• Blog Home
• Industry
  • All industries
  • Basic materials
  • Consumer goods
  • Consumer services
  • Financials
  • Health care
  • Industrials
  • Oil & gas
  • Technology
  • Telecommunications
  • Utilities
• Stakeholder
  • All stakeholders
  • Brand
  • Careers
  • Corporate governance
  • Corporate social responsibility
  • Customer
  • Employee
  • Investor
  • Media
  • Shareholders
  • Supplier
• Interviews
• RSS Centre
• Opportunities
  • Guest Posting

Corporate Governance, Ostriches and Black Swans

Simply put, a Black Swan event is one that has a low chance of happening but if it does the impact could be catastrophic. The most current example is the BP oil spill in the USA.

Underpinning Black Swans are some interesting philosophical and psychological factors of human frailties.

A black swan is a highly improbable event with three principal characteristics: It is unpredictable; it carries a massive impact; and, after the fact, we concoct an explanation that makes it appear less random, and more predictable, than it was. The astonishing success of Google was a black swan; so was 9/11. For Nassim Nicholas Taleb (author The Black Swan: The Impact of the Highly Improbable), black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives.

Why do we not acknowledge the phenomenon of black swans until after they occur? Part of the answer, according to Taleb, is that humans are hardwired to learn specifics when they should be focused on generalities. We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the “impossible.”

Black Swan: Strategy Execution for the “Outlier”

When Black Swan events occur, shareholders can suffer significant losses. Forbes magazine in their article, Of Brown Pelicans And Black Swans chronicled the financial impact of various corporate Black Swans–

	Company	Start Date	End date	Market cap (start date, in millions)	Market cap (end date, in millions)	Money Lost
XOM	Exxon Mobil	3/24/89	4/10/89	55,275	52,170	3,105
MS	Morgan Stanley	9/10/01	9/17/01	45,171	39,259	5,912
BAC	Bank of America	9/10/01	9/17/01	92,439	87,147	5,291
MAR	Marriott International, Inc	9/10/01	9/17/01	9,996	7,892	2,104
BID	Sotheby’s	9/10/01	9/17/01	636	550	85
AXP	American Express Company	9/10/01	9/17/01	40,563	35,048	5,515
BK	The Bank of New York Mellon Corporation	9/10/01	9/21/01	27,269	22,555	4,714
XOM	Exxon Mobil	8/29/05	10/21/05	368,346	349,115	19,231
COP	Conoco Phillips	8/29/05	10/21/05	87,791	80,943	6,848
SCGLY	Societe Generale SA (ADR)	1/18/08	1/28/08	58,192	49,014	9,178
TM	Toyota	1/21/10	2/4/10	155,884	123,749	32,135
DLAKY	Deutsche Lufthansa AG	4/15/10	4/28/10	8,207	7,395	812
BAIRY	British Airways	4/15/10	4/28/10	4,338	3,952	386
BP	BP	4/22/10	6/17/10	186,431	99,273	87,158

The costs of Black Swans can be daunting.

For Corporate Governance, dealing with Black Swans is risk management. The Board is responsible for oversight and the strategic direction of the company— not execution. This means Board members should take on a devil’s advocate role by asking C-Level managers questions such as–

• How will you make the strategic direction come alive?
• Have you considered all financial, strategic, ethical and risk issues?
• What is the worst that could go wrong and how will you manage the outcomes?

More insights for dealing with Black Swans are covered in the report Black Swans Do Exist published by International Federation of Accountants–

• Directors should increase their focus on risk, and engage more in detailed appreciation and understanding of the risks in their company’s products and service areas. For the financial services industry, a solution could be for boards to establish a specialized risk committee, and consider the employment of an external risk specialist.
• Black swans do, and will always, exist. Therefore, be much more alert to the fact that, even at the extreme end of risk possibility, things do actually happen.
• Executive remuneration should be better aligned with the longer-term real performance (in terms of profitability, not sales volume) of the organization—for example, via deferred remuneration in the form of shares.
• Governance issues are probably best tackled with a mixture of regulatory, investor, and board responsibility. To only look to investors being more active is unlikely to be effective.

What do you think? Would this help companies deal with the arrival of a Black Swan event – and avoid the ostrich ‘head in the sand’ syndrome?

