It was Gordon Gekko who said that “Greed is good” and currently it is that greed which is popularly believed to be the root cause of the current economic downturn. But who was it that said that “Change is Good”? What if the real root cause of the crisis is poor governance , jump-started and caused by the new Change mantra?
Nowadays, the word “Change” appears on a very high percentage of job descriptions. There are “Change Gurus”, “Change Agents”, “Change Trainers”, “Change Management” and a hundred other delicious flavours of Change.
“Change” has become synonymous with progress but very often the consequence of constant change is a company which never quite achieves stability or Steady State. It has been believed for nearly thirty years that a company which does not change, risks being “left behind”. However, there may be certain industries which should embrace the Steady State Theory and not the constant-change environment. Change not-only appears to feed progress but during transitional periods, it also provides opportunities for corporate mistakes to be buried. Because a constantly-changing company never achieves Steady State, management errors and holes in accounts are always regarded as just temporary.
A mere thirty years ago, there were four columns supporting the Financial Services Industry: Banking, Insurance and the Building Societies were the highly visible threesome and their City cousin was the Stockbroker. He was the mysterious one who spoke in a strange tongue and dealt in financial mysteries and abstracts. The sort of stuff that Bankers did not understand.
A few predicted that these four venerable institutions would, one day become indistinguishable from each other. And so it has come to pass.
Thirty years ago, Banks lent short-term unsecured money, issued chequebooks and most branches had a manager who was accessible both to the private individual as well as the local businessman. It was a “people business”. Eventually, Change decreed that Bank Managers were not skilled enough to recognise the subtle shades of risk hidden in propositions which landed on their desks. “Systems” were created. Decision-making was taken from the branches and handed to the system. Credit Scoring was the way forward.
Did credit-scoring work? Yes, but only when it was applied.
Building Societies were still true to their 19th Century roots. They lent money which enabled private individuals to buy a home after they had accumulated a deposit. There were only two types of mortgage. Gross of Tax and Net of Tax. There were savings accounts which were called Paid-up share accounts and there were only two types of these – the only difference being that you could either add interest annually of half-yearly. There were also deposit accounts which paid slightly less interest but allowed the depositor first crack at the funds in the unlikely event of a run on the Society’s funds. The products were simple.
The in the late 80s when MIRAS ( Mortgage Interest Relief At Source) was removed and the green light was given to all sorts of strange hybrid mortgages and accounts. New systems meant that even the most complicated and incomprehensible products could be administered.
Originally, Insurance companies sold peace of mind and would pay either a lump sum or an income to a family in the event of the breadwinner’s death. The first inkling of change was in the mid-seventies when the Royal Insurance Group introduced the first low-cost endowment plan – the G-plan. It sold like hotcakes. In the long term, these contracts produced hundreds of thousands of unhappy mortgagors and many red-faced Actuaries.
Stockbrokers lived in large (sometimes condemned) buildings in the City and they practiced their dark arts without too much interference from anyone.
In the good old days, the lending of money to an individual had never been a profession – it was more of a “trade” because it was simple. Consequently, the money-lending business (nowadays it is called “banking”) was run by ordinary honest folk who could gradually work their way to the top of their organisation. Not a Degree or MBA in sight. The same applied to the Building Societies and Insurance companies.
The Directors would make sure that they kept the bank or building society on an even keel and well within the liquidity rules plus they would vary interest rates when instructed by the Bank of England and they NEVER went bust because it was nigh on impossible to go bust. There was one occasion many years ago when the Chelsea Building Society was forced to revalue its assets in order to comply with liquidity rules but otherwise – no problems.
There were no executive bonuses because the word “profit” was not in their dictionary – but they would strive to make a small surplus. Likewise, there were no golf days, conventions or any other executive freebies.
But dark clouds were already gathering. Even 25 years ago, the Banks wanted to become Building Societies, the Building Societies thought that it would be a good idea to become Banks and the big Insurance Companies wished that they too could become all things to all people.
The high priests of Change were beginning to take a foothold.
Then, in the 1980s, laws were changed and the “suits” came.
Until then, Directors of lending institutions used to be a crustily venerable lot and tended to be unqualified businessmen who strangely enough, were more entrepreneurial than the MBAs that are running the show these days. Typically, they were senior partners in Accountancy Companies, Estate Agencies or Solicitors. They were men in their 50s and 60s who were REAL businessmen who had created their own wealth.
That is where the seeds of destruction were planted – in the panelled boardrooms of provincial England. The Old met the New and were dazzled by the following: (perm any two from six) MBA, Oxford, Cambridge, Harvard, Degree, University.
The pipe-smoking unqualified old duffers were dazzled and seduced by the shiny new boys with MBAs and incomprehensible management jive talk. They all wanted one!
Once laws had been changed and the new boys were let loose, Building Societies issued chequebooks, Insurance Companies bought Estate Agents, banks bought Stockbroking firms, Insurance Companies introduced savings accounts dressed-up as life assurance (remember Unit-lined whole-of life policies?), Stockbrokers morphed into Investment Banks, Banks bought Estate Agents – in fact, everyone bought (and sold) Estate Agents.
Foreign banks arrived in the UK and began buying-up bits and pieces. It was all about Change through acquisition and the ugly phrases “client-bank optimisation” and “cross-selling” were born.
The price that the industry paid for all this change was an imperceptibly gradual loss of management control and increasingly lengthening reporting lines. That in turn, resulted in two things: A sudden growth in regulation (SIB, LAUTRO, FSA) and the emergence of dictatorial and “entrepreneurial” management.
It was in 80s USA that the cult of the “corporate entrepreneur” had been born and transplanted rather uncomfortably into the gut of the UK’s financial industry.
A corporate entrepreneur is a man who takes risks with other peoples’ money and is rewarded for his “entrepreneurship” through the medium of the profit-related bonus.
The Financial Services industry became a testosterone-fuelled orgy of Change, Acquisition, Growth and an accelerating race towards more and more profit. Several CEOs would not have looked out-of-place in a James Bond villain’s lair.
The charismatic, dictatorial Chief Executive with a Messiah complex had arrived. This type of individual was comfortable in the company of millionaires and billionaires and his word was always final.
Many real entrepreneurs took advantage and high-level CEO-administered Vanity Lending was born.
Thirty years of change have created a Financial Services Industry which has become a Frankenstein and our Government is keeping very busy patching it up here and there.
Currently, there is little else that can be done but thirty years of increasingly accelerating change may eventually need radical solutions and perhaps a return to the old ways. Simple products for what is essentially a simple process.
The Change Experiment has not been successful because current economics now owes more to the Chaos rather than the Keynes theory.
Is it time to go Back to the Future?