Lying to Ourselves over PFI – Private Finance Initiative

Ashmole-Academy-817x389

PFI was Government outsourcing at its worst as the Independent has uncovered. There is a saying “There are no free lunches” but politicians like to pretend that there are.

PFI was a scheme to bring forward capital spending for hospitals, schools, care homes and others areas of under-funded public utilities without showing it in spending profiles – without being honest and transparent with the public about what it was doing.

Ally this to the cozy relationship between certain politicians and those in the building and construction industry and the inability of civil servants to really understand enough about the risks to dissuade politicians and the recipe was in place.

What we have is a burden on our public sector that will not impact the politicians that made the decisions but will have grave (in some cases literally) consequences for those who will be unable to be provided with the care they need as costs in our public sector rise over the next few decades as the bills are paid.

Back in 1998, when I was a Trustee / Governor at a local school in North London, I identified that the school needed to be rebuilt. It was crumbling, had asbestos, its electrical wiring was unsafe, roofs were collapsing and let in vast amounts of rain water and the school had to make use of temporary facilities that were installed 30 years before. There was a real danger that the school would be closed at some time in the future unless radical steps were taken and the only answer was to rebuild.

I made a presentation to the Board of Governors in 1998 where I proposed that, while PFI was an option being actively touted by Government as a panacea, we should not touch it. In Powerpoint slides, printed and shown on an overhead projector (we could not afford the computer equipment) I tried to persuade reluctant but well-meaning local people to reject the obvious answer because of “long-term high charge over 30 years” and loss of control over our own assets. The slide shown 17 years ago is below:

1998

The school, now Ashmole Academy in Barnet was built without PFI – although it took until 2004 to see it through. Eleven years’ later, the school (where I was Chair for 12 years from 2002 until 2014) remains in excellent condition and is an excellent school – one of the best in England.

When this Government began its enquiry into school buildings a few years’ ago, it commissioned Sebastian James and his team that produced the James Report.

This report, to which a few of us from the board at Ashmole made representations and met with members of the Report team prior to publication, did not condemn PFI but simply said:

Private Finance Initiative

A procurement route established in 1995, and more widely adopted since 1997. It is an important route for much Government spending on assets as it transfers significant risks to the private sector. PFI requires private sector consortia to raise private finance to fund a project, which must involve investment in assets, and the long-term delivery of services to the public sector.

As a result, PFI was allowed to continue on the basis that it meant to provide a “transfer of risks to the private sector”. For this transfer (which is really nonsense as the transfer was merely to get public sector spending off the books and into the books of the companies), the construction and service companies were handsomely compensated.

Not only that, but local and national public sectors were completely overwhelmed by the prospect of architectural excellence rather than practical building and this resulted in grandiose schemes that impress architects and win awards but ended up being hard to maintain, costly to build and a long-term drain on finances.

The lessor, now the School or the local authority is then stuck with a long-term agreement which it has to pay – at costs which are far greater than those which a Government could have loaned the money at – just to get costs off the books so no-one would notice that the financial burden was excessive while the new facilities were being built.

As to the risk being transferred, at Ashmole, we decided to take on such risk and then make sure that we had good contractors, good architects, good project management overseen by knowledgeable Board directors / trustees and good contracts in place. The risk was normal – it was on the suppliers not the school as we were the customers. The risk issue is nonsense.

The James Report is now forgotten but should have been a reminder that PFI was a major accident waiting to happen.

The Independent’s Report highlights not just the crippling costs of PFI but also the problems that are met when government (local and national) become swept away by those in the private sector who promise a free lunch and by their own lack of transparency and inability to understand business.

We entrust Government with much of our future but, while we condemn those that allowed PFI to take place in such a shambolic way, we should bear in mind that we may be expecting far too much in an area of greatest risk – the place where public and private sector meet. Knowledge and capability on either side are varied but neither really “gets” the other. This is why banking crises will always appear from time to time and why outsourcing of public sector often delivers much less than “expected”.

The place where public and private sector meet is a dangerous one and is less well understood than the specific sectors themselves. However, one way that such disasters as PFI could be reduced is through transparency – it was the desire to keep costs “off the books” that took us into PFI when extra expenditure on the public sector financed by low-costs Treasuries would have been a far better investment.

However, the pressure to falsely account was made by the pressure put on politicians by keeping government spending down even in the face of greatest need. It is why, even today, the NHS funding row is all about showing how the £8bn will be afforded in years to come when we all really know that we have very little idea what the UK’s finances will look like in three to five years. Good management of finances does not mean we can possibly be that accurate (no company really believes it knows how it will be doing beyond twelve months and beyond that, forecasts are but guides based on spreadsheets – the same is true of economies but with thousands more indeterminate variables).

So, PFI and similar comes from our desire to lie to ourselves and for politicians to lie to a public that is implicit in the lie.

We need to educate ourselves to reality by being more transparent.

Swing Riots to Zero Hours

 

150402_Swing Riots

The early 19th Century contains a forgotten history lesson in trying to understand the changes in the relationship between the workforce and business.

Farming in the early 19th Century (by far the main employer) was mainly open field farming where wealthy landowners leased out their farms to tenant farmers. These tenant farmers then brought in labour to work the farms. Farm labourers were selected at annual labour fairs in the villages and small towns close to the farms. When selected, the labourer would be employed by the farmer for a year or so and live on the farm – usually sharing in the work and eating with the farmer and his family.

This seemingly idyllic relationship can be likened to working relationships in the 1960’s and 1970’s when employment was meant to be “for life”. It was the breakdown in that relationship and the tensions that ensued that led to British trades-unions forcing a mass of industrial disputes in the 1970’s that Margaret Thatcher’s government sought to end.

In the 1820’s and 1830’s, the annual fairs gave way to monthly contracts and then often to weekly and daily as the world of agriculture was devastated after the end of the Napoleonic Wars, as weather conditions worsened for farming and as poor conditions led to a rise in disease that devastated cattle and sheep in many areas. The need to keep costs lower and lower led to wage reductions on a regular basis and the invention of the threshing machine was seen as a needed investment by farmowners that could afford the investment.

