Apr 202012
 

Governments and business everywhere live in a state of tension. Neither behaves exactly as the other would wish. They have different agendas and different ways of meeting their goals. They need each other, but mostly don’t like each other.

In some countries, they do work reasonably well together. Some governments do try hard to create a business-friendly environment. But more often, the relationship is an uneasy one.

When a prominent business leader speaks out against his government—and more so in a country like South Africa, still struggling to escape its past, and where politicians are prickly and many are socialist or harbor deep anti-business feelings—he needs to think carefully about what will follow. The outcome is unlikely to be what he wishes for. The response from those he’s criticized will be defensive and angry. His peers in business will duck for cover. His own business may be negatively affected.

This is exactly what we now see unfolding in the drama between Reuel Khoza, non-executive chairman of Nedbank, and the ANC-led government of South Africa.

Khoza lit the match with this comment in his chairman’s statement in Nedbank’s latest (2011) annual report:

“UPHOLDING OUR CONSTITUTION

“SA is widely recognised for its liberal and enlightened constitution, yet we observe the emergence of a strange breed of leaders who are determined to undermine the rule of law and override the constitution. Our political leadership’s moral quotient is degenerating and we are fast losing the checks and balances that are necessary to prevent a recurrence of the past. This is not the accountable democracy for which generations suffered and fought.

“The integrity, health, socioeconomic soundness and prosperity of SA is the collective responsibility of all citizens, corporate or individual. We have a duty to build and develop this nation and to call to book the putative leaders who, due to sheer incapacity to deal with the complexity of 21st century governance and leadership, cannot lead.

“We have a duty to insist on strict adherence to the institutional forms that underpin our young democracy.”

The ANC/government immediately struck back at Khoza. The attacks—labelled in the media as “boorish,” “hypersentive,” “paranoid,” “personal,” “inappropriate,” and “illogical”—ensured that the matter got wide publicity, and may have done more damage to SA than anything he’d said. Various commentators called for open and polite discussion of the issues he’d raised. Khoza visited the ANC’s headquarters to discuss the matter, and the movement issued a statement afterward, saying:

“We are happy that this interaction took part in a cordial atmosphere and was fruitful.

“The meeting resolved what was perceived as a stand-off and addressed a variety of issues related to governance and business leadership.

“We are encouraged that a variety of options in terms of engagement were considered. The meeting resolved that there will be more meaningful interaction between the two parties in future.”

OK. And what now? What might “more meaningful interaction” mean? Is all forgiven? Has Khoza’s message been given short shrift or taken to heart?

Will there be further chats…or actual changes of leadership…more careful recruitment of future leaders…leadership development programs…? Is Khoza now going to back down and pretend he didn’t really mean what he said? Or will he repeat it the next time some journalist asks him if he was serious? How will he deal with questions about this matter that will surely be lobbed at him when next he speaks at a conference?

While all this was happening, Garth Griffin, outgoing chairman of Absa, wrote in his own bank’s annual report that SA needed less talk, more action. Then Nicky Newton-King, CEO of the Johannesburg Securities exchange (JSE), told the Cape Town Press Club that investors wanted certainty from markets, but Khoza’s views reflected uncertainty about the direction of South Africa’s policies.

Some people saw these as signs that “business” was starting to speak out, and hoped for more.  But that’s not been the case.

While there were murmurs from the corporate sector about government being wrong to expect business to stick to business and stay out of politics, hardly anyone said Khoza was right. That was left to “outsiders” like Institute of Race Relations CEO John Kane-Berman, the indomitable Business Day letter writer, Dr Lucas Ntyintyane, and the CEO of the SA Chamber of Commerce and Industry.

Massmart CEO Grant Pattison saw Khoza’s comment as having hit a nerve because it was “too close to the truth.” But when the Sunday Times sought comment from other captains of industry, most became unavailable or refused to speak.

Corporate SA has once again been cowed.

SO WHAT EXACTLY HAS BEEN ACHIEVED?

