By Olu Akanmu
There has been very significant outrage at the announcement by the Federal government that six additional federal universities will take off from next academic session. The paltry N10billion naira voted for their take off raises fundamental question about the quality of education that these universities will deliver. If the federal government has not been able to fund existing twenty-five universities properly, why should it start an additional six universities? It does not suggest that quality and standard are important to government. Patriotic concerns have been expressed that it is time to recognize that the current fee regime of the universities is too small to complement the paltry funding that they receive from the government. That the Nigeria state should not own a Nigerian youth, university education but a good secondary foundation education. That university fees need to be significantly higher perhaps at near commercial level for sustainability and standard of the university system. This may be complemented by endowment from rich and charitable individuals and a student loan program where students could borrow to pay the near-commercial high school fees. We respond to this school of thought in this essay.
The problem of our higher education and its larger social impact are complex hence the solution to the problem will be non-linear. Education is a public good whose larger social and economic benefits are bigger than what can be typically harnessed by private capital in investment returns. This creates a pricing problem in that prices may be either too high as to serve only the markets where capital can get its return, leaving a large section of society un-served with dire social consequences; or too low as to serve everyone but priced below the optimal level for private capital returns, which implies there will be little or no investment. This is the market failure problem that recognizes that while the markets may be best in allocating society’s resources efficiently, it has significant limitations in the case of public goods like education, national security and public health. When the state is endowed with abundant resources, it could intervene to correct the limitations of markets by providing public goods exclusively for society as we have tried to do in Nigeria. Given however, the current resource limitations of the Nigeria state, what we need is a structured, tiered and segmented partnership with private capital in the provision of our public goods such as our university education.
Firstly, we need to license more private universities and create structures that allow them to charge market prices for the market segments that can afford to pay such commercial prices. We should create incentives for the acceleration of private investments including tax incentives that will encourage the provision of world class infrastructures and standards in our private universities. There is a significant middle-class market that educates their wards in private secondary schools at costs that are fifty times higher than the highest fees in our public universities. That market should be served by the private universities and should free the public universities to serve the market segments that cannot afford to pay commercial prices. The public universities will serve as a social safety net for the larger section of the population that cannot afford commercial prices for education. It will provide for them university education as a public good whose opportunity cost would have been a half-educated population that could contribute very little to the well-being of the modern society. Then, we should have very tough regulation of standards by the National University Commission on curriculum, teaching qualification, facilities and minimum pass requirements including the unapologetic closure of departments that fall below such prescribed standards.
How would the public universities charging non-market prices be funded? We should re-set our national priorities to fund programs that have deep and spiral impact on society. The billions of dollars we have spent on ECOMOG operations since our first intervention in Liberia could have made a difference in the standard of our university education. Incidentally, there is a correlation between the decline of our university standards from the 1990s and our first ECOMOG adventure. We should also rationalize the structure of our governments at federal and state level and rationalize our executive and legislative bureaucracy with their bloated recurrent expenditures. We must also tackle corruption more vigorously. A key reason why society is unable to fund the provision of public goods is that society’s resources are looted heavily by the corruption menace. We can increase the efficiency of expenditure on public goods by at least thirty percent if we eliminate wastages and over-invoicing due to corruption in government. A student loan program learning from the American system could be useful but may be constrained by the limitation of our financial system with its very low financial inclusion where less than ten percent of our population has access to serious credit. We can also impose a one percent tax on foreign education remittances to support university education in Nigeria. A parent remitting USD20, 000 for her ward’s school fees will contribute a token USD200 to our university system and its public good. Because, many of us middle class people have been privileged by society, we should have such moral and legal responsibility to contribute to public good. Educational endowment from the rich could also be a good funding source as we have in the US, but this is a function of the depth of the moral fiber of the rich and their sense of duty to society. This is an area where our rich and those of the advanced societies are different. In a society where the rich do not even pay their legitimate taxes, it is not clear how much could be mobilized from them in serious charitable endowment to fund public goods like education. Rather we should strengthen our tax and tax collection systems to ensure that wealthy individuals fulfill their legitimate tax obligations ensuring that we spend a good portion of the increased tax revenue to fund our education sector.
In the last one year, we have spent a good part of state resources to bail-out our banks and the larger financial system. This is because our government is correctly operating with a paradigm that the financial system is a public good whose ill-being has serious social consequences and externalities beyond the private interest of our banks’ shareholders. We should also apply the same the public good concept to our higher education sector and its crisis. That there are significant externalities in social benefits in the well-being of our education sector beyond the private interest of individual students and their families. We must however do this within the context of good fiscal discipline; rationalize government fats and wastages ensuring that we do not create a ballooning public debt in the process.
Sunday, December 19, 2010
Let’s Rebuild the Fallen Walls - Reflections on the Decay of Public Secondary School Education in Nigeria
By Olu Akanmu
Keynote Speech by Olu Akanmu at the Lagelu Grammar School Old Boys Association, 50th Anniversary Fund Raising Dinner. January 13, 2008
Brothers, Seniors and Contemporaries. We have come to celebrate the 50th anniversary of our institution, our secondary school on whose foundations we have built what have made us to be called success. While it is on one hand a celebration, it also represents the highlighting of the decay of our institution, a metaphor for the decay of our nation and its institutional fabrics.
Lagelu Grammar School, with its serene academic environment, its beautiful and tall Casuarina trees, that made the sky felt so near. Those Casuarina trees that constantly told us as students; that the sky could be reached and not an impossible summit. Lagelu was the hallowed temple for the moulding of leaders of tomorrow, whose catchments area was largely among the indigenes of Ibadan; who were its founding fathers.
Today, the walls of the hallowed temple of our institution, nay our nation is fallen. The Casuarina trees are gone. The environment is no longer serene. The glasses of the windows of the beautiful hall, a rock solid architectural masterpiece, are now made of wooden planks. There are neither more encyclopedia in the library nor chemicals in the laboratory. Lagelu, that was the pride of the nation in French subject in the late 70s, winning prizes even in West Africa, no longer offer French to its students. The wide expanse of school land of a thousand acres is gone. They have been taken over by the police barracks and several schools claiming to be offsprings of the Lagelu mother school, but who are nothing but pretenders to the heritage. The boarding house where we learnt discipline and toughness is also gone. It was the place where we were toughened by cutting the stubborn grass of our slanting football field.
As we have said, the institutional decay of our school, is a metaphor for the decay of our nation and its institutional fabrics. It represents the decay of our communities, of our government, and the ethical values that should have made us a strong nation. The nature of our societal institutions today is the outcome of our collective efforts as leaders and followers.
Our institutions have decayed, not because we lack resources, for we are a blessed nation. Our institutions have decayed because we have enthroned the values of graft over service. Our institutions have decayed because we have worshiped material over knowledge. Our institutions have decayed because we have let enlightened self-interest entrenched itself over the interest of the larger community.
Our school took its name from Lagelu, the founder of the ancient city of Ibadan. Ibadan the ancient city of our birth, that is rich in history of the triumph of community values over enlightened self interest. We remember the famous story of Efunsetan Aniwura, the Iyalode of Ibadan, her wickedness, her oppression of the citizenry; and her eventual defeat by the collective will of the people.
Brothers, Seniors and Contemporaries. The fact is that if Efunsetan were to be alive today in many parts of our nation, she would be a political party Chairman or member of board of trustee of the political party of her choice. Such is the decadence of our political institution today.
Yet, we must not loose hope, for we can see some silver lining in the dark clouds. Our leaders and their stewardship are being questioned for the first time in the law courts. Enlightened self interest may push back but the larger community interest is resisting well through the institution of our vibrant press, a real blessing of our democratic experiment.
Enlightened self interest perpetuates itself over our larger community interest when the institutions for expression of our community interest are either weak or non-existent. We see this in our democracy and its faulty electoral process. Even the President acknowledged that what we had in April was not an election to be proud of and has set up a committee on electoral reforms. While we re-build the political process and its institutional framework to which our political parties are core; it is critical that we strengthen alternative social institutions outside the political process. These social institutions provide alternative platforms for the expression of our larger community interests. These alternative social institutions include our NGOs, our town unions and Parapos and our old boys associations such as that of Lagelu Grammar School. They must however not just be elitist groups that flaunt the success of its members and promote only their self-interest. If they do so, they will be guilty of the sins of the politicians. They must be associations that are truly non-partisan, associations that champion our larger community interest; who put pressure on the political process to reform it, to be truly democratic.
And back to matters of our beloveth school. Our different generations, who have passed through Lagelu Grammar School, have been very privileged. We have had the privilege of sound education of the highest academic and moral standards. To this privilege that we had, comes an obligation to give back to the institution that has shaped our lives. We must rebuild the fallen walls of the hallowed temple of our beloveth school. Albert Einstein said and I quote
“Everyday, I remind myself that my inner and outer life are based on the labours of other men, living and dead, and that I must exert myself in order to give in the same measure as I have received and am still receiving”.
A generation had the vision and founded the school and gave us a privilege education. We who have received from the school must give back as much as we have received. Our generation must ensure that the baton does not fall from our hands. That even if the baton has fallen, it must be picked up again and we must begin a new race to connect the school back to the glory of the past.
There are several programs and endowments that have been proposed by the national body. Lets us give generously to support them. Let’s also ensure that as we build new infrastructure in the school, that those infrastructures are maintained and sustained. Let’s have a tripartite governance structure for the school of those who have genuine vested interest in its highest standards. These are the teachers, the parents and the old boys association. As we rebuild our old school and improve its standards, we are in our little, but no small way building back the nation and its standards. It is therefore a privilege and sacred duty for which we must be proud, proud to serve and proud to give.
Brothers, Seniors and Contemporaries. Thank you for listening.
Speech by Olu Akanmu at the Lagelu Grammar School Old Boys Association, 50th Anniversary Fund Raising Dinner. January 13, 2008
Keynote Speech by Olu Akanmu at the Lagelu Grammar School Old Boys Association, 50th Anniversary Fund Raising Dinner. January 13, 2008
Brothers, Seniors and Contemporaries. We have come to celebrate the 50th anniversary of our institution, our secondary school on whose foundations we have built what have made us to be called success. While it is on one hand a celebration, it also represents the highlighting of the decay of our institution, a metaphor for the decay of our nation and its institutional fabrics.
Lagelu Grammar School, with its serene academic environment, its beautiful and tall Casuarina trees, that made the sky felt so near. Those Casuarina trees that constantly told us as students; that the sky could be reached and not an impossible summit. Lagelu was the hallowed temple for the moulding of leaders of tomorrow, whose catchments area was largely among the indigenes of Ibadan; who were its founding fathers.
Today, the walls of the hallowed temple of our institution, nay our nation is fallen. The Casuarina trees are gone. The environment is no longer serene. The glasses of the windows of the beautiful hall, a rock solid architectural masterpiece, are now made of wooden planks. There are neither more encyclopedia in the library nor chemicals in the laboratory. Lagelu, that was the pride of the nation in French subject in the late 70s, winning prizes even in West Africa, no longer offer French to its students. The wide expanse of school land of a thousand acres is gone. They have been taken over by the police barracks and several schools claiming to be offsprings of the Lagelu mother school, but who are nothing but pretenders to the heritage. The boarding house where we learnt discipline and toughness is also gone. It was the place where we were toughened by cutting the stubborn grass of our slanting football field.
As we have said, the institutional decay of our school, is a metaphor for the decay of our nation and its institutional fabrics. It represents the decay of our communities, of our government, and the ethical values that should have made us a strong nation. The nature of our societal institutions today is the outcome of our collective efforts as leaders and followers.
Our institutions have decayed, not because we lack resources, for we are a blessed nation. Our institutions have decayed because we have enthroned the values of graft over service. Our institutions have decayed because we have worshiped material over knowledge. Our institutions have decayed because we have let enlightened self-interest entrenched itself over the interest of the larger community.
Our school took its name from Lagelu, the founder of the ancient city of Ibadan. Ibadan the ancient city of our birth, that is rich in history of the triumph of community values over enlightened self interest. We remember the famous story of Efunsetan Aniwura, the Iyalode of Ibadan, her wickedness, her oppression of the citizenry; and her eventual defeat by the collective will of the people.
Brothers, Seniors and Contemporaries. The fact is that if Efunsetan were to be alive today in many parts of our nation, she would be a political party Chairman or member of board of trustee of the political party of her choice. Such is the decadence of our political institution today.
Yet, we must not loose hope, for we can see some silver lining in the dark clouds. Our leaders and their stewardship are being questioned for the first time in the law courts. Enlightened self interest may push back but the larger community interest is resisting well through the institution of our vibrant press, a real blessing of our democratic experiment.
