StrategyDriven Editorial Perspective – Creating Event Certainty, part 3 of 3

No event response plan is even worth the paper it is written on if not promptly and properly executed. And while an estimated 20,000 to 40,000 barrels (840,000 to 1,680,000 gallons) of oil gush into the Gulf of Mexico per day1, more questions arise about the appropriateness of British Petroleum (BP) and the U.S. government’s response to the crisis.


“A good plan violently executed right now is far better than a perfect plan executed next week.”

George S. Patton (1885 – 1945)
General, United States Army


 
Appropriateness of Action

After persistent questioning by the U.S. State Department Press Corp, it came to light in early May that while at least thirteen countries have offered to assist in the Gulf of Mexico cleanup the U.S. government is not accepting most of this support. The countries named by the U.S. State Department as offering support include: Canada, Croatia, France, Germany, Ireland, Mexico, the Netherlands, Norway, Romania, Republic of Korea, Spain, Sweden, and the United Kingdom. The U.S. State Department notice characterized the assistance as being offers that “include experts in various aspects of oil spill impacts, research and technical expertise, booms, chemical oil dispersants, oil pumps, skimmers, and wildlife treatment.” However, this notice also stated, “While there is no need right now that the U.S. cannot meet, the U.S. Coast Guard is assessing these offers of assistance to see if there will be something which we will need in the near future.”2

Over a month later, Fox News reported that the U.S. government has accepted some foreign assistance including:

  • Canada’s offer of 3,000 meters of containment boom
  • Three sets of COSEZ sweeping arms from the Dutch
  • Mexico’s offer of two skimmers and 4,200 meters of boom
  • Norway’s offer of 8 skimming systems

More important is what is not in use, namely the world’s best oil skimming ships from Belgium, the Netherlands, and Norway because of their non-compliance with the Jones Act, a 1920’s protectionist law aimed at benefiting labor unions. While the George W. Bush Administration waived the Jones Act requirements in order to accept foreign assistance following the Hurricane Katrina Disaster, the Obama Administration has indicated no such intentions in dealing with the BP Oil Spill Crisis.3

Failure of the Obama Administration to waive the Jones Act requirements and welcome Belgian, Dutch, and Norwegian oil skimmers to defend the shores of the United States is inexcusable. Compounding this issue is the lack of command leadership being exercised by both President Obama and Coast Guard Admiral Thad Allen. Admiral Allen is quoted as saying, “if it gets to the point where a Jones Act waiver is required, we’re willing to do that too. Nobody has come to me with a request for a Jones Act waiver.” As the Incident Commander, Admiral Allen is solely responsible to make the decision on whether or not to make a waiver request. He is responsible to exercise command judgment, not wait on a subordinate or outsider to provide him with his opinion or direction. With the oil leak ongoing, an estimated 39,525,000+ gallons of oil leaked4, 840,000 to 1,680,000 gallons more oil entering the Gulf daily, failing oil booms5, a marginally effective BP well cap6, and only 320,000 gallons of oil skimmed7 add up to the common sense solution that President Obama and Admiral Allen need to act now to waive the Jones Act and invite our global allies to assist with the Gulf Oil Spill recovery effort.

As with almost all events, these inappropriate actions only serve to intensify the severity of damage being done to the people, businesses, and environment of the Gulf States.

Timeliness of Action

Timely actions mitigate events and prevent the promulgation of adverse effects. In countries such as the Netherlands, oil companies are given 12 hours to appropriately respond to an oil leak before the government takes over and the oil company presented ‘the bill.’ This, however, is not the case in the United States where BP’s response has, in several cases, been inexcusably slow8 with no or delayed government intervention.

From the beginning, BP and the U.S government were slow to respond to the oil spill in the Gulf of Mexico. It was 12 days before the relief well, cited by many experts as the key to stopping the leak, was started.9 And once one well capping method is deemed unsuccessful, it is several days before the next method is tried.10 Clearly, BP nor the U.S. government appears to have been fully prepared to implement their oil spill response plans and once implemented are doing so far too slowly.