Reuel Khoza was brave to do what he did. He stuck his head above the parapet to say what many other people think. Nick Binedell, dean of the Gordon Institute of Business Science (GIBS) said he was “a bit provocative” but “should be commended for getting the debate out in the open.”

The political climate in SA has soured badly in recent years. The national conversation has become toxic, uncivil and destructive—and will get more so in the months ahead of the ANC’s December policy conference at Mangaung, as power struggles intensify. Politicians and bureaucrats worldwide get slammed for their behavior, but ours are drawing more and more negative attention.

Relations between government and business have never been good since the 1994 transition, and are marked by mutual suspicion and distrust. While government struggles to deliver on its mandate, and desperately needs business investment and assistance, too many of its policies, actions, and words add up to a different message and have the opposite effect.

One objective of the Nedbank Group strategy is, “Becoming the public sector bank of choice.” But the threat has been made that the ANC might need to review its dealings with the bank, and with ANC cadres so firmly entrenched across the public sector, this doesn’t even need to become a formal position to have some impact.

Nedbank also aims to become the leader in business banking, and its retail unit has been performing well. But again, in both of these areas, ANC supporters may be turned off by Khoza’s criticism.

Although he opened his chairman’s statement by emphasizing the importance of sound corporate governance, Khoza then waded into risky territory—in the name of his company. Strange, given that one of Nedbank’s “Deep green aspirations” is to be “worldclass at managing risk.” And that in the risk management review in the annual report, it states:

“Nedbank Group has a strong risk culture and follows worldclass enterprisewide risk management, which aligns strategy, policies, people, processes, technology and business intelligence in order to evaluate, manage and optimise the opportunities, threats and uncertainties the group may face in its ongoing efforts to maximise sustainable shareholder value.”

So what risks has Khoza exposed the bank to? Did Old Mutual, Nedbank’s parent, know this was coming—and what was their view about it? Did Nedbank’s board have advance warning—and what inputs did the members make? Who else in the bank saw the statement before it was published?

QUESTIONS FOR THE FUTURE

Past experience has shown the ANC/government to be extremely sensitive to business statements it doesn’t like. So if one thing was guaranteed in this case, it was that the response to Khoza’s opinion would not be calm, respectful, or kind. He pulled no punches, and the fact that he had been close to the Mbeki administration was probably an added irritant.

However, some of the country’s political leaders may think carefully about what he said, and may even try to change their ways and try to get people around them to change, too.

South Africa badly needs all hands on deck, and government and business to work together to create the much vaunted “better life for all.” Now, that is either much more or much less likely. Much depends on whether government is able to tone down its anti-business signals, convince business that it really does value it, and do whatever is needed to make SA a good place to do business. Without that context, business will always be reluctant to invest, create jobs, or contribute in all the other ways that it can.

So here we have an interesting case study for business leaders—and for business schools. With some difficult questions:

  1. What should characterize the relationship between government and business?
  2. How freely and openly should business speak about national affairs?
  3. Should business leaders speak out personally, and under the banner of their firms, or should they leave comment to the organizations that represent them (chambers of commerce, Business Unity South Africa, the Black Business Council, the Black Management Forum, etc.)?
  4. Should they engage publicly with government about contentious matters, or should they do it behind closed doors?
  5. How should companies evaluate the risks of making statements critical of government?
  6. How should they manage the flak that flies when things go badly?

We live in testing, touchy times. Creating a “burning platform” might be the only way to get some things done, but it can also take you down. This saga could have a happy ending. It would be a pity if it ended in tears.

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  •  20/04/2012
Apr 042012
 

When Samsung announced in mid-2010 that to grow its business in Africa, it would design products specifically for Africa, it confirmed two facts about global competition today:

  1. As growth in developed markets gets more difficult, firms must seek and exploit opportunities in developing markets.
  2. To succeed there, they need to “act local.”

Explaining Samsung’s plan, George Ferreira, COO of Samsung Electronics SA, said:

“In line with our key value of co-prosperity, coupled with our business and development sector partnerships, we have a vision of developing technology that is built in Africa, for Africa, by Africa”…We will over the next few years be allocating more local R&D investment for further local product planning, design and development.”

