Good Honest Dollar $$

According to an article in The Australian a couple of weeks ago, executives of Goldman Sachs told managers earlier this month to ensure that reaction inside the bank was subdued regarding the announcement on July 15 of a settlement concerning the firm’s highly publicised dispute with the Securities Exchange Commission (SEC).

Cheering or other forms of celebration, they feared, would damage the firm’s reputation beyond what had already occurred since the announcement of the SEC action last April.

(The settlement, under which the bank agreed to a penalty of $US550millon, represented the largest fine ever imposed on a Wall Street firm to-date.)

Good thing too. The settlement has removed a great deal of uncertainly for Goldman. But it was not a cause for celebration, especially given the prospect of further legal action – not to mention the damage which the bank’s reputation has suffered as a result of these events.

About the settlement
Announced on July 15, the settlement relates to charges against the firm brought about by the Securities Exchange Commission (SEC) in April for defrauding investors by misstating and omitting key information about ABACUS 2007-AC1 (ABACUS), a financial product it sold to two institutional investors as the American housing market was faltering in 2007.

Under the terms of the settlement, Goldman has admitted that marketing materials relating to the transaction in question contained incomplete information. The bank has accepted a fine of $550 million and has also agreed to undertake appropriate remedial action with regard to practices in its offering of mortgage securities.
 

Worries not over
To be sure, from Goldman’s point of view, the settlement does remove a great deal of uncertainty. Better yet, they actually got a fairly good deal: the amount paid is well below worst case scenario predictions (some analysts were tipping $1billion or more – refer article) and no departures at senior levels were required. Things could have been worse.

Still, their problems are a long way from over. For one thing, there are obvious concerns about the settlement serving as encouragement for further legal action from investors who lost out on other Goldman products. Already, Australia’s Basis Capital is asking for $US1billion in damages plus recoupment of initial capital relating to the sale of Tiberwolf securities in 2007 (refer article).  Royal Bank of Scotland (RBS), too (whose subsidiary ABN Amro lost $841 million through the provision of credit insurance on the ABACUS transaction), is widely rumored to be considering its options.

And let’s not forget the ongoing criminal investigation into the bank and its employees by US federal prosecutors either.

Credibility damage
Moreover, the settlement does serve as a blow to Goldman’s credibility.

Granted, the settlement did not constitute an admission of guilt. Nevertheless the fact that Goldman were willing to settle for that amount of money does suggest that they had a case to answer. And given how quickly they caved in, the firm’s initial response (where they dismissed the complaint as being ‘unfounded in law and fact’) does now look a little nonsensical.

For Goldman, this matters. Ranked eighth in Fortune’s 50 Most Admired Companies (refer Goldman Media Awards site), the firm’s standout reputation amongst its peers, along with the prestige associated with its name, has long been a crucial source of competitive advantage.

Hold the Celebrations
Throughout its history, Goldman has had many achievements to celebrate.

In the past six months alone, these include awards such as Euromoney’s Best Global Investment Bank (Jul 2010) and Investment Dealer’s Digest’s Bank of the Year (Jan 2010) as well as inclusion in Business Week’s 20 Best Companies for Leadership (Feb 2010) – and these are just to name a few.

These awards are a credit to Goldman (as are the stellar returns the firm delivers to shareholders so consistently). Celebrations relating to achievements like this are more than justified.

Not so for the ‘award’ from the SEC of Wall Street’s largest ever financial penalty. No matter how much of a relief the settlement might have been, its announcement was no cause for celebration. Any cheering would rightfully have caused further damage to the bank’s reputation.

Goldman was right to be relieved. It was also right not to open the champagne.

That should only happen at times worthy of celebration.

.

In the modern business climate, manners and etiquette are a crucial aspect of maintaining a positive corporate reputation – especially in the course of handling difficult issues.

Good manners cost next to nothing. Yet a little courtesy goes a long way.

Last month in my neighborhood there was a perfect example of a situation which was handled poorly but could have easily been handled better with a little effort – much better.