Enlightened self interest perpetuates itself over our larger community interest when the institutions for expression of our community interest are either weak or non-existent. We see this in our democracy and its faulty electoral process. Even the President acknowledged that what we had in April was not an election to be proud of and has set up a committee on electoral reforms. While we re-build the political process and its institutional framework to which our political parties are core; it is critical that we strengthen alternative social institutions outside the political process. These social institutions provide alternative platforms for the expression of our larger community interests. These alternative social institutions include our NGOs, our town unions and Parapos and our old boys associations such as that of Lagelu Grammar School. They must however not just be elitist groups that flaunt the success of its members and promote only their self-interest. If they do so, they will be guilty of the sins of the politicians. They must be associations that are truly non-partisan, associations that champion our larger community interest; who put pressure on the political process to reform it, to be truly democratic.
And back to matters of our beloveth school. Our different generations, who have passed through Lagelu Grammar School, have been very privileged. We have had the privilege of sound education of the highest academic and moral standards. To this privilege that we had, comes an obligation to give back to the institution that has shaped our lives. We must rebuild the fallen walls of the hallowed temple of our beloveth school. Albert Einstein said and I quote
“Everyday, I remind myself that my inner and outer life are based on the labours of other men, living and dead, and that I must exert myself in order to give in the same measure as I have received and am still receiving”.
A generation had the vision and founded the school and gave us a privilege education. We who have received from the school must give back as much as we have received. Our generation must ensure that the baton does not fall from our hands. That even if the baton has fallen, it must be picked up again and we must begin a new race to connect the school back to the glory of the past.
There are several programs and endowments that have been proposed by the national body. Lets us give generously to support them. Let’s also ensure that as we build new infrastructure in the school, that those infrastructures are maintained and sustained. Let’s have a tripartite governance structure for the school of those who have genuine vested interest in its highest standards. These are the teachers, the parents and the old boys association. As we rebuild our old school and improve its standards, we are in our little, but no small way building back the nation and its standards. It is therefore a privilege and sacred duty for which we must be proud, proud to serve and proud to give.
Brothers, Seniors and Contemporaries. Thank you for listening.
Speech by Olu Akanmu at the Lagelu Grammar School Old Boys Association, 50th Anniversary Fund Raising Dinner. January 13, 2008
Friday, November 26, 2010
Managerial Compensation and Risk Incentives in the Financial System
By Olu Akanmu
Given our recent experience and the need to rebuild public trust in the financial system, we will need to reshape the values of managers of businesses in public corporations to which we have endowed our privileged trust, as customers, shareholders, government and the larger public. One of the most important lessons that managers need to re-learn is that an organization does not just exist to make profit for its shareholders alone. That a good company is that which has a social purpose for which making profit is the by-product of fulfilling that larger social purpose. Therefore, a good company is not that which posts bumper profits that managers celebrate but harms the larger interest of other stakeholders such as customers, the government and general public welfare. A good company is that which is able to optimize the interest of all its stake-holding groups of customers, shareholders, the state and the larger public. It provides great products and services that improve the quality of life of Nigerians, return good profit to shareholders while contributing to national economic development. A good company will not significantly externalize the cost of its business. When a company makes huge profit by destroying the environment, and gets away with it, because social institutions are weak to make it pay for it, it is externalizing its cost and betraying public trust. As we have seen all across the world, when managers of financial institutions take excessive risks, which endanger the financial system and have to be bailed out by their governments and state resources, they are externalizing the cost of their firm’s profit. In Nigeria for example, the opportunity cost of the money used to bail out our banks are the roads, schools, hospitals, power and public infrastructure that have to be forgone because public resources had to be diverted to save the financial system. Society has trusted too much. The fact is that firms will most always externalize their cost unless there are social institutions such as regulations and the tax system that prevent them from externalizing their cost or make them pay for it, when they do so. That is why we support the policy of the European Union that banks need to be taxed specially to build a pool of funds which shall fund the cost of future bail-out of the financial system when the need arises again.
The argument above however presupposes that if the interest of managers and the larger public interest are not always fully aligned, that at least managers are acting as true agents of their principal (their shareholders) and their interests are both aligned. This is not always so. Our compensation policy especially the big annual profit bonuses, tend to reward managers excessively for the short term over the long term. This tend to create a classic moral-hazard problem where managers take investment decisions with excessive long term risk, which may not crystallize in the early years when they cash in on their short term profit and profit bonuses. When these risks eventually crystallize in the future, the managers have moved on, leaving the firm, its shareholders and future managers to manage the consequences of fallen profit and collapsed share prices. This phenomenon has new lingo and acronym in behavioural finance called IBGYBG meaning I’ll Be Gone, You ‘ll Be Gone. Essentially, our compensation policy creates a perverse incentive that encourages a risk behavior that transfers the negative consequence of managerial risk decisions to someone else in the future while the manager appropriates the reward in the short term. When the reward of a risk could be appropriated by the risk taker, and the consequence of the risk is for someone else, there is a tendency by the risk taker to take excessive and sometimes unreasonable risk. This is the moral hazard problem in risk management. It plays heavily in the nature of our managerial compensation where rewards are heavily weighed in favour of annual profit bonuses and virtually nothing in long term share prices of corporations. With the benefit of hindsight, looking back at the downstream oil and gas businesses and the margin loans transactions of our banks in the period of financial industry exuberance, we could see clearly the IBGYBG syndrome manifesting strongly among our managers. We could see the way the perverse incentive and compensation of the industry for short term rewards, immediate profits and annual bonuses made our managers underplay or even ignore the long term consequences of their transaction risks. This will need to change to align managerial interest better with that of shareholders and strengthen public trust in corporations. Compensation of managers must carry a significant long term portion related to the future share prices and values of their firms, as a function of the long term impact of their managerial decisions.
We like to say however that we have no issue with size of the compensation of the manager as long as it is a function of the shareholder value created and it contains a significant long term portion that ties the compensation to the long term consequence of managerial risk decision. We recognize that there are short term pressures for talents in organizations that tend to encourage short term managerial rewards such as strong annual bonuses to keep valuable staff from competition. Given our recent experience and the need to rebuild trust in financial system, ensuring a better alignment of managerial interest with shareholders, our compensation policy must balance the need to keep our talents and the need to ensure that those talents kept and their executives are actually working for their shareholders in the long term.
Olu Akanmu
Novermber 2010
Given our recent experience and the need to rebuild public trust in the financial system, we will need to reshape the values of managers of businesses in public corporations to which we have endowed our privileged trust, as customers, shareholders, government and the larger public. One of the most important lessons that managers need to re-learn is that an organization does not just exist to make profit for its shareholders alone. That a good company is that which has a social purpose for which making profit is the by-product of fulfilling that larger social purpose. Therefore, a good company is not that which posts bumper profits that managers celebrate but harms the larger interest of other stakeholders such as customers, the government and general public welfare. A good company is that which is able to optimize the interest of all its stake-holding groups of customers, shareholders, the state and the larger public. It provides great products and services that improve the quality of life of Nigerians, return good profit to shareholders while contributing to national economic development. A good company will not significantly externalize the cost of its business. When a company makes huge profit by destroying the environment, and gets away with it, because social institutions are weak to make it pay for it, it is externalizing its cost and betraying public trust. As we have seen all across the world, when managers of financial institutions take excessive risks, which endanger the financial system and have to be bailed out by their governments and state resources, they are externalizing the cost of their firm’s profit. In Nigeria for example, the opportunity cost of the money used to bail out our banks are the roads, schools, hospitals, power and public infrastructure that have to be forgone because public resources had to be diverted to save the financial system. Society has trusted too much. The fact is that firms will most always externalize their cost unless there are social institutions such as regulations and the tax system that prevent them from externalizing their cost or make them pay for it, when they do so. That is why we support the policy of the European Union that banks need to be taxed specially to build a pool of funds which shall fund the cost of future bail-out of the financial system when the need arises again.
The argument above however presupposes that if the interest of managers and the larger public interest are not always fully aligned, that at least managers are acting as true agents of their principal (their shareholders) and their interests are both aligned. This is not always so. Our compensation policy especially the big annual profit bonuses, tend to reward managers excessively for the short term over the long term. This tend to create a classic moral-hazard problem where managers take investment decisions with excessive long term risk, which may not crystallize in the early years when they cash in on their short term profit and profit bonuses. When these risks eventually crystallize in the future, the managers have moved on, leaving the firm, its shareholders and future managers to manage the consequences of fallen profit and collapsed share prices. This phenomenon has new lingo and acronym in behavioural finance called IBGYBG meaning I’ll Be Gone, You ‘ll Be Gone. Essentially, our compensation policy creates a perverse incentive that encourages a risk behavior that transfers the negative consequence of managerial risk decisions to someone else in the future while the manager appropriates the reward in the short term. When the reward of a risk could be appropriated by the risk taker, and the consequence of the risk is for someone else, there is a tendency by the risk taker to take excessive and sometimes unreasonable risk. This is the moral hazard problem in risk management. It plays heavily in the nature of our managerial compensation where rewards are heavily weighed in favour of annual profit bonuses and virtually nothing in long term share prices of corporations. With the benefit of hindsight, looking back at the downstream oil and gas businesses and the margin loans transactions of our banks in the period of financial industry exuberance, we could see clearly the IBGYBG syndrome manifesting strongly among our managers. We could see the way the perverse incentive and compensation of the industry for short term rewards, immediate profits and annual bonuses made our managers underplay or even ignore the long term consequences of their transaction risks. This will need to change to align managerial interest better with that of shareholders and strengthen public trust in corporations. Compensation of managers must carry a significant long term portion related to the future share prices and values of their firms, as a function of the long term impact of their managerial decisions.
We like to say however that we have no issue with size of the compensation of the manager as long as it is a function of the shareholder value created and it contains a significant long term portion that ties the compensation to the long term consequence of managerial risk decision. We recognize that there are short term pressures for talents in organizations that tend to encourage short term managerial rewards such as strong annual bonuses to keep valuable staff from competition. Given our recent experience and the need to rebuild trust in financial system, ensuring a better alignment of managerial interest with shareholders, our compensation policy must balance the need to keep our talents and the need to ensure that those talents kept and their executives are actually working for their shareholders in the long term.
Olu Akanmu
Novermber 2010
Wednesday, September 29, 2010
Professions, Profits and Public Morality
Speech delivered by Olu Akanmu as Keynote Address
at the 13th Annual Conference of the
Nigeria Association of Industrial Pharmacists
This conference is happening as the echoes of our democratic transition and election gets louder and louder. It is happening in a particular period of serious economic challenge for our businesses defined by weak demand and low consumer purchasing power, poor utilization of capacities in our factories, and constrained access to credit for the real sector. It is happening in this period of the emasculation of many small businesses, with slowed or stagnant inventory turn-over in our retail shops. It is happening in this period of decayed public infrastructure which increases the cost of doing business while reducing the competitiveness of our meager manufactured exports. It is a tough time for business in Nigeria. It is a tough time for the manufacturing sector in particular for which the pharmaceutical industry is one. The loud echoes of our democratic transition cannot obscure the cries of our business for economic survival.
In seasons like this, where markets have shrunk significantly thereby increasing competitive pressures, where industries are witnessing signs of premature aging occasioned by the contraction of customer demand, with bankers on the back of business owners to pay down previously availed loans, the challenges are tough and there is a tendency to be desperate, to find short-cuts to survival, to seek NOT to play by fair and legitimate rules in the quest for survival or success. At the employee levels, wages have been rationalized and the social and dependant burden on wages have significantly increased. These social and survival pressures on employees may even drive tendencies to seek short-cut to survival and even cheat.
Yet evidence abound that not playing by fair and legitimate rules while it may lead to success in the short term or even for some time, cannot guarantee and sustain success for individuals and organizations. The lessons of the banking industry in the recent times teach us that the only way to guarantee sustainable and enduring success for business is to compete fairly and succeed ethically, to build organizations that have the cultures , controls and governance that guarantee transparency and executive accountability to their board, the shareholders and the larger public. If however, the cost of not playing by the rules, the cost of unethical conduct is limited only to the organization that so practices such and so competes, perhaps the society could have walked away easily with a sense that the guilty has been punished. It is however not so. The cost of not playing by the rules is not limited to the organizations that practice such. These organizations infringe enormous cost on society as a result of their actions. We see in the in the financial service industry, globally and in Nigeria, huge costs to tax -payers in the bailing out of banks and other financial institutions such as the insurance companies that insure the risks of the financial system. In the petroleum and chemical industries, we see huge cost of environmental pollution to society when those organizations elect to succeed at all cost and sacrifice societal interest on the altar of their corporate success. In the pharmaceutical industry, we see the cost of un-fair or unethical play manifested in the social cost of fake or adulterated medicines, with increased health care cost when sub-standard doses of drugs such as antibiotics are administered leading to resistance of infectious diseases.