A press release from the company added:

“Samsung have undertaken extensive research and development (R&D) to develop technology innovations, specific to the African consumers’ needs. These include, TVs with built in power surge protectors, triple protector technology for air conditioners to ensure durability, power surge protection and safeguarding against high temperatures and humidity, deep foam washing machines that are 70% energy efficient – saving up to 30% water use, dura-cool refrigerators with cool pack – allowing the refrigerators to stay cool without power, as well as dual-sim technology and long battery life phones with battery standby times of up to 25 days.”

According to a report on Moneyweb, “The electronics group hopes to attract the African market with a range of television and refrigeration products that are designed to withstand power surges, dust particles and humidity and camera and camcorders that are designed to take “better” pictures of dark toned people.”

In one example of how it will pursue its strategy, Samsung has teamed up with the University of Cape Town (UCT) in South Africa and Strathmore University in Kenya to develop unique mobile phone applications for Africa. Such collaboration is sure to yield ideas that the company wouldn’t develop on its own, and to speed up the time-to-market process.

However, what the electronics giant did not say was that innovations in developing markets may prove valuable in developed markets (a process known as “reverse innovation” or “frugal innovation”). This has been the experience of companies producing products as diverse as soap, tractors, and medical scanners. And innovations may include not just new products, but also processes and business models.

Innovations from developing markets give firms new opportunities in developed markets by providing simpler, cheaper products

Reverse innovation will be one of the most important trends of coming years. It opens many new opportunities for developing markets and for the companies and innovators in them. And it provides new reasons to go to places you weren’t really sold on, to invest there, and to make a deliberate effort to learn whatever you can from being there.

Champion of the movement is V.J. Govindarajan, professor of international business at Tuck School of Business at Dartmouth College, and the first professor in residence and chief innovation consultant at General Electric. His October 2009 Harvard Business Review article, “How GE is disrupting itself,” co-authored with GE chairman and CEO Jeff Immelt and Chris Trimble, another Tuck faculty member, won the McKinsey Award. His new book, Reverse Innovation (co-authored again with Trimble), will probably draw similar praise—and stoke interest in the concept. They provide many examples of how firms have gone about it, plus advice for those who want to.

In an interview with [email protected] (April 2, 2012), Govindarajan explained some of the rationale behind the concept:

The fundamental driver of reverse innovation is the income gap that exists between emerging markets and the developed countries. The per capita income of India, for instance, is about US$3,000, whereas it is about $50,000 in the U.S. There is no way to design a product for the American mass market and then simply adapt it and hope to capture middle India. You need to innovate for India, not simply export to India. Buyers in poor countries demand solutions on an entirely different price-performance curve. They demand new, high-tech solutions that deliver ultra-low costs and “good enough” quality.”

“Poor countries will become R&D labs for breakthrough innovations in diverse fields as housing, transportation, energy, health care, entertainment, telecommunications, financial services, clean water and many more.

Reverse innovation has the potential to transform wealth in the world. Growth in developed countries has slowed down. Much of the growth is now in developing countries. The 2008 financial crisis and the more recent debt crisis [in Europe] have only exacerbated this situation. As such, we are likely to see the center of gravity for innovation shifting from rich to poor countries.”

Questions to ask now:

  • What will developing countries do to promote not just their market opportunities, but also their innovation opportunities?
  • What will local firms in those countries do to take advantage of this trend?
  • How will local universities and other potential partners respond?
  • How can you exploit this idea?

The entire world is a learning laboratory. No place has a monopoly on ideas. Today, it’s foolish—and potentially costly and risky as well—to be myopic.

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  •  04/04/2012
Mar 222012
 

In my March 17 blog about the resignation of Greg Smith from Goldman Sachs, I predicted the story would become a big one. According to the Wall Street Journal, Smith’s Op-Ed missile in the New York Times drew three million page views by the afternoon of publication. It quickly trended in the top ten messages on Twitter. My Google search for “goldman sachs, greg smith” this morning yielded 44,300,000 pages. The infosphere is humming over the matter.

