18 Feb 2008

Northern Rock - two key questions that need to be answered

The first question - and it has hardly been receiving attention in all the discussions of the Northern Rock saga that we are aware of - is the question of how it can be that in a so-called 'democracy' emergency legislation can be passed where the executive and legislative branches of government are in collusion and decide to 'nationalize' private property. The emergency support that the German Government has just decided to give to IKB Deutsche Industriebank in Germany (thanks to an obliging taxpayer that has no say in these arbitrary spending decisions) is just a less blatant form of nationalisation (where private wealth is taken away from its rightful owners and spent by politicians to spend on their favored constituencies).

The second question is again an indictment of Government, more specifically the quasi-governmental agencies that masquerade as 'banks' and are more commonly known as 'Central' Banks. In recent months untold (literally) billions of confetti money have been spent by these curious 'banks' in providing liquidity to the World's Banking system. No one will deny that Northern Rock used the leeway that is given by banking regulations to an extent that could with some justice be described as imprudent. But this is no excuse to provide all other banks with liquidity but let this particular bank hang out to dry. This was the crucial decision (mistake?) taken by the authorities back last summer and that has to be the point of departure when assessing the correct compensation for the Northern Rock shareholders. It simply is not good enough to destroy a business first and then base compensation on the situation that has been created by one's actions.

4 Feb 2008

Non-Dom Taxes - Nail in the Coffin for London's City?

Ill-conceived taxes were instrumental in the development of the Eurocurrency and bond markets during the late 1960s and early 1970s. First the American Government in its wisdom introduced the so-called Interest Equalisation Tax in 1963 in order to make it more expensive for non-US borrowers to access the US capital market. Then the Swiss authorities levied penal tax rates on transactions involving Eurobonds and other securities. As a consequence, most business involving international securities decamped to London during the 1970s. Now Gordon Brown has decided to make his own mark on the history of the Euromarkets by introducing a special levy on foreigners involved in the international capital markets. Not only is the per-capital levy of £30000 per person highly arbitrary and unfair but the detailed regulations introduced are so complicated and wide-ranging as to provide the proverbial straw that breaks the camel's back. The London City should take note that in the intervening years the authorities in Switzerland and the USA have learned a lesson or two and that financial institutions - once gone from the City of London - are unlikely ever to return again.

10 Nov 2007

Exit 'Fred the Shred'- Character traits in Chief Executives

We have never personally met Fred Goodwin but reading an article about him we were reminded that many corporate disasters happened under the leadership of executives that were described as domineering. Whatever the merits of this adjective in Goodwin's case - any analyst worth his salt should scan press articles for similar key words and have a good second look at any business that is run by someone described with these words.

25 Oct 2007

To Quant or not to Quant?

Yesterday's Financial Times carried a polemical piece by Nassim Taleb. In it he derided the use of mathematical models and called the so-called Nobel Prize for Economics an absurdity.
While we ploughed our way through a fair share of mathematics in our undergraduate economic classes and found them pretty remote from reality, we would not go so far as to completely reject the role of mathematics in the financial markets. At that time it was a sign of stellar quant ability if a bond trader or salesman could calculate the yield to maturity on a bond without use of a calculator, but time has moved on.
The recent events in the credit markets, however, have demonstrated that at PhD in Maths cannot be a substitute for good judgement and that good character should still be the basis for a successful career and business.

4 Oct 2007

Bonus Fears: Not as bad as the headlines make believe

Some newspaper headlines predict massive job losses and a substantial drop in bonuses for financial market professionals this year. Apart from creating a bit of publicity for some of our competitors who are quoted by the media we advise clients and candidates to keep a cool head and focus on the big picture.Excessive discussions about the expected level of bonuses are a nuisance in the best of times and for many firms the year is only over on 31 December. So there is still a lot to play for. Emerging Markets are booming (too much?), and fund-raising continues at a frenetic pace in the alternative investment field.