StrategyDriven Recommended Practices

Risk response relies as much upon the proper and timely execution of the mitigation plan as it does development of the plan itself. All too often, executives and managers become penny wise and pound foolish; focusing too much on the cost of the event’s mitigation rather than on mitigating the event itself. Those falling prey to this temptation typically find their organization’s mitigation timeline extended and their costs soaring.

Whether responding to an isolated incident such as the unexpected resignation of a key resource or a global impacting event like the BP Oil Spill, StrategyDriven recommends executives and managers consider the following event response principles:

Event Response

  1. Promptly execute the in place risk mitigation, transference, and avoidance mechanisms. The in place plan, conceived by the most experienced minds in a stress-free environment, cannot help alleviate the event’s negative impacts if not implemented – timely execution is critical to curtailing the damage. While executing the plan, allow flexibility to address unique circumstances.
  2. Always be looking ahead… assume failure and prepare to perform the next several response actions in parallel. Transitioning from one phase of a plan to another takes precious time. Assuming that current efforts will fail and prestaging the personnel, procedures, materials, components, tools, and equipment to executive several subsequent phases eliminates this wait time thereby accelerating the event response efforts which in-turn help reduce the overall negative impact incurred.
  3. Accept outside assistance as appropriate. Some outside assistance may be truly unnecessary, inappropriate, and distracting. However, legitimate offers of assistance from knowledgeable and experienced persons should be accepted so to shorten the response and recovery time frame and/or mitigate negative outcomes.
  4. Communicate constructively and proactively with the press, public, and stakeholders. People fear the unknown; and during times of crisis, the unknown creates vast unnecessary uncertainty. Remaining as transparent as possible by openly communicating known event conditions and mitigating actions as clearly and accurately as possible helps reduce the unknown and generates good will.
  5. Constructively assist in the incident recovery – even if the event is not your direct responsibility. As responsible members of the broader local and global community, we should reasonably assist others in the mitigation of significant events if we possess the talent, knowledge, methods, and/or equipment to do so.
  6. Seek legal counsel. We live in a litigious society. Whether the event is or is not your organization’s responsibility, it is often prudent to seek legal counsel to ensure your and your company’s rights are protected.

Final Thoughts…

For four weeks, we have commented on the failures of British Petroleum and the U.S. government in responding to the Gulf Oil Spill. Based on this example, we have recommended several actions be taken by leaders to ready their organization and better respond to significant events should they occur.

Johnson & Johnson’s handling of The Tylenol Crisis of 1982 stands as an example of effective crisis management. For a brief review of that event and Johnson & Johnson’s response, we suggest reading: The Tylenol Crisis, 1982 by Effective Crisis Management.11