The situation in question concerns the closure of the Croydon Market, a flea market which operates not far from my house in an undercover car park area adjacent to the Centro Croydon shopping centre.

PCL Prattcorp, which bought the shopping centre and the market site in May, closed the market last month, apparently citing concerns relating to insurance and safety (refer article).

 
A badly handled situation
This was never going to be an easy situation. The market opened in 1908 and has been operating in its present location since the end of World War I. Its closure was always going to be met with sadness. Not to mention the impact on stallholders, who depend on this market and other markets for their livelihood.

But what made things worse was PCL’s handling of the situation. Rather than being given advance notice of the closure, stallholders were not told at all. Instead, on Sunday June 28, they loaded up their gear and made the trip to market as normal, hoping for a good day of sales. (Some came from as far away as Horsham, four hours to the west, where markets had been held the previous day.) Alas, they arrived to find the gates closed and security guards turning them away. Their entire effort had been wasted. Worse still, those dealing in perishables were left with unsaleable stock.

Hardly any better was the company’s handling of the media. Enquiries from the Maroondah Leader, a local newspaper, were referred by PCL’s head office to management of the centre itself. Centre management, in turn, handballed those same queries back to head office. No one, it seems, wanted anything to do with this.

 
What should have happened
This situation could easily have been handled better with only a small amount of effort on the part of PCL.

Two simple steps would have gone a long way:

 
• Advance notice.

Giving stallholders advance notice of the closure would have been basic common courtesy.

Even a short period of notice – say, six weeks or even a month – may have enabled stallholders to arrange to set up at different markets in alternative locations, thereby minimising the disruption of the closure to their operations.

Advance notice would also have allowed them to clear unsold stock in the final weeks of trading.

(Even if safety concerns were a factor in the decision, as the company insists, the suddenness of the closure hardly seems necessary. The market has been operating in the same location without incident since World War I, surely it has not suddenly become so unsafe to the point of needing to be closed without advance notice.)

 
• Coordinated media strategy.

Given PCL’s size – it paid $31.5 million Australian dollars [$USD 26.5 million (approx)] for the centre – its absence of a strategy for handling media enquires is staggering.

It would not have been hard, for example, to prepare a short media statement about the closure. Nor would it have been difficult to arrange a designated contact point for media enquires. Yet either of these measures would have gone a long way toward making PCL look more professional.

(The company did make a media statement in the end. But that did not come until July 02 – almost a week after all the drama. Too little, too late.)

 
Simple steps, big impact
None of this would have been hard or costly. But better handling of the situation would have gone a long way toward enhancing PCL’s reputation.

Stallholders are businesspeople, and have a right to expect advance notice of decisions affecting their operations.

Moreover, the poor handling of this situation reflects badly upon PCL as a company, and this has adverse consequences for the company in terms of community reputation and staff morale. Pity. Even a little forethought on its part would have made a world of difference.

Etiquette and manners are essential when dealing with difficult situations.

Thoughtfulness and consideration hardly cost anything. But a few simple steps can go a long way.

.

There are a number of lessons to be learned from the current disaster surrounding BP and the oil spill in the Gulf of Mexico.

The most obvious (and most important) of these relate to the importance of disaster management planning and disaster prevention strategies.

But one interesting facet of the debacle is how some public statements made by the company have been well intended yet served only to inflame public anger.

Three examples stand out:

• Chairman Carl-Henric Svanberg’s declaration, made after a meeting with President Obama on June 16, that, “We care about the small people”;
• Chief Executive Tony Hayward’s lament last month that, “I want my life back“; and
• Hayward’s earlier comment about the size of the spill being ‘tiny’ compared to the size of the ocean.

 
Fine intentions, bad wording 
Each of the above statements were made out of good intention. Svanberg was simply trying to assure residents in affected areas that the company was taking their concerns seriously. Hayward, too, was trying to apologise for the disruption which the spill had caused to people’s lives.

But none were appropriate. Rather, each served only to cause offence.

