100th POST: The Failure of Corporate Governance in Banking Sector

Pictures : Fat Cats, nickname to greedy directors that weren't governed effectively




-applicable to P1 (ACCA)
My Blog's 100th POST! Time flies. Experience increases. Expertise sharpens. These bound to happen, as lecturers or students alike when you do research and explain your analysis. I must say, more than 12 years in lecturing profession has been enriching in knowledge and enjoyable in teaching/guiding my students to ACCA SUCCESS.

Let's see the article below extracted from Economists.com. Read it and see what recommendations you can forward to improve the Corporate Governance. The bankers - fat cats have been notorious in taking 50% of accumalated profits past 10 years and leaving 50% for its owners. When the finance sector collapsed, causing the destruction of billions of shareholders' wealth, these fat cats Directors cooly walked away unscathed!

The governmments namely UK & USA scrambled to pump in billions of dollars aid to prop up the banks. As a side note, Dr. Mahathir has been critical of these, as he reasoned that taxpayers money should be used to help the victims namely customers that are too highly geared, and not the very people/bankers who caused the collapse.

This bankers came back and happily declare unashamely exorbitant amount of remuneration. City of London's bonus has increased 50% to £6 billion in 2009!

In other words, shareholders take the risks and if there are profits, we (bankers) take, if Losses then you take it mentality is pervasive. Read the article below and think of the question:

How can the corporate governance on the remuneration system be improved? (8 marks)


It needs more than indignation to put brakes on bankers’ pay

LORD MYNERS, the City minister, is allegedly worth £30m ($47m). He is an unlikely tribune of the people. Yet he has been sounding off, more vociferously than his colleagues, about “unacceptable” pay deals for bankers. Derivatives traders are not footballers with unique talents and “should not be paid as though they are”, he said last month. More recently he has railed against “market failure”, accusing big clients of investment banks of not challenging the fees and margins they are charged. The crisis does not seem to have affected the way bankers are rewarded. Lack of transparency makes them seem the more villainous. “The nation is angry about this. I’m angry,” says Lord Myners.

But such attempts at moral suasion are not working, and those in authority seem reluctant to do more. “We are not an incomes regulator,” says Hector Sants, chief executive of the Financial Services Authority (FSA). The watchdog’s only sanction is to demand more regulatory capital from those banks whose pay policies appear to be putting their firms at greater risk.

The Treasury could influence matters at RBS and Lloyds Banking Group, two big banks in which it has substantial shareholdings, but is reluctant to micromanage. There was not a murmur when RBS hired a head trader for a rumoured £7m in total. The government worries that any attack on bankers’ pay could drive financiers offshore, depriving the exchequer of much revenue. City bonuses, which dropped from £10 billion in 2007 to £4 billion in 2008, could bounce back to £6 billion this year, says the Centre for Economic and Business Research (CEBR), a consultancy.

They mirror the health of a financial-services sector that in the good times brought in up to £67 billion in annual tax revenues, estimates PwC, an accounting firm. This fiscal year the figure could drop to £39 billion, says Douglas McWilliams at the CEBR, although banks’ recently buoyant business may increase it. A windfall tax on profits, discussed by both government and opposition, might put any recovery at risk. So could the slightly softer option of preventing banks from offsetting past losses against future tax bills.

The reluctance to bash bankers’ bonuses stems from recognition that wholesale finance is a global business. Bankers are highly mobile, says Marcus Agius, chairman of Barclays. He argues that banks in Britain must be free to pay as much as those elsewhere, but says he is “agnostic” about what that level should be.

National and international proposals to reform pay at regulated financial firms are similarly agnostic. They mostly do not spell out how much public disclosure there should be of big pay packages, other than those for board members. An exception is the communiqué from the Group of 20 (G20) big countries in September, which requires a detailed breakdown of the remuneration of “employees whose actions have a material impact on the risk exposure of the firm”. Yet that measure is unlikely to be implemented, even though the big British banks and the London-based operations of global investment banks have agreed to it.

The FSA, for its part, is not bothered about public disclosure as long as it has the information itself. Sir David Walker, a former central banker charged with an official review of bank-governance practices, has suggested that bands of remuneration for heavy hitters outside the boardroom be disclosed. It seems that banks, in the absence of much more than appeals to their better nature, will be setting their own benchmarks as and when they please. Barclays began a review of its remuneration policies in 2008. It remains unfinished.

Source: www.economist.com, 2009

Canon may follow Xerox's Acquisition trail –Awaiting Disaster?

- related to P3 (BA)

P3 (Business Analysis, ACCA) Paper in action
Many businesses failed to ask a simple basic but paradoxically difficult question, “What business are we in?” using visions, mission statement and corporate objectives are mere tools to communicate but they fail when Board lacks the commitment and drive. Worse yet, according to Sally Yeung and Andrew Campbell, such statements made are mere ‘lip-service’.

