Checks and balances…they’re a feature not a bug

It’s been an exciting few days for checks and balances.

Adam Neumann got ousted as CEO of WeWork after their IPO disappeared in a flash of unicorn dust.

The Democrats started an impeachment case against President Trump in Congress.

California Governor Gavin Newsom signed a new law forcing Uber, Lyft and similar companies to reclassify their contractors as employees…a potential knockout blow to the business models of those firms.

In the UK, Prime Minister Boris Johnson came off second best in the Supreme Court earlier this week.

And late on Friday evening, news broke that Boris Johnson’s behaviour while Mayor of London, by allegedly favouring a female entrepreneur he was close friends with, has been referred to the Independent Office for Police Conduct. (An oversight route made possible because, as Mayor of London, he was also London’s Police and Crime Commissioner.)

Much as I’m scathing about WeWork’s Adam Neumann on Twitter from time to time, in fairness he’s largely accepted the game’s up for him (albeit he has 700 million reasons not to feel too bad about the way things turned out).

In every other case, the response of those who’ve had their behaviour questioned is to say that the case against them is a political move by their opponents.

But is it?

A feature, not a bug

Having your political opponents take a case against you isn’t a bug in the system, it’s a feature of it. And one we should treasure.

After all, who’s going to keep you honest? Your cronies, your friends, the people who drink deeply from the same well of dodgy cash as you do?

Of course not.

It’s the people who have completely different views to yours, opponents who don’t bathe in the same water as you do, who keep you honest. That’s exactly how checks and balances are supposed to work.

The US Constitution, for all its faults, is still one of the finest structures for the separation of powers the world has ever seen.

The three elements of government – the Executive, the Legislature and the Supreme Court – have been set up in such a way that one element alone cannot act without the consent, tacit or otherwise, of the other two.

While that’s occasionally frustrating, we have to remember the drafters of the Constitution wrote it that way on purpose. They were the original “small government” pioneers who resented the Kings and Queens of England interfering in the affairs of the North American colonies.

That’s why the Declaration of Independence didn’t replace a King in London with one in New York or Boston. The colonialists wanted an entirely different model. One where no absolute ruler could tell them what to do.

So the US Constitution was designed to make it all-but-impossible for any one person to hold all the cards when it came to the business of government.

But the drafters of the US Constitution were also public spirited enough to recognise that they had a responsibility to, as the preamble to the Constitution says, “promote the general welfare”.

So if all three elements – Executive, Legislature and Supreme Court – agreed on a course of action, that was probably a sensible way forward which the country could unite behind.

The drafters of the US Constitution never quite put it in these terms, but they’d suffered under the yoke of far-off kings and noblemen for long enough to know that, in the famous words Lord Acton would utter a century or so later…

Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men…

Lord Acton – letter to Bishop Creighton, quoted by econlib.org

From the Boston Tea Party to chocolate’s sugar rush

In the UK, we famously don’t have a written constitution. Most of the time it somehow all works anyway, but there are times when that unwritten constitution is strained to its limits.

The same is true in company law. For a long time company bosses could do pretty much what they liked. Most were decent people trying their best, but a few disreputable individuals with their eyes on the big money prize pushed things too far.

The late 1980s and early 1990s saw financial scandals like Polly Peck, Robert Maxwell’s plundering of his companies’ pension funds, the Barings Bank collapse and BCCI.

Even for a country with an unwritten constitution we Brits collectively decided there had been one corporate scandal too many, so decided we’s write a “constitution” for our businesses to follow.

The basic structure for this new system of corporate governance was laid out in the Cadbury Report, named after Sir Adrian Cadbury, of the Cadbury chocolate empire, who chaired the less than snappily-titled Committee on the Financial Aspects of Corporate Governance.

I did a law degree before being seduced by the bright lights of an accounting career, and had a particular interest in constitutional law, so I was probably less surprised than many to find the Cadbury Report highlighting the importance of the separation of powers in an organisation to help keep people honest.

This included the principle, familiar to drafters of national constitutions around the world for the last 250 years or so, that no one individual should have final decision-making powers in a business. This would be ensured by having independent non-executive directors in the majority on company boards.

In the most recent iteration of corporate governance standards in the UK, the UK Corporate Governance Code, there is an explicit requirement for the Chair of the board to be independent of the business and separate from the Chief Executive (Provision 9).

All UK-listed companies are required to comply with the UK Corporate Governance Code as a condition of retaining their stock market listing. Similar provisions apply in most major financial markets around the world.

From Sir Adrian Cadbury onward, those in charge of corporate governance in the UK have understood that “power corrupts and absolute power corrupts absolutely”. They have done their best to make sure nobody holds absolute power in an organisation.

Well, that’s the theory…

Of course, even a system with separation of powers built into it relies on people behaving honestly and sensibly.

And this isn’t an expectation for company bosses alone. It’s how the UK’s parliamentary oversight process is supposed to work, as is the governance process in trade unions.

However, as we’ve seen recently in politics, if you make sure…by fair means or foul…the people exercising oversight all share precisely the same position as you do on this issues of the day, or that they have some vested interest in the outcome you’re seeking for yourself, even if that’s for a different reason than the reason you have, then oversight can quickly become a sham.

Tiny numbers of people control the UK’s main political parties by taking positions which have alienated substantial numbers of their own supporters. Far from being political suicide, as you might initially think, this means those spouting the most extreme nonsense, on both left and right, hide under the language of “implementing a democratic mandate from my party”.

When “your party” means the 20 or so most vocal activists in each constituency cobbling together to ensure a vote which serves a party leader’s best interests, that’s not a democratic mandate at all. It’s closer to mob rule.

And the same is true of corporate governance.

Governance of any sort is a sham when the people doing the oversight are just as interested in reaping the rewards as the person heading the organisation.