Rightly so, too: references to ‘small people’ are rarely well received (Svanberg later recognised this apologised for his comment), and Hayward’s choice of words was dreadful – especially in light of the death of the eleven workers and the impact of the spill on so many lives. As for Hayward’s earlier comment about the size of the spill – that pretty much speaks for itself.

To be fair, given the extent to which BP execs have been under the pump, it was perhaps inevitable that some poorly worded statements were going to come out. And it should also be acknowledged that not even the best worded of statements would have done much given the magnitude of this disaster.

But that is no excuse. Well intended though they might have been, none of the above statements were appropriate. It is right that they backfired.

(It is also right, given the scale of the disaster and BP’s poor handling of the situation, that public anger against the company continues to grow.)

The lesson is clear: efforts to soothe public anger can easily have the opposite effect – especially in a crisis situation.

Choose your words carefully!

 
P.S. I cringe whenever I hear terms like ‘small people’ or ‘little people.’ Regardless of how well intentioned they might be, these terms are patronising and offensive. They have no place in good English usage.

No matter who they are or where they come from, each and every person is important. So too is each and every family, community, region or country. No one should be thought of otherwise and good language usage should reflect this.

.

After a spate of worker suicides, questions must surely be asked about labour conditions at the Longhua complex in southern China operated by the Hon Hai Precision Industry Company (also known as Foxconn), the world’s largest contract manufacturer by revenue.

Most importantly:  should Apple, Dell, HP and others move their business elsewhere?

I don’t think so – at least not at this stage.

 
Background
According to the UK Telegraph, at least sixteen workers have attempted suicide this year at the plant.

Sadly, twelve of these have resulted in deaths.

The number of suicides is not statistically exceptional. According to the Wall Street Journal, the overall suicide rate in China is around fourteen per 100,000 people. At that rate, given the plant’s workforce of around 400,000, you would expect around fifty or sixty deaths in any given year.

Nevertheless, the sudden spate of these tragic events – most of which have occurred over the past two months – has raised alarm bells. Hon Hai’s customers, which include Apple, Dell, HP, Nokia, Motorola and Nintendo, are facing intense scrutiny with regard to there involvement with the firm.

 
Don’t take business elsewhere – yet
Still, western electronics firms are not likely to abandon such an important supplier.

Nor should they at this stage – neither business case considerations nor ethical considerations support this.

Let’s look at each of these in turn:

 
• Business case.

As the world’s largest contract manufacturer, Han Hoi has made itself integral to the manufacturing process of many of its customers. Extracting them from the supply chain, according to the Wall Street Journal, would be possible but difficult.

From a business case perspective, these operational concerns no doubt far outweigh PR considerations associated with the recent publicity surrounding these events.

 
• Ethical considerations.

Nor do ethical considerations themselves make a strong case for taking business elsewhere.

Reports about working conditions at the plant vary. On a BBC forum, for example, Bruce Blanche, a Canadian consultant in Shenzhen, describes prison like conditions and cites reports of workers being doing more than 100 hours per month. On that same forum however, workers at the plant, whilst agreeing that work conditions are intense, describe the factory as ‘top notch’ and ‘very good.’ And labour rights activists, according to the Wall Street Journal, say that whilst conditions are not good, they are improving and compare favourably with those of many other factories in China.

Given the mixed nature of these reports, it is far from certain that working conditions would be better with alternative suppliers – at least within China anyway.

 
A better way – send in the inspectors
But that is not to say that Apple and others should do nothing.

Apple, HP, Nokia and Dell, Motorola and Nintendo all say they have been in contact with Foxconn management and are investigating practices with regard to these incidents. Steve Jobs, for example, says that Apple is “All over this.”

Good. That is exactly what should happen. Foxconn should not be dumped, but it does need a wake up call. The arrival of workplace inspectors from Apple and others on their doorstep should get the message across.

Contract suppliers should only be dumped where work conditions are downright atrocious.

In contrast, in cases like Foxconn, where work conditions are tough but not atrocious (by Chinese standards), the factory shows signs of improvement, and extraction from the supply chain would have significant operational implications, suppliers should not be dumped but instead be worked with.

