Can we prevent future occurrences?

If so, how?

In his April 1, 2009 Wall Street Journal article, Preventing ‘Too Big To Fail’ Isn’t Easy, Sudeep Reddy noted that Gary Stern, the president of the Federal Reserve Bank of Minneapolis, had repeatedly warned regulators of allowing banks to get too large.  He also quoted Former Fed Chairman, Alan Greenspan, who said “Knowing when the crisis will happen is not possible for human beings.”  

While I agree that we may not be able to predict the exact time that a crisis will occur, we can certainly get early warning signals that we’re creating one.  Certainly Mr. Stern had that ability.  The key is that the earlier we can identify that an effort is going to fail, the smaller the crisis we’ll face when it does occur.  How can we avoid the “too big to fail” mistake in the future?  There are two questions that I find particularly helpful in discerning whether or not a merger or acquisition will fail.  

The first comes from Juli Niemann, Smith Moore & Co.’s resident economist who asks “Are they investing cash?”  Juli says that managements make more prudent investments when they’re using their company’s cash than when they’re borrowing the money from others.  We need only recall our youth to validate her statement.  Who among us wasn’t more frivolous in our spending when our parents were footing the bill than when we had to cough up the money ourselves?

• The second question is one that has served me well both in my personal investments and my client work.  The question is “What’s in it for the customer?”  An industry leader acquiring a relative newcomer to the industry can significantly increase customer value if:
• the newcomer has offerings that the industry leader does not
• those offerings are valued by the industry leader’s customers
• it would take years for the industry leader to develop comparable offerings
• it would take the newcomer years to build the name recognition and gain the level of customer confidence the industry leader possesses
• there are markets in which the industry leader has a presence that the newcomer doesn’t serve

Had these questions had been asked prior to the Bank of America/Merrill Lynch and Wachovia/A.G. Edwards mergers would the regulators have approved them?  We’ll never know for sure, but three things that are obvious is that all four companies had:

•  stellar reputations with strong brand recognition
• wide distribution channels which made them readily accessible to customers and prospects
• a wide array of offerings designed to satisfy virtually any customer need

From that vantage point, was there really any reason for those mergers to occur?  

It’s counter-intuitive, but these two simple questions:

•  Are they investing cash?
• What’s in it for the customer?

can provide regulators with the insights they need prevent a recurrence of the “too big too fail” fiasco we’re currently suffering.

The 7 Steps to Becoming INVALUABLE program I offer is designed to help you see more effective ways of doing business – ways that dramatically improve your bottom line while making your life easier.  In today’s blog I used Step 1, Contributory Negligence, to demonstrate how simple, inexpensive and easy to implement solutions can be when we break problems down and begin to look at them from the standpoint of what we did to contribute to them.

I also used Step 5, Contrarian Mindset, to look beneath the level of complexity most people see to the lowest common denominator(s) that drive the challenges we face.  In this instance, two fairly simple questions serve as powerful indicators of how to avoid “Too Big To Fail.”  For more information on the 7 Steps to Becoming INVALUABLE visit www.furtwengler.com/7steps.htm. 

Please share your experiences and wisdom with Invaluable Leader readers by posting your comments.  If you’d like to receive a weekly email reminder for The Invaluable Leader blog or if there’s a topic you’d like me to address, please send me an email at dale@furtwengler.com.

Too much government intervention?

Or too little, too late?

While these are questions that will undoubtedly be debated for decades, they are the wrong questions.  Why?  Because they don’t provide any insights into how we avoid government intervention in the future.

In my book, The Uniqueness Myth, I note that in many companies’ policy decisions are made without regard for whether or not the policy will invite regulation.  Even in the face of threatened regulation, many businesses and professions refuse to reexamine policies.  For decades Congress threatened to regulate the accounting profession.  The American Institute of Certified Public Accountants was able to deflect those threats with assurances that the profession was doing an effective job of regulating itself.  Of course that all changed when Enron’s and WorldCom’s creative accounting came to light.

These massive frauds resulted in the Sarbanes-Oxley Act which imposed major financial recordkeeping, control and reporting standards on businesses and the accountants alike.  These regulations didn’t just affect the accounting profession and those companies whose stock is traded publicly; it extended to small to mid-size businesses as well.  The cost of complying with Sarbanes-Oxley is estimated to be in the billions of dollars.  Now we’re experiencing trillions of dollars of cost as a result of the failed policies in the mortgage markets.

It’s not just the financial costs of regulation that are troublesome.  It’s the loss of freedom to decide our own destiny.  It’s counter-intuitive but if we developed policies with an eye to avoiding regulation, we’d have the freedom to craft approaches to doing business that allow us to gain a competitive advantage using significantly less costly approaches than those dictated by a regulatory agency.

How do we do a more effective job of avoiding government regulation?

1. Take policy decisions out of the hands of one or two individuals.  Everyone, including business owners, has a personal agenda that often overrides sound reasoning
2. Establish a cross-functional team that involves all the major disciplines in your organization so that the policy’s impact on customers, employees, vendors, and owners is evaluated effectively
3. Establish a checklist of questions to use in the evaluation in step 2.  Make sure the checklist includes the question “Will this policy invite regulation?”
4. Any time that you’re tempted to bypass this process, remind yourself of the costs involved in complying with regulations with which you’re already saddled.  Then ask yourself “Do I really want to risk further regulation?”
5. Get involved in your industry or professional oversight functions.  When you see practices developing that are likely to invite regulation, remind the membership of the costs they’re incurring as a result of previous regulation.  Then help them develop policies that will help them and you avoid future regulation and gain a competitive advantage in the global marketplace.

As you can see there isn’t significant time or cost investment associated with crafting policies that avoid regulation.  Even with step 5, the cost you’ll incur by being active in your industry or profession pales in comparison to the cost of regulation.  Use these simple steps to help you avoid inviting the government to become your business partner.

The 7 Steps to Becoming INVALUABLE program I offer is designed to help you see more effective ways of doing business – ways that dramatically improve your bottom line while making your life easier.  In today’s blog I used Step 1, Contributory Negligence, to demonstrate how we contribute to every problem we face and how that knowledge can be used to craft simple, inexpensive, easy-to-implement solutions.  To learn more about the 7 Steps to Becoming INVALUABLE program, click on http://furwengler.com/7Step/htm

Please share your thoughts, whether you agree or not, by posting a comment.  If there are topics you’d like me to address, send me an email at dale@furtwengler.com