Given recent events in the industries earlier described, it is pertinent to ask, what is legitimate profit? And when is the making of profit legitimate? We must also ask an even more critical question whether all legitimate profits are ethical. Or essentially, when is profit unethical even when it is legitimate? While it is easy to look at the law and answer the question of legitimacy of profit as that which is made without violating the governing law of society, it is more difficult to answer the question of whether there could conflict between legitimacy and social ethic, whether a legitimate profit could be unethical. The fact is that there are instances where the law lags behind the ethical standards that society requires. We see this clearly in the behavior of leading global financial institutions like Goldman Sachs and the role they played in the global financial crisis, where Goldman for example sold mortgage financial derivatives to its clients and at the same time created counter-product to bet against the financial product it sold, that it would fail. When the financial derivate product it sold failed, Goldman clients lost huge money, some of them even went bankrupt but Goldman Sachs made billions of dollars on the basis of its successful bet. Goldman in the US congress hearing, when it was accused of profiting from the financial misfortune of society, claimed that it did not break the law. It did not matter. Its actions and corporate behavior were unethical. This is similarly illustrated in the tobacco industry that claims to provide employment of for thousands of Nigeria through its factory and agriculture extension program. It does its business within the law. The social cost of tobacco to the larger society in cancer and other pulmonary diseases however raises fundamental question about the ethic of the tobacco industry beyond whether it does its business within the governing laws of society.
What then is an ethical business or an ethical way of doing business? I will define an ethical business as that which fulfills a defined social purpose in improving societal or community well-being, does not externalize the cost of its success in social cost to society, competes fairly and transparently on the merits of its organization assets and will not provide incentives to its external stakeholders that perverts their fair and objective judgment of its services relative to alternatives available. An ethical company will also be transparent to its employees, its shareholders and its critical external stakeholders. Using this definition, we can begin to examine and query the ethical depth of our organizations and the particular role we play within it. When we forget the larger reason for being of our organization and our profession, and we seek to win contract or prescription commitment at all cost, including providing incentives or inducement that compromises the objective examination of our products by customers, we are not practicing ethically. When we do not disclose fully the side effects of medicines to aid their objective choice by prescribers, we are not practicing ethically. Ethical breaches by professionals are very serious because they enjoy sacred and privileged trust from society that they will discharge their service at a minimum standard far above what can be received from anyone else. That is why we call them professionals while pretenders to the profession who cannot deliver the minimum standard expected by society are known as quacks. It therefore beholds on us as pharmacists, that the encounter of a patient with us must be clearly different from that of a non-professional. We owe this as an obligation to society flowing out of its privileged trust to us as professionals. When therefore, we fall short of professional standards, when the quality and standard of service delivery between a pharmacist and a non-professional are similar, when we do such, we breach society’s sacred trust and compromise the ethical foundation of our relationship with the larger society.
It is time to raise our standards, to the lofty heights of the dreams of our founding fathers, compromised not by the current economic and infrastructure challenges that we face but exalted by our checkered history as one of the oldest organized professional bodies in Nigeria. Let us publicly sanction those who practice below the standards society expects us, with the full arm of the law on their back, including suspension and expulsion from practice depending on the gravity of breach of professional trust. Let our regulators and the government agencies responsible for the importation, inspection and control of drug quality, co-ordinate and co-operate better. Let them raise their standards, which seem to have fallen in recent times according to the Pharmaceutical Society to ensure that never again would we ever see a Nigeria child die because of fake or sub-standard drug; as we recall the killer Paracetamol incidence of 2008. Let our criminal justice system and particularly our courts also dispense justice and punish those found guilty of these heinous crimes, and do so on time for justice delayed is justice denied. It is important that ethical infractions be sanctioned by professional bodies and the institutions of the larger society; for when there are no sanctions, ethical conduct becomes a mere sermonizing that we can elect to comply with only when it is convenient for us. Sanctions on ethical breaches are therefore critical to raising ethical standards among professionals who are privileged to enjoy society’s scared trust. We must also ensure that regulations and the laws concerning drug handling and distribution are enforced. That only those who are qualified and trained as pharmacists should be drug inspectors and that they must be led also by those who are trained in the chemistry, production and pharmacology of drugs. This is the law of the Nigeria state, and even the Nigeria state must comply with its own laws. For when we implement the law below the standards set by the law itself, we set aside the intent of the law, the reason for its legislation; we open a breach in execution of statutes, which would be exploited by those who seek to do business unethically.
The debased nature of ethics in business in our nation is manifested by the pervasive corruption in the public and private sector. Corruption compromises the efficient functioning of markets in its critical role of allocating resources to where they would be best utilized. With corruption, resources are allocated wrongly and sub-optimally, leading to very low social returns on investments. You only need to see the decayed nature of our public infrastructure despite previous years of massive investments to realize the cost of corruption to our society. Corruption essentially holds the market hostage, removes its freedom and hand-cuffs its un-seen hand as famously described by Adam Smith. Now that the Halliburton case is court, we expect that the case would be tried and brought to conclusion soonest. We expect the same of the Siemens case and other high profile cases. The way these cases are prosecuted will tell the international community and indeed ourselves as a nation, the level of our commitment to ethics in governance and morality in public affairs. Our national politics, the conduct of our elected politicians, the standards of morality and ethics by which we hold them significantly influence the conduct of other actors in the public and economic space. You will recall that when “settlement” became a lingo of our politics, it sooner became a lingo of our business. We must therefore demand higher standards of public morality and ethical conduct from our elected officials. We must ensure that we strengthen our democratic institutions such particularly our electoral process to ensure that our votes count and that every vote will be counted. This will make our elected officials accountable to the electorate, as we can truly vote them out, when they do not deliver conduct themselves below our consensus and standard of public morality. We must also strengthen our political parties to ensure internal democracy while ensuring that our people have alternative oppositions that are as equally strong as parties in government, to make our elections less predictable, to put incumbents on their toes and the opposition on their heels. We must strengthen our judicial institutions to ensure their independence to dispense justice without fair or favour while ensuring that only those who know the sacred nature of the duty and society’s trust of the bench, sit in judgment in our courts. The signals in the electoral process suggest that we are beginning to make progress. Let us therefore all register to vote, and vote this time around knowing that our votes will count and that the elections will reflect the true will of our people. When we reform our politics, and force higher standards of public morality on our elected officials, the multiplier effect on society in the acceptable level of ethical and moral conduct will be very significant.
We must also promote more open and transparent societies in both the public and private sectors. Ethics and public morality standards correlate strongly with the level of institutional and societal transparency. We therefore call on the national assembly to pass the Freedom of Information Bill to guarantee unfettered access of Nigerians to information concerning their state, the expenditure of state resources and the conduct of public officials. Because governments at its three tiers are the biggest spenders on pharmaceuticals in Nigeria, we must put in place higher levels of transparency in our public contract and procurement system. Contracts and procurement intentions and information must be widely available, advertised in the newspapers where possible, standards of prequalification of suppliers must be transparent as the prequalification itself. Tenders must be competitive, open and transparent. There must be separation of authority to pre-qualify suppliers, authority to award contracts and the authority to receive contracts and authority to pay for contract delivered. Then the procurement system must be regularly subjected to transparent third-party audits to ensure that what we wanted to buy is what we bought and that we paid fair prices for what we bought.
We must apply similar standards to contracts and procurements in the private sector. We must promote higher levels of transparency in the private sector to drive up ethical standards, and ensure internal and external stakeholder trust. We must build organizations with transparent internal processes where employees as internal stakeholders, can engage and question their management with candour on the business of the organization. When organizations are transparent internally, their transparent culture would be such that they will not have a problem in being transparent to their external stakeholders particularly their shareholders. These are the ethics and public morality lessons from Enron and the global financial institutions on the ethical breach of trust which they suffered in recent past. We must ensure higher standards of transparency and disclosure in our corporate financial reports. Corporate financial reports must reflect the true state and financial health of our corporations so that our shareholders and investing public, take their investment and risk decisions based on facts they can trust and not from flawed information. Managerial and executive “conflict of interest” must also be fully disclosed to ensure that managers and executives can truly perform their duties as true agents of their shareholders and keep the trust of the owners of the business.
We must also rediscover the real purpose of business which is to make enduring contribution to societal well-being, where business makes profit only as by-product of fulfilling this larger purpose. When we pursue profit and loose sight of the real and larger purpose of business, we sacrifice the greater good of society on the selfish altar of business interest. We compromise ourselves ethically and lower our standards of public morality. We must re-educate ourselves that the most successful business is not the one that made the biggest profit, but that which achieved good profits with an enduring contribution to societal well-being. We need to reform the character and content of management education in our business schools to increase the ethical content of its curriculum, to produce managers who know finance as well as fidelity, managers who know strategy as well as character. The recent global financial crisis where we witnessed some of the most irresponsible behavior by managers on Wall Street, who are largely Harvard, Wharton and Stanford graduates have thought us that there is fundamental gap of ethics and character in management education.
A discourse on public morality and ethics cannot be complete without discussing the role of religion. Religion is a foundation subject of ethics and public morality. Religion teaches us about good and evil, virtue and vice; and right and wrong. Religion teaches us about the ultimate triumph of good. It influences society significantly in its consensus on standards of ethics and public morality. We are a religious nation that actively seek divine intervention and help even when it may not be justified. You only need to see the Super Eagles on the pitch praying before their matches even when they have not adequately prepared to appreciate our national religious passion. Given societal decay and our falling moral standards, religion must play a more active role in re-shaping our values and public morality standards. We need to hear the voice of morality and ethical conduct much more loudly from our pulpits and minarets. The voice of morality, ethics and virtue must not be drowned by the voice of prosperity, success and breakthrough. Religion must teach, unlike the popular axiom, that the end does not always justify the means, that the end does not always justify the means. That, how we succeed as managers and business people, is no less important than our success itself. That virtue and success are not mutually exclusive, that profits and morality are not mutually incompatible. That if anything, virtue is a guarantee of enduring success, that morality and good business ethic is a guarantee of enduring profit. Was it not the Holy Book that says that “A false balance is an abomination to the LORD but a just weight is HIS delight” and that “wealth gotten by vanity shall be diminished but he that gathereth by labour shall increase”.
We need to change society, change our nation to a higher level of social ethics and moral standards. We do not have the singular illusion that it is would be easy. It is tough to be honest when falsehood is a norm. It is tough to be virtuous when vices are normal. It is tough to be straight when crookedness is celebrated. Yet, we must hold firmly to the WORD that says that the crooked path shall be made straight. Like Elijah or Elias in the Holy Books, it could sometimes feel lonely to do business ethically. We could feel like Elijah, tired and worn out, that everyone, except us, has sold out and bowed to Baal. Yet Elijah was wrong. He did not know until he was told that there were others like him, seven thousand others, who have not bowed to Baal. For everyone, man or woman, that does his or her business ethically, please know that there are seven thousand others like you. To change our society, these seven thousand and one people must find themselves. They must build ethical networks and alliance for change. If the good ones among us network together and form this alliance for change, we can make change happen and conquer the Ahabs and the Jezebels of our nation.
We see a new nation, a city on a hill, where the bright light of righteousness shines like the Sun. A city where prosperity flowers, where merit thrives and excellence flows like an unending river. And her beautiful children singing the forgotten stanza of its national anthem, that “in love and honesty to grow, and living just and true, great lofty heights attain, to build a nation where peace and justice shall reign”.
GOD bless our Nation. GOD bless Nigeria.
Thank you.
Olu Akanmu delivered this Speech as keynote address at the 13th Annual Conference of the Nigeria Association of Industrial Pharmacists on September 22nd, 2010
at the 13th Annual Conference of the
Nigeria Association of Industrial Pharmacists
This conference is happening as the echoes of our democratic transition and election gets louder and louder. It is happening in a particular period of serious economic challenge for our businesses defined by weak demand and low consumer purchasing power, poor utilization of capacities in our factories, and constrained access to credit for the real sector. It is happening in this period of the emasculation of many small businesses, with slowed or stagnant inventory turn-over in our retail shops. It is happening in this period of decayed public infrastructure which increases the cost of doing business while reducing the competitiveness of our meager manufactured exports. It is a tough time for business in Nigeria. It is a tough time for the manufacturing sector in particular for which the pharmaceutical industry is one. The loud echoes of our democratic transition cannot obscure the cries of our business for economic survival.
