Monday, 31 March 2008

The Bottom Line at BA

Some are born in crisis, some achieve crisis and some have crisis thrust upon them.

Churchill was born in crisis when he took over as Prime Minister in 1940. Many chief executives are thrust into crisis through a disaster, think of those trying to carry on after 9/11 . Then there are those who through their own management style, or the culture of the company manage to achieve crisis because they do not pay enough attention.

Willie Walsh the CEO at BA has achieved crisis for his company. The opening of Terminal 5 was a well heralded event. The issues that had to be addressed were well understood and yet not enough attention was paid to them, because not only has a lot of baggage been lost and passengers severely inconvenienced but flights are having to be cancelled on a daily basis. It has been humiliating for the staff, the company and the wider community.

Walsh is a numbers' guy, he has not demonstrated any people skills in public that I am aware of and I would guess that his drive to ensure the bottom line is healthy is at the bottom of this mess. More time for training, fewer flights to start with so that the system and staff could be better able to cope, these would have been ruled out, in the fond hope that it will be all right on the night. In business continuity terms BA has been found wanting and their incompetence has affected many others - in future the best decision will be not to fly BA for if you do it could impact your business badly.

Will BA shareholders demand Walsh resigns because of the damage done to reputation and therefore the money earning capacity of the company? Probably not, they won't make the connection between reputation and share price and the culture that brought about the Terminal 5 fiasco, but they should.

Saturday, 29 March 2008

A Risk Management culture for the long term

I should declare two interests. First my wife has less than 200 shares in the company and second from 1982 to 1990 I was General Manager of Spirax-Sarco's Japan Branch.

Spirax-Sarco was first amongst equals in low pressure steam controls in 1982, with strong competition from German, Japanese and American competitors. Now 25 years later it is the undisputed world leader. During those 25 years it has made but two major acquisitions - the first was to buy its orginal parent Sarco Inc in the USA and secondly to buy the Watson-Bredel company with its range of peristaltic pumps. Its major divestment was to sell off the Drayton radiator valve company in order to concentrate on its core business. Over the period it has more than trebled its sales to £417 miliion and quadrupled its profits. Most of the growth has been internally generated as it expanded into new markets - it has its own or associated companies in 33 markets - and through new products, most of which have been developed in the last 15 years, all focused on managing steam systems.

It has been led by a series of outstanding executives, including the founder Lionel Northcroft and on April 1st 2008 a new CEO takes over, the third engineer drawn from outside the company (he joined in 2003), whilst there have been two accountants who have come up from within.

The foundations of its success has been its application knowledge which , from my experience in Japan was clearly a completely novel way to sell for the Japanese users of steam systems. The knowledge was provided free of charge to help customers design better systems in order to deliver improved product quality for whatever was using steam for process and reduce energy costs. The Spirax correspondence course on steam system design has been take by over 1 million students - it is available free of charge in almost every major language.

What does all this have to do with risk management?


First the company has been disciplined and has not made rash acquisitions. It has stuck to the knitting, would that British Leyland had.

Second it has managed the succession of its leaders very effectively and has ensured that no one can hijack the direction of the company, not for Spirax the fate of GEC.

Thirdly it has used its knowledge to successfully develop markets such as Korea and China so that now Asia accounts for twice the profit from North America and closer to home Continental Europe twice the profit from the UK. This spread of markets has allowed it to manage exchange risks and market downturns in various economies and to deliver an increase in dividends per share for each of the last 15 years.

Fourth, because of its dividend performance and strong management record it has 50% of its shares held by 10 different investment funds, many of which have had the shares for over 20 years. This has given the management stability, but they have earned it.

Fifth being involved with energy saving whilst climate change moves up the agenda, something recognised by Spirax at least 20 years ago, creates a culture, shared by the staff globally , of a company ( I use that in both meanings of the word) addressing to the best of its ability one of the key problems of the world community. Spirax does not lose many people to its competitors.

Wednesday, 26 March 2008

A fall from a roof top

One Chinese definition of "schadenfreude" is " it is pleasant to see an old friend fall from a roof top."