For the farm workers, by 1830, life had become intolerable and the “Swing” riots ensued. Rowland E Prothero (Baron Ernle), writing in his “English Farming” (1888):

“While the Luddites broke up machinery, gangs of rural labourers destroyed threshing machines, or avenged the fancied conspiracy of farmers by burning farm-houses, stacks, and ricks, or wrecking the shops of butchers and bakers. In the riots of 1830-31, when “Swing” and his proselytes were at work, agrarian fires blazed from Dorsetshire to Lincolnshire.”

Fast-forward to 2015 and we are now confronted by the realization that business (our 21st Century equivalent of 19th Century farming in terms of employment) is now employing zero hours contracts with increasing regularity. This 19th Century response to a 21st Century problem goes hand-in-hand with the UK’s inability to increase its productivity to anywhere near the levels of Germany and France (let alone the USA).

Luddism (and its followers, the Luddites) was a cry against the fear of mechanization in mills and early factories (and the farms) while the “Swing” riots, although exacerbated by the introduction of threshing machines, was more than this. It was a reaction against a change in relationships that had been developed over many years. This breakdown of the relationship between the farm labourer and the farmer (and the poverty into which farm labourers were thrown) led to riots and the extraordinary backlash of Government (labourers were imprisoned, many were banished to the colonies and many were executed).

Zero Hours Working and Independence

This time around, zero hours contracting is also a symptom of a breakdown in relationships. It is common in low-skill environments and very common in many areas where Government (local and national) has decided to outsource. Many of these jobs occur where the individual on a zero-hours contract is working in social care. This is an example of short-term cost requirements that can easily lead to long-term quality disappearance – as the ability of the carer is their responsibility as far as the contractor is concerned.

For some time, the relationships between employer and worker in manufacturing and services has been changing – and reflects the way of agriculture in the early 19th Century. Workers are now more like sub-contractors as Tom Peters  (a leader in management thinking) envisaged back in 1994 when he wrote an article in The Independent – “Travel the Independent Road”:

“I contend that…everyone, bellhop, boss, scientist, had best achieve the mindset of the independent contractor.”

With the growth in self-employment in the UK since the financial crash of 2007/8 (where 15% of all workers are now self-employed and one-third of employment since 2010 has been in this area according to the Bank of England), we do appear to be changing the relationship between bosses and workers. In the Bank of England’s Q1 2015 Report, it asserts that “much of the recent increase in self-employment reflects longer-term trends.”

The steady ageing of the population and the increased distance between business managers (the most similar to tenant farmers in the 1830’s) and the average worker (at least in terms of salary) suggests that the 20th Century may well have been just a phase in the development of capitalism. It may well be that the natural default position is more ambiguous – offering those with skills the ability to sell into a marketplace with a range of options rather than the existing with one employer that pays for those skills for the whole of a working life.

In highly skilled jobs within the film industry, for example, it has been common for some time for companies to be formed just to make one film. Skills are brought to bear on that film (whether by actors, directors, script writers, cameramen/women and all the rest) who then disperse at the end of the production. They leave with payment for their role and investment of time and skill and, hopefully, with their reputations enhanced – reputations that will help them towards the next collaboration.

In most work, the old mentality of learning on a job and working for the same company for life persists. Zero hours contracts splits the worker from the employer so that they cannot gain training and benefits from that skill accumulation.

The Labour Party, in the run-up to the May 7th General Election, calls for the curtailment of such contracts. However, as argued in many areas, there are many types of such contracts (not all bad) – Independent 3rd April 2015 – and the move to such contracts may well be a harbinger of changes in the working structure. If the latter, while abuses at work need to be stopped, then we still need to have a change our thinking about how we assist those who are independent contractors to develop skills and capabilities (and also help them to negotiate good independent contracts) and to help them to access the work where it is available.

This calls for government to understand and work with the organisations that represent the self-employed – who have been for so long the virtual bystanders in a game carried out by business and representatives of permanent employees (trades unions and staff associations).

There may well be no repeat of the Swing Riots in the 21st Century but as inequality of income and wealth become progressively worse, it is critical that we ensure that inequality of opportunity for all those who want to work but may decide (or have it decided for them) to work as independents is minimized. This can be done by enabling training in skills and enhancing the networks of opportunity for them.

Independent working can be entirely fulfilling but the old (Ed Miliband?) mindset needs to change to the way the world is working in the 21st Century and to maximize the ability of the self-employed / Independent worker to achieve success in this changing (and uncertain world).

 

 

 

 

 

 

“Blind Eye” Culture in Business

A good article written by Rowan Bosworth-Davies and posted on Linkedin today prompted me to respond favourably as follows:

This article has a shown a good understanding of “blind eye” corruption that is, unfortunately, at the top of many banks and many businesses. It could be argued that HSBC, Tesco, GSK and many others (from the UK alone) pushed bottom line growth at the expense of ethics and (often) the law while senior management profess no knowledge whatsoever of the problems that were under way in their companies.

When I wrote “Last Line of Defense” 15 years ago, I tried to explain in the book the process that a business (written there as a fictionalised US defense and aerospace business) went through that propelled it to commit corrupt acts while keeping the boss clean. Having worked in that industry, it was something that I had seen at first hand and 15 years’ later, it persists. Businesses are subject to major stresses and opportunities that drive them to the edge of acceptability.

For large companies, the penalties need to be huge to stymie the desire to do wrong and they need to be enforced. Prevention is the best cure, of course, but that depends on rigorous independent scrutiny by NED’s /Independent Directors that has not showed itself to work at HSBC.

It needs external auditors who should be required to carry out audits of potential corruption and the company’s adherence to processes that prevent it.

It requires leadership that drives in a culture of ethics throughout.

It requires a business that makes it clear that is has to know that each area adheres to its ethical culture and where there are no areas of secrecy – again, as is claimed at HSBC.