Smith has drawn heaps of praise for the way he showed Goldman the middle finger. But while he has lots of admirers, many of them citing other examples of huffy employees spilling their guts on the way out the door, he’s also drawn a surprising amount of criticism—and not just from business commentators or other hard-core capitalists. Populist, anti-business sentiment clearly has its limits.

Meanwhile, Goldman is reviewing Smith’s claims, and searching its email records for “muppets,” to identify employees who insulted clients and handed its detractors a soundbite from hell. It’ll also look for other offensive terms, but hasn’t said what will happen to staff who used them. (In America, “muppet” was popularized by the hit TV show of that name featuring Miss Piggy, Kermit the Frog, and other cuddly characters. In Britain, it’s a label for stupid, gullible people.)

The debate is on.

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  •  22/03/2012
Mar 172012
 

When Greg Smith, a 33-year-old London-based Goldman Sachs executive director published reasons for his resignation in the New York Times on March 14, he was scathing in his criticism. In a knife-to-the-heart Op-Ed piece heavy on praise for himself, he wrote:

“…I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.”

“…culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief”…

“It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as ‘muppets,’ sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s Work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding.

“I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.”

Andy Rosenthal, the Times editorial page editor, told The Huffington Post that Smith had approached them about writing the article. “We checked him out,” he said. “…the whole idea of Op-Ed is to generate debate and discussion, so the more, the better.” The article has certainly generated plenty of both. Its all over the internet and according to BloombergBusinessWeek, book agents and publishers are keen to sign a deal with him.

THE FIRST RESPONSE

According to the NYT, Smith’s “wake up call to the directors” exploded “like a bomb” within Goldman. “He just took a howitzer and blew the entire firm away,” said one observer. Within a day, investors stripped $2.15bn from the bank’s value.

As happens in this age of instant opinions, citizen journalism, and social media, the story “went viral.” The public and the media quickly added fuel to the fire with a mixture of praise and condemnation. Smith was variously described as “brave,” “reckless,” “foolish,” “disgruntled,” and “disloyal.” The fact that he’d held back his resignation until he’d been paid his $500,000 bonus for 2011 drew snide jabs. But journalists who dug into his background and talked to people who knew him when he was growing up in South Africa reported that he had a reputation for integrity.

A Bloomberg News item in the San Franscisco Chronicle tackled Smith for his naiveté, implicitly supporting Goldman and saying what many business leaders no doubt thought:

“It must have been a terrible shock when Smith concluded that Goldman actually was primarily about making money. He spares us the sordid details, but apparently it took more than a decade for the scales to finally fall from his eyes…

“We have some advice for Smith, as well as the thousands of college students who apply to work at Goldman Sachs each year: If you want to dedicate your life to serving humanity, do not go to work for Goldman Sachs. That’s not its function, and it never will be. Go to work for Goldman Sachs if you wish to work hard and get paid more than you deserve even so. (Or if you want to make your living selling derivatives but don’t know what a derivative is, as Smith concedes in passing that he didn’t at first.)”

Forbes columnist argues that this event is a mere a storm in a teacup, and says the excitement over it will soon blow away:

“So what should our reaction to this be? No, not as clients of the firm, that’s obvious. Similarly for the management, what they need to change is obvious. But what should we, the people out here in the public and political square be trying to do about the company?

“Nothing of course, we should be doing nothing at all. For one of the great joys of this mixed capitalism and free markets system is that mistakes like those allegedly being made by Goldman Sachs are self-limiting, indeed, self-correcting.”

Of course, Goldman—the target of much criticism in the past few years—quickly denied Smith’s accusations:

We were disappointed to read the assertions by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman think about the firm and the work it does on behalf of our clients.”

WHAT’S NEXT?

So where do things go from here? How will Goldman deal with Smith and the continuing fallout? What does this drama mean for other banks—and, indeed, for other companies of any kind? (And let’s not forget to ask, how will Smith’s career be affected?)