Their precise objectives might be slightly different, but the key is that now, in effect, we have a single individual able to make all the decisions in direct contravention of every fundamental precept of corporate governance.

In theory, the governance structure has been set up to prevent that. In practice nobody wants to stop an out-of-control Chief Executive because they get a share of the spoils if the Chief Executive gets away with it.

Take the unfortunate WeWork saga.

There was absolutely nothing Adam Neumann did at that company which wasn’t public knowledge and which the chair and board of directors were unaware of. There was full disclosure in the S-1 form filed with the SEC prior to WeWork’s abortive IPO. There is no suggestion that any information has been withheld from either the board of directors or the SEC.

In fact, it was the disclosure of what WeWork had been up to in their S-1 which sank their IPO without trace.

The only question is – how on earth did the corporate governance abomination that was WeWork ever think their behaviour as a business, and their Chief Executive’s…shall we politely say…narcissistic idiosyncrasies were in any way acceptable for a public company with a supposed value of $47 billion?

The answer – any rational notion of corporate governance in that business had completely failed.

The consequence of that failure of corporate governance – WeWork went from a valuation of $47 billion to, effectively, zero in the space of a few weeks. That’s an expensive lesson, so let’s look at how such a spectacular failure happened on the eve of a major IPO.

Where was the board while all this was going on?

You might think the board of WeWork would have stepped in when Adam Neumann started going off the rails a little.

In fairness to Neumann, he clearly had energy, vision and a way of presenting his ideas persuasively which would have made him an asset to any business. But he was like the 3 year-old whose parents don’t stop them eating as many cookies as they want and instead end up dealing with their child’s poor behaviour as they ride the roller coaster of successive massive sugar rushes followed an hour or two later by deep crashes.

In the business world, as for toddlers, poor behaviour left unchecked tends to have severely negative consequences down the line. Not usually $47 billion-worth, admittedly, but still consequences.

Yet the board of WeWork displayed very little inclination to keep Adam Neumann’s hands out the narcissistic cookie jar, even though it is the role of the board to preserve the long-term health of the business. Whatever the people who lost $47 billion thought they were doing, they certainly weren’t preserving the long-term health of the business, as subsequent events have proved.

And that’s largely because the board of WeWork had their hands in a cookie jar too, albeit a financial cookie jar rather than a narcissistic one.

They didn’t get their “hits” from another narcissistic episode, like their Chief Executive basking in admiring articles in business magazines and speaking at top-line conferences around the world.

In the words of Vanity Fair…

It’s hard to overstate the degree to which WeWork’s business is built on the egomaniacal glamour and millennial mysticism of Neumann and his wife. Neumann sold WeWork not merely as a real estate play. It wasn’t even a tech company (though he said it should be valued as such). It was a movement, complete with its own catechisms (“What is your superpower?” was one). Many major players found this special sauce irresistible.

Vanity Fair, 23 September 2019

No, the board got their “hits” from selling shares in WeWork at successively higher valuations, which in turn made their personal shareholdings, and those of the investors they represented, more valuable.

WeWork was founded in 2010 and by 2012 had raised $17 million in a Series A funding round. A $40 million Series B followed and their $157 million Series C in November 2013 valued the company at $1.6 billion.

From there, it was up and up, all the way to $47 billion by summer 2019.

When you’ve got a charismatic founder with, ahem, those little idiosyncrasies generating significant personal wealth for you…or a substantial return on investment for your employers…or both…very few people are strong enough to want to knock that particular gravy train off its tracks.

And yet that’s precisely what should have happened long ago.

When fantasy meets reality

Sooner or later even gravy trains hit the buffers.

There’s even an expression for it in financial markets – the “greater fool” theory.

It states, roughly, that no matter how delusional you are, as long as you can find someone more delusional than you are to buy your shares from you at a fancy price then everything is OK.

Indeed, they’re buying those shares in the expectation that they’ll be able to find a “greater fool” a little way down the line to sell those shares on to and make a profit for themselves.

But if you’re the last “fool” in line before the market shifts south at a rate of knots, then you’re the one whose wealth is destroyed.

At lower levels of valuation, WeWork might have made some financial sense. London-listed IWG plc, which has been in the shared office business for 30 years and operates the Regus brand of shared offices, is worth a little under $5 billion.

But there was a point for WeWork when the valuation jumped across a line from “a very optimistic view of future prospects” to “delusional and not justified under any sensible economic model”.

And at that point, WeWork’s corporate governance failed.

Not because they didn’t tick any boxes they should have ticked. As I’ve said already, there is no suggestion that WeWork withheld any information from the SEC, the NYSE or the legions of public investors they hoped to attract.

But, had the WeWork IPO got away, there wouldn’t be a single person on their board upset with Adam Neumann. He’d still be their CEO, in all his idiosyncratic glory.

The early investors would have banked their cash and gone off into the sunset before the ordinary man and woman in the street realised they’d been completely stiffed by people who sold them a business model which made no economic sense.

And the board was egged on by the investment bankers at JP Morgan and Goldman Sachs who stood to make millions in fees from a successful IPO. In the memorable words of NYU Stern Business School Professor Scott Galloway

The bankers (JPM and Goldman) stand to register $122 million in fees flinging feces at retail investors visiting the unicorn zoo.

Scott Galloway August 16, 2019

Corporate governance failed at WeWork because nobody was prepared to take the other side of the deal.

While the investment bankers, board members and investors were licking their lips and planning to buy themselves oceangoing yachts and Gulfstream jets with their profits, nobody was saying “are we all sure this is a good idea?”.

Nobody was looking out for the retail investors, the ordinary people who invest their hard-earned savings in public companies, either directly or through their pension funds and mutual funds…except perhaps Professor Galloway.

And it’s not that nobody knew the truth.