The banking crises and the problems at Wall-Mart, Tesco, GSK and elsewhere show that the problems that bedevilled the Defense and Aerospace industry (and may still do in some areas) is common throughout finance and elsewhere. This culture is one that has been tolerated by Governments – especially in the UK where prosecutions are not made if there is doubt of success. This is a problem in corruption and money laundering that makes top business people complacent. Only in the USA does there appear to be a drive to resolve this problem – at least via prosecution.

Gulliver’s Travails – HSBC’s Satire on the rest of us

150225_Gulliver

 

It seems like Jonathan Swift’s best act of satire has been mixed with Robert Louis Stevenson’s best story-telling and then updated to the 21st Century as HSBC were derided before the House of Commons Treasury Committee today (25th February, 2015).

Nick Shaxson wrote “Treasure Islands” about tax havens but even he could not have foretold what looks like a complete satire on British society perpetrated by our biggest bank.

The Chair and CEO of HSBC Holdings (Stuart Gulliver and Douglas Flint) may well have been crafted by Swift and Stevenson. Lemuel Gulliver and Captain Flint (or his parrot that sat on the shoulder of Long John Silver) are two of the greatest characters in British fiction.

Gulliver’s Travels was (especially in its pre-Bowdlerised version) a satire on government and the British people.

Treasure Island was a story about man’s greed.

How odd that its two best-known characters come together before the Commons treasury Committee – both trying their best to defend their own position and that of their bank’s.

The Satire

HSBC are surely being disingenuous or maybe downright satirical pouring scorn on the general public. As they have been dealt blow after blow around money laundering, gold pricing, Swiss bank tax evasion and others, the satire has grown.

We sit open-mouthed at the sight of senior business folk that have earned £ millions but who take no overall account for the problems that were caused on their watch. Banking is now held in total contempt by most yet no-one has been brought to account in the UK since the banking-induced recession in 2007/8.

To the banks, the rest of society appears to be merely a group of Lilliputians finding a giant on the beach but being so impressed by their size and strength that we can do nothing.

To the banks, the rest of society appears to be like treasure chests that are theirs to own.

This is the reversal of their original intention – which was to lubricate business and to enable tomorrow’s investments to be made earlier. Society needs to find a way out of the satire that is being played on itself and what better opportunity is there than in the dual presentation of Swift and Stevenson’s characters before us?

No Impunity?

It is very hard to feel empathy for wealthy bankers who have presided over such failings. Douglas Flint points out that he has not taken bonuses for some time and Stuart Gulliver believes that banks are now being held to higher account than the Church and the armed services. The first is irrelevant and the second is a disgraceful statement that does much dis-service to any organization that has made so many gross errors of judgement and suffers so little governance – governance that is only applied when mistakes are found out.

The ability of senior bank staff in the UK to maintain complete impunity from prosecution remains a singular insult to the rest of the population that has seen real wage deflation since 2007/8.

However hard it is to bring bankers to justice under UK law, there seems to be as little chance of action now as there was when Gordon Brown was snuggling close to that community when the roof caved in.

HMRC appears complicit in its investigations since the receipt of whistle-blown data five years ago but that should not inhibit the UK’s investigators from doing more than the Treasury Committee – which seems to accept that it cannot find anything out before it goes wrong time after time after time and just hopes that HSBC gets it right sometime.

Messrs Gulliver and Flint had an uncomfortable day today and I am sure that they are working hard to make things right. Yet, claims that they did not know what was going on in Switzerland (or elsewhere where the bank failed) are weak claims that have not been sufficiently critiqued. When HSBC bought the Swiss private banks, they knew the secrecy laws in that country and they knew that there were major risks. To adhere to the escape clause of Swiss secrecy in a UK-registered company with world-wide shareholders seems to be an attempt to escape responsibility for any problems that might ever be encountered when an acquisition is made.

The reputational losses to HSBC as a result of the acquisition is substantial. HSBC’s shareholders should be mounting a class action on that basis alone as today statements were made that seemed to suggest that when HSBC makes an acquisition in a place of opacity, no matter what the outcome the senior staff that signed off on the acquisition cannot be held to account.

That is in addition to the nonsense that HSBC Board members should be relieved of governance responsibilities if there is secrecy in a jurisdiction.

This is surely a great satire perpetrated on the rest of us. Someone does need to unravel it. Swift originally wrote Gulliver’s Travels as a gross satire on society. We should not allow Gulliver’s Travails (and Flint’s) be Bowdlerised in the same way.

So and so’s. How Some Banks Con

What does HSBC stand for? What do we do about it?

“so and so” – an undefined person considered beneath contempt

  • So, HSBC is shown by the BBC to have systematically organized illegal tax benefits for hundreds or thousands of its customers through its Swiss subsidiary. No surprise.
  • So, HMRC (the UK’s tax collection agency) has recovered only £135 million since that time in tax and penalties out of billions that are illegally saved each year. No surprise.
  • So, HMRC and this government agreed with the Swiss authorities (after the leaks about HSBC were found) not to prosecute except where the cases would be virtually guaranteed to succeed. No surprise.
  • So, the then Sir Stephen Green (now Baron Green), then HSBC’s CEO at the time is not talking and the Conservatives (via the chief Secretary to the Treasury – David Gauke) say that there is no evidence that he directly knew of what was going on. No surprise.
  • So, the Conservatives demand to know why Ed Balls, now Shadow Chancellor and then City (of London) Minister did nothing at the time. No surprise.
  • Anyone see the actions that the issues and finger-pointing provoke? Just politicians ranting at each other while the poor taxpayer – those “so and so’s” who have been squeezed mercilessly since the banking industry exploded in 2007/8 – is left with the bill – lower wages and austerity.

Meanwhile, the real “so and so’s” who should have been prosecuted and some doing time in prison are seen as outside the justice system – no longer within the law despite proof of a multi-billion pounds swindle on the UK.

So what?

Well, there has been extreme tax fraud – no-one denies it. Even HSBC accepts that they have had to make major changes in their banking practices – although, according to staff who have left HSBC this did not really make any progress until well into 2011.