In seasons like this, where markets have shrunk significantly thereby increasing competitive pressures, where industries are witnessing signs of premature aging occasioned by the contraction of customer demand, with bankers on the back of business owners to pay down previously availed loans, the challenges are tough and there is a tendency to be desperate, to find short-cuts to survival, to seek NOT to play by fair and legitimate rules in the quest for survival or success. At the employee levels, wages have been rationalized and the social and dependant burden on wages have significantly increased. These social and survival pressures on employees may even drive tendencies to seek short-cut to survival and even cheat.
Yet evidence abound that not playing by fair and legitimate rules while it may lead to success in the short term or even for some time, cannot guarantee and sustain success for individuals and organizations. The lessons of the banking industry in the recent times teach us that the only way to guarantee sustainable and enduring success for business is to compete fairly and succeed ethically, to build organizations that have the cultures , controls and governance that guarantee transparency and executive accountability to their board, the shareholders and the larger public. If however, the cost of not playing by the rules, the cost of unethical conduct is limited only to the organization that so practices such and so competes, perhaps the society could have walked away easily with a sense that the guilty has been punished. It is however not so. The cost of not playing by the rules is not limited to the organizations that practice such. These organizations infringe enormous cost on society as a result of their actions. We see in the in the financial service industry, globally and in Nigeria, huge costs to tax -payers in the bailing out of banks and other financial institutions such as the insurance companies that insure the risks of the financial system. In the petroleum and chemical industries, we see huge cost of environmental pollution to society when those organizations elect to succeed at all cost and sacrifice societal interest on the altar of their corporate success. In the pharmaceutical industry, we see the cost of un-fair or unethical play manifested in the social cost of fake or adulterated medicines, with increased health care cost when sub-standard doses of drugs such as antibiotics are administered leading to resistance of infectious diseases.
Given recent events in the industries earlier described, it is pertinent to ask, what is legitimate profit? And when is the making of profit legitimate? We must also ask an even more critical question whether all legitimate profits are ethical. Or essentially, when is profit unethical even when it is legitimate? While it is easy to look at the law and answer the question of legitimacy of profit as that which is made without violating the governing law of society, it is more difficult to answer the question of whether there could conflict between legitimacy and social ethic, whether a legitimate profit could be unethical. The fact is that there are instances where the law lags behind the ethical standards that society requires. We see this clearly in the behavior of leading global financial institutions like Goldman Sachs and the role they played in the global financial crisis, where Goldman for example sold mortgage financial derivatives to its clients and at the same time created counter-product to bet against the financial product it sold, that it would fail. When the financial derivate product it sold failed, Goldman clients lost huge money, some of them even went bankrupt but Goldman Sachs made billions of dollars on the basis of its successful bet. Goldman in the US congress hearing, when it was accused of profiting from the financial misfortune of society, claimed that it did not break the law. It did not matter. Its actions and corporate behavior were unethical. This is similarly illustrated in the tobacco industry that claims to provide employment of for thousands of Nigeria through its factory and agriculture extension program. It does its business within the law. The social cost of tobacco to the larger society in cancer and other pulmonary diseases however raises fundamental question about the ethic of the tobacco industry beyond whether it does its business within the governing laws of society.
What then is an ethical business or an ethical way of doing business? I will define an ethical business as that which fulfills a defined social purpose in improving societal or community well-being, does not externalize the cost of its success in social cost to society, competes fairly and transparently on the merits of its organization assets and will not provide incentives to its external stakeholders that perverts their fair and objective judgment of its services relative to alternatives available. An ethical company will also be transparent to its employees, its shareholders and its critical external stakeholders. Using this definition, we can begin to examine and query the ethical depth of our organizations and the particular role we play within it. When we forget the larger reason for being of our organization and our profession, and we seek to win contract or prescription commitment at all cost, including providing incentives or inducement that compromises the objective examination of our products by customers, we are not practicing ethically. When we do not disclose fully the side effects of medicines to aid their objective choice by prescribers, we are not practicing ethically. Ethical breaches by professionals are very serious because they enjoy sacred and privileged trust from society that they will discharge their service at a minimum standard far above what can be received from anyone else. That is why we call them professionals while pretenders to the profession who cannot deliver the minimum standard expected by society are known as quacks. It therefore beholds on us as pharmacists, that the encounter of a patient with us must be clearly different from that of a non-professional. We owe this as an obligation to society flowing out of its privileged trust to us as professionals. When therefore, we fall short of professional standards, when the quality and standard of service delivery between a pharmacist and a non-professional are similar, when we do such, we breach society’s sacred trust and compromise the ethical foundation of our relationship with the larger society.
It is time to raise our standards, to the lofty heights of the dreams of our founding fathers, compromised not by the current economic and infrastructure challenges that we face but exalted by our checkered history as one of the oldest organized professional bodies in Nigeria. Let us publicly sanction those who practice below the standards society expects us, with the full arm of the law on their back, including suspension and expulsion from practice depending on the gravity of breach of professional trust. Let our regulators and the government agencies responsible for the importation, inspection and control of drug quality, co-ordinate and co-operate better. Let them raise their standards, which seem to have fallen in recent times according to the Pharmaceutical Society to ensure that never again would we ever see a Nigeria child die because of fake or sub-standard drug; as we recall the killer Paracetamol incidence of 2008. Let our criminal justice system and particularly our courts also dispense justice and punish those found guilty of these heinous crimes, and do so on time for justice delayed is justice denied. It is important that ethical infractions be sanctioned by professional bodies and the institutions of the larger society; for when there are no sanctions, ethical conduct becomes a mere sermonizing that we can elect to comply with only when it is convenient for us. Sanctions on ethical breaches are therefore critical to raising ethical standards among professionals who are privileged to enjoy society’s scared trust. We must also ensure that regulations and the laws concerning drug handling and distribution are enforced. That only those who are qualified and trained as pharmacists should be drug inspectors and that they must be led also by those who are trained in the chemistry, production and pharmacology of drugs. This is the law of the Nigeria state, and even the Nigeria state must comply with its own laws. For when we implement the law below the standards set by the law itself, we set aside the intent of the law, the reason for its legislation; we open a breach in execution of statutes, which would be exploited by those who seek to do business unethically.
The debased nature of ethics in business in our nation is manifested by the pervasive corruption in the public and private sector. Corruption compromises the efficient functioning of markets in its critical role of allocating resources to where they would be best utilized. With corruption, resources are allocated wrongly and sub-optimally, leading to very low social returns on investments. You only need to see the decayed nature of our public infrastructure despite previous years of massive investments to realize the cost of corruption to our society. Corruption essentially holds the market hostage, removes its freedom and hand-cuffs its un-seen hand as famously described by Adam Smith. Now that the Halliburton case is court, we expect that the case would be tried and brought to conclusion soonest. We expect the same of the Siemens case and other high profile cases. The way these cases are prosecuted will tell the international community and indeed ourselves as a nation, the level of our commitment to ethics in governance and morality in public affairs. Our national politics, the conduct of our elected politicians, the standards of morality and ethics by which we hold them significantly influence the conduct of other actors in the public and economic space. You will recall that when “settlement” became a lingo of our politics, it sooner became a lingo of our business. We must therefore demand higher standards of public morality and ethical conduct from our elected officials. We must ensure that we strengthen our democratic institutions such particularly our electoral process to ensure that our votes count and that every vote will be counted. This will make our elected officials accountable to the electorate, as we can truly vote them out, when they do not deliver conduct themselves below our consensus and standard of public morality. We must also strengthen our political parties to ensure internal democracy while ensuring that our people have alternative oppositions that are as equally strong as parties in government, to make our elections less predictable, to put incumbents on their toes and the opposition on their heels. We must strengthen our judicial institutions to ensure their independence to dispense justice without fair or favour while ensuring that only those who know the sacred nature of the duty and society’s trust of the bench, sit in judgment in our courts. The signals in the electoral process suggest that we are beginning to make progress. Let us therefore all register to vote, and vote this time around knowing that our votes will count and that the elections will reflect the true will of our people. When we reform our politics, and force higher standards of public morality on our elected officials, the multiplier effect on society in the acceptable level of ethical and moral conduct will be very significant.
We must also promote more open and transparent societies in both the public and private sectors. Ethics and public morality standards correlate strongly with the level of institutional and societal transparency. We therefore call on the national assembly to pass the Freedom of Information Bill to guarantee unfettered access of Nigerians to information concerning their state, the expenditure of state resources and the conduct of public officials. Because governments at its three tiers are the biggest spenders on pharmaceuticals in Nigeria, we must put in place higher levels of transparency in our public contract and procurement system. Contracts and procurement intentions and information must be widely available, advertised in the newspapers where possible, standards of prequalification of suppliers must be transparent as the prequalification itself. Tenders must be competitive, open and transparent. There must be separation of authority to pre-qualify suppliers, authority to award contracts and the authority to receive contracts and authority to pay for contract delivered. Then the procurement system must be regularly subjected to transparent third-party audits to ensure that what we wanted to buy is what we bought and that we paid fair prices for what we bought.
We must apply similar standards to contracts and procurements in the private sector. We must promote higher levels of transparency in the private sector to drive up ethical standards, and ensure internal and external stakeholder trust. We must build organizations with transparent internal processes where employees as internal stakeholders, can engage and question their management with candour on the business of the organization. When organizations are transparent internally, their transparent culture would be such that they will not have a problem in being transparent to their external stakeholders particularly their shareholders. These are the ethics and public morality lessons from Enron and the global financial institutions on the ethical breach of trust which they suffered in recent past. We must ensure higher standards of transparency and disclosure in our corporate financial reports. Corporate financial reports must reflect the true state and financial health of our corporations so that our shareholders and investing public, take their investment and risk decisions based on facts they can trust and not from flawed information. Managerial and executive “conflict of interest” must also be fully disclosed to ensure that managers and executives can truly perform their duties as true agents of their shareholders and keep the trust of the owners of the business.
We must also rediscover the real purpose of business which is to make enduring contribution to societal well-being, where business makes profit only as by-product of fulfilling this larger purpose. When we pursue profit and loose sight of the real and larger purpose of business, we sacrifice the greater good of society on the selfish altar of business interest. We compromise ourselves ethically and lower our standards of public morality. We must re-educate ourselves that the most successful business is not the one that made the biggest profit, but that which achieved good profits with an enduring contribution to societal well-being. We need to reform the character and content of management education in our business schools to increase the ethical content of its curriculum, to produce managers who know finance as well as fidelity, managers who know strategy as well as character. The recent global financial crisis where we witnessed some of the most irresponsible behavior by managers on Wall Street, who are largely Harvard, Wharton and Stanford graduates have thought us that there is fundamental gap of ethics and character in management education.
A discourse on public morality and ethics cannot be complete without discussing the role of religion. Religion is a foundation subject of ethics and public morality. Religion teaches us about good and evil, virtue and vice; and right and wrong. Religion teaches us about the ultimate triumph of good. It influences society significantly in its consensus on standards of ethics and public morality. We are a religious nation that actively seek divine intervention and help even when it may not be justified. You only need to see the Super Eagles on the pitch praying before their matches even when they have not adequately prepared to appreciate our national religious passion. Given societal decay and our falling moral standards, religion must play a more active role in re-shaping our values and public morality standards. We need to hear the voice of morality and ethical conduct much more loudly from our pulpits and minarets. The voice of morality, ethics and virtue must not be drowned by the voice of prosperity, success and breakthrough. Religion must teach, unlike the popular axiom, that the end does not always justify the means, that the end does not always justify the means. That, how we succeed as managers and business people, is no less important than our success itself. That virtue and success are not mutually exclusive, that profits and morality are not mutually incompatible. That if anything, virtue is a guarantee of enduring success, that morality and good business ethic is a guarantee of enduring profit. Was it not the Holy Book that says that “A false balance is an abomination to the LORD but a just weight is HIS delight” and that “wealth gotten by vanity shall be diminished but he that gathereth by labour shall increase”.
We need to change society, change our nation to a higher level of social ethics and moral standards. We do not have the singular illusion that it is would be easy. It is tough to be honest when falsehood is a norm. It is tough to be virtuous when vices are normal. It is tough to be straight when crookedness is celebrated. Yet, we must hold firmly to the WORD that says that the crooked path shall be made straight. Like Elijah or Elias in the Holy Books, it could sometimes feel lonely to do business ethically. We could feel like Elijah, tired and worn out, that everyone, except us, has sold out and bowed to Baal. Yet Elijah was wrong. He did not know until he was told that there were others like him, seven thousand others, who have not bowed to Baal. For everyone, man or woman, that does his or her business ethically, please know that there are seven thousand others like you. To change our society, these seven thousand and one people must find themselves. They must build ethical networks and alliance for change. If the good ones among us network together and form this alliance for change, we can make change happen and conquer the Ahabs and the Jezebels of our nation.