People who work at JP Morgan and Goldman Sachs might not have moral compasses which work terribly well, but they’re smart people. They know how to run an Excel spreadsheet. And there’s no way on earth an objectively-constructed Excel spreadsheet loaded with WeWork’s business plan would have made any economic sense at any point in the next several centuries.

They must have known WeWork’s plans made no sense, but pressed on anyway with their eyes on $122 million in fees.

By the same token, the board of WeWork, which had plenty of smart people sitting on it, must have known the business plan made no economic sense, but pressed on anyway with their share of $47 billion as the prize for getting the IPO away.

WeWork, in a sense, did nothing wrong. Every box which should have been ticked was ticked.

And yet WeWork did everything wrong when it came to the fundamental principles of corporate governance.

Every business needs someone taking the other side of the deal

In the modern corporate world, pledging allegiance to some corporate messiah is what fancy business schools’ leadership programmes say should happen.

This is hokum.

The most valuable person in any business is the one who isn’t drinking the same Kool-Aid as everyone else. The person who can take an independent view, someone who can put themselves in the position of an outsider looking in on the business and ask the CEO and investors “are we quite sure we want to do things like this?”.

Like the little boy in the story about the emperor’s new clothes, someone has got to be given authority to speak out and challenge the prevailing orthodoxy without fear or favour.

Despite what people with fancy MBAs will tell you, that sort of dissent isn’t a sign of organisational weakness, it’s a sign of organisational strength.

And it’s the foundation of good corporate governance – not the tick-box type where your high-priced lawyers make sure you don’t get sued, but the type that matters. The type of governance that stops you making a $47 billion fool of yourself, destined to go down in business history as either a crook or a moron.

Checks and balances matter. They’re a feature not a bug, but when everyone’s drinking from the same ego-fuelled money trough, all the tick-box corporate governance in the world won’t save an out-of-control business from the consequences of its investors’ greed and its Chief Executive’s narcissism.

It cost WeWork $47 billion to learn this lesson.

Hopefully you’re a lot smarter than they were.

(Picture credit: Bekir Dönmez on Unsplash )

The Business Disaster Zone…and how to avoid it…

Before being seduced by the bright lights and glamour of the accounting profession, I did a Law degree. That taught me the single most important thing I’ve ever learned, and I’m going to tell you what that is in just a moment.

It’s how I’ve been able to create great businesses as a CFO and in other C-Suite roles.

As a CFO, I know that keeping your accounting records straight is an important, and legally-required, activity. It keeps you out of jail, but it’s rare this adds a lot of value to any business.

There is, however, one thing I do which always adds value. And you’re about to discover how to do it too, making you smarter than a Nobel Prize winner if you do it right.

It’s something I learned it in the second year of my Law Degree.

The wise old professor who took our Company Law class looked at us over the rim of his glasses one morning, mid-lecture, and told the class-full of aspiring young lawyers… “Never forget there are always two sides to every legal argument…there’s often more than two, but there’s always at least two. It’s your job to work out the other side’s perspective and why that might be different from your client’s so you can develop a way of counteracting their claims.”

There’s always at least two sides.

Especially when you think there isn’t.

To run a great business you don’t need the smartest people in the room. In fact, sometimes that’s a hindrance rather than an asset, as we’ll see shortly.

What you need are different experiences and different perspectives. Someone exploring the side of the story nobody else is.

And in case you think that’s an unnecessary luxury or a waste of time, here are three quick stories of how some of the smartest people on the planet got things spectacularly wrong because that’s exactly what they thought…followed by the steps you can take to make sure your business doesn’t suffer a similar fate…

To screw things up really badly, you need a Nobel Prize winner

To screw things up really badly, you need a Nobel Prize winner. But to bring the financial world to its knees, you need two.

Improbable, you might think, but in 1998 that’s exactly what happened, largely behind closed doors and with the minimum of publicity. For a time, unknown to most of us, the international financial system was only a heartbeat or two away from collapse.

And we got there thanks to two Nobel prize-winners and a room full of PhDs in Greenwich, Connecticut. Some of the smartest people on the planet.

Robert C. Merton and Myron Scholes won the Nobel Prize in economics for developing a financial model which untangled the arcane world of pricing options on financial markets.

So when Merton and Scholes became partners in Long Term Capital Management (LTCM), a hedge fund set up by some of Wall Street’s biggest names of the mid-1990s, surely nothing could go wrong?.

LTCM used the principles developed by Merton and Scholes (and Scholes’ co-developer Fischer Black…together, creators of the Black-Scholes Option Pricing Model which is still used in financial markets today) to devise an unusual investment strategy using highly-leveraged financial derivatives.

LTCM’s approach was hugely successful for a time, returning unprecedented 40%-plus annual gains on its portfolio.

But, soon after, this secretive, closely-held hedge fund controlling highly-leveraged off-balance sheet derivatives worth an estimated $1.25 trillion…roughly the GDP of an economy like Australia or Spain…came crashing down in spectacular fashion as their models stopped working and their luck ran out.

The reason for this collapse? Insiders at LTCM were so wedded to their “magic formula” that they couldn’t see any other possible strategy. People who didn’t “get” their genius were shunned or ignored. They were the smartest people on the planet, after all, so everyone who didn’t see things their way must be suckers or idiots…right?

LTCM stuck by their strategy even as the markets moved sharply against them because they were so convinced the market was wrong and their formulas were right.

As we know now, it turned out the market knew exactly what it was doing after all and LTCM disappeared in a cloud of dust as quickly as it had arrived on the scene just a couple of years earlier.

The Federal Reserve twisted the arms of the big Wall Street banks to bail out LTCM at a cost of $4 billion or so and save the international financial system from potential ruin.

But, to the very end, some of the partners at LTCM believed so firmly in the models the firm had developed and the strategies their data had led them to believe were “true” that they almost went down with their ship.

And nearly took all of us with them.

History doesn’t repeat, but it rhymes

10 years after LTCM went belly-up the financial crisis hit.