The case study below shows how a distressed company, Canon, tries to re-identify itself. It didn’t want to sell boxes of Information Technology equipment but takes a step further in saying, “Why customers need us?”

In P3 (Business Analysis, ACCA) Paper, there is a real chance of this type of question tested. So familiarise yourself with this topic from the excerpt edited report. Enjoy...

Following the Joneses : Canon’s re-positioning process
Recall Porter’s critique that acquisitions generally destroys shareholders’ value. Well, despite empirical evidence, many firms never learn.

Canon operation in Singapore is "open" to opportunities to acquire suitable business process outsourcing (BPO) companies, as well as to strengthen partnerships to boost its imaging business, according to senior executives based here.

Alan Chng, South and Southeast Asia vice president of Canon's business imaging solutions, noted during a media gathering here Wednesday that the Japanese company "has intentions" to make market moves similar to its rivals in order to gain entry to the BPO market.

Following Xerox’s model
Competitor Xerox announced it would acquire BPO player Affiliate Computer Services for US$6.4 billion. The transaction helps Burns expand into a market Xerox values at about $150 billion and gives her a foothold in managing administrative operations for multiple arms of the U.S. government. The number of workers at the world’s largest maker of high-speed color printers will increase to about 128,000.

“With this combination, our tool box just got a lot bigger,” Affiliated Computer CEO Lynn Blodgett said in an interview. Blodgett, 55, will run the business as a unit of Xerox. Almost 90 percent of Affiliated Computer’s new business contracts last year came from outsourcing, or managing operations for other companies. Total sales rose 5.9 percent to $6.5 billion in the year ended June 30, 2009. Xerox has posted sales declines for three straight quarters, with analysts projecting a fourth, according to the average of estimates compiled by Bloomberg. Global spending on technology products will fall 8 percent this year, Goldman Sachs Group Inc. said this month. Xerox has about 54,000 employees, and Affiliated Computer has 74,000 workers. Xerox said annual cost savings from the deal will increase to as much as $400 million in three years.

Exam Note: The following highlights that must be in your answer script!
But the downsides are it doubles Xerox debts, cause Shareholders uncertain and selling off its shares, took over Affliated Computer much larger employees head count and causing internal integration problem. (please note that Porter’s famous Golden Triangle theories are much applicable here)


Canon’s expansion mode
"Definitely, it's time for us to go into this area," said Chng, adding that candidates suitable for acquisition could be businesses in Asia that have synergies with Canon.Lim Kok Hin, Singapore senior director and general manager of Canon's business imaging solutions and business solutions, added that the company may also strengthen or expand its partnerships to include such services in its portfolio. "At the moment it looks like we're wide open to [both] options," he said.

Customers, explained Lim, often do not expect a single company to do able to do everything, and are "comfortable enough" to approach Canon as a "turnkey operator".

The drive toward a "solutions" approach, or packaging software and services along with hardware, has been intensified over the last few years as companies were no longer interested in "buying a box". Instead, Lim said, they want to solve business problems. For instance, Canon recently worked with a large tour operator in Singapore to implement on-demand printing based on personalized customer itineraries. The initiative helped minimize wastage as it eliminates the need to store as well as produce standard travel brochures in bulk.
As part of its shift toward "solutions" rather than device sales, Canon officially unveiled a free audit service, where it provides a "health screen" of a customer's imaging environment, said Chng. The company has so far conducted an audit of its own office premises in Singapore, as well as a few other companies in the island-state. Canon will continue to expand the service to other markets in the region, he added.

Verdict: All the best, Canon. There are much divorces (de-mergers) but that didn’t stop people from marrying (Mergers exercise), did they?

Government's TOP 10 Recovery Strategies

Pic 01 (left) : Hmmm... is it Debit or Credit?
Pic 02 (Right): Boys, oh boy... you have a long way to go



Recession may not be a bad word. Japan, South Korea experienced economic disasters after World War II and Korean War respectively. WIth zilch and only armed with human spirit, both countries grew phenomenally over 3 decades since the 1950's.

TOP 10 Actions
Having seen all of the above, Malaysian Government can do wonders to turn around the economy:

1. At least a 9% budget deficit spending to compensate the weak aggregate demand of consumptions and investments. Note this must continue for at least 3 years, as threats of inflation is low due to liquidity trap situation which is an increase in money supply may not increase threat of interest rate hikes.

2. Keep interest rates low to below 2% ie many local banks offering rates at BLR less 2% with intention to stimulate loan demand.

3. Focus on infrastructure development in lagging states especially Penang, Johor, Kelantan and Trengganu. For eastern coasts states, consider high speed trains to link Johor Bahru to Mallacca and Penang mainland link to Kuala Lumpur. Conduct analysis of volume traffic taking PLUS highways in order to evaluate the feasibility of mammoth tasks.

