lack of corporate transparency creates perverse incentives

The present hot topic for everyone is how best to curb the corporate and financial excesses and risky behaviour that lead most of the world's economies into the worst recession since the Great Depression. However, the '800 pound gorilla' in the room that this debate neglects is the lack of transparency that senior executives have over their operations and initiatives, and the perverse incentives this creates.

In the English-speaking world, key policymakers and the public at large have taken up the mantle of improving corporate governance, more specifically limiting corporate remuneration, as a way to check senior executives' and bankers' appetite for risky, even illegal, short-term profit maximising that can inject dangerous volatility into financial systems and markets.

In Australia, APRA recently proposed new executive compensation guidelines, and the ASX Corporate Governance Council is considering issuing guidelines that would require ASX-listed companies to maintain records of their briefings with analysts, provide advance notice and make them more widely accessible to provide for the more equal and fair dissemination of information.

In the UK, a recently published government-commissioned report on corporate governance by Morgan Stanley senior adviser David Walker recommends that banker pay be awarded on a long-term basis and would subject banker bonus payments to close public scrutiny. In the US, there is a compensation 'czar' tasked by the US Treasury to reign in senior executive compensation at companies that received government bailout funds.

I can see and appreciate the logic in addressing the perverse incentives that currently reside within executive and banker compensation structures. But, this is only one side of the equation. The other side involves the fact that senior executives within many organisations can not clearly and accurately identify, measure, and manage their internal costs and value-creation activities.

Unfortunately, in many instances, senior management is making important strategic and investment decisions based on experience, 'gut feels', and/or short-term, known measures, such stock price and personal compensation targets - which in the US, especially, normally consists of stock and option grants. Arguably, this inability to identify, measure and manage organisational costs and benefits encourages senior management to focus more on more short-term, tangible performance metrics (i.e., personal remuneration targets) at the expense of longer-term initiatives whose benefits are at best uncertain.

At mbh, we regularly provide technology solutions and consulting services to organisations that lack the internal processes and technology for clear assessment of operational costs and the value potential of initiatives. We developed our web-based, enterprise project portfolio management software solution, UniPhi, to address what we see as an alarming lack of operational and strategic transparency within most organisations.

We believe that any organisation with 100 or more people should adopt an enterprise-level project portfolio management system to provide greater transparency of operational costs and the initiatives most likely to add, or destroy, value. By equipping senior executives with this knowledge, they will be more inclined to behave in the interests of the organisation, because they'll have a better understanding of what is really happening and can take appropriate steps.

In addition, this greater transparency allows for better accountability, since the information resides within the project portfolio management system for the entire organisation to see. This should dramatically lessen management's incentives to engage in short-term, self-serving, and possibly illegal, activities, since the possibility of disclosure is heightened.

A project portfolio management system also assists the Board of Directors in carrying out their oversight duties, given they will have a much better grasp of what is occurring within an organisation at the strategic and operational levels. This system also assists in accurate public financial reporting, since everyone across the organisation will be working from the same set of financial data.

For many organisations, this increased transparency may fell like an uncomfortable 'shock' to the system. However, it is much more preferable than having politicians manage your organisation after some catastophe. Just ask Bank of America, who is paying back its bailout funds early, because it believes the US Treasury's executive compensation restrictions prevent it from attracting a qualified successor to its outgoing CEO.

Enterprise project portfolio management may not be the proverbial 'silver bullet' for the corporate governance problem, but it definitely enhances internal corporate transparency, and thus accountability, which is a step in the right direction.

banks and managers as agents for owners

It's going to be a very interesting 12 months in relation to bank profits. The profit made by Goldman Sachs and the quick return of smugness in the industry is a fascinating example of arrogance that completely destroys self reflection. I'm hoping the jury is still out and that someone within the industry will pull the various egos in a room, bang their heads together and then some sense ensues. The banks have generated such a phenomenal amount of destruction to market based capitalism it is one of life's great examples in arrogance in ignorance. The biggest challenge to market based capitalism for me is the challenge that banks bonuses paid to employees has proven beyond a doubt the importance of owner based management. In fact Adam Smith asserted that self interest will be guided by the invisible hand to generate public good only if the owner is also the manager. Of course, the leverage of the manager being an agent for the owner is crucial to modern market economies but the abuse of this agency power by bank employees has thrown all the benefits of this leverage to the wind.

So, lets see how the public reacts to this new arrogance of the banks that has occured so soon after these same bankers were on their knees begging the public for help.