Foxconn should be cajoled, worked with and woken up.

They should not be dumped at this stage.

.

Over recent years, the way in which annual general meetings (AGMs) are conducted in my home country of Australia has been the subject of a considerable volume of criticism, and calls for an overhaul of the way they are conducted have intensified.

However, I do not support these calls.

Whilst not perfect, I feel that AGMs in their current form are worthwhile – predominately for shareholders but also for companies as well. 

 
AGMs under fire
Last week, James McKenzie, chairman of Australian retail company Pacific Brands, became the latest voice in calls for a complete overhaul of shareholder meetings in Australia, according to a report in the Australian Financial Review (AGMs: Nice place for a cup of tea and a bite to eat, May 15, 2010).

McKenzie believes the U.S model, which relies more on proxy votes, is more effective.

“What I like about the American AGM system is that you don’t get 250 people stacked in a room for probably not the right objectives – i.e. free food and a cup of tea afterwards, asking silly questions ..”

“.. The Americans do it all by proxy.”

He is not alone. According to the report, two-thirds of directors at the Australian Company Institute of Directors annual conference in Christchurch, New Zealand, agreed that the AGM was no longer an effective place of communication with shareholders.

(Note: Though the above quote refers to the American system, my comments here relate solely to Australia and do not, in any way, represent a critique of current U.S practice in this area)

 
Some criticisms valid ..
To be sure, some areas of complaint are valid.

AGMs do cost money and take up management time. And occasionally, the process is subject to abuse – either by interest groups trying to push their own agendas, or by individual shareholders using the meeting as a forum to make unsubstantiated allegations.

 
.. but they do have value
Nevertheless, AGMs are worthwhile, and their value extends well beyond scrumptious sandwiches and snacks.

This is so for a number of reasons:

 
• Those ‘frivolous’ questions are important.

To be sure, some questions and comments may seem inconsequential in the broad scheme of things.

But they are important to those who ask them. And it is important that all shareholders, regardless of the size of their holding, have an effective forum to ask questions, voice frustrations or concerns, and challenge directors on areas of performance or behavior.

 
• For shareholders, there is real value in meeting senior staff.

Equally important is the ‘mingling’ which takes place after the formal part of the meeting.

In my own case, I have only ever been to one AGM: that of Australian chemicals and mining services outfit Orica Ltd last year.

Most likely the process of meeting myself and other small shareholders did not seem overly consequential from the viewpoint of directors and senior managers on that occasion.

But it was important to me. This was my one chance to meet the key people behind my investment, and having sat in on the presentation and met some of those in charge, I went home that day feeling a great deal more comfortable about where my money was placed.

 
• They do promote accountability.

There is something special about face to face meetings, and the idea of directors having to account for themseves in person does up the ante a notch in terms of accountability.

For one thing, the corporate ‘spin doctoring’ often associated with other forms of communication is not so easy face to face. And it becomes more difficult for directors to gloss over or ignore legitimate concerns about performance or behavior in a forum where they are subject to direct challenge from shareholders.

Besides, the idea that any individual shareholder can be physically present during and participate in proceedings regarding board elections and company resolutions does promote confidence in the idea that the whole thing is properly transparent and above board. This is still the case even where proxies account for large portions of the vote.

 
• An investment in stakeholder relations

But most importantly AGMs do not just benefit shareholders; well run, they benefit the company as well.

AGMs represent an unparalleled opportunity to exhibit professionalism; to articulate vision, strategy and direction; and to respond in a constructive way to any legitimate investor concerns.

All this does wonders for investor relations (not to mention public relations), and I would certainly have thought that the benefits of a successful meeting would be more than sufficient to justify the costs involved – particularly given the importance of shareholders as a stakeholder group.

In their current form, AGM’s in Australia are not perfect. But they do have value, and I do not support calls for an overhaul with regard to their proceedings.

Oh, and keep that free food coming – those doughnuts, muffins and fresh sandwiches are delicious!

.