Sir Stephen Green may well not have known the specifics. CEO’s of big banks (and most large organisations) are sheltered from the bad things going on but it is no defence to state that they did not know “specifically”. CEO’s are appointed as heads of such organisations and set the tone – the culture – of any organisation. As such, they are culpable for any major misdeeds that occur. In his excellent book on RBS, Shredded, Ian Fraser takes apart any claims that CEO’s can be said to have stood outside the fray. Maybe RBS was even worse than HSBC but senior management set the culture and reap the rewards of profits – Sir Stephen would have benefitted personally from the gains made through tax fraud in the Swiss subsidiary and, if he did not know what was happening (just as Henry II is alleged to have made the claims about Thomas Becket’s murder in 1170), then his lack of pro-activity in finding out would have been a joke. We don’t seem to have learned much in 845 years!

Anyway, if Sir Stephen Green knew nothing and is as innocent as a puppy, then how can Ed Balls (City Minister at the time) be accused of knowing everything by the people who then appointed Sir Stephen Green (now Baron Green of Hurstpierpoint) to Government in 2010?

Is there really a case against Ed Balls when the good Baron knew nothing, apparently? David Gauke sounded ridiculous on BBC Radio 4’s Today programme today because he was being so. Stupid political points were being made when the “so and so’s” who rule the world (the bankers) are freed from the rigours of the law (and any ethical codes) and continuously benefit.

Public Accounting for the “So ands so’s”

So, Margaret Hodge (the Chair of the British Parliament’s Public Accounts Committee – PAC) states that she will bring those responsible before her Committee. She states, quite properly, that the UK is not “aggressive enough” is tackling these issues. Even though the issues occurred during the previous Labour Government’s period in office, Mrs Hodge states very clearly that Stephen Green has a responsibility – he either “knew” of the tax dodges or was “asleep at the wheel” – quite right!

The PAC should now (seven years too late) point to what should be done: not just who is culpable but how the UK will recover the lost tax and how the UK will not stand for repeated situations. The USA fines banks billions of dollars. The UK (with the political establishment too much in hock to the banks and the civil servants and HMRC too timid and weak) does almost nothing but whimpers about no-one being responsible and it being too difficult to prove.

Which “so and so’s” are running the madhouse?

Isn’t it time that those who have suffered so much from the banks’ failures begin to see some recompense? This is not a desire for revenge but failures of this size have not led to a discernible change in this country’s culture or efforts to ensure such failures do not recur.

HSBC seems not to have been penalized for tax avoidance schemes and a culture that would not be tolerated even at Tesco. The UK has a need to change the way it deals with abhorrent schemes and aberrant behaviours. Politicians and those who work in the public sector need to feel the pressure that the public wants them to be under – pressure that needs to result in the defence of public needs. If it does not, then Syriza in Greece was an outcome of such lack of public interest and UKIP in the UK is another (although not quite the anti-aberrant banking behavior that is needed). If this Government does not ensure that the “so-and-so’s” aren’t allowed to run the country, then May’s general election in the UK will see an even more angry electorate ditching them.

13th Century – Magna Carta; 21st – a new “Great Charter”?

‘to no one will we sell, to no one deny or delay right or justice’.

Magna carta

On 15th June, 2015, Magna Carta will be commemorated. It will be 800 years since King John of England affixed his royal seal to the document at Runnymede – alongside the Thames in southern England. Magna Carta was an agreement between King John and English nobles that sought to overturn the singular rule by a despotic monarch and set the scene for the gradualist changes that resulted in democracy.

Magna Carta emphasized the rights of the individual over the state (even if those individuals in 1215 were just a few nobles).

That fight between the state (and those who want to capture the state for themselves) and the individual is unresolved 800 years later despite successive waves of change.

While in the West we consider the balance between the State and individuals to be rational and where the rights of individuals are upheld by rules such as The Human Rights Act, there is a perpetual seeking after new balances when threats appear or when certain groups capture more of the State. In the USA, for example, this balancing resulted in the splitting of responsibility between Executive, Legislature (itself into two parts) and Judges – which Fukuyama now calls a “vetocracy” which is more and more in the pay of key sectors that know how to manipulate decisions.

More widely, nations like China and Russia have never allowed significance to a balance between the state and individual rights. China, especially, has for 2000 years emphasized rule by law rather than rule of law – where the State (or those that consider themselves to be the State) is above the law. Xi Jinping’s recent attack on corruption appears to be but the latest attempt by one person and his clique to dominate the state.

More recently, like a laser beam to the head, the murders in France of journalists at Charlie Hebdo, of a Muslim policewoman close by and, later, at a Kosher deli, have highlighted that the individual and the rights of any individual are consistently challenged by states and those purporting to act on behalf of a state (or, in this case, an entity that stood before the state or that, in some cases, acts as a state – here, a religion).

The death of King Abdullah of Saudi Arabia reminds us of the total submission of individual rights in that country beneath the rule of one family – under the aegis of the Wahhabi sect of Islam.

Individual Rights

The battle between the State (whether represented by an elite or an ideology headed by a group purportedly representing that ideology) and individuals is a battle that clearly still rages. The rights of the individual against such groups are key to the different mindsets that distinguish real freedom from all other forms of government and governance.

The spectrum is a wide one but State (with a wide definition of that word) “ownership” ranges from political or quasi-political (such as China) to dictatorial (Equitorial Guinea, Angola) to religious (ISIS) to monarchic / theocratic (Saudi Arabia) to such “democracies” where voting is rigged (such as Zimbabwe and Afghanistan) to enable elites to maintain themselves in power.

This is not a battle between different nations but one where the rights of individuals are challenged by state or state-like bodies.

Whereas we may not see the actions taken against journalists in Turkey by the Erdogan regime to be in any way similar to extreme violence as has just happened in France, it is on that spectrum. Between states that defend the rights of individuals and those which violently oppress them (and subsume them to the so-called state or a religion) lies many variations – but, all can slide in the wrong way to extremism.