We see a new nation, a city on a hill, where the bright light of righteousness shines like the Sun. A city where prosperity flowers, where merit thrives and excellence flows like an unending river. And her beautiful children singing the forgotten stanza of its national anthem, that “in love and honesty to grow, and living just and true, great lofty heights attain, to build a nation where peace and justice shall reign”.
GOD bless our Nation. GOD bless Nigeria.
Thank you.
Olu Akanmu delivered this Speech as keynote address at the 13th Annual Conference of the Nigeria Association of Industrial Pharmacists on September 22nd, 2010
Monday, June 21, 2010
Rebuilding Trust in the Financial System
By Olu Akanmu
“…Markets rely on rules and laws, but those rules and laws in turn depend on truth and trust. Conceal the truth or erode trust and the game becomes so unreliable that no one will want to play. The market will empty and share prices will collapse, as ordinary people find other places to put their money-into their houses, maybe, or under their beds…”
-Charles Handy
The financial service industry needs to rebuild trust. Without trust, the industry cannot stand. When a Goldman Sachs would sell financial derivatives products to its clients, and create a counter product to bet against them on the basis that they would fail and made billions of dollars, on the basis of its successful bet, something has fundamentally gone wrong with banking. The engagement of the US Congress with Goldman Sachs executives was very revealing. The Goldman executives tried to show that they did not break the law, that what they did was legally permissible. It does not matter. It is unethical. Goldman Sachs clients who bought the financial derivatives products that it sold trusted it. Goldman, by betting against its own product did not believe in what it sold. By making billions of dollars on its successful bet that the product it sold would fail, it betrayed trust. At home in Nigeria, we are also dealing with trust issues. The audited reports of many of our financial services institutions have had to be reviewed with the effect of a night and day difference in the reported health of those institutions between 2008 and 2009. Yet, the public took its investments decisions on these institutions based on their previously reported financial health. Many have lost money. Many were ordinary retail investors participating in the stock market for the first time. These are our own “Main Street” people. Their investments, sometimes life savings have been eroded. They remember the banker or the stock broker who visited them in their offices and homes and sold the bank’s shares to them. He had the figures and the facts, well presented. He is a banker, their brother, their sister or even their church member. Why should they not trust him? They are disappointed. They have turned away from the market and lost confidence in it. It is however not about banking alone. If the same auditors work for the banks and other non-financial service companies , we should reasonably expect that there would be issues in the audited financials of the manufacturing and other sectors, if they are subjected to same rigorous test. The issues of the financial service industry might therefore be a reflection of a more general pervasive but not yet very visible problem of big business. Yet, it is critical that our financial services industry regain public trust. Their financial intermediation role in the market is critical to the efficient allocation of capital to where it would be best utilized, a critical function for economic growth. Organizations and individuals are the players in the financial markets. To trust the market, we must trust the organizations that play in it. It is in the self-interest of these organizations to get the public to trust them again, so that they can play their role and fulfill their reason for being. What therefore, do business organizations and financial market players need to do, to get the public to trust them again?
First, we need a new regime of transparency in business organizations. Transparency is a critical foundation of trust. Companies must commit to transparency with its external publics especially its shareholders. To do this however, the companies would first need to be transparent to themselves. According to Warren Bennis and James O’Toole, Professors of Leadership and Business Ethic s “..No organization can be honest with the public if it is not honest with itself..”. Internal transparency is therefore a prerequisite for external transparency. Information that is true on the business and its performance must flow more freely among managers and employees of companies. Free information flow pre-supposes that the processes that generate the information themselves are transparent. Access and control of information tend to be seen wrongly as a privilege of power. And sometimes, the restriction of information flow is excused on the basis of protecting critical information from leaking to competitors. This concern however has to be balanced with the imperative of organizational transparency ensuring that employees as critical internal stakeholders know the business, its financial performance and can question their leaders with candor on the performance issues of the company. This will engender trust between the organization, its leaders and its staff. And if the leaders of a company can be transparent to its staff by information and by internal process, they will have little problem in being transparent to its shareholders and the general public as they would have first built a culture of transparency internally. Of course, we do recognize that leadership commitment alone is not sufficient to make internal transparency happen. The governance structure of the organization is critical, a functioning board, that enforces by policy and by its policy audit processes, transparent processes and information flow as part of larger commitment to external transparency to the shareholders and the larger public. In addition, we will like to recommend the evolution of a new set of players in the financial markets which we call Transparency Auditing and Rating Organizations (TAROs). Just as countries are rated on the basis of their Transparency and social governance by organizations like the Transparency International, companies could be rated by the TAROs on the basis of their internal transparency and corporate governance. The TAROs will fuse the model of the Credit Risk Rating agencies like Standard and Poor, with country transparency audit model of the Transparency International. We expect that good companies will submit themselves for Transparency audit and bad companies will not. We expect that the market will factor this formal independent transparency audit into the risk rating of the company and the determination of the cost of capital to the company. Essentially, transparent companies will be rewarded by lower cost of capital and better share prices.
Secondly, to rebuild public trust in business, we need an overhaul of our auditing standards and corporate financial reporting. This is obvious. The Nigeria Accounting Standards Board and the Institute of Chartered Accountants of Nigeria (ICAN) have a responsibility to make this happen. In their seminal work on the subject of Corporate Financial Reporting and Public Trust, Samuel DiPiazza, Global CEO, of PricewaterhouseCoopers and Robert Eccles said as follows “..Information is the lifeblood of the capital markets. Investors risk their hard earned capital in the markets in great measure based on the information they receive from their target companies…When information comes from companies, investors need confidence that it is complete, accurate and trustworthy..Investors understand that in free capital market, the opportunity for gain comes with the possibility of loss. But investors have the right to expect that the benefit or consequences will result from the decisions they make, not from flawed information….”. Financial reporting and auditing can no longer be done with a subtle hint of Caveat Emptor. To the extent that the lay public, our Main Street, is participating more actively in financial markets as it gets more deepened, they need to trust financial reports, and they need to get it increasingly in the formats that make meaning to them. If the auditing and accounting profession will keep public trust and fulfill its social purpose of an independent attester of the financial health of public companies, it must increasingly think and act this way. It is apparent that given the wide disparities in the financials reports of banks between 2008 and 2009 and similar events in Cadbury some few years ago, that our national auditing standards may not be sufficient to un-earth and report the true financial health of our corporations. We also need specific industry standards that allow transparent and objective comparison of companies on their performance ensuring that measurements are standardized among players in the same sectors. For example, who is the second largest telecom company in Nigeria? It depends on who you ask, on what you measure and how you measure it. If the second and third telecos in Nigeria were to come to the market, unless such industry standards are defined, it will be difficult to compare them objectively for investment decisions. The issues apply to other industry sectors as well. Good transparent companies would however go beyond industry standards disclosure requirements. Good companies will un-opaquely disclose their strategic plans, corporate governance, risk management practices, shareholding structures and compensation policies. They will show why they are the best parent of the businesses they manage and if they are not, what they are doing to ensuring so. These three practices, adoption of higher auditing standards than we have today, industry specific standards in financial reporting and company specific disclosures on policies, plan, shareholding structures and business practices, will improve the integrity of financial reporting and engender better public trust in our corporations. This will also correct information asymmetry in the financial market s ensuring that information flow more freely among market players, making the market more efficient in its role of allocating capital and resources to where it would get the best returns.
Thirdly, the larger Nigerian society and investment community must change its lottery (kalokalo) paradigm of the investment market. While there will always be short term arbitrage opportunities in markets due to information asymmetries that some investors could exploit for short-term gains that are akin to playing lotteries, the larger society cannot be investing with a kalokalo paradigm that excludes business and market fundamentals. That is a key lesson of our financial markets in the last five years. Unreasonable kalokalo expectation returns of investors from companies tend to compel the managers of those companies to look for kalokalo profit that has little bearing with their business fundamentals. And when they do not meet the unreasonable profit which they have promised the market, they tend to look for short-cuts to cover the gap. If they succeed the first time, the kalokalo investor expectation gets even stronger fueling a stronger kalokalo profit promise and even more dangerous short-cutting by company managers. Intuitively, we (investors and company managers) recognized that we should not trust each other, but everyone tried to be smart in the market- game in their little space, as if they could cocooned out the larger market fundamentals from their space. Eventually, the complex interactions of our several games created a market-burst that blew in everyone’s face. To correct this and rebuild trust between investors and company managers, three set of players in the corporate reporting supply chain will need to play some critical roles. As discussed earlier, independent auditors need to raise their standards to report what is truly reflective of the financial health of corporations. Secondly, the third party Analyst community will need to be more rigorous and more clearly separate itself from the stock brokers to ensure independence and objectivity. The third party analyst community in Nigeria, seem not to have an independent defined structure outside the stock broking professional community. They need to raise their standards, self- regulate themselves and take public accountability for the integrity of the advice they give the investment community. Our third party analyst tend to use valuation models that relate stock values only to their peers in the same or similar sector within the Nigeria market. If a peer stock is therefore overvalued due to poor market information, market manipulation or distorted information by company public relations, the valuation model overvalues the stock and issue a strong unreasonable buy advice to the investing public. Such models as we typically use, do not recognize the increasing stronger integration of our market with global financial markets as short-term capital flows moves freely in and out of the Nigeria market. Our analyst community must do more to access international data and use models that value stocks relative to their peers in similar sectors and similar country and risk markets. That is the difference in the quality of market analysis by a J.P. Morgan on the Nigeria stock market and that which you get from your local stock broker. Then we will need to raise the standard of financial journalism and investment information distribution. Efficient market hypothesis is based on the assumption that investors are rational and that information is available for buyers and sellers to price assets objectively and optimally. When there are information asymmetries, when information are not widely available or they are distorted by public relations activity of companies, the market cannot be efficient; assets will be priced wrongly and everyone will loose. Financial journalism therefore has a social and historic role to play in the efficient functioning of our markets and the rebuilding of public trust.
Fourthly, we will need to reshape the values of managers of businesses in public corporations to which we have endowed a privileged trust, as customers, shareholders, government and the larger public. One of the most important lessons that managers need to re-learn is that an organization does not just exist to make profit for its shareholders alone. A good company is that which has a social purpose for which making profit is the by-product of fulfilling that larger social purpose. Therefore, a good company is not that which posts bumper profits that managers celebrate but harms the larger interest of other stakeholders such as customers, the government and general public welfare. A good company is that which is able to optimize the interest of all its stake-holding groups of customers, shareholders, the state and the larger public. It provides great products and services that improve the quality of life of Nigerians, return good profit to shareholders while contributing to national economic development. A good company will not significantly externalize the cost of its business. When a company makes huge profit by destroying the environment, and gets away with it, because social institutions are weak to make it pay for it, it is externalizing its cost and betraying public trust. As we have seen all across the world, when managers of financial institutions take excessive risks, which endanger the financial system and have to be bailed out by their governments and state resources, they are externalizing the cost of their firm’s profit. Society has however trusted too much. The fact is that firms will most always externalize their cost unless there are social institutions such as regulations and the tax system that prevents them from externalizing their cost or make them pay for it, when they do so. That is why we support the new policy being pushed by the US authorities and President Sarkozy of France that banks need to be taxed specially to build a pool of funds which shall fund the cost of future bail-out of the financial system when the need arises again.
The argument above however presupposes that if the interest of managers and the larger public interest are not fully aligned, that at least managers are true agents of their principal (their shareholders) and their interests are fully aligned. This is not always so. Our compensation policy especially the big annual profit bonuses, tend to reward managers excessively for the short term over the long term. This tend to create a classic moral-hazard problem where managers take investment decisions with excessive long term risk, which may not crystallize in the early years when they cash in on their short term profit and profit bonuses. When these risks eventually crystallize in the future, the managers have moved on, leaving the firm, its shareholders and future managers to manage the consequences of fallen profit and collapsed share prices. Essentially, our compensation policy, encourages a risk behavior that allows the transfer of the consequence of managerial risk decisions to someone else in the future. When the reward of a risk could be appropriated by the risk taker, and the consequence of the risk is for someone else, there is a tendency by the risk taker to take excessive and sometimes unreasonable risk. This is the moral hazard problem in risk management. It plays heavily in the nature of our managerial compensation where rewards are heavily weighed in favour of annual profit bonuses and virtually nothing in long term share prices of corporations. This will need to change to align managerial interest better with that of shareholders and strengthen public trust in corporations. Compensation of managers must carry a significant long term portion related to the future share prices and values of their firms, as a function of the long term impact of their managerial decisions.