The rot started when sub-prime mortgage specialist New Century Financial Corporation went into Chapter 11 protection in April 2007. 18 months later Lehman Brothers spectacularly imploded and nearly took the global banking system down with it.

The Federal Reserve and governments around the world pumped billions into their economies to prevent the global banking system collapsing altogether.

While there were many contributory factors, at the heart of the financial crisis were the “Quants”, or Quantitative Analysts…Wall Street’s developers of complex spreadsheets and financial models.

These backroom specialists thought they’d developed a way of taking sub-prime mortgages…essentially the dodgiest loans in any lender’s portfolio…and converting them into AAA investments.

In fairness, the maths is quite interesting and the broad concept is not without entirely without merit but, as we now know, those loans were not as attractive as the Wall Street sales teams would have us believe. It turned out they were largely worthless.

Even at the time, some investors held the view that, to put it as politely as possible, no amount of effluent could be endlessly repackaged with a range of other sources of effluent without it remaining anything other than 100% effluent.

But the Quants had their models and their spreadsheets showing just how valuable their securities were.

There was plenty of “proof”, plenty of data, plenty of financial models developed by top-end PhDs from the very best Ivy League schools. These were smart people. And the numbers never lie…right?

On the way up, everyone did very nicely out of this financial alchemy. Few people asked awkward questions while they were busy filling their own bank accounts.

Like Long Term Capital Management, the strategy worked absolutely fine until…virtually overnight…it didn’t, and the biggest financial crisis the world has ever known got fully into its stride.

I’d like to buy the world a Coke

Sometimes called the “hilltop ad”, the mighty Coca-Cola Company shifted plenty of their products on the back of one of the classic TV ads of all time.

Even the jingle was adored, a rare event in the tough world of TV advertising. It was so popular The New Seekers took a re-worked version, which they re-titled “I’d Like To Teach The World To Sing (In Perfect Harmony)”, to the UK Number One spot in 1971.

The Coca-Cola Company had long been one of the world’s most profitable and most successful businesses. Until one day in the early 1980s, when they had an idea which has since been used as a case study of corporate failure in probably thousands of MBA classes.

Coke was concerned about their main rival, Pepsi. They’d been making ever-greater inroads into Coke’s dominant market share since the end of the Second World War.

The pressure ramped up in 1975 when, with the warm feelings of the “I’d like to buy the world a Coke” commercial still fresh in soft drink buyers’ minds, Pepsi launched their hugely successful “Pepsi Challenge” campaign.

Consumers were invited, on camera, to sip Pepsi and Coke side-by-side in a blind taste test and choose their favourite. When the big reveal came, their preferred drink was almost always Pepsi, even among people who described themselves as long-term Coke drinkers.

Perhaps understandably, this caused consternation in Coke’s headquarters.

The New Product Development team was whipped into action. Make us a drink that performs better in blind taste tests than Pepsi, they said.

After spending a rumoured $4 million in new product development costs (Coca-Cola has never confirmed the actual number) that’s exactly what they got.

Almost 200,000 blind taste tests were carried out to reformulate Coca-Cola’s century-old recipe. As many as half of the testers preferred New Coke to both Classic Coke and to Pepsi. It was just what the top brass had been hoping for.

Certain of their strategy after analysing the data from those 200,000 taste tests, overnight Coca-Cola retired the recipe they’d been serving for 100 years and introduced New Coke in a blaze of publicity.

There was just one problem.

Despite the extensive pre-launch testing, in practice consumers didn’t buy New Coke in the shops…or at least not more than once.

There was plenty of speculation about why, but that hardly matters. When it came to voting with their wallets, consumers didn’t buy New Coke at the tills. The 100-year old Coca-Cola Company was on the brink of a meltdown.

Only 77 days after withdrawing what was now called Classic Coke from the shelves, the Coca-Cola Company re-introduced it and consumers started buying their products again. New Coke’s market share dwindled to almost nothing and it was quietly withdrawn, and an estimated $30 million of unsold concentrate written off in the process.

At the press conference to announce the hurried back-tracking on their strategy Coca-Cola’s then-President, Don Keough, uttered probably the most honest assessment of an internally-created disaster any business leader has ever given…

Some critics will say Coca-Cola made a marketing mistake. Some cynics will say that we planned the whole thing. The truth is we’re not that dumb and we’re not that smart.

Don Keough, Coca-Cola President, 1985

Where did it all go wrong?

These three business disasters…and there have been plenty more…share one common characteristic.

Nobody in the business was taking a different perspective to everyone else.

The same Kool-Aid was being quaffed by everyone involved in the decision-making and, if there were any dissenting voices, they quickly got the message that their input was unwelcome to a career-threatening degree.

In every case, there was nothing wrong with the mathematical calculation of the numbers all these businesses relied on. The basic premise was flawed, but the maths just faithfully reflected that initial premise.

Put enough scientific-sounding formulas together and throw in some huge computers churning through terabytes or petabytes of information and very few people are going to challenge the answer the magic box throws out.

None of these ultimately fatal decisions lacked data. But data alone wasn’t enough to protect those businesses from disaster.

In every case, each business allowed itself to be seduced by their own brilliance, convinced of their invincibility, secure in their position at the top of the world.

Because of their brilliance…those Nobel Prize winners, rooms-full of top PhDs, expert new product development teams…those businesses suckered themselves into believing they had an edge they didn’t really have.

The more data they had, the more they believed everyone else in the world…Wall Street, the Federal Reserve, soft drink buyers…were completely wrong.

Those businesses forgot their data was just a model…an estimation, an approximation, a best guess at a point in time.

Data was elevated from the status of “potentially helpful aide to decision-making” to the status of “nobody dare question the all-knowing, all-seeing Oracle”.

Strong opinions, loosely held

If you can’t rely on your data what do you do?

