It’s back to basics for big business

Jan 18, 2009 Strategy, Sunday Nation

Surely it’s impossible for a company listed in three stock exchanges to falsify its accounts for years on end? Surely you cannot put a fictitious $1 billion in cash on your balance sheet, and get it past your auditors? Surely you can’t just keep recording fake profit margins? Actually, you can. Satyam Computer Services, an Indian IT giant, did it; its entire board has just been replaced by a government-appointed one.

Surely a retailer that’s been around for eight decades knows what it’s doing? Surely it has settled on a business model that works, and is connected with its target customer? Not Woolworths in the UK, whose 800 branches closed this month, sending 27,000 employees home. After years of muddled positioning and pointless product ranges, the world-famous brand had only nostalgia going for it. Loaded with crippling debts, the business could not even be sold for the princely sum of one pound sterling.

Can one fund manager beguile huge global banks and very wealthy individuals with the promise of astonishingly robust and improbably consistent returns? Surely the superbly educated and experienced business elite would smell a rat? Surely pyramid schemes only work on illiterate bumpkins? Not quite. The likes of HSBC and Santander were suckered by one Bernard Madoff, former NASDAQ chairman. This gentleman is now in judicial custody for perpetrating what might turn out to be biggest financial fraud in history.

I wrote last week that in 2008 the halo sported by leaders of big business has slipped badly. It is now revealed to be a mere prop, a special effect that obfuscates the reality: that corporate titans and slick professionals are often as clueless and as befuddled by greed as everyone else.

This is indeed a time for introspection, for coming clean, for accepting our role in the worldwide economic mess with contrition and humility. It is time to go back to basics, and relearn all the things that were once the essentials of business.

Your mother told you, I hope, to put some money aside for a rainy day. Once upon a time, businesses also followed this maxim. They kept decent cash reserves on their balance sheets, to tide them through difficult times and to allow them to take quick advantage of unexpected opportunities. Where did that idea go? The likes of the American car makers and Woolworths have seen out many recessions in their history. This time, they were caught with their pants down: no cash. When demand softened, they found they could not get past a month or two.

It had become fashionable to consider cash reserves as old-fashioned, a management maxim for fuddy-duddies. The in crowd gave cash out to shareholders to boost the share price; played the markets using sophisticated instruments; paid it out in enormous bonuses to the top dogs. Today, only those with cash reserves are smiling: seeing out the recession while others crash and burn, and waiting for opportunities to buy (cashless) businesses.

And what happened to the idea of risk? Risk management used to be a core function for the CEO and CFO, and the board of directors and its audit committee. During the credit-fuelled boom of the past few years, little attention was given to risk in board meetings. Instead, everyone’s attention was on growth at any cost. And so, banks began lending out without collateral; car makers became money lenders; and new financial instruments spread risky debt throughout the world. Where were the boards of directors in all this? The ones at Lehman, Satyam, Woolworths et al are tending their gardens right now.

What about the idea of ethics? The idea of personal gain turned out to be far more powerful. As remuneration became linked to short-term performance measures, a feeding frenzy started amongst the pin-striped cuff-linked ones. People brought in the numbers any which way they could, and to hell with prudence. Soon, a casino mentality was in the ascendant; people who murmured their concerns were dinosaurs to be ignored.

Now that the global economy is in tatters, will anyone say sorry? Unlikely. Renowned economist John Kay pointed out in a recent column that corporate egos are not conducive to regret. Indeed, all the talk is about “challenging conditions” and “unprecedented turbulence” rather than personal responsibility. Those who caused this mess claim to be its victims rather than its villains.

This shambles was not visited upon us from up above; it is the result of the flawed judgement and broken moral compass of men and women who should have known better. Being involved in business should be a noble pastime, one that brings great wealth to the world and solves the problems of billions. Those who run big business and those who regulate it have a great duty of responsibility for managing the wealth and livelihood of others. Many have shirked that responsibility. If this awful recession does one thing for us, let it remind us of the timeless need to do things right.