As we have discussed earlier, a transparent organization and a culture of candour between the managers of a firm and its employee is critical to building organizations that will win public trust. When an organization is transparent with itself, it will have no problem being transparent with its publics. To build a culture of candour however, leaders and managers will have become more tolerant of dissent. This is a big challenge given big “Oga” nature of our organizations that has its roots in our typical African gerontocracy. A boss is like an elder in the family. He is male, older, therefore much wiser and always right. He, as an elder sits in managerial council of elders, with older and wiser people like him, where like the African secret cults of elders, they meet in secret, agree in secret and only communicate their decisions even without rationale, to ordinary young plebians (their staff) to implement. The young plebians must not question the decisions of the elders because they do not know what the elders know, or are not wise enough. The elders (the managers) can therefore do anything and get away with it. Once, in a while, there could be some young people sitting in the council of elders, because of their specials skill or valor. These young people acquire the character of the secret cult of the elders and behave like them. It is not therefore a question of age but of our typical African gerontocratic management culture. To build transparency, we must create new “open societies” in our organizations with a new type of elder who while being a leader, can be openly questioned by her followers, a leader who will tolerate dissent as a necessary ingredient of widening perspectives in solving organization problems. Essentially, we will need to have organizations where managers are more openly accountable for their decisions to their internal stakeholders. Related to the above, is that leaders must take responsibility for promoting strong ethical behavior in their organizations. As Peter Drucker said “..the spirit of an organization is created from the top”. Leaders are the biggest influence on their organizations. They create the spirit of the enterprise, its values and its behavior. What they do, or do not, is most critical in building organization culture. The character and behavior of managers in organizations are shaped by two things, what the leaders do or how they behave, and secondly by what the leaders reward or sanction. Leaders must act as important ethical role models for their organizations. They must reward not only result or performance but also the process and the behavior exhibited in delivering performance. Leaders have a responsibility to ensure that there are strong consequences for ethical infractions in their organizations. Unless, they do this, ethical behavior becomes a mere sermonizing that can be ignored or adopted only when convenient by managers.
We should not conclude the discussion on shaping the character and values of managers without discussing education of managers and the challenge of public trust. This subject has received wide attention and soul-searching among leading international business schools. There is an acceptance by the business schools that if the gentlemen who nearly brought down the financial system by some of the most irresponsible behavior were Harvard , Wharton and Stanford graduates, there is something fundamental that they did not learn in business schools. Watching some of the younger Goldman Sachs executives defend themselves in the US Congress recently, you can’t but notice that the attitude is “it is about me, if it is profitable and it is legal, it does not matter what happens after, I take my profit”. While ethics is thought in business schools, its method and its content will need to be reviewed and reformed. Writing on this subject in the Harvard Business Review, Joel Podolny, a former Professor at the Harvard Business School said as follows “ I am angry about the inattention to ethics and value based leadership in business schools. We didn’t need the current melt-down to tell us that; the Enron and the WorldCom scandals proved it more than seven years ago”. We need the same type of open and public soul searching by our business schools especially the Lagos Business School (LBS) that produces the cream of our managerial leadership. The problem in teaching ethics and developing a robust ethics curriculum and content for MBAs is that the subject of ethical inquiry is philosophical, a humanities discipline with strong roots in philosophy, history, literature, religion and psychology, and not a quantitative science that lends itself to mathematical and statistical models of such as calculus, regression models and chi squares, the tools of some of the most prestigious academic disciplines in business schools. Charles Handy, the father of British Management education and one the founders of the London Business School observed in his memoirs that MBAs should rather be called Master of Business Analysis because of the heavy bias of towards analysis rather than critical thinking and moral reasoning in business education. Both Handy and Podolny observed that the analysis in typical business school case studies do not prepare managers to make moral choices when faced with ethical dilemmas after graduation. Charles Handy tells the story of his attempt to introduce the study of the Greek literature classic, the Sophocles Antigone in the curriculum of the London Business School in its early years. Antigone had to choose between the order of her uncle Creon, the victorious ruler of Thebes who had killed her brother Polyneices in battle and ordered his body not to be buried in humiliation for crows and vultures to pick at, outside the city walls. Yet by her duty to her religion, Antigone knows that it is a sacrilege to the Gods to leave a man unburied. Souls of bodies that are not buried will be condemned to perpetual hell and will be forever chased by the Furies. Yet to bury her brother, will be to disobey the order of the king and duty to the state. The consequence of disobedience of the order of the King was execution. Antigone’s conscience and duty to her state were in conflict. Antigone chose her conscience, buried her brother and committed suicide. Charles Handy wanted to use this Sophocles tragedy to teach his business students in the 1960s, the subject of ethical conflict and moral reasoning. In his memoirs, he noted that he had to drop the course from the London Business School curriculum as the course was un-popular, resisted as not being critically relevant by the students and the companies who sponsored them. Several decades later in 2006, writing in his memoirs, he regretted not being stubborn enough and bowing to the will of the business school education market at that time. Enron and Worldcom scandals had showed that the absence of such subjects in business education curriculum has produced generations of managers, loyal only to their bonuses with very little social conscience.
It is time to rebuild the broken wall of trust between business and society. The cracks are big and like a piece of broken china, they will be difficult to repair. Yet we must not despair. This broken china of public trust must be fixed because there are no options. The trust that the society gives business is the privileged charter on which business exits and does its business. If there is a one sentence summary of the lessons of the past three years for our big business, it is that the pursuit of profit cannot be a substitute for morality and social conscience. Business must no longer act as if profit and morality are mutually exclusive. Business and its civil organizations must adopt a new focused agenda of rebuilding public trust. There has been very little to suggest that this subject is receiving the right level of attention among the civil organizations of business and its professional associations. After the initial brouhaha of last year, our professional and business civil organizations are back to business as usual, with the annual traditional change and display of medals on the necks their different Presidents. As we have seen in the United States, our business, its civil and professional associations need to engage the public openly on what they are doing to reform themselves given that the larger society is the critical stakeholder in this dialogue of trust. Our business professional associations have traditionally acted like trade unions set up largely to protect their trade and the interest of their members. It is time now for them to act more altruistically in the in the interest of the larger society and fix this broken china of public trust. And as business does this, our larger society must reform itself. Our business are largely a reflection of who we are and the values that we celebrate. We must re-commit to stronger ethical values and public morality. We must commit to the values of a more open society and strengthen the civil and democratic institutions that enable such open and transparent society to thrive. It is an historic task for our generation that we must not fail.
Olu Akanmu
June 2010
“…Markets rely on rules and laws, but those rules and laws in turn depend on truth and trust. Conceal the truth or erode trust and the game becomes so unreliable that no one will want to play. The market will empty and share prices will collapse, as ordinary people find other places to put their money-into their houses, maybe, or under their beds…”
-Charles Handy
The financial service industry needs to rebuild trust. Without trust, the industry cannot stand. When a Goldman Sachs would sell financial derivatives products to its clients, and create a counter product to bet against them on the basis that they would fail and made billions of dollars, on the basis of its successful bet, something has fundamentally gone wrong with banking. The engagement of the US Congress with Goldman Sachs executives was very revealing. The Goldman executives tried to show that they did not break the law, that what they did was legally permissible. It does not matter. It is unethical. Goldman Sachs clients who bought the financial derivatives products that it sold trusted it. Goldman, by betting against its own product did not believe in what it sold. By making billions of dollars on its successful bet that the product it sold would fail, it betrayed trust. At home in Nigeria, we are also dealing with trust issues. The audited reports of many of our financial services institutions have had to be reviewed with the effect of a night and day difference in the reported health of those institutions between 2008 and 2009. Yet, the public took its investments decisions on these institutions based on their previously reported financial health. Many have lost money. Many were ordinary retail investors participating in the stock market for the first time. These are our own “Main Street” people. Their investments, sometimes life savings have been eroded. They remember the banker or the stock broker who visited them in their offices and homes and sold the bank’s shares to them. He had the figures and the facts, well presented. He is a banker, their brother, their sister or even their church member. Why should they not trust him? They are disappointed. They have turned away from the market and lost confidence in it. It is however not about banking alone. If the same auditors work for the banks and other non-financial service companies , we should reasonably expect that there would be issues in the audited financials of the manufacturing and other sectors, if they are subjected to same rigorous test. The issues of the financial service industry might therefore be a reflection of a more general pervasive but not yet very visible problem of big business. Yet, it is critical that our financial services industry regain public trust. Their financial intermediation role in the market is critical to the efficient allocation of capital to where it would be best utilized, a critical function for economic growth. Organizations and individuals are the players in the financial markets. To trust the market, we must trust the organizations that play in it. It is in the self-interest of these organizations to get the public to trust them again, so that they can play their role and fulfill their reason for being. What therefore, do business organizations and financial market players need to do, to get the public to trust them again?
First, we need a new regime of transparency in business organizations. Transparency is a critical foundation of trust. Companies must commit to transparency with its external publics especially its shareholders. To do this however, the companies would first need to be transparent to themselves. According to Warren Bennis and James O’Toole, Professors of Leadership and Business Ethic s “..No organization can be honest with the public if it is not honest with itself..”. Internal transparency is therefore a prerequisite for external transparency. Information that is true on the business and its performance must flow more freely among managers and employees of companies. Free information flow pre-supposes that the processes that generate the information themselves are transparent. Access and control of information tend to be seen wrongly as a privilege of power. And sometimes, the restriction of information flow is excused on the basis of protecting critical information from leaking to competitors. This concern however has to be balanced with the imperative of organizational transparency ensuring that employees as critical internal stakeholders know the business, its financial performance and can question their leaders with candor on the performance issues of the company. This will engender trust between the organization, its leaders and its staff. And if the leaders of a company can be transparent to its staff by information and by internal process, they will have little problem in being transparent to its shareholders and the general public as they would have first built a culture of transparency internally. Of course, we do recognize that leadership commitment alone is not sufficient to make internal transparency happen. The governance structure of the organization is critical, a functioning board, that enforces by policy and by its policy audit processes, transparent processes and information flow as part of larger commitment to external transparency to the shareholders and the larger public. In addition, we will like to recommend the evolution of a new set of players in the financial markets which we call Transparency Auditing and Rating Organizations (TAROs). Just as countries are rated on the basis of their Transparency and social governance by organizations like the Transparency International, companies could be rated by the TAROs on the basis of their internal transparency and corporate governance. The TAROs will fuse the model of the Credit Risk Rating agencies like Standard and Poor, with country transparency audit model of the Transparency International. We expect that good companies will submit themselves for Transparency audit and bad companies will not. We expect that the market will factor this formal independent transparency audit into the risk rating of the company and the determination of the cost of capital to the company. Essentially, transparent companies will be rewarded by lower cost of capital and better share prices.
Secondly, to rebuild public trust in business, we need an overhaul of our auditing standards and corporate financial reporting. This is obvious. The Nigeria Accounting Standards Board and the Institute of Chartered Accountants of Nigeria (ICAN) have a responsibility to make this happen. In their seminal work on the subject of Corporate Financial Reporting and Public Trust, Samuel DiPiazza, Global CEO, of PricewaterhouseCoopers and Robert Eccles said as follows “..Information is the lifeblood of the capital markets. Investors risk their hard earned capital in the markets in great measure based on the information they receive from their target companies…When information comes from companies, investors need confidence that it is complete, accurate and trustworthy..Investors understand that in free capital market, the opportunity for gain comes with the possibility of loss. But investors have the right to expect that the benefit or consequences will result from the decisions they make, not from flawed information….”. Financial reporting and auditing can no longer be done with a subtle hint of Caveat Emptor. To the extent that the lay public, our Main Street, is participating more actively in financial markets as it gets more deepened, they need to trust financial reports, and they need to get it increasingly in the formats that make meaning to them. If the auditing and accounting profession will keep public trust and fulfill its social purpose of an independent attester of the financial health of public companies, it must increasingly think and act this way. It is apparent that given the wide disparities in the financials reports of banks between 2008 and 2009 and similar events in Cadbury some few years ago, that our national auditing standards may not be sufficient to un-earth and report the true financial health of our corporations. We also need specific industry standards that allow transparent and objective comparison of companies on their performance ensuring that measurements are standardized among players in the same sectors. For example, who is the second largest telecom company in Nigeria? It depends on who you ask, on what you measure and how you measure it. If the second and third telecos in Nigeria were to come to the market, unless such industry standards are defined, it will be difficult to compare them objectively for investment decisions. The issues apply to other industry sectors as well. Good transparent companies would however go beyond industry standards disclosure requirements. Good companies will un-opaquely disclose their strategic plans, corporate governance, risk management practices, shareholding structures and compensation policies. They will show why they are the best parent of the businesses they manage and if they are not, what they are doing to ensuring so. These three practices, adoption of higher auditing standards than we have today, industry specific standards in financial reporting and company specific disclosures on policies, plan, shareholding structures and business practices, will improve the integrity of financial reporting and engender better public trust in our corporations. This will also correct information asymmetry in the financial market s ensuring that information flow more freely among market players, making the market more efficient in its role of allocating capital and resources to where it would get the best returns.