StrategyDriven wishes to thank the people and companies of Canada, Croatia, France, Germany, Ireland, Mexico, the Netherlands, Norway, Romania, Republic of Korea, Spain, Sweden, and the United Kingdom for their offers of assistance in the BP Oil Spill recovery effort. We also extend our appreciation to the men and women of the U.S. Coast Guard and the Gulf States for their effort to contain the spill and protect our country from its harmful impacts.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “BP Oil Leak Rate Called 8 Times Worse Than Earlier Estimate,” David Muir and Bradley Blackburn, ABC News, June 10, 2010 (http://abcnews.go.com/WN/Media/bp-oil-spill-federal-panel-flow-rate-worse/story?id=10881441)
  2. “U.S. not accepting foreign help on oil spill,” Josh Rogin, Foreign Policy, May 6, 2010 (http://thecable.foreignpolicy.com/posts/2010/05/06/us_not_accepting_foreign_help_on_oil_spill)
  3. “Jones Act Slowing Oil Spill Cleanup?” Brian Wilson, Fox News, June 10, 2010 (http://liveshots.blogs.foxnews.com/2010/06/10/jones-act-slowing-oil-spill-cleanup/)
  4. “How Much Oil Has Leaked Into the Gulf of Mexico?” Chris Amico, PBS, May 9, 2010 (http://www.pbs.org/newshour/rundown/2010/05/how-much-oil-has-spilled-in-the-gulf-of-mexico.html)
  5. “Containment boom effort comes up short in BP oil spill,” Peter Grier, The Christian Science Monitor, June 11, 2010 (http://www.csmonitor.com/USA/2010/0611/Containment-boom-effort-comes-up-short-in-BP-oil-spill)
  6. “BP Oil Spill Cap helps slow Gulf oil spill: Will it work?” Cheryl Phillips, Examiner, June 6, 2010 (http://www.examiner.com/x-22397-Providence-Business-Headlines-Examiner~y2010m6d6-BP-Oil-Spill-Cap-helps-slow-Gulf-oil-spill)
  7. “Containment boom effort comes up short in BP oil spill,” Peter Grier, The Christian Science Monitor, June 11, 2010 (http://www.csmonitor.com/USA/2010/0611/Containment-boom-effort-comes-up-short-in-BP-oil-spill)
  8. “Steffy: U.S. and BP slow to accept Dutch expertise,” Loren Steffy, Houston Chronicle, June 8, 2010 (http://www.chron.com/disp/story.mpl/business/steffy/7043272.html)
  9. “Spill relief well draws scrutiny, fears,” Greg Bluestein and Jason Dearen, Associated Press, June 13, 2010 (http://www.msnbc.msn.com/id/37674027/ns/disaster_in_the_gulf)
  10. “’Top kill’ fails to stop Gulf oil leak, new plan readied,” The Economic Times, May 30, 2010 (http://economictimes.indiatimes.com/articleshow/5990458.cms)
  11. “The Tylenol Crisis, 1982,” Effective Crisis Management, 2002 (http://iml.jou.ufl.edu/projects/Fall02/Susi/tylenol.htm)

StrategyDriven Editorial Perspective – Creating Event Certainty, part 2 of 3

Oil from the ill-fated British Petroleum (BP) leased Horizon Deepwater rig continues to gush into the Gulf of Mexico – the massive oil slick already contaminating the coastline of several Gulf States, injuring wildlife, and threatening to evolve into an unprecedented ecological disaster. In the over forty days since the leak first began, both BP and U.S. government agencies have been ineffective at mitigating the effects of this accident. Recent reports, however, suggest this didn’t need to be the case; that the U.S. government should have been better prepared to handle such an accident if it had truly learned from readiness exercises conducted over the past eight years.

Investigations by The Center for Public Integrity and ABC News revealed the U.S. government conducted oil response drills in 2002, 2004, 2007, and 2010. These drills revealed several concerns regarding the United States’ preparedness to handle such an accident including inexperience, poor communications, and conflicting roles.1 The investigation also showed these vulnerabilities went uncorrected; resulting in diminished effectiveness of the government’s response when the actual accident occurred.2, 3

Large scale exercises involving multiple government agencies are often incredibly expensive and highly disruptive – though not as expensive as the events they seek to prevent or mitigate. Not acting to eliminate deficiencies identified during these learning events is simply irresponsible. Unfortunately, the impact of this negligent behavior is only now being recognized – far too late to for those irreparably harmed by the BP oil leak.

StrategyDriven Recommended Practices

Self assessments and other activities identifying emergency response vulnerabilities are nearly worthless unless organization leaders act to resolve deficiencies and improve subsequent performance. Without this corrective action, unnecessary uncertainty knowingly persists.

