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The disappointment of mergers and acquisitions

Do mergers and acquisitions make sense?

Kraft and Heinz are to merge. Is that good or bad? The answer depends on who you are. But mergers and acquisitions rarely create shareholder value, according to received wisdom. Of course some (some shareholders, the advisers) are going to benefit otherwise they wouldn’t happen. But the businesses as a whole usually suffer.

And so do other stakeholders. Staff will typically suffer as one of the rationales for such deals is usually staff savings. Suppliers are similarly likely to suffer because the rationalisation of procurement is another driver. But such stakeholders are never consulted in advance of an agreement.

And the environment is rarely mentioned – when was the last time you heard about a big deal that was justified as necessary to preserve the environment?

Beyond the particular companies involved in any deal, through the consolidation of organisations of such scale the economic system as a whole loses diversity and resilience. With fewer participants and fewer, more controlled connections between them, the economy becomes more fragile and less responsive.

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What's wrong with finance?

Why are there so many scandals within the finance sector? From the many news reports the banking, finance and insurance sector across the world seems rife with malpractice.

Insurance seems to be commonly mis-sold – to those who don’t need it and to those who don’t care enough to shop around at the end of the year. Banking often provides poor service and finds it hard to justify its charges. (But it can help you avoid tax.) And then there’s finance. Apart from crashing the world economy, a surprising number of markets seem to have been rigged and operated for the benefit of the industry rather than the market participants.

It doesn’t look as though it’s a matter of a few rotten apples spoiling things. The entire barrel looks badly decomposed. It is tempting to think of the sector as a zombie – still out to get you even though it is clearly dead. But that would be wrong.

It is true that there are so many separate companies involved in all these scandals that it must be a systemic problem. And because finance is the life-blood of the economy, an infection in one part of a bank can spread everywhere.

Also, the typical reaction of the management of financial companies rarely helps. The response to a scandal is almost invariably a variation on this theme: “we’re sorry that [something] has gone wrong. This behaviour does not represent the ethics of the bank as a whole, it is the result of a few rogue individuals. However we have already put in place far stricter controls that will prevent this sort of thing ever happening again.” With a few changes, that could also have come from the mouth of the regulator.

But a few weeks later, it happens again…

Which matters because we have little choice in where to put our money. True, crowd-sourced finance, local money schemes and friendly societies are beginning to push the mainstream finance sector out of the way. But can this disintermediation spread beyond smaller ventures? As a result, trust in a fundamental institution of our economy is falling away. The final result may be increasingly ‘irrational’ behaviour by all of us that will make the smooth functioning of the economy – and of our lives – increasingly difficult.

The question remains, however – why is the finance sector in particular in this state?

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Do men behaving badly damage business?

American Apparel has been rebuked in the UK for the sixth time in two and a half years over its advertising. Each time for being offensive to women. It seems the corporate culture behind the ads has affected its share price – which has continued to fall over the past five years, while the markets as a whole have risen.

This is not evidence that doing good drives good business so much as that doing badly in ethical terms can affect business badly.

Why is it then, with cautionary tales like this and the considerable research literature on the matter, that it is still so easy to find examples of poor ethics in business?

There’s clearly still money in behaving badly.

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Does anybody know what banks are for?

The long litany of scandals suggests that bankers believe it is simply to make as much money as possible by any means possible. Yet surprisingly, they also have a social purpose.

Given the banks own the primary mechanisms that facilitate economic activity, there are quite a lot of ways for them to make money. That includes charging people for insurance they don’t need, selling them mortgages that seem cheaper because they can never be paid off, fixing in their favour the core interest rates that control the economy, inventing financial products so complicated that customers can’t understand them or the risks they will be running, short-term lending to people who can’t possibly afford to repay, taking businesses into intensive care only to pull the plug so they can purchase the assets cheaply…and so on.

On the other hand, imagine a modern world without the convenience of a payment system that allows you to go to the other end of the country and still be able to pay a shop for what you want to buy, without carrying the cash. Or having to keep your savings under your bed.

Most businesses have a social purpose. And in general, those that focus on their social purpose, rather than only on their profits are the same as those that succeed in the long run.

But if you are a bank, perhaps it is easy to get confused, since your product – money – goes by the same name as what your profits are measured in, ie money. But if they are to succeed and especially if they are to gain back the trust of society, they need a rather smarter take on their purpose.

They need to remember what they are really for.

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Unsocial enterprise?

Worries over the role of the moneylenders (that’s excluding the banks, whom some think don’t deserve that name any more) is growing.