Coming soon: How Shell Uses Scenarios To Manage Risks.

Conveying Credibility and Corporate Strategy

There is a company known to nearly everyone in the US –Campbell’s. The company has been in business for 140 years. Quite an accomplishment.

Campbell’s website is indicative of a well run company. First, on the Our Company page we see a reference to their “Success Model”, but notably there is even a link to a rare product problem. This is unusual indeed, and contributes to the visitors perception of credibility and trustworthiness.

Next there is a separate page for the “Success Model” (going to the Annual Review, integrated into the corporate site).

Noteworthy is the visibility and commentary from the two top executives. 

There is also a further discussion on the three components of the success model; click on each component and more information is displayed. Nicely done: the company does a good job explaining how this model drives corporate strategy.

It is interesting to note that there is another display of the success model in the Corporate Social Responsibility report for 2010–

Integrity is added and a link to a comprehensive comprehensive Code of Business Conduct and Ethics is provided. While this addition is laudable, I suggest it should be prominently displayed with the other three components throughout the site.

In sum, Campbell’s conveys credibility and transparency as well as an engaging way of communicating their success model.

Tales From Corporate Governance Surveys

There is always something happening in Corporate Governance.

Two recent notable items are –

• Corporate Governance is Top Challenge for Companies Considering an IPO, KPMG Survey Series Finds
• Annual Global CEO Survey by Price Waterhouse Coopers (PWC)

KPMG and the New York Stock Exchange-Euronext recently offered IPO Bootcamps for companies considering an initial public offering (IPO). Participating companies were asked to name their top three challenges in preparing for an IPO. The results are a bit surprising. The top three items were -

• improving corporate governance (64 percent)
• preparation of a robust business plan (40 percent) and
• preparation of financial track record (36 percent).

Often, it’s the small details that companies overlook that can cause headaches down the road. For example, while many companies realize that corporate governance is a demanding issue, when selecting board members, many don’t consider that an important role for directors is working with management to ensure the right tone at the top for ethics and compliance. (Aamir Husain, a partner in KPMG LLP)

This is encouraging. Fostering compliance and ethics at the early stage of a company’s formation increases the likelihood that these issues will be properly executed as the company grows.

The PWC CEO Survey is extensive but some key items stand out:

• most CEOs outside of financial services believe the economic crisis has not changed public perceptions of their industries. They believe the trust issue is restricted to the banks and isolated to countries that experienced the worst banking crises.
• The view that companies can rebuild trust through new remuneration models appears to be held by a minority of CEOs from virtually every country.

While small start-up companies realize the importance of trust and ethics, CEOs at large established companies (at least according to the PWC Survey) still don’t get it.

Economic Indicators: Pink Ties and Trash

I must admit, I follow announcements of official indicators that measure where the economy is going. These are very involved data gathering and analytical endeavors. Currently they give no definitive picture.

I started to think that there might be other measures that are not compiled, yet might give less analytical but subtle indicators that would give an unofficial account of where the economy is headed. Then I found this article  “Economy: These Below-the-Radar Indicators May Signal Growth” on Bloomberg BusinessWeek. Seems that there are some uncommon economic indicators such as–

• diesel fuel sales at roughly 7,000 truck stops across the country–climbed 3.1 percent in May from April, the largest monthly increase since February 1999
• train shipments of waste and scrap materials–increasing at the fastest pace in 16 years
• electricity usage and the service economy, ( this is compiled by the Edison Electric Institute releases weekly represents certain aspects of the service sector, such as office and retail space). Richard DeKaser, president of Woodley Park Research in Washington, D.C. says–

“When you’re filling up office buildings, and office buildings are working overtime—and the same for retail stores—that’s a good proxy for those sectors.”

This indicator for the week ended June 5 was up 10.8 percent from the same week in 2009.

• While the the typical employment data is dismal, optimism in recent data concerning temporary workers. The May 25 report by the American Staffing Association showed May staffing employment up 3 percent from April and up 19 percent from a year earlier.