Whether developing the response to a newly identified risk or an opportunity to improve existing response plans, organization leadership should consider implementation of the following actions to ensure their organization is ready to appropriately respond when an adverse event occurs:

Contingency Planning and Response Readiness

  1. Prioritize and act on assessment findings. Companies don’t have the unlimited resources needed to pursue every opportunity and preventative measure. However, actions to mitigate or prevent shortfalls that represent significant risk to the organization should be funded, acted upon, and monitored for ongoing success.
  2. Put in place those mechanisms that will help your organization mitigate, transfer, and avoid risk realization. Every company should have a portfolio of contingency plans to deal with adverse circumstances and marketplace opportunities. Also consider adding contingency plans to deal with the adverse impacts brought on by another company’s actions if the significance of those impacts warrants such action.
  3. Prestage personnel, procedures, materials, and tools to respond to events as they occur. To be effective, a response must be timely. Prestaging personnel, procedures, and materials enables an organization to mobilize quickly when an undesired event occurs.
  4. Conduct follow-up maintenance and inventory checks of prestaged procedures and materials. Regulations and policies become change and methodologies become outdated necessitating the periodic review and updating of prestaged procedures. Likewise, materials spoil (exceed their expiration date) and tools need periodic servicing to maintain their effectiveness. And all of these items are at risk of being misplaced, lost, or stolen which demands periodic inventories be taken and replacements made as needed.
  5. Practice, practice, practice. Practice provides experience which drives response readiness. Additionally, changes to procedures and new personnel create the need for refresher and initial training.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “Training Exercises Showed Gaps in Government Preparedness Before BP Oil Spill – Inexperience, Poor Communications, Conflicting Roles Cited,” John Solomon and Aaron Mehta, The Center for Public Integrity, May 11, 2010 (http://www.publicintegrity.org/articles/entry/2079/)
  2. “Before the Gulf Oil Spill, U.S. Training Exercises Revealed Preparation Gaps,” Matthew Richmond, Fair Warning, May 17, 2010 (http://www.fairwarning.org/2010/05/before-the-gulf-oil-spill-u-s-training-exercises-revealed-preparation-gaps/)
  3. “Coast Guard officials told of potential oil spill response problems years ago,” Ben Raines, Alabama Live, May 21, 2010 (http://blog.al.com/live/2010/05/coast_guard_officials_have_kno.html)

StrategyDriven Editorial Perspective – Creating Event Certainty, part 1 of 3

With the ill-fated British Petroleum (BP) oil rig continuing to release vast amounts of crude into the Gulf of Mexico, it has now come to light that the United States government, focused on taking over vast portions of the American economy, was negligent in performing its rightful oversight role. A recent report by The New York Times indicated the U.S. Department of the Interior’s Minerals Management Service (MMS) “gave permission to BP and dozens of other oil companies to drill in the Gulf of Mexico without first getting required permits from another agency that assesses threats to endangered species – and despite strong warnings from that agency about the impact the drilling was likely to have on the gulf.” 1 And while MMS is charged with enforcing safety regulations and collecting drilling lease and royalty fees, a 2008 probe by U.S. Interior Department Inspector General Earl Devaney “found MMS employees had sex with and accepted gifts from industry contacts while failing to collect almost $200 million due from energy companies.” 2

Let’s face it; government regulators are not the only the only ones who get too cozy with those they provide oversight for. Accounting firm Arthur Andersen was found guilty of obstruction of justice for their role in helping conceal financial report mischaracterizations by its client, Enron.3 Similarly, the nuclear industry created oversight organization, the Institute of Nuclear Power Operations (INPO), has either failed to identify audited plant performance issues and effectively communicate them or evaluated utilities inadequately acted on INPO’s findings; necessitating ‘last line of defense’ action by the U.S. Nuclear Regulatory Commission as was the case at Arizona Public Service’s Palo Verde Nuclear Generating Station.4 In INPO’s case, its Board of Directors – those who set INPO’s executive salaries and the Institute’s budget – is comprised of nuclear utility Chief Executive Officers, the leaders of the organizations INPO is to independently assess.5 Note that APS’s CEO was INPO’s Chairman of the Board in 2005 during the onset of his plant’s recent performance decline.5, 6