I’ve always liked an idea I’ve heard Marc Andreessen, of top Silicon Valley VC firm Andreessen-Horowitz, talk about.

When his fund makes investments, he thinks in terms of “strong opinions, loosely held”.

What he means by that is the firm is completely committed to whatever strategy they’ve decided, but they’re always testing out other options, considering where their initial model may be off-base to some extent, and they don’t shy away from having to completely re-invent the business model if that seems the right thing to do.

In the 10 years since the firm was founded, Andreessen-Horowitz has grown from nothing to having $10 billion under management. So it’s probably fair to say there’s something in that approach.

If you’re not lucky enough to have a top Silicon Valley VC on board, what do you do?

No matter how well you’re doing, you need to be able to take a completely different perspective on your business.

Just as the darkest hour is just before dawn, the biggest risk to your business comes when things have never been better.

LTCM enjoyed a succession of stellar years before going belly-up in the matter of a few months.

Wall Street was buzzing, bonuses were flowing, markets were booming…right up until the point where the sub-prime crisis hit and a succession of major financial institutions imploded overnight.

The Coca-Cola Company was still the world’s number one soft drink maker when it decided that it needed to be more like its less-successful competitor even though the race was Coke’s to lose.

Taking a very different perspective sounds easy, but it’s really hard. The odds are stacked against it to a large extent.

If you ask one of your managers for a report on something, odds are they’re not going to put something forward that shows them in a bad light. Even if they have to stay up all night to find a glimmer of positivity, they’ll include some data to suggest they’re doing at least an OK job, even as their world collapses around them.

That goes double if the report relates to a part of the business where the CEO or the Board has been quite specific about how they want it to run.

How the business interacts with customers, both its current customers and its future potential ones, is a common area for CEOs and Boards to take a particular interest. Ditto how it interacts with employees. And, occasionally, how the technology that underpins the business works.

That doesn’t mean any of those strategies are wrong. But over time, the market might move in a different way. To give a current example, the Daily Telegraph reported at the weekend that Facebook usage is down by one-third in the UK due to concerns about their data privacy policies.

Money-making machine though Facebook is, it’s in real danger of being caught on the wrong side of a sudden market move away from sophisticated, some might say manipulative, advertising-funded income strategies and towards a world where there are greater concerns about protecting privacy.

Their strategy worked until it didn’t. Just like LTCM’s. Just like Lehman Brothers’. Just like the Coca-Cola Company’s.

That’s why a different perspective is so important.

And, in a lot of businesses, that’s the job of your CFO. Even though they will be just as committed to your business succeeding as you are, the worst thing you can expect them to do is drink the same Kool-Aid as everyone else.

A good CFO should be good with numbers, without being a slave to them…especially when those numbers come from somewhere other than the Finance Department.

They should be supportive of the company’s mission, but challenging about the best way to get there.

They should help make sure any major decision…even one taken for the best of reasons with more data than you can shake a stick at…doesn’t bankrupt your business if it should turn out, with the benefit of hindsight, to have been a move in the wrong direction.

To paraphrase Scotland’s national poet, Robert Burns, into modern English, “the best-laid plans of mice and men often go awry”.

One of the best ways to make sure your plans don’t go awry is to have the right Finance Director or CFO in your business, someone who’s going to bring a perspective nobody else is bringing..

When the rest of the business is zigging, you want your CFO to be zagging. Not necessarily because they’re right, but just because that’s how you bring a different perspective to bear. That’s how you end up considering some issues you might not have considered otherwise.

And remember, there’s always at least two sides to everything. You need to give someone the job of finding the perspective everyone else has missed.

Your CFO is usually a great choice.

(Picture credit: Leio McLaren (@leiomclaren) on Unsplash)

The Abominable No-Man

Factories are great places for imaginative nicknames…I used to work with someone who was known as “The Abominable No-Man”.

That probably tells you all you need to know about his positive attitude to life and his communications skills.

And to be fair, that’s a nickname many businesses could probably pinch for their Finance Director or CFO as that’s the reputation that tends to precede us. People think we’re just there to crush their pet projects, moan about people overspending their budgets and rat them out to their boss when they miss their KPIs.

When I started out in the accounting profession, that was pretty much the brief for the Finance Department. But I was really lucky early in my career to work for the finest Finance Directors I’ve ever come across.

He was amazingly successful and, for a relatively young guy, was the Group Finance Director for one of the UK’s largest quoted companies. He’d got there by doing things very differently and he was a great mentor to me.

One of the things I learned from him was that it wasn’t the Finance Director’s job to say “no” to things. It was the job of a Finance Director or CFO to think through “if this is good for the business, how do we make this happen, even though we didn’t plan for it or set aside a budget for it?”

James – my old boss – had a great way of conceiving his budgets and strategic plans which is pretty much summed up by Stanford University Professor Paul Saffo’s “strong opinions, weakly held” mantra.

James was sceptical about anyone’s ability to write a strategic plan or a budget six months before the start of a financial year which would, with any great accuracy, predict the likely year-end out-turn 18 months later.

Which isn’t to say James didn’t do a strategic plan. He did.

What set him apart, especially at the time, was his willingness to change that strategic plan in light of new information, new evidence or new opportunities. He had to hit a margin target and a “cash at bank” target, but as long as he did that, neither the Group Chief Executive nor the City analysts cared much how he did it.

At the time he wrote the plan and set the budgets, James had a strong opinion that he had devised the best plan he could with the information available to him at the time. But if something better came along, those strong views were weakly held, and he devised a better plan instead without being overly precious about the plan he’d prepared a few months earlier.

This was James’s “X Factor” – the skill that, more than any other, set him apart. His nimble approach to running the finances of a large quoted company would set finance teams in many much smaller businesses into meltdown, even today when buzzwords like pivoting and re-imagining have seeped into the business vocabulary.