Unfortunately for banks, they’ve made themselves a juicy target for outrage. When Smith’s article appeared, a lot of people probably thought to themselves—or said to others: “I knew it. Here we go again. Scumbag bankers. Can’t trust them an inch. Bastards got bailed out, but keep stealing our money!” So what’s likely out in the “public and political square” is that this story will get so much airtime it will be impossible to ignore. The media will continue to make a feast of it. Politicians and regulators will seize the chance to sound off, and maybe try to force change. The anti-capitalist, anti-business crowd will jam the infosphere and the profit motive will take another beating. Smith’s act will become a popular dinner table topic, the stuff of business school class debates, and a trigger for massive introspection at both Goldman and other firms.

Business leaders need to tread carefully through this minefield. The CEO of Morgan Stanley told his staff not to circulate the Smith piece. Jamie Dimon, CEO of JP Morgan Chase & Co., sent word to his people that they should continue to act in the above-board way they always had. In a widely-publicized e-mail, he warned:

I want to be clear that I don’t want anyone here to seek advantage from a competitor’s alleged issues or hearsay—ever. It’s not the way we do business.”

You can bet the bosses of other financial institutions have sent similar messages to their staff and clients, and will spend a lot of time and money trying to distance themselves from the blast and confirm that they’re above reproach. And you can bet that a lot of people, from spin doctors to corporate governance gurus, from HR executives to career coaches, from management consultants to IT security experts, will hop onto the bandwagon and make new work for themselves.

Make no mistake, this event has huge implications. It affects not just financial institutions, but all of business.

THE DIFFICULTY OF PROTECTING A REPUTATION WHEN YOU CAN’T PROTECT SECRETS

One of the most important social trends of the past half century has been the move towards openness and transparency. That’s a very good thing. But it doesn’t make life easy for business.

Windows to the internal workings of organizations are being forced wide open. Largely as a result of scandals at Enron, Anderson, and many other firms, corporate governance has become a growth industry. Firms are required to provide more and more information about themselves. They face a growing number of regulators and a growing tide of regulation, vigilant law enforcement agencies, and courts that are under pressure to impose severe sanctions for shenanigans.

News-hungry media are quick to spot wrongdoing. Consumer hotlines not only give disgruntled customers a voice, but also make it likely that one complaint will trigger a shitstorm of others. Facebook, Twitter, YouTube, blogs, e-mail, instant messaging, and other social media make it increasingly hard to keep anything under wraps, and easy to be a critic or spread dirt. And reasonableness, objectivity, balance, and truth do not always prevail.

Wikileaks, has created awful problems for governments, the military, corporates, and individuals by splashing confidential material all over the internet. A growing community of criminal hackers break into government and business databases, and don’t hesitate to fraudulently use credit card details or post personal information on the web.

Whistleblowers like Greg Smith have long been a concern to employers. But if once they were vilified, they’re now encouraged, protected, applauded, and rewarded—true social heroes. Their motives don’t matter; the fact that they’re insiders, and therefore must know what’s going on, gives their views credibility and clout. And in a verbal war between a whistleblower and a company’s leaders, the underdog invariably wins most sympathy and support.

Dealing with anonymous attackers is no easy task. Fighting back when your attacker is a valued member of your team, apparently with nothing to gain by opening up—and apparently of unquestionable integrity, too—may be worse.  The reputational damage that follows leaks is hard to contain or fix. A carefully-crafted image that has taken years to establish can be shredded in an instant.

VALUES DON’T GUARANTEE “GOOD” BEHAVIOUR

Surveys show that public trust in companies and their executives is at an all-time low. The trust level in many teams is also nowhere near where it should be. So what now? Do you demand that your new hires all sign confidentiality agreements? (And how enforceable are those, and do you really want to explain yourself in court?) Do you require the same of the people you already employ? How do you deal with those who refuse? How do you deal with violators?

According to Smith, Goldman has a culture problem. He has just provided the culture-change crowd with new inspiration—and a new promotional drum to beat.