Company leaders should not rely solely on government, consultant, and industry organizations to identify their risks; they and their workforce must actively assess their own performance to find those conditions, methods, and cultures that expose their organization to adverse outcomes. Several years ago, the Alaska Oil and Gas Conservation Commission found that Nabors Drilling, a subcontractor to BP, falsified blowout preventer test results on one of its Alaska oil rigs. One individual interviewed during the investigation alleged BP officials were aware of the practice but did nothing to prevent it.7 Given a blowout preventer failed to operate properly during the ongoing Gulf oil spill event – resulting in a significant release of crude oil to the environment – it is certain that BP and its vendors and contractors will be investigated for their operations, maintenance, and testing practices; this time with the whole world watching.

StrategyDriven Recommended Practices

These events represent a failure to recognize and/or appropriately response to risks. Some of these cases represent a conflict of interest: sexual favors, gift giving, and direct compensation and bonus awards; others an inadequate significance assignment or an ineffective response to findings. They also highlight the existence of unnecessary uncertainty associated with ineffective risk management systems. Because every organization faces risks, how then can unnecessary uncertainty be recognized such that risks are minimized, mitigated, transferred, and/or avoided? What of the unnecessary risk presented by the operations of those companies monitored by those regulators and auditors having a history of performance lapses or others that are structured and/or rewarded in a way that might breed a conflict of interest?

Assessment Practices – Recognizing Risks

  1. Don’t rely on a single auditor or audit organization. Relying on only one mechanism to identify issues leaves the conflict of interest risk unaddressed. Without redundant oversight groups, bias or ineptness on the part of the singular assessor will leave the organization fully exposed in that area. Not every aspect of performance warrants redundant assessment. Only those areas presenting high or catastrophic risk to the organization should be considered for this added expense.
  2. Create a culture that values constructive criticism as a vital part of organizational learning and growth. If executives, managers, and employees truly embrace constructive feedback as an opportunity to learn and improve, then the organization itself will identify many of its shortfalls. However, some shortcomings may be outside of the workforce’s collective experience and so actions 1 and 4 still apply.
  3. Protect internal assessors from abusive feedback and retribution (if needed). Organizations not having a learning culture often blame the messenger for identified performance shortfalls. In these cases, it is important to senior leaders to provide cover for assessors until such a culture has been developed.
  4. Engage truly independent assessors in the performance evaluation process. Independent assessors as highlighted in both StrategyDriven Strategic Analysis Best Practice 4 – Independent Assessors and StrategyDriven Podcast Episode 15 – Independent Assessors provide a unique, less biased perspective on the organization’s performance and are therefore more likely to identify value adding opportunities. This occurs because the independent assessors are not unduly influenced by the organization’s history and shared culture, they have less fear of retribution and adverse career impact, and if well selected possess knowledge and experience in areas outside that of the organization’s workforce.
  5. Use quantifiable information to the extent possible during assessments. Basing assessment findings on quantifiably observable facts helps eliminate subjectivity and opinion from the evaluation’s findings; making it more acceptable to the assessed organization.
  6. Assess performance against best practice and/or ideal performance; defining performance standards ahead of the assessment. Establishing and communicating the standards by which the organization’s performance will be assessed makes the results more quantifiable and therefore more accepted as well as providing a progress measure for improvement initiatives.
  7. Actively monitor the publicly available regulatory and audit reports of other companies. Treat the risks posed by other organizations no differently than you would those of direct marketplace competitors. Monitor these businesses’ activities for signs of undesired activities or results.
  8. Identify and measure marketplace factors that indicate if the performance of other organizations represents a potentially adverse risk to your company. Not all adverse impacts will be realized through direct interaction with this high risk companies. Some impacts may be transferred via suppliers/vendors and customers. Therefore, it is important to understand and monitor the overall marketplace environment.
  9. Engage with the leaders of these organizations in public and private forums to identify and, as necessary, mitigate risks. If another, non-competitor organization presents a real risk to your company’s operations, communicate that risk to that organization’s leaders and work with them to minimize that risk. A good offense, with the spirit of goodwill and partnership, is sometimes the best defense.