4. Speed up development of internal cities Monorails or Multi-rails to improve public transport so as to substitute car purchases. Malaysians have the 3rd highest ratio of car per population in the world. Too much discretionary income spent on cars which leads to weak demand for other consumables like shopping, holidays, hairdos, fashion wears. Tap on local 27 million population leads to stronger domestic demand.

5. Offer 100,000 green cards per year to attract foreign talents from Indonesia, India and China. Please note its only 0.3% of population, so bringing in foreign nationalities will not bring political strains amongst races.

6. Liberalise SEVEN (7)states economy. Allow each state to focus on their areas of expertise in their own unique industries such as:

i. Selangor – focus on banking and finance
ii. Penang – focus on high end semi-conductors, fabless chips
iii. Kelantan – focus on Islamic Universities studies, don’t forget this is largely untapped market witn Muslim Population of 1.6billion worldwide
iv. Trengganu – bio-tech agriculture on tobacco, oil palm refineries
v. Johor – focus on Iskandar Project and ancillary industries supporting it
vi. Mallacca – tourism and patient-care tourism
vii. Pahang – resorts leveraging on virgin tropical jungle, have resorts living for high end customers. Open up and liberalise gaming-casinoes. Compete with Macau for Chinese tourists. Offer Air Asia free landbank in middle of Pahang as feeder line into its casinoes resort.

7. Note that Malaysian professionals overseas are reluctant to return. Offer ZERO tax income holiday for 3 years if they return, ZERO tax on car owned and ZERO stamp duties for homes they purchase above RM500,000. Malaysians likely to return for sentimental reasons like coming back because of Bak Kut Teh,Roti Chanai lepak corners, Satay.

8. Re-train and re-position 30% 1.1million civil servants to productive sectors like fisheries, cab driving. We have one of the highest civil servants:private section ratio in the world for a ‘free’ economy. A waste.

9. Offer licenses to foreign institutional funds to invest in Bursa Malaysia. Have in place, links to universities that supply Finance Graduates, Info tech capable of broad band communication worldwide, perks for foreign talents as expatriates.
The amount of economic turnaround is fantastic, but all go to waste with poor implementation! Thus governance is critical by setting up :
i) Economic –committee for each state. That will be 7states in Peninsular and still counting. Members should be from tycoons, university researchers with PhD in related fields – note special emphasis and invitation to foreigners to chair the meeting if no local PhD candidates (likely the case) are available.
ii) Transparencies in providing statistics. Beef up Economics Department and Bank Negara Malaysia to provide analysis. Make available online
iii) Interests rates decision should be based on at least 7 top economists in the country and by vote determine the direction.
iv) Everyday, and i repeat, everyday, share success stories of top entrepreneurs with heavy biased toward successful Bumiputeras. Change populace mindsets that its the people and not the government that make a difference in nation’s future. There are many, many successful Bumiputeras professionals and entrepreneurs, keep on if possible a million times a day to disemminate this news.

10. Stop politicking by making empty promises.

What it means for ACCA graduates?
To all my valued students of INTI College Subang Jaya, you see everything works for you and your future. You can capitalise on immense opportunities ahead when government stimulates the economy creating high value jobs. Its only YOURS when you become an ACCA graduate. The economy needs highly skilled intellectuals and professionals. So, work hard for 3 years and reap the rich rewards for next 30 years!

Invitation
All you ACCA candidates, your comments i.e. constructive comments on:

I) What the government can do?
II) Which industries are key?
III) What would you have done, if you are the CEO i.e. Prime Minister of Malaysia?

Nobel Prize-winning economist – Horrifying Prognosis

From left to right:
Pic 01 - 03 : Great Depression of 1930s. People lining up for food rations from USA government. We don't hope for this in Malaysia, which is only a developing nation. So shouldn't you ration your pocket money? Stretch it further?

Pic 04: Renown Economist, Paul Krugman


Nobel Prize-winning economist Paul Krugman said damage from the U.S. recession may persist “for a very long time,” with no clear engine for renewed growth.

“I’m really quite scared that we could muddle along,” Krugman said in a lecture today at the London School of Economics and Political Science. “I really do see the possibility of a global version of the Japanese ‘lost decade’ without the prospect of an export-led recovery. This could be unpleasant for a very long time.”

U.S. stocks erased a decline yesterday after Krugman said the economy will probably emerge from the recession by September. Recent reports showing smaller declines in housing and manufacturing and fewer job losses have reinforced forecasts that the slump may end this year.

“The ‘oh-my-God-the-world-is-ending’” phase of the economic downturn is over, and financial markets are “stabilizing,” Krugman said today. Still, “the employment situation is continuing to look bad and will probably get worse,” he said.
Krugman said he has “no idea” what will power the U.S. out of recession. The U.S. fiscal stimulus package, while not “trivial,” isn’t large enough to fuel sustained growth. Also, with the global economy in the doldrums, the U.S. can’t rely on a revival from a surge in exports, he said.