The extremists who claimed to be Islamists are one extreme; Erdogan’s government is dangerously edging in that direction as freedom of the press is a crucial embodiment of individual freedom.

Corruption at the Heart

Sarah Chayes has just published “Thieves of State”. It is an extraordinary book that, through her own experiences as a journalist and then on the staff of various military commanders from the US and in places like Afghanistan, enables her to show clearly how corruption is at the heart of so many national and international upheavals. From Afghanistan to Egypt, from Tunisia to Nigeria, governance has been geared towards corruption and becomes the mechanism of government.

Sarah’s aim is to show how the corruption flow in those countries is not top-down, but bottom-up, where so-called “facilitation payments” lead up the chain to larger corruption at the top – whereby nations recast themselves as mafias but, now, emasculating nations.

She shows how Karzai was able to do this in Afghanistan; how the military do this in Egypt; why this was the norm in Tunisia.

Individualism and the right of individuals to have justice have no place in such states. The state is simply a mechanism to suck the benefits of society through corruption to a few at the top who become extremely wealthy and some further corrupt benefits to those further down to makes ends meet. The vast majority of society suffers through lack of funds and the thieving of funds meant for development – for policing, for security, for health services, for education and for the rest of what we in the West would call normality.

This is why the Arab Spring promised so much but gave so little. Only in Tunisia has the promise started to be met. The strength of people in such a country is to be applauded and the recent election of Beji Caid Essebsi in a free and open election to be warmly welcomed.

Similarly, the people of Sri Lanka made a momentous decision at the ballot box by throwing out President Rajapaska and electing Maithripala Sirisena – a man dedicated to fighting corruption and nepotism.

Yet, as Sarah Chayes has shown, outside of these countries, either corrupt states remain ruled by corrupt kleptocrats or the fight back is via religion. Boko Haram and ISIS claim to be against the ways of the West as they see it – the corruption that is embedded in Nigeria or Iraq. At this extreme, even education is seen as the mechanism by which individuals grab the capability to enter into the corrupt system. Chayes views the connivance of the USA in that corruption (she mentions the suitcases of cash that the CIA provided to Karzai as but one example) as leading to the success of terrorist organisations in gaining credibility amongst many people in countries like Iraq because they see this as the only way out of the corruption that wrecks their lives.

Working on the disease

Yet, it is 800 years since Magna Carta – an agreement between a king that believed in his own divinely-given rights as usurping all others and a group of wealthy noblemen that wished to garner some rights to themselves. From that time, many of us have progressed to where individual rights are now enshrined in law and also in practice.

Yet, as recently as the 17th Century, England was riven with corruption – it was endemic. Samuel Pepys, the renowned diarist of that time, spent six years to work corruption out of the Royal Navy – which was crumbling under the weight of bribery and nepotism – notably, the sale of position and procurement. Although Pepys was not innocent of corruption himself, as his biographer, Claire Tomalin has written, his own honesty went some way to right some wrongs. England gradually, through the 18th and 19th Centuries, eroded corruption from its core but it was not an overnight demolition. Chayes’ example of Singapore and its ability to eradicate corruption almost overnight is a good case of a small nation challenging itself and succeeding. Elsewhere, it takes longer

Chayes focuses sensibly on the role of not just organizations like the military within corrupt nations but organisations outside like the CIA in understanding the drivers against the halting the disease of corruption and the complete erosion of justice. However, as the West (via organisations like the OECD and the US FCPA) progressed after World War II to a consensus on governance and how governance would become part of the stated requirement for development assistance, this has, more recently, been unsettled by the rise of China – which has appeared to care little for such governance considerations – notably in its dealings with African states.

This unsettling of the post-WWII consensus (despite Xi Jingping’s drive to eradicate the disease in China – which many suggest is more politically motivated than anything else) is a major challenge that can be added to Sarah Chaye’s list of issues to be assessed when developing an anti-corruption programme.

A “Great Charter” for the 21st Century

Sarah Chaye’s book puts corruption at the heart of the problem that besets the world.

  • While climate change (with its own problems of solution and understanding) has been seen as a world-wide challenge that has to be resolved;
  • while health concerns are the subject of huge technological research and financial resolve;
  • while economic prosperity is the subject for everyone at all times;
  • while nature conservation and the future of human life on this planet is a central consideration of all;
  • while terrorism is dislocating masses, murdering thousands, displacing millions – often through the guise of extreme forms of religion – and requires regular government action;
  • corruption plays a role in all the world’s key areas of collapse but has far less formal acknoweldgment.

From small-scale facilitation payments to large scale national strangulation, corruption inhibits and destroys.

The world now needs a charter for the 21st Century that marries the rights of individuals and justice (started with the Magna Carta in 1215) to the rights of individuals and communities to be unhindered by corruption. We now need a formal acknowledgement of its central corrosive ability that destroys nations, destroys security and completely disallows individual and community justice to take place.

“To no one will we sell what is not ours to sell”

“From no one will we take what is not ours to take”

 

‘to no one will we sell, to no one deny or delay right or justice’.

200 Years of Peace? 200 Years of Rockets and Bombs?

Dec 24, 1814 – Signing of the Treaty of Ghent between USA and UK

Dec 24, 2014 – Arms Trade Treaty

141215_TreatyofGhentpicii

While we have been commemorating the centenary of the beginning of the First World War, it is now exactly 200 years since the UK and USA signed the Treaty of Ghent signaling the end to the War of 1812 and the establishment in British eyes of American equality, firm agreement on borders and freedom to sail the seas and an agreement to seek the end of slave trafficking. The Treaty was deemed to be “an honourable peace” for the United States that many believe was a rallying call to its citizens – honourably exiting the War with firm borders and a fundamental view of nationhood. The UK and USA have been at peace (outside the odd skirmish) for 200 years and “The Star Spangled Banner” (written in 1814 to commemorate the bombardment of Fort McHenry in Chesapeake Bay by the Royal Navy) remains the anthem of the USA to this day – while its lyrics remain constant:

“And the rockets’ red glare, the bombs bursting in air”

During those 200 years, however, the world has been stricken with world wars and regional conflicts that rewrote borders almost everywhere. We live now with the consequences of borders drawn up by Empires that bore very little resemblance to the needs of the people within them. In many countries in Africa and Asia, nations were brought into being that collected many different peoples. In Africa, these people were then subjected to rulers that grouped them into so-called tribes (that Fukuyama describes as newly created) and have been the cause of much bloodshed since then. Nigeria, for example, was never a nation until it was created by the British and the Muslim north and Christian south are uneasy bedfellows.

