It Takes Two to Tango

Employee engagement, in various guises, is among the new buzzwords of recent years. To be more accurate, it’s a repackaging of old ideas by the consulting industry. Under a shiny “NEW” label the consultants have found yet another way of exploiting corporate insecurity and thereby picking its pockets.

There appears to be only circular definitions of what constitutes an engaged employee. The CIPD defines employee engagement as “a combination of commitment to the organisation and its values plus a willingness to help out colleagues (organisational citizenship). It goes beyond job satisfaction and is not simply motivation. Engagement is something the employee has to offer: it cannot be ‘required’ as part of the employment contract.”

In short, an engaged employee is any employee who is engaged. It’s a matter of attitude.

Today’s employers are encouraged to recruit for attitude; train for skill when searching for new employees. That approach saves the job of instilling an attitude seen as ‘right’ by the employer in question, but it only goes so far. Whatever attitude is exhibited during the recruitment process it will only be retain if the employee’s circumstances are conducive.

To a large extent that depends on the employer, but it can equally be affected either by changes in the employee’s private life, or by shifts in their personal beliefs and values. Over the employee’s private life and over beliefs and values the employer has little or no control. And rightly so. An employment contract is an exchange of time and skills for money and associated benefits. It is not entry into a closed religious order.

Most of the literature on this subject talks about measuring employee attitudes and conducting regular employee attitude surveys. Any organisation that needs to do that has to raise an immediate red flag in its own mind. If concern for the attitude and mindset of employees is not part of the daily interaction in the company, if senior management has actually lost touch with how employees think and feel, then there is an immediate problem.

Organisations that have a high proportion of employees who are unengaged or disengaged are offered various approaches to reverse that situation. These include:
• giving the opportunity to feed views and opinions upwards
• keeping employees informed about what is going on
• seeing that managers are committed
• having fair and just management processes for dealing with problems.

Perhaps more telling – and rarely mentioned – is the sobering process of the organisation examining its own value as expressed in its formal and informal manner of doing things. What message is the organisation really giving to its employees (and its customers)? Can people be reasonably expected to sign up enthusiastically to such a message?

This search for paragons of virtue among employees has an interesting parallel in the education sector. In England, when a pupil truants from school, we ask what is wrong with the child. In France, they ask what is wrong with the school. If you are an employer looking for greater engagement then be prepared. If it is absent then the cause may lay uncomfortably close to home.

Clinging to the Wreckage

UBS, Switzerland's largest banking group, has just written off $37bn (£18.7bn) of its sub-prime investments.

Following an internal investigation demanded by the Swiss Federal Banking Commission, the Swiss version of our own dear FSA, it admitted a series of mistakes including inadequate supervision, poor risk management and a failure to react quickly enough when the sub-prime market started crumbling.

UBS was so focused on racking up ever larger profits that it “forgot” every silver lining has a cloud.

This is its first full-year loss (Sfr4.38bn for 2007) since its came into being 10 years ago following the merger of Swiss Banking Corporation and Union Bank of Switzerland. Planned job cuts are rumoured to run to more than 3,000 people.

As one might expect of the Swiss, those in charge have shouldered their full share of the responsibility and suffered the inevitable consequences. The Chief Executive, Peter Wuffli, was ousted in July last year, followed by the CFO, Clive Standish and the Head of Investment Banking Huw Jenkins. This month it was announced that the Chairman, Marcel Ospel, would not seek re-election.

Meanwhile, here in the UK, RBS came up with a further £5.9bn of write-offs on bad debts yesterday having already declared a £1.7bn write-down of sub-prime investments in December. However, you would search in vain for any admissions of abject personal failure by top management, let alone a principled resignation. In any industrial company the chairman and chief executive would both have been fired and forgotten by now. Not so with RBS.

Apparently RBS's has two excuses: (1) things have changed, and (2) it didn't foresee quite how bad things would become. Well, isn’t that what leaders are paid to do? Doesn’t leadership imply vision – the ability to see and foresee, rather than stumbling over the truth, picking themselves up and hurrying off as if nothing had happened (Churchill). And if they fail to uphold their end of the contract should that contract not be properly terminated?