3 Apr 2007

Lessons from a Boat Race - Or how to make teams work better together

Can business leaders really learn from a study in which the Cambridge University boat club has been observed at work during seven-months period? That would be the impression one could get from reading the conclusion by Mark de Rond, a senior Lecturer at the Judge business school in Cambridge, who conducted an 'ethnographic' study of the boat team as it prepared for the annual Oxford-Cambridge boat race on April 7. Dr de Rond concludes that a team in a boat is a social entity and it can be a massive brake on the boat if the team members are not all working together.We think that this is a truism - especially in the lower ranks of management. Earlier in the same column ('Business Life' by Stefan Stern, Financial Times) the author stated that 'at the highest level (of management) you must perform in areas that are beyond your expertise, where the facts are not known'.This, in our view, is the key problem of leadership. The key to top management performance is not just higher efficiency. Clear targets can easily be defined for staff and lower levels of management - as well as the members of a race team. But Business Leaders have to move into the (dark) future and decisions have to be made where the outcomes are never clearly visible.In our opinion good management at the highest level requires a balance between good judgement and experience. The same applies to the selection of top management - be it from internal or external candidates. It will always remain a mix of science and art.

10 Feb 2007

Professionals should do well again in 2007

The larger firms have built their staff levels from a standing start (Goldman had 56 employees in 1978 in London, Morgan Stanley had not even opened an office) to a cast of thousands.This was an extraordinary period of expansion that has come to an end. At best, employment levels will stagnate at this high level and fluctuate slightly around it with the ebb and flow of business levels.Professionals should be relatively safe from the trend towards overseas outsourcing or automation. Individual employees, however, will be under pressure to perform and may be weeded out in favour of younger staff that is potentially cheaper and keen to move up the career ladder.

31 Jan 2007

London vs. New York - A Tale of two Cities

We do not think that the ascendancy of London as a financial centre to rival - and even overtake - New York should surprise anyone. The issue of overregulation in the US may be a factor but sheer demographic realities make it difficult for New York to maintain its position as undisputed leader among financial centres. This position was a legacy of two world wars and now that Europe is not cut in half by the Iron Curtain London is the natural financial centre for a region with a population of 600 million inhabitants. London is also geographically much closer to the Middle East and Africa and even Latin America is not that much farther away from London than from New York. London also offers a much more diverse workforce than New York as it is close to a multitude of different countries whose languages are regularly needed to conduct business effectively around the world.

15 Jan 2007

Arbitrary bonus allocation creates legal minefield

The Financial Services Industry is in the middle of the annual round of deciding the size of the bonus pool for its employees as well as the distribution of the payments between the various departments and staff members. Recent Press comments let us send a word of caution to Senior Management and Human Resource Departments. We are very sympathetic to management's desire to reward those among their staff that they think offer the best potential to make good contributions in the future. So we are not surprised that employers may wish to award the bulk of their bonus pool to the most profitable employees or to younger staff that they wish to motivate.However, today's litigious workplace limits the amount of discretion employers have without running the risk of being dragged into damaging and costly legal disputes.Awarding bonuses on anything less than objective standards creates a legal minefield for the employer as those employees that have received a low bonus may be tempted to have their compensation reviewed by an employment tribunal or even in a court of law.Some firms still have no adequate internal system to allocate profits on an objective basis and they should now urgently review their management controls. They will need them so that they can make sure that bonus payments are backed up by hard numbers that can stand up to scrutiny in a court if staff members feel that their bonus was allocated in an arbitrary fashion.

16 Nov 2006

Bonus time approaching fast

When discussing bonus trends we always jokingly say that if all the bonus hopes in the City were to be full-filled in any given year, the bonus pool - however large it might in fact be - would have to be twice the size to satisfy the hopes of recipients.Earlier this year we warned that employers should take great care to award bonus payments in a rationale and well-documented fashion.Recently we found an interesting piece posted by Freshfields on the Complinet website. This supports our warnings and discusses ways for employers to avoid contractual claims arising out of bonus decisions. The Freshfield article touches on questions such as: Is there any entitlement to be considered for a bonus? To what extent can a bonus be fully discretionary (if at all)? How to avoid discrimination claims.