21st Century Nationhood

The 21st Century offers both great opportunities and great risks. The nations that have been established during those last 200 years may, in many cases, bear little resemblance even after all those years to the people that live there.

  • We see this in nations like Ukraine where Russia is attempting destabilization through the indigenous Russian populations in the East.
  • We see this in a country like Nigeria – split between a Muslim north and a mainly Christian south.
  • We see this throughout the Middle East where the so-called Islamic State (IS) calls for a caliphate and an end to the “arbitrary” borders brought in by the British and others after the First World War, where Sunni and Shia are pitted against each other.
  • We see it in many African states, where colonial rulers attempted to develop states which had not existed before and where definition by nation is still hugely misunderstood.
  • We see it in China where Tibet has long wanted its independence and where the Uighurs still rally against Han domination.
  • We see it even in western Europe where, for example, the Scots only narrowly decided to remain in the UK after a referendum, where the Catalans are keen to split from Spain and where many northern Italians yearn to split from the under-developed and relatively ungovernable south.
  • We saw it in the Soviet Union which broke up into states that were better aligned;
  • We saw it as Yugoslavia split.
  • We saw it as Czechoslovakia split.

Multi-National groupings

 

The 21st Century has, however, witnessed a rapid drive to globalism so that the inter-relationships of countries with others are more complicated than ever. Whether it is China in Africa or the USA in Central America, leading economies are progressively more dependent on others.

This is now a world where multi-national companies are in competitive positions with nations. Maybe not in the same way that the British East India Company – which still had its monopoly intact at the time of the Treaty of Ghent in 1812 – but where agreements under way such as TTIP (Transatlantic Trade and Investment Partnership) between the EU and USA, companies are expanding their rights to take Governments to court under the ISDS – investor-state dispute settlement mechanism. Several countries (such as South Africa and Indonesia) are now opting out of such arrangements  which provide an equality between corporations and governments that could well be said to be anti-democratic.

Beyond companies, nations are increasingly engaged in arenas such as the UN, EU, NAFTA, African Union, ASEAN and multitudes of other multi-national engagement devices.

With the rise of the internet and social media, it is also far easier for individuals from opposite sides of the world to group together and do so within seconds.

Orwell posited three regional groupings with continuous warfare in his “1984”. 66 years on from when that book was written, the bipolar world of the US and Soviet Union became the unipolar world of the USA and now sees the rise of China fighting for prime position economically and others fighting for the next division placings within a world of fast communication and many forms of potential divisiveness and opportunities for engagement.

Big Brother may well be in place but it is more two-way as Snowden recently showed. As long as there remains a free press and the use of the internet is available, this will continue in ways that Orwell did not foresee (outside of states like North Korea and, at a lower level, China).

 

Shifting sands

It is not just in the Middle East that the sands shift as IS is fought by the Kurds and local national forces.

Sands continuously shift throughout the world as people group around a variety of causes, ideas and faiths and behind a variety of organisations and individuals. In a complex world, change is constant as our experiences evolve. However, it is clear that nations can no longer hide within themselves – each nation is exposed externally and internally as communication systems expand.

It took several weeks for the fact that the Treaty of Ghent had been signed to be relayed to those in the USA still fighting and dying.

Now, drones don’t just provide the means to inflict missiles on enemies but also provide data and information within milliseconds. Mobile phones provide instant photos and videos worldwide. The so-called Arab Spring was clearly accelerated by such media and took Middle Eastern governments by surprise as a result of that speed. In Tunisia, the results have been impressive for democracy even if elsewhere the forces for vested interests have re-emerged.

We do not know how humans will be organized in 200 years’ time. Issues like the environment and global warming will take precedence as the real (rather than promised) effects bite. These and other impacts will provide a changing environment that will, as always, require the most from human ingenuity. As we would appear to the world of 1814, the world of 2214 will feel very different to now – even if we can assume that technology will maintain our enjoyment of the planet.

But, what we assume to be stable – the nations that we are part of – will undoubtedly shift over this century and beyond. As rapid and increasingly ubiquitous communications become ever more the norm for most of us, and, after what may be a long period of difficult adjustment, there could be a tendency towards a better understanding of humanity beyond national boundaries and of our place on this planet.

While the Treaty of Ghent is hardly a cause of much celebration and it has been almost forgotten amongst the sounds of WWI commemorations, it was significant in that it signaled friendly relations between the most prosperous nation on earth at the time (the UK) and its wayward child (the USA) – two “united” nations that remain and prosper 200 years later – much of that owing to their “special” relationship that has matured during that time.

Today, 24th December, 2014, the Arms Trade Treaty (ATT) comes into effect. Could this be the positive event that will be celebrated 200 years from now? That Treaty has been signed up to by 130 nations – not even signed by Russia and China and still to be ratified by one of the signatories to the Treaty of Ghent – the USA. It took several months for the ratification of that Treaty by the US Senate in 2015 – owing mainly to communication delays. There is no such excuse in 2014/15. Let the ATT not be delayed any further – let nations not be swayed by the arms companies.

For now – let’s all enjoy the festive season and my best wishes for 2015!