Then there is this article published by Forbes: “Uncommonly Clever Economic Indicators”. These indicators are a bit more interesting–

• pink ties Bob Allsbrook, chief economist for Regions Bank, in Birmingham, Ala., looks for wisdom in neckwear–specifically, pink ties. … “Since the start of the summer(2009), I’ve seen lots of men wearing pink and fuchsia colored ties,” he notes.
• the size of restaurant trash bags : Americans are eating out again, and that’s a good sign. You can see that trend in the size of the garbage piles behind restaurants
• denim jeans sales –NPD market research firm says
  

  “Jeans are a relatively cheap investment and one of the first things consumers buy when the economy starts to bounce back. … denim sales have already started to pop: For the six months from January to June, denim sales jumped 5.3% to $7.6 billion vs. the same period in 2008.”

• corporate hotel cancellations — cancellations for corporate meetings and events declined substantially. However, major event planners are booking space for 2010, 2011 and even 2012.

This article includes other interesting metrics such as shopping bags and Christie’s wine auctions.

Want to find out where the economy is headed? Put on a pink tie, get in your diesel truck and drive behind some restaurants.

Goldman Sachs–Here We Go Again?

The announcement came during stock market trading hours–GOLDMAN SACHS SUED BY SEC.

Some complained that the SEC should have waited until the markets closed. But the damage to Goldman Sachs shareowners and the markets was already done.

A week later more news came out on the weekend–

NEW YORK (MarketWatch) — Emails at Goldman Sachs Group Inc. released by a Senate subcommittee show just how much financial reform is needed, two leading senators said on Sunday.

The emails, released Saturday, show executives and other employees at Goldman Sachs knew that the firm was making money on the collapse of the housing market, largely by betting on the failure of mortgage securitizations and derivatives like the ones it bundled and sold to investors, whose failure led to the financial crisis.

“There is something terribly wrong about a country like ours where you make billions of dollars by making nothing and producing nothing but taking advantage of an economic situation, Sen. Christopher Dodd, D-Conn., said Sunday on Meet the Press.

What makes this emerging story even more interesting is that Goldman Sachs appeared on Barron’s February 15th cover story on The World’s Most Respected Companies; it was rated 30 out of 100 companies. Barron’s noted –

I am not faulting Barron’s (this is a good publication and I am a subscriber). Rather, this highlights the continuing problem we have with Corporate Ethics.

This story has another interesting and promising aspect: when considering a similar deal, Bear Stearns turned it down because of its Ethics conflict. As reported in the Guardian–

Bear Stearns, the Wall Street bank now part of JP Morgan Chase, turned down a similarly structured deal to the one under scrutiny between Paulson & Co and Goldman Sachs because it “didn’t pass the ethics standards”.

The bank, which collapsed during the credit crisis, “smelled trouble” when John Paulson, the hedge fund’s founder, approached it with the idea of creating an investment that the fund could bet against, according to author Gregory Zuckerman in his book on Paulson, The Greatest Trade Ever.

As noted in the MarketWatch item above, the Goldman Sachs incident is once again motivating a hair trigger demand for more regulation. When will there be a realization that you cannot regulate ethics?

This is not an academic or esoteric issue. When people are no longer restrained by objective notions of right and wrong, nothing is safe—not your investments, not your house, not your neighborhood, not you! What we’re talking about, ultimately, is the moral consensus upon which the rule of law rests—that’s the very foundation block of Western governments and societies.

When ethics fail in the commercial markets, more and more stringent regulations are certain to follow. It’s the only way to assure the integrity of financial and commercial transactions. But we lose freedom in the process.

The problem is that regulation, however well intended, can’t solve the ethical problem. The best regulation can do is to define what people can get away with by drawing a line they can’t cross. It does not answer the question, “What is the honest way to do business?” Crosswalk.com Commentary

In one of my recent posts, I mentioned that Ethics, to be effective, must be well integrated within the organization’s Culture; so much so that it guides daily decisions of all employees-

Perhaps the key reason is that most companies don’t realize that ethics must start with “the tone at the top”. Board and C-Suite members must be visible in promoting ethical behavior and putting in place an ethics program that promotes an ethics culture. This takes considerable effort and time since it must be embedded in the existing corporate culture.

Bravo to Bear Stearns for showing that Corporate Ethics can work, sometimes.

« Previous Page — Next Page »

Search:

• About Corporate Eye

  Corporate Eye provides information and insight into best practice in online corporate communications.

  Is your main interest industry based, or stakeholder based? Either way, we hope we've made it easy for you to find something relevant to you and your company.

  Please explore ...