One of their favorite tools is values. “Values-based management” (not the same thing as value management) or “managing by values” is a hot fad, and thanks to Smith, just got hotter. The theory is that if you spell out how you expect your people to behave, they’ll stay on the straight and narrow, be nice to each other, bust a gut for customers, and produce innovations galore. But that’s a very big “if.” And anxious executives should beware: changing culture is never easy and always slow, and values are no silver bullet. So while we’re in for a noisy debate about all this, and opportunists will make pots of money peddling “new” ways to make things better, don’t expect miracles.

Most values statements include the same handful of terms—”integrity,” “respect,” “innovation,” “service,” “responsibility,” “teamwork,” “accountability.” Yet precisely what these mean is often open to interpretation. And you have to ask: if this guff  features so strongly in business books and leadership courses, if so much prominence is given to it in company documents and presentations and on office walls, and if it’s discussed so often and so seriously in team-building sessions and strategy workshops, why is “walking the talk” so uncommon?

The first reason is that it’s damned difficult. (The 10 Commandments haven’t done too well, have they?) It’s one thing to say that companies would solve many of their problems if they “just did the right thing,” but it’s quite another to actually do it. Values that sound so right when you adopt them are almost certain to clash with future circumstances, and what then? How much “flexibility” should you tolerate? When and how should you bend the rules? After all, values can’t be cast in stone … or can they? Should everyone be allowed to bend them, or just a special few?

The second reason is that all too often the very people who espouse a set of values are the ones who violate them. And are seen to violate them. They set a bad example—”Do what I say, not what I do.” Perhaps they never really believed in those values in the first place, but needed something to improve their company’s performance and thought a values statement might do the trick. Or maybe they were just humouring the HR department. Or they just wanted to be seen to be standing for the right things and to be in tune with the latest management thinking.

Individual and groups all have values of one sort or another. These may be either implicit or explicit. But it’s sheer delusion to think that merely drafting an explicit set of values will keep a company out of trouble. Take another look at Goldman’s response to Greg Smith:

“We were disappointed to read the assertions by this individual that DO NOT REFLECT OUR VALUES…”

This begs several questions: What exactly are those values? How were they defined and how are they communicated? Who champions them? How rigorously does the firm test itself against them? What sanctions exist for violating them?

It also illustrates the high probability of mixed messages about this very central, very potent subject. Leaders do not always send consistent signals. People interpret things differently. And they misinterpret things very easily.

For all the value in  values, there’s also a risk in making a big deal of them. When you tell your team that you expect them to adhere to a certain code, every word immediately becomes a potential rod for your own back. From the minute you utter them, the people around you listen, watch, and wait: “Oh yes … let’s see if she really means this.” And if you’re not 100% resolute and consistent in your own behaviour, their response will be, “If she was so serious about those values, but then didn’t stick to them, what else is she not being honest about? How can I trust her about anything?”

DID SMITH DO THE RIGHT THING?

It’s easy to be critical of corporate behaviour—and much of it deserves major criticism. Whistleblowers do have an important role to play in exposing corporate misdemeanors and ensuring that executives are held to account. But while Smith complains that “It makes me ill how callously people talk about ripping their clients off,” he also admits, “I don’t know of any illegal behaviour…” No doubt, we’ll hear more about that. Meanwhile, several clients have commented on the internet that they use Goldman because it gets results for them.

Smith spent 12 years at Goldman, in New York and London, so had plenty of time to choose to leave. For at least a decade he “recruited and mentored candidates through our grueling interview process”—most likely in the last 10 years of his career there, not the first. So how was he able to suppress his growing disgust at Goldman’s ethos and its leaders, and what did he tell those young people? Why did he agree to keep selling something he abhorred?

In his essay, he makes a strong effort to establish his own bona fides, but doesn’t say whether he ever spoke up before he savaged the hand that fed him. We’re left to guess whether the practices that caused his disappointment in Goldman in any way helped him earn his bonuses.

Smith isn’t the first person to leave a firm in a public huff. He won’t be the last. But his use of the New York Times to strike at his employer was a particularly spiteful move.

The Greg Smith/Goldman Sachs case is a special one in many ways, and the story is a work in progress. It has a long, long way to run.

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  •  17/03/2012