According to Sir Tom McKillop, the RBS chairman, the board is unanimous: the current team is the one to take the bank forward. On what logical basis should that be the case? Those that have engineered dramatic expansion are rarely adept at managing either a holding operation, or retrenchment. Those call for very different skills. Endangering the ship when it’s in stormy seas, based solely on your capacity in calm waters, constitutes reckless conduct in anybody’s book.

Marianne Jennings, Professor of Legal & Ethical Studies at Arizona State University has identified the belief by management that they are so brilliant and innovative that the mundane rules of accounting, corporate governance and even basic economics do not apply to them as one of the seven signs of ethical collapse. RBS fits the bill.

Of the five leadership traits identified by Kouzes and Posner’s research that was done for the book ‘The Leadership Challenge’ namely:

~ Honesty
~ Forward-Looking
~ Competency
~ Inspirational
~ Intelligence

RBS seems to fall short on the first three.

If the Swiss banking fraternity have the principled leadership qualities needed to do the right thing then those privileged individuals on this side of the Channel should exhibit the same qualities.

The Crunch Goes Wider Than Credit

The downward pressure on house prices is a simple market reaction to fewer buyers who are willing to pay the asking price and have enough funds to do so. The National Association of Estate Agents reports that the number of house buyers on agents’ books dropped in February to the lowest yet recorded, from an average of 276 per agent in January to 243. The number of properties for sale fell from 83 to 74 per agent over the same period.

There are three main groups who cannot wait out the present situation:

• Borrowers who have used the previous market value of the house to secure debts and where the lender is now calling either for repayment or further security;
• First time buyers now denied sufficient mortgage finance to purchase and unable to find suitable alternative rented accommodation;
• Sellers already in the process of moving home where the gap between the sale price and the buying price has widened due to different market conditions in each case.

For other groups, while present circumstances surrounding mortgages are an inconvenience, the delay and frustration involved are relatively small consequences.

Some characterise the credit crunch as the result of a series of market failures. On the contrary, the markets have worked as markets do. Through a combination of greed and incompetence some banks fell down on the job. The crunch occurred as a result of the parcelling up of mortgages into tradable securities. Now nobody wants to buy something that has little worth and banks are increasingly reluctant to lend to each other. It sounds like a typical market to me.

More serious is the indirect outfall. This takes the form of lost jobs and, in some cases, the wholesale closure of firms. Jobs and firms affected include planners, surveyors, gravel and cement works, brick makers, the transport industry, builders and the building trade, estate agents, solicitors, removers, domestic furnishers and appliance makers – even the Post Office, the Land Registry and the local Councils that need less people to deal with change of addresses.

As workers fall out of employment the tax-take drops and the social security bill grows. As firms go out of business the bad debts of their supplies and lenders increase. It takes very little to trigger a domino effect throughout the sector and associated providers.

Signs that this process may have already started are coming from the USA. 153,000 redundancies were declared across the US financial services industry in 2007, more than half of them relating to mortgages. In the next 12 to 18 months American commercial banks are expected to cut a further 200,000 US jobs to reduce costs. Those job cuts will be in operational and support departments among modestly paid people.

Meanwhile, those heading the institutions are out of their depth. The US banking industry has not experienced a reduction in revenue for 40 years. In 2008, it looks like it will decrease for the first time in the working lives of those in charge. They have no practical hands-on knowledge of how to handle it. We can expect more costly mistakes as they learn at everyone else’s expense.

The call now is for governments to “fix” the problem. In an interim report in February to the G7 the Financial Stability Forum said, “Events have shown that the quality of risk management varied significantly among the largest and apparently most sophisticated market participants.” What comfort can we take as governments now begin to meddle – the self-same governments that failed to notice and regulate the dangerous free-for-all in the first place? It is not sophistication we seek; it is plain commonsense.

The last Conservative government was rightly excoriated for devastating the manufacturing base of this country. We have yet to see the worst that this Labour government can do to rival that. When help and hemlock are offered by the same hand any hesitation is wholly understandable.

First Cloud Cuckoo of Spring?

Andrew Oswald proposes that to cope with possible bank collapses we should devise an effective insurance solution in which governments are only minimally involved (Independent on Sunday, 30 March 2008). He sees this as a cast-iron guarantee. I beg to differ.

Mr Oswald’s idea is that when depositors open an account they should be offered insurance deals that, for different levels of premium, would guarantee different amounts of their funds. Those customers who wish for complete security will have that option, but only at the cost of a substantial premium.