Thirdly, the larger Nigerian society and investment community must change its lottery (kalokalo) paradigm of the investment market. While there will always be short term arbitrage opportunities in markets due to information asymmetries that some investors could exploit for short-term gains that are akin to playing lotteries, the larger society cannot be investing with a kalokalo paradigm that excludes business and market fundamentals. That is a key lesson of our financial markets in the last five years. Unreasonable kalokalo expectation returns of investors from companies tend to compel the managers of those companies to look for kalokalo profit that has little bearing with their business fundamentals. And when they do not meet the unreasonable profit which they have promised the market, they tend to look for short-cuts to cover the gap. If they succeed the first time, the kalokalo investor expectation gets even stronger fueling a stronger kalokalo profit promise and even more dangerous short-cutting by company managers. Intuitively, we (investors and company managers) recognized that we should not trust each other, but everyone tried to be smart in the market- game in their little space, as if they could cocooned out the larger market fundamentals from their space. Eventually, the complex interactions of our several games created a market-burst that blew in everyone’s face. To correct this and rebuild trust between investors and company managers, three set of players in the corporate reporting supply chain will need to play some critical roles. As discussed earlier, independent auditors need to raise their standards to report what is truly reflective of the financial health of corporations. Secondly, the third party Analyst community will need to be more rigorous and more clearly separate itself from the stock brokers to ensure independence and objectivity. The third party analyst community in Nigeria, seem not to have an independent defined structure outside the stock broking professional community. They need to raise their standards, self- regulate themselves and take public accountability for the integrity of the advice they give the investment community. Our third party analyst tend to use valuation models that relate stock values only to their peers in the same or similar sector within the Nigeria market. If a peer stock is therefore overvalued due to poor market information, market manipulation or distorted information by company public relations, the valuation model overvalues the stock and issue a strong unreasonable buy advice to the investing public. Such models as we typically use, do not recognize the increasing stronger integration of our market with global financial markets as short-term capital flows moves freely in and out of the Nigeria market. Our analyst community must do more to access international data and use models that value stocks relative to their peers in similar sectors and similar country and risk markets. That is the difference in the quality of market analysis by a J.P. Morgan on the Nigeria stock market and that which you get from your local stock broker. Then we will need to raise the standard of financial journalism and investment information distribution. Efficient market hypothesis is based on the assumption that investors are rational and that information is available for buyers and sellers to price assets objectively and optimally. When there are information asymmetries, when information are not widely available or they are distorted by public relations activity of companies, the market cannot be efficient; assets will be priced wrongly and everyone will loose. Financial journalism therefore has a social and historic role to play in the efficient functioning of our markets and the rebuilding of public trust.
Fourthly, we will need to reshape the values of managers of businesses in public corporations to which we have endowed a privileged trust, as customers, shareholders, government and the larger public. One of the most important lessons that managers need to re-learn is that an organization does not just exist to make profit for its shareholders alone. A good company is that which has a social purpose for which making profit is the by-product of fulfilling that larger social purpose. Therefore, a good company is not that which posts bumper profits that managers celebrate but harms the larger interest of other stakeholders such as customers, the government and general public welfare. A good company is that which is able to optimize the interest of all its stake-holding groups of customers, shareholders, the state and the larger public. It provides great products and services that improve the quality of life of Nigerians, return good profit to shareholders while contributing to national economic development. A good company will not significantly externalize the cost of its business. When a company makes huge profit by destroying the environment, and gets away with it, because social institutions are weak to make it pay for it, it is externalizing its cost and betraying public trust. As we have seen all across the world, when managers of financial institutions take excessive risks, which endanger the financial system and have to be bailed out by their governments and state resources, they are externalizing the cost of their firm’s profit. Society has however trusted too much. The fact is that firms will most always externalize their cost unless there are social institutions such as regulations and the tax system that prevents them from externalizing their cost or make them pay for it, when they do so. That is why we support the new policy being pushed by the US authorities and President Sarkozy of France that banks need to be taxed specially to build a pool of funds which shall fund the cost of future bail-out of the financial system when the need arises again.
The argument above however presupposes that if the interest of managers and the larger public interest are not fully aligned, that at least managers are true agents of their principal (their shareholders) and their interests are fully aligned. This is not always so. Our compensation policy especially the big annual profit bonuses, tend to reward managers excessively for the short term over the long term. This tend to create a classic moral-hazard problem where managers take investment decisions with excessive long term risk, which may not crystallize in the early years when they cash in on their short term profit and profit bonuses. When these risks eventually crystallize in the future, the managers have moved on, leaving the firm, its shareholders and future managers to manage the consequences of fallen profit and collapsed share prices. Essentially, our compensation policy, encourages a risk behavior that allows the transfer of the consequence of managerial risk decisions to someone else in the future. When the reward of a risk could be appropriated by the risk taker, and the consequence of the risk is for someone else, there is a tendency by the risk taker to take excessive and sometimes unreasonable risk. This is the moral hazard problem in risk management. It plays heavily in the nature of our managerial compensation where rewards are heavily weighed in favour of annual profit bonuses and virtually nothing in long term share prices of corporations. This will need to change to align managerial interest better with that of shareholders and strengthen public trust in corporations. Compensation of managers must carry a significant long term portion related to the future share prices and values of their firms, as a function of the long term impact of their managerial decisions.
As we have discussed earlier, a transparent organization and a culture of candour between the managers of a firm and its employee is critical to building organizations that will win public trust. When an organization is transparent with itself, it will have no problem being transparent with its publics. To build a culture of candour however, leaders and managers will have become more tolerant of dissent. This is a big challenge given big “Oga” nature of our organizations that has its roots in our typical African gerontocracy. A boss is like an elder in the family. He is male, older, therefore much wiser and always right. He, as an elder sits in managerial council of elders, with older and wiser people like him, where like the African secret cults of elders, they meet in secret, agree in secret and only communicate their decisions even without rationale, to ordinary young plebians (their staff) to implement. The young plebians must not question the decisions of the elders because they do not know what the elders know, or are not wise enough. The elders (the managers) can therefore do anything and get away with it. Once, in a while, there could be some young people sitting in the council of elders, because of their specials skill or valor. These young people acquire the character of the secret cult of the elders and behave like them. It is not therefore a question of age but of our typical African gerontocratic management culture. To build transparency, we must create new “open societies” in our organizations with a new type of elder who while being a leader, can be openly questioned by her followers, a leader who will tolerate dissent as a necessary ingredient of widening perspectives in solving organization problems. Essentially, we will need to have organizations where managers are more openly accountable for their decisions to their internal stakeholders. Related to the above, is that leaders must take responsibility for promoting strong ethical behavior in their organizations. As Peter Drucker said “..the spirit of an organization is created from the top”. Leaders are the biggest influence on their organizations. They create the spirit of the enterprise, its values and its behavior. What they do, or do not, is most critical in building organization culture. The character and behavior of managers in organizations are shaped by two things, what the leaders do or how they behave, and secondly by what the leaders reward or sanction. Leaders must act as important ethical role models for their organizations. They must reward not only result or performance but also the process and the behavior exhibited in delivering performance. Leaders have a responsibility to ensure that there are strong consequences for ethical infractions in their organizations. Unless, they do this, ethical behavior becomes a mere sermonizing that can be ignored or adopted only when convenient by managers.
We should not conclude the discussion on shaping the character and values of managers without discussing education of managers and the challenge of public trust. This subject has received wide attention and soul-searching among leading international business schools. There is an acceptance by the business schools that if the gentlemen who nearly brought down the financial system by some of the most irresponsible behavior were Harvard , Wharton and Stanford graduates, there is something fundamental that they did not learn in business schools. Watching some of the younger Goldman Sachs executives defend themselves in the US Congress recently, you can’t but notice that the attitude is “it is about me, if it is profitable and it is legal, it does not matter what happens after, I take my profit”. While ethics is thought in business schools, its method and its content will need to be reviewed and reformed. Writing on this subject in the Harvard Business Review, Joel Podolny, a former Professor at the Harvard Business School said as follows “ I am angry about the inattention to ethics and value based leadership in business schools. We didn’t need the current melt-down to tell us that; the Enron and the WorldCom scandals proved it more than seven years ago”. We need the same type of open and public soul searching by our business schools especially the Lagos Business School (LBS) that produces the cream of our managerial leadership. The problem in teaching ethics and developing a robust ethics curriculum and content for MBAs is that the subject of ethical inquiry is philosophical, a humanities discipline with strong roots in philosophy, history, literature, religion and psychology, and not a quantitative science that lends itself to mathematical and statistical models of such as calculus, regression models and chi squares, the tools of some of the most prestigious academic disciplines in business schools. Charles Handy, the father of British Management education and one the founders of the London Business School observed in his memoirs that MBAs should rather be called Master of Business Analysis because of the heavy bias of towards analysis rather than critical thinking and moral reasoning in business education. Both Handy and Podolny observed that the analysis in typical business school case studies do not prepare managers to make moral choices when faced with ethical dilemmas after graduation. Charles Handy tells the story of his attempt to introduce the study of the Greek literature classic, the Sophocles Antigone in the curriculum of the London Business School in its early years. Antigone had to choose between the order of her uncle Creon, the victorious ruler of Thebes who had killed her brother Polyneices in battle and ordered his body not to be buried in humiliation for crows and vultures to pick at, outside the city walls. Yet by her duty to her religion, Antigone knows that it is a sacrilege to the Gods to leave a man unburied. Souls of bodies that are not buried will be condemned to perpetual hell and will be forever chased by the Furies. Yet to bury her brother, will be to disobey the order of the king and duty to the state. The consequence of disobedience of the order of the King was execution. Antigone’s conscience and duty to her state were in conflict. Antigone chose her conscience, buried her brother and committed suicide. Charles Handy wanted to use this Sophocles tragedy to teach his business students in the 1960s, the subject of ethical conflict and moral reasoning. In his memoirs, he noted that he had to drop the course from the London Business School curriculum as the course was un-popular, resisted as not being critically relevant by the students and the companies who sponsored them. Several decades later in 2006, writing in his memoirs, he regretted not being stubborn enough and bowing to the will of the business school education market at that time. Enron and Worldcom scandals had showed that the absence of such subjects in business education curriculum has produced generations of managers, loyal only to their bonuses with very little social conscience.
It is time to rebuild the broken wall of trust between business and society. The cracks are big and like a piece of broken china, they will be difficult to repair. Yet we must not despair. This broken china of public trust must be fixed because there are no options. The trust that the society gives business is the privileged charter on which business exits and does its business. If there is a one sentence summary of the lessons of the past three years for our big business, it is that the pursuit of profit cannot be a substitute for morality and social conscience. Business must no longer act as if profit and morality are mutually exclusive. Business and its civil organizations must adopt a new focused agenda of rebuilding public trust. There has been very little to suggest that this subject is receiving the right level of attention among the civil organizations of business and its professional associations. After the initial brouhaha of last year, our professional and business civil organizations are back to business as usual, with the annual traditional change and display of medals on the necks their different Presidents. As we have seen in the United States, our business, its civil and professional associations need to engage the public openly on what they are doing to reform themselves given that the larger society is the critical stakeholder in this dialogue of trust. Our business professional associations have traditionally acted like trade unions set up largely to protect their trade and the interest of their members. It is time now for them to act more altruistically in the in the interest of the larger society and fix this broken china of public trust. And as business does this, our larger society must reform itself. Our business are largely a reflection of who we are and the values that we celebrate. We must re-commit to stronger ethical values and public morality. We must commit to the values of a more open society and strengthen the civil and democratic institutions that enable such open and transparent society to thrive. It is an historic task for our generation that we must not fail.