I disagree. Having yesterday attended the funeral of a friend, who had fallen from his roof just before last Christmas whilst clearing the gutters of leaves ,I can say that there is nothing pleasant at all, just general shock and sadness that a very fit and popular man should be cut down in the prime of life.

Much more to the point is the realisation of how the low probability, high impact events can cause such disastrous consequences. Of course you may say that going up onto the roof is inherently dangerous and therefore the probability was not so low, but my friend, who had lived in the house for 30 years and had doubtless gone on to the roof every year to deal with the leaves, had not considered it a risky venture, confident as he was in his knowledge of the roof, which was not very high and of his own excellent balance and agility. He was a man, who having retired early from a large accountancy practice, had not the slightest interest in risk taking either financial or physical.

Because he did not see the risk as severe he went onto the roof unprepared - no harness, no one to stand at the bottom of the ladder and, most importantly, for it would have saved his life - no hard hat. I don't blame him, I have done the same many times, but I won't in future, for I have been made aware in a most terrible way of the perils of taking risk lightly at home, where we automatically assume that nothing bad can befall us. I tell this story in the hope that those who read it will think more positively of hard hats and wear them when appropriate.

Now if the Chinese had said " it is pleasant to see an arrogant hypocrite fall from the roof top" then I would have taken the roof top to be the metaphorical one which Mr. Spitzer fell off and joined in the clouds of schadenfreude wafting down Wall Street. But an arrogant hypocrite by definition does not equal a friend.

Monday, 17 March 2008

Risk Management can never be perfect

The title of this blog comes from Alan Greenspan's article in today's Financial Times. He is referring, in particular, to the exercised state of the financial markets. He points out that the risk management models do not adequately account for human nature, in one of its manifestations he referred to "irrational exuberance" when he was Chairman of the Fed. Now he considers that "paradoxically,to the extent risk management succeeds in indentifying such episodes,it can prolong and enlarge the period of euphoria."

By which I guess he means that people rely on risk management methodology too much and that, only when it is proven inadequate, such as now, does fear replace euphoria and greed.

Friday, 14 March 2008

Timing is all

Keynes said "In the long run we are all dead." He also observed " wordly wisdom teaches it is better to fail conventionally than it is to succeed unconventionally."

It is that second quote that is mentioned in today's Telegraph obituary of Tony Dye , the Phillips and Drew Fund Manager. Dye was a contrarian who in 1996 considered the FTSE 100 overvalued at 4000 and took a sizeable part of his clients' money out of the market. In March 2000 when the index stood at 6400 he was fired , yet within a month of his leaving the stock market turned. Many of those fund managers who had followed the herd kept their jobs.

Dye's story indicates the importance of timing in risk management. If he had made the switch out of equities in January 2000 he would have been hailed as one of the greatest fund managers of all time. He was right that the market would fall, but completely out on his timing, partly because he underestimated the power of Alan Greenspan to support irrational exuberance whilst at the same time fulminating against it.

There is nothing intrinsically wrong with going with the herd although it is always worth remembering that the Gadarene swine thought the going was good for the first part of the way . Warren Buffett always reckons it is best to fearful when others are greedy and greedy when others are fearful and as for timing, Bernard Baruch said "I have made my fortune by buying too late and selling too early".

Wednesday, 5 March 2008

Major sound bites

"A free and open society is worth a certain amount of risk," so said John Major, last Conservative Prime Minister, at the Guildhall last night where he was the guest speaker at the Chartered Insurance Institute's dinner and in snappingly good form.

He also pointed out that " if we are to control the liberty of individuals we need more uncertainty than that (by which he meant the current threat levels)".

He went on to inveigh against identity cards and dna databases and to point out that governments, of any party, with large majorities did not have to take as much care with legislation and so many poorly drafted got passed which would be better scrutinised by both sides if the government's majority was small. He admitted to there being" Too much legislation- I accept a degree of mea culpa".

" Simplicities in politics so often backfire,"was his phrase which conjured up all the unintended consequences of knee jerk reactions by politicians to tabloid headlines.

Amongst the guests were his old colleagues,such as Lord Heseltine and Lord David Hunt, the President of the CII. Most interesting was the presence of Charles Clarke, the ex Home Secretary. I wonder where he stands now on identity cards and why politicans out of office make so much sense.