Thursday 10 March 2011

McKinsey's culture in question

An interesting column in today's Financial Times by John Gapper. He argues that the charging of the ex-CEO Rajat Gupta with insider trading is a severe strain on the firm's perceived governance culture. Gapper makes the perceptive point that McKinsey that:

It is hard to believe that trading on price-sensitive inside information from clients is rife inside the puritan, strait-laced firm – if evidence of that emerged, it would soon collapse, as Arthur Andersen did after Enron. But the accumulation and sharing of privileged knowledge is integral to how it works and it cannot afford its corporate and government clients to pull the shutters down.

This goes to the heart of McKinsey business model and is another useful piece of evidence in establishing the link between corporate culture and strategy. It is also an interesting reflection on a weakness of the McKinsey 7S model - that Shared Values (at the heart of the model) may well not be shared with your key client base. I wonder what their own consultants would advise?


Wednesday 9 March 2011

Is the FSA going soft on governance culture?

Interesting Clare Distinguished Lecture in Economics and Public Policy speech recently by Lord Adair Turner, Chairman of the FSA, on whether the current reforms of the financial services sector are going far enough. Short answer is No - because the current fixes patch up the existing system without reforming it sufficient to prevent another crisis.

As rightly Lord Turner points out:
An appropriately radical response to the financial crisis requires that we take into account explanations of financial market imperfection and instability which go beyond the identification of specific information asymmetries or incentive problems.

However, having rightly pointed to broader fixes that include learnings from behavioural analysis, insuperable information asymmetries (a la Joseph Stiglitz), and the inherent irreducibility of some uncertainty (a la Frank Knight), Lord Turner simply suggests regulators should retain a discretionary macro-prudential capacity to intervene when they smell danger:
As a result, fixing poor incentives - such as those created by 'too big to fail' banks or by perversely designed bonus arrangements - while a necessary part of the regulatory response, cannot be sufficient. Our policy response needs also to include policies which focus on the complex dynamics of the whole system, above all through higher equity capital requirements, and macro-prudential policies which can arise even in a system where individual agents' incentives were always well designed.
Surely the recent crisis has demonstrated the FSA's shortcomings in acting as an all-seeing deus ex machina? Instead, they should actively research micro-prudential tools with which to regularise behaviour of individual agents. Something with which this group has made some headway. We await Lord Turner's call...