Banging the Cultural Drum for Banks

 

Banging the Cultural Drum for Banks

Banging the Cultural Drum for Banks

Culture – the total of the inherited ideas, beliefs, values, and knowledge, which constitute the shared bases of social action (Collins English Dictionary) 

Ethics – the moral value of human conduct and of the rules and principles that ought to govern it |(Collins English dictionary)

“The epitome of the multifarious cultural and ethical failures at the bank include the fact its investment banking arm, now due to be largely shut down, was only able to thrive by cheating, and that the arm, now called Markets and Investment Banking (M&IB), continued to rig various benchmarks, swindling investors and counterparties, for years after the bailout.” Ian Fraser – describing one aspect of his book “Shredded: Inside RBS The Bank That Broke Britain”


 

Just last week, Cass Business School and New City Agenda issued: A Report on the Culture of British Retail Banking . It is a useful analysis of the banking failures but, for once, centred on culture at the banks. As such, it deserves attention.

In a previous note my focus was on how the banks had got themselves into a grand mess because they rushed into a culture that was short-term and focused more on individuals working for the banks than their customers.

The Cass / NCA report is a useful attempt to understand the cultural problems of the banks and what needs to be done to change those problems. It seems churlish of me to sound a note of concern with the analysis bearing in mind how much I have written on the need but, despite the work that has gone into the study, I do find some serious gaps in the assumptions, the recommendations and the risks.

 

  1. Society

 

One concern is that the study suggests banks (particularly the larger ones) are similar to any other large companies – like those in the oil sector (to which reference is made concerning culture change) – and should therefore be treated like those in other sectors. Unfortunately, banking is unlike any other sector.

 

  • No other sector creates money;
  • No other sector holds the rest of the economy to ransom through its systemic economic risk;
  • No other sector is so intertwined with economies and governments.

 

For these reasons, the thought that banks have to be allowed to take care of themselves (which is a crucial assumption of the report) contains dangers that the report does not examine. While banks are intimately involved with other organisations in both private and public sectors, the report does not seem to share a view that wider society has a stake in them. The fact that general taxpayers are paying off the burden of their recent misdeeds is a real and proper concern. It is not just “customers” (a key focus of the report) that feel the problem of poor investment in IT or bad service – it is also all those affected by huge government deficits and cut-backs that have been the result of the banking induced crisis. I don’t see this recognition.

 

What this means is that banks cannot just be left alone to reflect on their cultures. There does need to be a societal involvement in the cultural thinking that shows banks understand what they are there for – which is different to most industries. This culture is not just about being sustainable or not creating “externalities” (like oil companies should be focused on – e.g. pollution) but on the central role that banks play in society and the huge risks that they provide. This short note is not the place to examine the role that banks should perform (although I have touched on that before – https://jeffkaye.wordpress.com/2012/02/05/banks-and-time-travel/) but their national and economic roles and their inherent risks have to be important aspects of their culture.

 

  1. Ethics

 

The mention of ethics in the banking system is a touchy one. Ethical codes are often there to be abused (viz. FIFA) but the banks perform such a key role in society that they should not be allowed to differ in how they develop ethics codes and they should be regulated around ethical behavior.

 

The word “ethics” appears fleetingly in the Cass / New City Agenda report. Yet, it should be the basis upon which culture is developed. It is via an ethical approach to its customers and wider society that banks need to be based. The report focuses on how banking culture has been “Sales” led (even excessively so) but this would not have happened if banking culture and banking leaders had been ethical in their approach.

 

  1. Accountability

 

Again, the report states that the banks operated a “Sales Culture” – and was excessive in that direction. Of course, all businesses have to operate a sales culture to a degree or they go out of business. But, the extreme form of “sales culture” that operated was enabled by top management.

 

It can be stated reasonably that banks operated (and still operate) without a culture of accountability. Another crucial organisational mandate that appears to be missing from the analysis in the report is this one – individuals within the banks seemed to be accountable to themselves or to just small groups. The businesses did not seem to have areas of key accountability for such fundamental mistakes and still do not. Any successful business or organisational culture requires accountability – culture is driven from the top so that it must be clear that “the top” has to be clearly accountable for major deviations.

 

This accountability has to be within the Board, Board Committees, Regulators and Auditors. The culture has to be clear that accountability is embedded within it.

 

  1. Governance

 

This is linked to accountability, of course, but Governance has to include the oversight of business culture – which is itself wrapped within the overall purpose of the organization. Governance is, by law, the responsibility of the Board acting on behalf of shareholders. However, in the case of large banks – and this becomes a crucial requirement – societal governance should also be required. A bank’s board, when deemed to be large enough, should include Directors who are there to judge whether the bank is meeting its societal objectives – a privately owned, market-driven business but with key societal objectives. This is, therefore, linked to both accountability and societal inclusion. Having The Banking Standards Review Council under the auspices of Sir Richard Lambert is fine but this Council is likely to be dominated by the banks – indeed, Sir Richard is looking to the banks and building societies for members – a bit like the police governing the police. The BSRC (if it is to work at all) needs outside members who are not influenced overmuch by the banking fraternity.

 

  1. International Norms

 

Another problem for the banks (and the report) is that we now live in a global economy. As in the period leading up to the disasters of 2007/8, our banks did not act alone but were in a group of western banks throughout Europe and the USA that played the same game. Next time, the centre of the storm may be elsewhere.

 

This requires some real thought being given to how British banking will (if it adopts sustainable cultures) not be persuaded to ditch their ethics if others go haywire as in 2007/8. This requires international banking to be based on the same footing. It may require a set of ethical baselines such as the one that EITI (The Extractive Industry Transparency Initiative) has developed for that industry.

 

  1. Sustainability

 

Covering all of the above is the need to banks to be properly sustainable – and the report does focus on ridding the industry of its short-termism. However, this is, again, for both the industry and for society to develop a sustainable path – as banks are often too big to be left to themselves and have shown a distinct lack of ability to judge what will make them sustainable.

 

  1. Risk and pay

 

The final issue I believe has been de-focused is that bankers pay themselves when they do well and just lose bonuses when they don’t. Assuming they work within the law, why are bankers paid as entrepreneurs on the upside but as staff on the downside?

