rehearsed with the exception of one. What about the idea that in actual fact they are too big to succeed?

Now this might seem rather an odd suggestion given that some of the “too big too fail” banks were on the face of it “big” and big tends to be regarded as successful in a business context. But I have long argued that, in knowledge based industries – and I believe banking and finance is a knowledge based industry - big is not necessarily better. I have also argued on a number of occasions that the financial crisis was a failure of those industries in understanding the nature of knowledge management and knowledge based business generally.

I remember working with a professional services firm that had extremely strong social and trust networks in it. It worked very hard on these bonds with rigorous recruitment practices, unusual reward schemes and extensive reinforcement and encouragement programs to maintain them.

But they had a problem. As they competed in an increasingly global market they had expanded in both headcount and geographical spread and these bonds, this community, was becoming strained and threatened. As a KM engagement we were looking at ways to try to retain that key cultural plank as the company grew. It was a challenge, but it was inspiring to encounter a firm that recognised how important this human relationship model was and is to their success, and believe me this was a successful firm. Scale was a problem.

The advantage that “small” can bring to knowledge based firms by embedding trust and enhancing pooled human cognition is, in my view, enormous. And I am not alone in saying this. Gor-Tex for example apparently try to limit office sizes to 150.

Much of this ties into the so called Dunbar numbers and to try to ignore it would be to fly in the face of many thousands of years of evolution. Of course there are many things that can be done to allow companies to grow, but I do think there is a limit.

Bujt it seems to me that too often as companies in knowledge based industries choose to scale up there is a tendency to try to commoditise what they do and to try to systematise complex decision making away from what is required – i.e. the application of the human brain. They seem to be applying management models of simply analysing and reducing transaction costs that were useful in a previous industrial but are less relevant in a knowledge based value adding environment.

So I say lets chop the banks into bits not only to avoid the “too big to fail” dilemma, but because they will probably perform better.