Olu Akanmu
June 2010
Monday, March 22, 2010
Reflections on the “Responsible Manager”
By Olu Akanmu
Management guru C.K Prahalad published a short article titled “The Responsible Manager” on page 36 of the January-February , 2010 edition of the Harvard Business Review. The article is a “Collectors item”. It is short and easy to read. I recommend it strongly. Prahalad says that over the last 33 years, he has ended his MBA and executive education courses by sharing his perspectives on how managers can be “responsible”. He says he has had no reason to change the note year after year. The subject of the “responsible manager” has never been more relevant than now, when corporations and its managers have lost public trust. Many corporations in Nigeria over the last three years have destroyed shareholder value, measured by the massive collapse of share prices on the Nigeria Stock Exchange. Managers are not “trusted” anymore by their shareholders and even their subordinates. The level of cynicism among employees towards their managers and their leaders have perhaps never been this high. If managers can’t be trusted, if they are perceived not to be “responsible”, they do not have a moral basis to lead their people and their organizations. They are definitely sub-optimizing performance because they cannot mobilize fully, the collective energy and the heart and soul of their people.
Prahalad identifies in his article, eleven ways that managers could become ‘responsible”. These are as follows.
1) Understand the importance of non-conformity. Leadership is about change, hope and the future. Leaders have to venture into uncharted territories and must be able to handle intellectual solitude and ambiguity.
2) Display a commitment to learning and develop yourself
3) Put personal performance in perspective. Humility in success and courage in failure are the hallmarks of a good leader.
4) Invest in developing other people. Be unstinting in helping your colleagues realize their full potential.
5) Learn to relate to those who are less fortunate. Good leaders are inclusive, even though that is not easy.
6) Be concerned about due process. People seek fairness not favours. They often don’t mind if decisions don’t go their way as long as the process is fair and transparent.
7) Realize the importance of loyalty to the organization, profession, community, society and above all the family.
8) Assume responsibility for outcomes as well as for the process and people will work with you. How you achieve results will shape the kind of person you are.
9) Remember you are part of a privileged few. That is your strength and also the cross you carry. Balance achievement with compassion and learning with understanding.
10) Expect to be judged by what you do and how well you do it-not by what you say you want to do. The bias for action must be balanced by empathy and caring for other people.
11) Be conscious of the part you play. Be concerned about the poor and the disabled; accept human weakness, laugh at yourself and avoid the temptation to play GOD. Leadership is about self-awareness, recognizing your failing, and developing modesty, humility and humanity.
I like to add a 12th one which I learnt from Steve Covey’s “7 Habbits of Highly Effective People”
12) Have a “mentality of abundance” in your relationships with your colleagues. This will help you to professionally put the organization and the greater good of all above your self-interest. The world is full of boundless opportunities and platforms to create and make a difference. There are no ultimate platforms or positions. You only need to be creative to see another one to stand and make the difference that you seek.
These are indeed humbling times that call for deep introspection for professional managers. We are learning even more clearly that technical competence enough do not make great managers. Values and good personal ethics are fundamental. Perhaps, Prahalad’s 8th point above is most critical for our managers in Nigeria today. The result that we get cannot be divorced from the process of getting the result. The appreciation of this will make our managers more ethical and make our organizations reward both results and behavior. For so long, we have rewarded results and performance with little attention to behavior. A dominating management paradigm among Nigeria managers in the recent times has been “Effort is nothing; result is everything”. This is echoed in every business review session with the most brutal sentiments that has become the culture of our high performance service industry. This paradigm over time tended to have become “Behaviour is nothing, result is everything”. Anything, any method tended to be good enough if it produces result especially in the race to win and annihilate competition. We have made bad behavior thrive. And organizations where bad behavior thrives are ultimately weak and can never realize its full corporate potential. And if corporations are social institutions endowed with privileged obligations to society, managers have a responsibility to manage them much better by behaving better. Our managers must therefore become more” responsible”.
C.K. Prahalad died on the 16th of April, this year in San Diego, United States at the age of 68. The global business community and its thought leaders will miss him. It is said that if there was a Nobel Prize in management, C.K. Prahalad would have won one. He was the co-author of the famous Strategy classic “Competing for the Future” where with Gary Hamel; he developed the theory of the Core Competence of the Corporation. They showed that the key to future industry leadership is to develop an independent view of tomorrow’s opportunities and develop unique un-generic capabilities to exploit them. Every sentence in “Competing for the Future” is a management quote. There are not many books like it. Perhaps, Prahalad’s most controversial book was the “The Fortune at the Bottom of the Pyramid” published in 2006. In this classic, Prahalad advocated that the business world especially the Multi-national Corporations will be irresponsible if it continues to serve only 30% of world population with the assumption that the rest of the 70% of world population cannot be profitably served. In a period where growth has become flat or even declined in the first world, if the expectations and trajectory of growth seen in business over the last three decades are to be maintained, the business world must take a more critical look at the opportunities in the huge underserved populations in developing countries with a view to finding the radical business model that will unlock the potentials of these four billion people. He pointed to emerging and entrepreneurial businesses in the third world that, through a combination of innovative technologies, some of which were borrowed from the first world but adapted cost effectively to developing country consumer context, through innovative value engineering, are serving the third world markets profitably. These businesses along with building scale that compensates for the low margin of third world consumer, affordable packaging units, low cost distribution channel that improve access to product and services to previously underserved segments and strong consumer education, have unlocked and profit potentials of market segments that were previously ignored by the MNCs. Example of these companies include the Bharti in the telecom industry who are very profitable at half the price charged to telecom consumers in other markets. Tata of India has also developed a low price car at less than USD 3000, opening up a new car segment for the global auto industry. ICICI of India became the biggest retail banking franchise in India, outgunning the international banks on the basis of this business model. Unilever India has adapted its business model to this emerging market context, to maintain its leadership of the consumer goods industry in India, leveraging its India experience across several emerging markets. These companies are not only making profit in these previously ignored markets but they are impacting positively on the quality of life of their people. The business world will forever remember this altruistic wake-up call from Professor Prahalad. May his soul rest in peace.
Olu Akanmu
March 2010.
Management guru C.K Prahalad published a short article titled “The Responsible Manager” on page 36 of the January-February , 2010 edition of the Harvard Business Review. The article is a “Collectors item”. It is short and easy to read. I recommend it strongly. Prahalad says that over the last 33 years, he has ended his MBA and executive education courses by sharing his perspectives on how managers can be “responsible”. He says he has had no reason to change the note year after year. The subject of the “responsible manager” has never been more relevant than now, when corporations and its managers have lost public trust. Many corporations in Nigeria over the last three years have destroyed shareholder value, measured by the massive collapse of share prices on the Nigeria Stock Exchange. Managers are not “trusted” anymore by their shareholders and even their subordinates. The level of cynicism among employees towards their managers and their leaders have perhaps never been this high. If managers can’t be trusted, if they are perceived not to be “responsible”, they do not have a moral basis to lead their people and their organizations. They are definitely sub-optimizing performance because they cannot mobilize fully, the collective energy and the heart and soul of their people.
Prahalad identifies in his article, eleven ways that managers could become ‘responsible”. These are as follows.
1) Understand the importance of non-conformity. Leadership is about change, hope and the future. Leaders have to venture into uncharted territories and must be able to handle intellectual solitude and ambiguity.
2) Display a commitment to learning and develop yourself
3) Put personal performance in perspective. Humility in success and courage in failure are the hallmarks of a good leader.
4) Invest in developing other people. Be unstinting in helping your colleagues realize their full potential.
5) Learn to relate to those who are less fortunate. Good leaders are inclusive, even though that is not easy.
6) Be concerned about due process. People seek fairness not favours. They often don’t mind if decisions don’t go their way as long as the process is fair and transparent.
7) Realize the importance of loyalty to the organization, profession, community, society and above all the family.
8) Assume responsibility for outcomes as well as for the process and people will work with you. How you achieve results will shape the kind of person you are.
9) Remember you are part of a privileged few. That is your strength and also the cross you carry. Balance achievement with compassion and learning with understanding.
10) Expect to be judged by what you do and how well you do it-not by what you say you want to do. The bias for action must be balanced by empathy and caring for other people.
11) Be conscious of the part you play. Be concerned about the poor and the disabled; accept human weakness, laugh at yourself and avoid the temptation to play GOD. Leadership is about self-awareness, recognizing your failing, and developing modesty, humility and humanity.
I like to add a 12th one which I learnt from Steve Covey’s “7 Habbits of Highly Effective People”
12) Have a “mentality of abundance” in your relationships with your colleagues. This will help you to professionally put the organization and the greater good of all above your self-interest. The world is full of boundless opportunities and platforms to create and make a difference. There are no ultimate platforms or positions. You only need to be creative to see another one to stand and make the difference that you seek.
These are indeed humbling times that call for deep introspection for professional managers. We are learning even more clearly that technical competence enough do not make great managers. Values and good personal ethics are fundamental. Perhaps, Prahalad’s 8th point above is most critical for our managers in Nigeria today. The result that we get cannot be divorced from the process of getting the result. The appreciation of this will make our managers more ethical and make our organizations reward both results and behavior. For so long, we have rewarded results and performance with little attention to behavior. A dominating management paradigm among Nigeria managers in the recent times has been “Effort is nothing; result is everything”. This is echoed in every business review session with the most brutal sentiments that has become the culture of our high performance service industry. This paradigm over time tended to have become “Behaviour is nothing, result is everything”. Anything, any method tended to be good enough if it produces result especially in the race to win and annihilate competition. We have made bad behavior thrive. And organizations where bad behavior thrives are ultimately weak and can never realize its full corporate potential. And if corporations are social institutions endowed with privileged obligations to society, managers have a responsibility to manage them much better by behaving better. Our managers must therefore become more” responsible”.
C.K. Prahalad died on the 16th of April, this year in San Diego, United States at the age of 68. The global business community and its thought leaders will miss him. It is said that if there was a Nobel Prize in management, C.K. Prahalad would have won one. He was the co-author of the famous Strategy classic “Competing for the Future” where with Gary Hamel; he developed the theory of the Core Competence of the Corporation. They showed that the key to future industry leadership is to develop an independent view of tomorrow’s opportunities and develop unique un-generic capabilities to exploit them. Every sentence in “Competing for the Future” is a management quote. There are not many books like it. Perhaps, Prahalad’s most controversial book was the “The Fortune at the Bottom of the Pyramid” published in 2006. In this classic, Prahalad advocated that the business world especially the Multi-national Corporations will be irresponsible if it continues to serve only 30% of world population with the assumption that the rest of the 70% of world population cannot be profitably served. In a period where growth has become flat or even declined in the first world, if the expectations and trajectory of growth seen in business over the last three decades are to be maintained, the business world must take a more critical look at the opportunities in the huge underserved populations in developing countries with a view to finding the radical business model that will unlock the potentials of these four billion people. He pointed to emerging and entrepreneurial businesses in the third world that, through a combination of innovative technologies, some of which were borrowed from the first world but adapted cost effectively to developing country consumer context, through innovative value engineering, are serving the third world markets profitably. These businesses along with building scale that compensates for the low margin of third world consumer, affordable packaging units, low cost distribution channel that improve access to product and services to previously underserved segments and strong consumer education, have unlocked and profit potentials of market segments that were previously ignored by the MNCs. Example of these companies include the Bharti in the telecom industry who are very profitable at half the price charged to telecom consumers in other markets. Tata of India has also developed a low price car at less than USD 3000, opening up a new car segment for the global auto industry. ICICI of India became the biggest retail banking franchise in India, outgunning the international banks on the basis of this business model. Unilever India has adapted its business model to this emerging market context, to maintain its leadership of the consumer goods industry in India, leveraging its India experience across several emerging markets. These companies are not only making profit in these previously ignored markets but they are impacting positively on the quality of life of their people. The business world will forever remember this altruistic wake-up call from Professor Prahalad. May his soul rest in peace.
Olu Akanmu
March 2010.
Friday, March 19, 2010
15 Changing Contexts of Marketing Today
This presentation has been given on two major occassions. First, at the 35th Association of Advertising Agencies of Nigeria (AAAN) Conference in July, 2008. It was later presented as keynote address at the launch of Global Marketing Network (GMN) in Nigeria in October, the same year. While one or two historical facts might have changed, the presentation remains very seminal for marketing practitioners today and likely to remain so for years to come. Please, find the link below
http://www.slideshare.net/olu_akanmu/15-changing-contexts-of-marketing-today
http://www.slideshare.net/olu_akanmu/15-changing-contexts-of-marketing-today
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