Additional Resources

StrategyDriven best practices (and warning flags) regarding the practices associated with the identification of organizational risks can be found in our Strategic Analysis and Self Assessment Program topic areas.

Final Thoughts…

Enterprise risk management (ERM) is a critical component of an organization’s strategy to mitigate, transfer, and avoid the adverse impacts of undesired events. The recommendations provided within this editorial focus on the assessment activities associated with ERM and represent all those activities that are in our view the several critical actions organizations should take to identify potential adverse events that naturally occur as a part of doing business. It has been our experience that the cost of incident prevention far outweighs the cost of incident recovery. While it is sometimes difficult to justify the expense for preventative action, one only has to look at the cost in life and property of recent industrial accidents to know this cost is truly worthwhile.

Lastly, we identified four organizations – the U.S. Department of the Interior’s Mineral Management Service, Arthur Andersen, the Institute of Nuclear Power Operations, and British Petroleum – as having had performance shortfalls documented in the public domain. In fairness to the dedicated individuals employed by these organizations, many companies and the public have benefited from their well-intentioned oversight efforts. StrategyDriven believes that reforms, both within these organizations and those they serve, are needed to further reduce the likelihood that future catastrophic failure injures the public, employees, shareholders, other stakeholders (vendors, suppliers, and consumers), and the environment.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. “U.S. Said to Allow Drilling Without Needed Permits,” Ian Urbina, The New York Times, May 13, 2010 (http://www.nytimes.com/2010/05/14/us/14agency.html)
  2. “Oil-Spill Agency Fetches $13 Billion Amid ‘Cozy Ties,” Jim Efstathiou Jr., Bloomberg-Businessweek, May 16, 2010 (http://www.businessweek.com/news/2010-05-11/oil-spill-agency-fetches-13-billion-amid-cozy-ties-update4-.html)
  3. “Called to Account,” Cathy Booth Thomas, Time, June 18, 2002 (http://www.time.com/time/business/article/0,8599,263006,00.html)
  4. “Palo Verde Performance Improvement Plans,” David Lochbaum, Union of Concerned Scientists, January 11, 2008(http://www.ucsusa.org/assets/documents/nuclear_power/20080111-pv-ucs-r4-inpo-role.pdf)
  5. “INPO Overview,” Clair Goddard, Institute o Nuclear Power Operations, March 2005 (http://www.serc1.org/documents/Joint%20Standing%20Committees/2005/SERC%20Joint%20Committee%20Meeting%20%283-10-05%29%20Myrtle%20Beach/10a.%20Clair%20Goddard%20-%20Keynote%20Speaker%20from%20INPO.pdf)
  6. “Annual Assessment Letter – Palo Verde Nuclear Generating Station (NRC Inspection Report 05000528/2006001; 05000529/2006001; 05000530/2006001),” US Nuclear Regulatory Commission, March 2, 2006 (http://www.nrc.gov/NRR/OVERSIGHT/ASSESS/LETTERS/palo_2005q4.pdf)
  7. “Whistleblower Claims That BP Was Aware Of Cheating On Blowout Preventer Tests,” Marcus Baram, The Huffington Post, May 13, 2010 (http://www.huffingtonpost.com/2010/05/12/bp-whistleblower-claimed_n_573839.html)

StrategyDriven Editorial Perspective – Government as Owner and Regulator: The Ultimate Conflict of Interest

What would it be like to have the ultimate home court advantage? How about:

  • Defining the rules of the game;
  • Changing the rules of the game, in your favor of course, at any time after the game has started;
  • Refereeing the game and being allowed to choose when and when not to penalize your team for rules violations;
  • Enticingly recruiting the opponents best players; and
  • Examining the other teams’ playbooks, trade secrets, and other confidential materials on demand?