 

If pay is to be maintained on the upside, then so does the opposite apply. Entrepreneurs are risk animals that bet their own money to reap fortunes if they succeed. A major flaw in our economies is how the financial sector and managers within it (to a reduced extent the same in other sectors) have captured the winnings from those with “skin in the game” – which used to be the shareholders.

 

The latter suffer the risk of loss on the downside, bankers do not. This should be changed.

 

21st Century Banking Culture

 

Society, Ethics, Accountability and Governance appear to be the basis for any banking system in the global economy of the 21st Century. While the report is highly practical and research based, leaders within the UK (not just bankers) should be developing the strategies for the future based on a society that will perform and that we want to be part of.

 

Banking is too important to be left to just practical considerations. Real leadership is required and unless societal, ethical, accountability and governance concerns are fully embedded into banking culture, the same problems will arise time and again.

The Corruption Agenda gets into Higher Gear

Last night, 20th November, Transparency International – UK (the UK chapter of the world’s largest anti-corruption NGO) held its Annual Lecture. TI had invited Jose Ugaz several months ago and in the meantime he had been elected Chair of the world-wide TI organisation. It was in this new role that he addressed an audience of several hundred people in the Canary Wharf office of Clifford Chance.

141121_yXJ68_3k_400x400

TI has been, for many years, known for its excellence in research (something we cherish in the UK), for its excellent people amongst over 100 chapters world-wide and, in the UK certainly, an ability to influence at the highest levels.

Recently, we were delighted by the Prime Minister’s pledge on beneficial ownership (the development of a register of all company owners in the UK).

A New Gear for Corruption

Jose Ugaz has a great background (bringing Fujimori to jail in Peru along with 1500 other successful prosecutions for grand corruption there – in effect, unravelling the overthrow of a state by an elite group that rules through corruption) and made a great speech.

The cornerstone of this speech was that, on the shoulders of TI’s success over the last 20 years, it would now be more forceful in attacking grand corruption and in bringing to book those responsible (ending impunity). This is a change for TI – not noted for its forcefulness in attacking individuals but more for its focus on changing systems. It will be a challenge as it develops and understands fully how to manage the process.

However, the approach has received tremendous support within TI and, from last night’s reception, this is also supported by those with an interest in the subject.

The World has changed

The timing of this re-emphasis is important. Not only is the world still reeling from the shocks of the financial disasters of 2007/8 but much of the world’s legal framework against corruption is in place. From the FCPA (introduced by the USA back in the 1970’s) to the  OECD anti-bribery convention through to the UK’s Bribery Act of 2010 and many other laws introduced in China and elsewhere, the word is out – that bribery and corruption are a central part of the world’s problems whether because of the billions annually stolen from the poor that deprive them of food, shelter, healthcare, education and so much else or because of the huge security issues that result from corruption in armed forces that allow situations to develop as badly as in Nigeria and Iraq.

The stage is now set for the implementation (understanding that laws will need to keep up with changes in the world). Implementation means the carrying out of the law on an international scale.

Making the anti-corruption laws work

It has taken over 20 years to bring in the legal changes that are now in place. While not perfect (and still fought by many such as Chambers of Commerce in the USA), they provide a basis for real change.

However, as Jose Ugaz was at pains to point out in his speech, levels of corruption world-wide are probably higher now than they were 20 years ago. This needs a focus on priorities (which he believes to be grand corruption – involving life changing amounts or having major adverse impacts on those defrauded – and “no impunity”) and means a change in several areas.

For TI, this will mean focusing on real cases of grand corruption and bringing those responsible before public opinion and many to court.

It also means, in my view, an emphasis on the ability of law enforcement agencies throughout the world and on the governments that fund them to make the laws work. This means prioritising and funding those agencies to detect, investigate, solve, charge and convict – not from time to time but as the norm in the same way that we in the UK would expect murder, violent crime, major robberies and other crimes to be resolved.

This will be a real challenge too – many countries in the world do not have effective judicial systems or effective law enforcement – much of which is corrupt.

That is partly why a move has been made to develop an International Anti-Corruption Court on the same basis as the International Criminal Court – notably by American Judge Mark Wolf.This is worth pursuing even if it will be hard to achieve.

Sometimes, you know that change is in the air. Corruption is now endangering whole nations – from Russia to Ukraine, from Mexico to Iraq, grand corruption is endemic. But, there is also a sense that the time is right for some action. Jose Ugaz showed that the approach can work and now leads an NGO that is fixed on the goals that he is now setting.

It was a great speech that was highly motivational. As we all know, words have to lead to actions – just as the words in all the laws that are in place in so many places now have to lead to enforcement and implementation.

 The writer is a Trustee of Transparency International – UK

 

Why use GDP for our EU Membership Fees?

There was some useful analysis in the Financial Times on how the charge for the UK’s membership is calculated but the real question should be how the UK’s membership fee is actually derived and whether it is proper to do so in that way.

75% of our membership fee is based on Gross National Income – see Eurostat website – basically GDP plus overseas resident income less foreigners’ income from the UK.

The base of GDP (so well explained in Diane Coyle’s recent book “GDP“)  is fraught with problems as GDP is a measure of gross output in reality and not a real measure of wealth. In addition, it seems that there is no sense of income per head of population so that we could be getting poorer per head and still pay more into the EU.

The focus on GDP (imports and VAT making up the rest of the membership fee) should be what we focus upon. While sales figures may be fine as the base for membership clubs, using it as the major source of our EU fee is problematical and deserves more scrutiny as GDP was never intended to become the source for such calculations but is a lazy measurement – ignoring, for example, factors for wealth per capita.

In a 21st Century organisation such as the EU, the cost of running the central bureaucracy should be something that is transparent, understood and rational. It is now time for a thorough review of our membership fee – and an understanding of how we are taxed to pay for the EU political hub in Brussels.

The USA rebelled over taxation without representation and it is interesting that we in the UK (the electors) have never been asked about this issue – maybe minor in terms of our GDP but clearly a raw nerve. There is a rebellion around the concept of the UK within the EU and the fact that our membership costs are not understood (by the Treasury as well as the rest of us by all accounts) does need to be remedied.