Wonga is but one of the many lenders to those who cannot really afford to borrow. But it’s catchy name means it will receive more adverse attention than most. Yet CSR strikes even here: in an effort at PR, Wonga has launched openwonga.com a website that details how it all works and why it is not such a bad thing. This points out that they have made 7 million loans over the last 6 years and that (only?) 1.2% of those were extended three times. But it is not clear what happens after a loan has been extended 3 times: while that is the maximum number of extensions Wonga allows, can you take out another loan on top? And 1.2% of 7 million is 84,000. It’s a shame there is no analysis of those loans. Or the number that have been tipped into bankruptcy as a result.

But that is all for the UK, yet Wonga also operates in South Africa, Canada and Poland. The national websites for those operations do not have similar statistics pages. However, under the title of ‘Responsible Lending’ they do helpfully point out that ‘Wonga is not the cheapest way to borrow money.’

Part of the solution is to promote credit unions, a form of social enterprise that may charge high rates of interest, but not the hundreds of percent that the likes of Wonga charge. So perhaps the main part of the solution is simply to limit the interest rates that can be charged.

People’s needs should be given priority over the needs of the market.

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Paying for purity with disaster

Money laundering is a bad thing – it supports crime and terrorism. And the banks’ payments payments systems are the soil in which money laundering can grow. So Barclays has decided to close the accounts of 100 of the money transmission businesses that transport remittances from the UK to Somalia through accounts with Barclays. No doubt it has been frightened by the $2b fine that HSBC received for its part in the black economy. Yet these money transmission businesses are a vital support of a substantial part of the Somali economy.

Moreover Barclays has in the past recognised that access to finance contributes to development and to the Millennium Development Goals. However most of the contribution that it acknowledges to the MDGs seem to be in the form of charitable activities. These may be worthy, but the £100m a year that Barclays’ money transmission services send back to Somalia alone from the UK must entirely dwarf that.

So what will happen? Most likely the money transmission will go on through unregulated channels such as hawala. Unfortunately these are precisely the mechanisms that are most likely to support criminal and terrorist activity. Beyond that, any further economic chaos created in Somalia by this decision is only going to exacerbate the forces of terrorism.

Time for some joined-up thinking?

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The Social Stock Exchange: making an impact by creating value?

The idea of increasing the flow of funds to social enterprises is a great idea. But how do we know that they really are social enterprises? Would Unilever count? What about Green & Black’s? See my Guardian blog here, which discusses some of the problems of knowing what to measure.

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What are banks for?

Right across the world there is an epidemic of poor behaviour from the banking sector. Facilitating money laundering, interest rate fixing and mis-selling of products are big in the news right now. And these are the activities of organizations that were once known as ‘pillars of the community’, not criminal gangs. Yet there is very little mention of these issues in sustainability and responsibility reports from the big banks. Why so?

The challenge is that these issues go to the heart of the social purpose of banks; they concern its core business. Banks really are supposed to take in money (but not from criminals). They are supposed to set interest rates (but not to fix them). And they are even meant to sell financial products (but not hoodwink people into contracts clearly against their interests).

Being at the heart of their social purpose, you would expect a responsibility report to deal with them. Yet that same fact is perhaps also why they do not.

Some other issues which are important usually are covered to some extent in responsibility reporting. The environment and staff issues come into this category. But then, they are not seen to be integral to the core business of banking. Doing banking, however wrongly, must be part of their core business – and perhaps that is why it is too threatening to talk about.

So it will be interesting to see which banks have the courage to report properly on the problems of the finance sector in the next round of responsibility reports.

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Making corporate responsibility personal responsibility

Taking personal reponsibility for bank failure is one way the size of banks could be limited. And according to the director of financial stability at the Bank of England, there might be a need to do so.

One way to limit both company size and appetite for risk is to tie the fortunes of directors and shareholders directly to the fortunes of their company. This could be accomplished by removing limited liability for companies above a certain size. Removing limited liability would mean that directors and shareholders would be personally liable if things go wrong. So removing it above a certain size of company would provide strong pressure to keep a company under the size limit and generally to behave with more caution.

But what about other companies? Non-bank companies may not be quite so structurally important to the economy, but if Walmart or Tescos collapsed, people would go hungry…

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Protecting the public or protecting the banks?

The Vickers Report recommends ring-fencing the retail banks. The point being not to constrain retail banking, but to keep the other, risky stuff away from that part of banking that the economy, and the public,  relies upon.

The CBI response comes out against the idea and talks a lot about costs, but doesn’t seem to mention any actual figures at all. Could this be because the costs of bailing out the banks after a crisis absolutely dwarf any marginal cost to ring-fenced banks of doing business?