Even though it’s nearly 20 years since I last worked for James, I still use the approach he modelled for me every day as a Finance Director and CFO. And yet, it’s still a rare approach for a Finance Director to take.

I still see plans which are kept inflexible, unchanging and inviolable long after they’ve lost touch with reality. And, I’ve got to say, for businesses like that, usually the bankruptcy courts aren’t all that far away. Those businesses don’t seek help until it’s too late because they think that “staying strong” and “holding people’s feet to the fire” for their original plan shows the sort of strong leadership people are supposed to admire.

Maybe next time, by all means start out with complete and utter conviction to the plan you’ve just prepared. After all, you’ve done your research, you’ve done an options appraisal or two, carried out some sensitivity analysis and reviewed the risks. At that moment in time, it’s the best plan you know how to write.

But if something changes in your business, or the sector you operate in, make sure those strong opinions are loosely held.

It’s not a sign of weakness to change your plan in the light of new evidence…but it is a sign of monumental stupidity not to change the plan when it’s clear the plan you wrote a few months ago is never going to come close to the new reality facing your business.

Although he never used the term, and may well not even have been aware of it, the greatest Finance Director I’ve ever seen taught me 20 years ago that you ran your business plan and your budgets with “strong opinions, loosely held”.

And, for your business, that’s a darn sight better than being nicknamed “The Abominable No-Man”.

10 business lessons from one of the world’s greatest drummers

Former drummer for The Police, Stewart Copeland, fronted a great BBC 4 documentary the other evening. (At the time of writing, still on iPlayer for another month…don’t miss it!)

I’ve long taken the view that music can teach us everything we need to know about business…but to give myself an extra challenge, I thought I’d forget the rest of the band for a change and today focus solely on the drummer.

Here’s 10 fundamental business truths courtesy of the legendary Stewart Copeland (plus a bonus at the end)…

  1. Even in a short-ish programme, there were a couple of times Stewart Copeland grated on me a little…apparently this was pretty much Sting’s experience too, back in the day. But, even as a big music fan, I learned so much I didn’t know before from watching his programme. (Moral of the story: don’t discount what people you don’t like are telling you. They always know things you don’t.)
  2. Stewart Copeland has an irrepressible enthusiasm for his craft. He’s taken the time to study it, to find out the history of it, to seek out other practitioners of it. (Moral of the story: even if you’re world-famous in your area of expertise, there’s always more to know and more to learn. The greatest drummers, and business leaders, never stop learning.)
  3. Stewart Copeland works really hard. If you watch him on a drum kit, he never stops. His drumming defined the sound of The Police, one of the biggest bands in the world. He had to work twice as hard as most drummers to fill out the sound because The Police were a three-piece band, rather than the more usual four or more members. (Moral of the story: if you want to be successful, hard work isn’t optional.)
  4. The greatest people at any task are those who think differently about the job in hand. Buddy Rich, Keith Moon, John Bonham…and indeed Stewart Copeland himself…all had a very distinctive, instantly-identifiable style. (Moral of the story: the greatest successes come from doing things very differently from everyone else, not just doing what everyone else does 5 or 10% better.)
  5. There’s always a place in the market for something different. In the early years of rock and roll, drummers sat at the back of the band with their heads down, doing their best to be invisible. Then Keith Moon came along and the whole country knew the name The Who’s drummer, even if they weren’t a fan of the band itself. How many other drummers do you know the names of? I’m guessing not many. (Moral of the story: never think “everything has been done already”. It never has been.)
  6. It surprised me to learn that modern drumming started out in the distinctly un-modern world of the Deep South just after the end of the American Civil War. (Moral of the story: there’s always a deeper reason, and a longer history, for whatever you’re grappling with than you think. Problems, and opportunities for that matter, don’t just pop up from nowhere…they started out years ago, barely noticed at the time, and snowballed into the problem or opportunity you’re grappling with today. Pay attention to the little things that cross your path…sooner or later, they’ll become the big things.)
  7. One little invention – the foot pedal for the bass drum – seemingly inconsequential at the time, made the modern drum kit possible. Before that, there was no way a drummer could simultaneously play several different shapes, sizes and tones of drum to engage better with a tune and drive the song the way modern drummers do. (Moral of the story: don’t wait forever for a “big idea” to come along. Continual innovation, and trying to improve even a tiny amount every day is the best way to succeed. A simple lever was all it took to change the world of drumming for ever.)
  8. The segment with Sheila E. (Prince’s drummer and musical director) alone was worth watching the whole programme for. She made her own way as a woman in a man’s world and, I’m sure, wasn’t always met with the support her talent deserved as she climbed the ranks of professional drummers. (Moral of the story: never let anyone tell you that you can’t achieve your ambitions. Give full rein to your talents, and work hard. You can achieve anything as long as you don’t give up.)
  9. Also from Sheila E…what you do between the beat is as important as what you do on the beat. A 1-2-3-4 rhythm quickly gets boring and mundane. Great drummers add light and shade to help tell the story of the song. But she also said it was important not to overdo the “between the notes” playing or you’ll lose your audience too. (Moral of the story: more is not always better. And it’s a matter of art, not science, as to what the optimum balance is, even in something that seems as mathematically-governed as playing 4 beats to the bar.)
  10. Stewart Copeland played with a huge variety of amateur and professional drummers on his programme…from people on the streets of New Orleans to superstars in their own right like Sheila E, Chad Smith of the Red Hot Chilli Peppers, Taylor Hawkins of the Foo Fighters and John Densmore of The Doors. No matter what he was doing with another drummer Stewart Copeland had a smile on his face the size of a barn door. (Moral of the story: if you can find just one activity that makes your spirit soar, do it as much as you can for the rest of your life. Stewart Copeland won’t be going to meet St Peter grumbling to himself about spending too much time on his drum kit…it’s what he was born to do. Find out what you were born to do, then pray for one-tenth of the joy drumming gives Stewart Copeland. You’ll spend the rest of your life with the biggest smile imaginable on your face.)