Even the end of a recession “doesn’t mean the same thing as it did in the old days,” said Krugman, a Princeton University economist. Unemployment may remain high longer than after the end of prior economic contractions, he said.
The National Bureau of Economic Research, based in Cambridge, Massachusetts, is the official arbiter of U.S. recessions and expansions. Robert Hall, the head of the NBER’s business-cycle-dating committee, said last week that it’s “way too early” to say the contraction is over.

What can and is Malaysian Government doing about it?
What is in store for upcoming ACCA graduates?

Coming soon...

Recession- What it means? Part II

(left to right)
Pic 01: You think this is tough, boy, wait until you reach ACCA level
Pic 02: Arrgghhh...This kids drive me up the wall.
Pic 03: To our happiness...Pic 04: Beautiful, Wonderful and Meaningful evening
Pic 05: President Obama's deficit spending is too little, too late

Recession Explained
Why do factories close down despite that high quality products are churned out? Why hardworking people are laid off from work, a waste of human talents that go unemployed? Why good location properties have few tenants? Puzzling as these questions are, but the economist will say it’s due to recession. Inspired and horrified by Economist Nobel Laureate Paul Krugman’s book – The Return of Depression Economics, allow me explain it in simple terms:

Romantic Couples and Babysitter Couples
Say in Singapore, there is this exclusive club where couples are of the upper middle income earners. These couples have children and they don’t trust hiring babysitters. This is inconvenient if couples want to spend romantic evenings out, we call them romantic couples. Since members are long friends and trust each other, they devise a system to help each other out. Each couple will be given fixed number of coupons. Romantic couples will use their allotted coupons to ‘pay’ babysitter couples. If romantic couples ran out of coupons, then they will have to offer other couples to babysit for them to earn their coupons. This system works fine if couples are regularly taking evenings out. One would expect it, if its Valentine Day, Anniversary Celebration, Engagement parties (normally wives have many ideas and occasions to celebrate).

What if couples decide that they need to accumulate the coupon by offering to babysit for others? The number is more than romantic couples? You will have more savings of coupons as fewer couples are taking romantic evenings. Since active romantic couples would quickly finish their coupons, then they need to stay home to offer to babysit. But since other couples in general are staying at home too, the coupons are not circulating. The frequency of evening out for romantic couples will fall as they are short of coupons. So they have to offer to babysit. Couples with surplus savings of coupons, seeing that there are fewer couples go out, may want to ‘conserve’ their precious savings and they too prefer to stay home.

We have most couples then staying home, causing a fall in frequency of romantic outings. There is a marked drop in demand for babysitting coupons even though couples are offering to babysit. This fall in demand compared to previous period is an output level receding, thus a recession.

Paradox of Savings
Here is the paradox, the more couples ‘save’ coupons the less the coupons are circulated, the lower the demand for babysitting services. However, the opposite is true, say each couple on average takes 4 times romantic outings to 9 times a month, then the coupons will circulate around from 4 to 9 times, creating more opportunities for couples to take evenings out.

The exclusive club may issue new coupons to ‘stimulate’ demand but the figure may be deemed too small to match babysitting couples.

Recession hits an economy, when spenders i.e. consumers, investors and government decide to spend less which translates to aggregate fall in demand. Even if McDonalds, Coca Cola and Steven Spielberg movies offer fantastic products or services, they will still have deteriorating business. Worst scenarios are once healthy firms face shut down risks. The speed of spending as dropped significantly causing less demand for goods and services.

In other words, we have healthy factories, hardworking people and good infrastructures, but a slow down in spending could not justify the use of these resources, causing unemployment and suplus resources.

Point to note is governments worldwide like America is issuing new ‘coupons’, by increasing money supply to boost demand. How? Allowing banks more fund to extend loans, credit and hire purchase. But there are few borrowers and spenders to use the new funds. Not giving up, President Obama led the spending by committing USA Government to projects worth US$797billion. This large in itself but is paltry compared to the trillions of dollars lost due to reduced spending from consumers and investors.

Malaysian Government pledged to spend RM1bilion (US$1=RM3.50) a month but compared to the size of loss output due to fall in demand or speed in spending, again its insignificant. Already Multi Nationals firms are announcing job cuts, investment postponements and cutting costs all of which worsen the already weakened demand.

Bright light at end of tunnel?
Like all recessions, they recover to healthy growth. Why not consider investing in upgrading?your qualifications? Buy good robust properties? Invest in businesses? all in anticipation of returning days where couples go out for romantic evenings.

In my next article, i will post analysis by renown economists who predicted darkening economic days ahead.