Those slightly less worried will be able to opt for a smaller premium and a larger "excess" where, in the event of a bank collapse, they will forgo the first X hundred pounds of their savings.

This wheeze seems to overlook the existence of The Financial Services Compensation Scheme. The FSCS is the UK's statutory fund of last resort for customers of authorised financial services firms. It pays compensation if a firm is unable, or likely to be unable, to pay claims against it. In general this is when a firm has stopped trading, and has insufficient assets to meet claims, or is in insolvency. The service is free to consumers.

The FSCS protects deposits, insurance policies, insurance broking (for business on or after 14 January 2005), investment business, and mortgage advice and arranging (for business on or after 31 October 2004).

As a statutory fund of last resort there are limits to the protection FSCS can provide. The maximum levels of compensation are:
· deposits: 100% of the first £35,000.
· investments: £48,000 per person (100% of the first £30,000 and 90% of the next £20,000).

Other levels govern insurance and mortgage provision.

The point being that 100% cover was in place for most small depositors of Northern Rock. It made no difference. People wanted their money out. Demonstrably, offering guarantees is wholly ineffective in such circumstances. People want to avoid the turmoil ahead of a collapse and the interregnum following a collapse when everything is sorted out at some other institutions’ leisure. Substituting commercial insurance cover for the Government-backed provision offered by the FSCS is unlikely to work.

Andrew Oswald also holds a somewhat rose-tinted view of the insurance industry. He believes that the large institutions who might offer this kind of saver insurance have assets spread widely enough, across many nations, to survive even major financial shocks within a single country. And, moreover, insurance companies are better placed than government inspectors to keep an expert eye on any profligate lending practices inside banks.

This is serious cloud cuckoo land. Maybe Mr Oswald is too young to remember the collapse of Lloyds. Let me remind him.

Between 1940 and 1970 many Lloyds syndicates took on enormous amounts of excess insurance business for leading asbestos companies. Underwriters ignored the medical evidence of the risks they were running, even though insurance companies had been refusing to sell life insurance to asbestos workers since 1918. The syndicates were enticed by the lucrative stream of premium and investment income which such business produced.

In 1992 the Yale School of Organisation and Management predicted 200,000 asbestos-related deaths over the next quarter of a century at a cost to asbestos manufacturers and their insurers of $50 billion. The combined book value of their 45 primary and excess insurers was estimated at only $50 billion, before allowance for all other types of claim likely to arise and make a call on those assets.

Many Lloyds Names were ruined financially. Some went bankrupt. Some committed suicide.

It doesn’t end there. On January 10, 2001 Chester Street Insurance Holdings Ltd., formerly Iron Trades Holdings Ltd was declared insolvent. Financial uncertainty over the escalation in asbestos liabilities led Chester Street’s directors to propose a run-off of the company’s business. The High Court approved the Scheme on February 28. Within ten days, the Scheme Administrators, in consultation with the Creditors’ Committee, set an initial payment percentage of just 5%. The likelihood of obtaining insurance-backed compensation for many UK victims of asbestos-related diseases evaporated.

The woeful record of the insurance industry is not confined to asbestos. In August 2001 the business of the Frontier Insurance Company was seized by officials of the New York State Insurance Department in a move designed to avoid insolvency. Harry W. Rhulen, the group's president and chief executive, said that the company's collapse had been caused by unsound underwriting and pricing of medical malpractice policies in the early and mid-1990's. “We did a poor job of determining which were the good doctors and which were the bad”.

In the same year the HIH Insurance Group collapsed and the NSW Supreme Court placed it into provisional liquidation. HIH insurance is now in run–off, which means it is managing its outstanding claims and not writing any new business. This could take several years to complete; some have suggested as long as 10 years.

Also in 2001 Independent Insurance, based in the UK, collapsed. The business consisted mainly of home contents insurance for council tenants, which involves the regular payment of small premiums. An initial valuation of the company's assets ran into "tens of millions", while estimates of its liabilities ranged as high as £1bn. The liquidators described the disaster as the worst “since Maxwell”.

Saver insurance is not the answer. It merely hands the hot potato to an industry no better placed to moderate risk and mitigate disaster than the banks themselves.