Final bonus lesson…I got all this (and more, I could probably have written 50 points if I put my mind to it) from watching a TV documentary about very much a minority interest subject on a channel that is itself a distinct minority interest for the British television-viewing public. There’s always something you can learn, even in the unlikeliest places, if you keep yourself open to the learning opportunities that come your way.

If you’re a music nerd like me…or even (gasp!) someone who has no idea what this article is all about, you can see Stewart Copeland “on duty” in this great live performance… https://youtu.be/Ki97mpo6Y_Y

You see, learning opportunities are everywhere if you pay attention to what’s going on around you…and yes, even drummers can give you a lesson or ten about what really matters in your business.

(Photo by Oscar Ivan Esquivel Arteaga on Unsplash)

Commendable ambition or carefree folly…which do your goals sound like?

No sooner have we hung up the new year’s calendar on our office walls than all those magazine articles and social media posts come out exhorting us to set ambitious goals so that we “crush it” (ugh) during the course of the coming year.

Henry Ford famously said “Whether you think you can do it, or whether you think you can’t, you’re right.”

And he’s right. If you don’t think you can do something, odds are you never will.

Less often taken into account, though, is the flipside of Henry Ford’s famous quote – just thinking you can do it doesn’t mean you will.

That’s important for your business because you need to know the difference between ambition and delusion. One makes your business into a worldwide success, the other takes it to the bankruptcy courts.

That’s not to say ambition is a bad thing. Quite the contrary.

I’ve long been a big fan of setting what Jim Collins and Jerry Porras called Big Hairy Audacious Goals (or BHAGs) in their book “Built To Last”. Their idea was that businesses should break out of the year-by-year planning cycle and set a long term direction.

Maybe you want to be the biggest company by sales turnover in your industry. Maybe you want to get 100% 5-star ratings on TripAdvisor. Maybe you want to join the Fortune 500.

Unless you’re already there, or pretty close, these achievements are likely to be Big Hairy Audacious Goals which will take several years to play out, and when you start on your journey, whilst you’ve got the ambition, you don’t know every single step that will take you from where you are, all the way to your destination. (And if you do, it’s not a BHAG, it’s just a business plan for what you’re already capable of delivering. By definition, for it to be a BHAG, you can’t know exactly how to achieve it in advance.)

The system can work well. I spent several happy years as a non-executive director at a business which used BHAGs very effectively to grow their sales income over a number of years.

What this business did well was to have a set of more detailed plans underneath the Big Hairy Audacious Goal…even though they couldn’t map out everything in detail. But if they had a pretty good view of how the next 18 months would play out in the context of a 10 year goal, they had a detailed plan for that and didn’t worry too much about the eight-and-a-half years to follow.

But I also worked for a business which talked about BHAGs and the importance of ambitious goals, but didn’t think things through properly.

One ambitious goal they had was to grow thousands of new customers in a market they had no experience of, and where entirely new channels to market would need to be developed from a standing start.

This wasn’t the world’s craziest idea with a 3-5 year planning horizon. But to the general astonishment of everyone else in the business, the CEO set a 1 year target for this to be achieved.

The rationale was often stated as “we’ve always set ambitious goals around here, and we’re always achieved them, even when people said we couldn’t”.

This wasn’t completely untrue. Company folklore had many examples of “taking on the world and winning” in the past as a result of the CEO’s decision-making.

The Chief Executive had every ounce of the self-belief Henry Ford thought was important, but by remaining completely convinced their vision would unfailingly manifest itself into reality, all they were doing is what financial advertisements say you should never do (“past experience is no guide to the future”).

It won’t surprise you to know that this plan didn’t go well at all. Within 12 months, the Chief Executive abruptly disappeared after missing sales targets for the year by around 80%. Income dried up and, as a result of hiking the cost base on the back of the “certainty” all this new business would turn up, the business quickly got into trouble.

The CEO’s Achilles heel was believing their own publicity. They’d been, in the words of Nassim Nicholas Taleb, “Fooled By Randomness” (the title of one of his earlier books, inexplicably less well-known than his later mega-bestseller “The Black Swan”).

Just because things always had worked, doesn’t mean they always will.

Sometimes, due to random effects…such as sheer good luck in stumbling across a key customer at the right time, a news story that changes people’s perceptions overnight or a key competitor shutting down…even pretty audacious goals can be achieved without much in the way of planning or insight.

Enjoy those moments when they happen, because they can, and do, happen to us all.

But never make the mistake of thinking that just because you set an ambitious goal or a BHAG and it was miraculously achieved in pretty short order that there was a huge amount of causation between you wishing it to happen and it actually happening.

And certainly don’t build your entire business on the assumption that because you benefited from massive good luck in the past, largely outside your control or influence, that you’ll unfailingly benefit from it in the future every time you dream up a new ambitious goal you’d like to achieve.

If you want to make substantial inroads into a completely new market in 12 months or less, involving several hundred thousand marketing touch-points, leading to tens of thousands of sales conversations, leading to a few thousand billable new customers without a specific plan to make that happen…together with suitably qualified, experienced and aligned staffing and resources…sooner or later your luck will run out.

As it did for this business. From headlining in the trade press one day, it ended up an economic basket case the next.

The tragedy was, this was all avoidable. The objective as a three to five year plan was probably achievable, as a one year plan it was suicidal.

If there had been some test marketing, perhaps some idea of how the metrics might work in this new marketplace, the business would have been able to model the resources it needed, and the marketing approach to deliver the ambition. (They still didn’t have enough cash to do it in 12 months, but at least they’d have realised why, on the basis of some reasonably sound information.)

If, rather than increasing the cost base to deal with the “certain” influx of new activity, the business had waited until significant inroads were being made in the customer sign-up process, that might have given the business some breathing room to realise their approach wasn’t working and regroup to start again before the ran out of cash.

In the end, the jacked-up cost base and the non-existent revenue increase was what did for the business…as it does for just about every business which tries this. It’s akin to putting everything the business has on a single spin of a roulette wheel, and there aren’t many people who think that’s much of a strategy for building value.

That said, don’t shy away from Big, Hairy, Audacious Goals, or BHAGs. I’ve seen them work really well.

But the bigger the goal, and the shorter timescale you’re trying to accomplish it in, the greater the risk it won’t happen. Just believing it will happen is no guarantee.

A BHAG for 10 years hence can afford to be a bit sketchy. You’ve got time to fine tune the details in light of experience. An ambitious target to be delivered in 12 months or less isn’t going to happen without a detailed plan, and the right resources in place.

The key for business leaders is to know the difference between commendable ambition and carefree folly. Get those mixed up and you may well not be around long enough to regret it.

(Picture credit: Heidi Sandstrom. on Unsplash )

How not to screw things up like a politician

Grouch Marx once said “Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies”.

At the moment, there’s no finer example of this phenomenon than the UK’s Transport Secretary, Chris Grayling. .

On top of a less-than-impressive few months in this role, yesterday he blamed the wage demands by rail unions for this year’s annual price rise in train tickets (BBC News report here).

Yet what the UK rail industry calls “regulated fares”, such as the season tickets which were at the heart of many of yesterday’s protests, are set according to a government formula agreed back in 2003 which has no connection whatsoever to wage rises in the railway industry (more details on the rail fare formula here).

This is important because once you’ve diagnosed the problem, rail unions in this case, that tends to be the problem you’ll set out to “fix”.

That’s not to say rail unions are blameless, or that they are tireless champions of anything other than their own members’ interests…it’s just to recognise that the Department of Transport’s ticket price formula can be in no way related to the wage rates of people working in the railway industry, as it’s not even part of the publicly-available formula for calculating ticket prices.

It’s hard to imagine that the interests of the UK’s long-suffering rail travellers would be improved by the Transport Secretary picking a fight with rail unions due to his lack of understanding of the pricing mechanism put in place by his own department.

Unless Chris Grayling was just playing politics to enhance his own standing within the Conservative Party, of course, which is probably several orders of magnitude worse than just being ignorant about pricing mechanisms for which he is the responsible cabinet minister.

By now, even if you weren’t sure before, I think we can probably agree that if you want something screwing up far more comprehensively than any mere mortal could hope for, the thing to do is to get a politician involved.

The question is how can business people like you and me you avoid screwing things up quite as badly as the average politician?

Groucho Marx was right – the diagnosis of a problem is key. Once you’ve decided what the problem is, that’s probably what you’ll do your best to solve. Get that wrong and the likelihood is that not only won’t you solve your original problem, you’ll probably have created another problem you didn’t have before in the process.

Albert Einstein said that if he was given an hour to save the plant, he’d spend 59 minutes defining the problem and one minute resolving it.

That may be a little extreme, but you can’t hope to find a good solution unless you’re solving the right problem. That’s where most politicians get it wrong – they’re taken in by their own political philosophies and see everything through those distorting lenses.

And, I’m sorry to say, business leaders, including myself, have distorting lenses of our own. Having a preferred view of the world distort our own perception of reality is a natural human characteristic. Everybody has it to at least some extent.

But there are things you can do to find better solutions. And that starts by how well you define the problem, as Albert Einstein said.

That depends in turn on how good you are at asking questions, and that’s a skill you can work on and improve, however good or bad you are at it now.

Research published in the Harvard Business Review set out a four-stage process for learning to ask better questions. In summary, this involves:

  • Establish the problem in as simple terms as possible – “We are looking for X in order to achieve Z as measured by W” is the format the article uses.
  • Secondly, you need to be clear how solving the problem contributes towards achieving a strategic organisational objective. You might think this was self-evident, but I’ve sat in plenty of meeting rooms where people thrashed out how to “solve” problems that, even if they were solved, would be unlikely to have any major impact on the organisation one way or the other.
  • Next, take a look at what your organisation has tried in the past and, if relevant, how other people in your industry have attempted to solve the same, or a similar, problem.
  • Finally, write a problem statement which defines the problem, its proposed solution and the requirements you’re trying to achieve, taking account of everything you’ve learned through the earlier stages in the process.

For the UK rail industry, it seems we haven’t even got past the first stage of defining the problem terribly well yet, but you can do better within your own business quite easily.

The HBR article has some great questions to ask during each stage of the process, but the key to solving any problem is always to cast your net as widely as possible when looking for answers.

If all important decisions are only made by senior executives in a conference room, I can guarantee a substantial proportion of those decisions will turn out to be wrong, or at least sub-optimal.

That’s not the executives’ fault – generally they come up with the best solutions that make sense to them, based on their qualifications and experience.

But usually they don’t have current experience of being a front-line sales person trying to sell whatever the company’s new business model is to a potential customer, or someone in the factory trying to produce against a revised product spec with tools that haven’t been properly designed for the purpose, or a call centre operator who handles the irate customers that call in when the revised product or service doesn’t work properly.

Of course, if it’s a strategic decision involving a large financial investment, senior executives have to make the final decision. To do otherwise would be to abdicate their responsibilities to the business.

But during the problem solving process, and especially the question-asking parts of it, involving as many people as possible, especially from the front-line can make a huge difference to the quality of the eventual solution and the cost-effectiveness with which it’s implemented.

If you want to screw things up like a politician, by all means sit in your conference room and make all the decisions amongst the senior executive team.

But I can guarantee that if your business learns to ask better questions, and involves a wider cross-section of staff than just your senior management team in solving them, even quite big issues for your business can be solved quickly and cost-effectively.

Let’s just hope that one day this might be the way we run our railways too.