That’s not just a home court advantage, it’s cheating – and in the business world there exists laws against such behavior… or does there?

Anti-trust laws and regulatory agencies overseeing monopoly businesses prevent any one company from gaining such significant market dominance as to create an unfair competitive advantage and establishing conditions of consumer vulnerability. Other laws, most notably the recently enacted Sarbanes-Oxley regulations, establish separation between auditors and the audited to eliminate conflicts of interest.

Recent bailouts by the U.S. government created an imbalance in the marketplace; introducing a ‘super competitor’ who is business owner, rule maker, and law enforcer. This ‘super competitor’ has no marketplace rival with even a fraction of its power and no immediate oversight as ballot box accountability occurs in only two year increments. As executives from Goldman Sachs learned, having had to sit through the U.S. Senate’s berating and vulgarities, there is little defense to be made once government officials have decided to target your organization.

As business owners, government officials act to further their companies’ goals; the problem is they have demonstrated a propensity to further their political interests as well. While at the center of the U.S. economic meltdown of 2008, poor business practices by mortgage lenders Fannie Mae and Freddie Mac, now owned by the U.S. government, are not addressed by the proposed financial markets regulatory bill being considered by Congress.1 And this is not be the first time Fannie Mae appears to have benefited from Congressional favoritism.2

StrategyDriven Recommended Practices

The conflict of interest created by the government’s entry into the marketplace is not likely to end soon. Therefore, StrategyDriven recommends organization leaders take the following actions:

  • Always behave ethically and promote ethical behavior among your employees. The best way to avoid government scrutiny is to not place yourself or your organization in a position of question. Ask yourself… How would this read on the front page of The New York Times? or Would I be proud to tell my mother I did this?
  • Respond to legitimate, legal government/regulatory requests for information; providing only what is asked for in a clear, concise, and truthful manner. Providing government officials with information they are either not entitled to or that is extraneous invites further questioning and scrutiny. This presents officials seeking a diversion from their own political ills an avenue to shift the public’s attention to you and your business; inappropriately if you and your organization have behaved ethically.
  • Establish an email content policy. Business email systems should be used for business purposes only – not for personal communications. Additionally, if emails are written for only business purposes, then they should only contain business appropriate language – no vulgarities.
  • Create an email/document retention and destruction policy. Some emails/documents must be retained for legal purposes; others for business reasons. Emails/documents not having a legitimate retention need should be destroyed within an appropriate timeframe.
  • Act quickly to restrict departing employee access to email, files, and records and quarantine their business materials particularly if they are joining a competitor or the government. This practice is unfortunate but necessary. As a corporate leader, it is your responsibility to protect your organization’s intellectual property and confidential materials as well as that of your clients and suppliers. Now that the government is a competitor and regulator, those going into government service represent a real business risk as government officials have demonstrated a propensity to act in both the interest of government companies and their political careers.
  • Don’t accept government bailout money. Companies accepting government funding become beholden to politicians whose goals and ambitions may not align with that of the business or its shareholders. Avoid the conflict of interest by not allowing it to exist in the first place.

None of these recommendations should be construed as a suggestion to avoid legal requirements or ethical behavior. Rather, they are recommendations to comply with the letter and intent of the law and to act with the utmost integrity. What we are suggesting is that action going beyond compliance or showing generosity toward the ‘super competitor’ U.S. government is unwarranted and should be avoided.

Final Thought…

The purpose of this editorial is to highlight actions executives and managers should take in this era of heightened government business ownership and marketplace participation rather than debate the unfortunate and often inappropriate actions of those responsible for these circumstances. StrategyDriven does not condone the actions of Goldman Sachs leaders and employees. We are also disappointed by the unbecoming behavior exhibited by Senators Carl Levin (D-Michigan) and Claire McCaskill (D-Missouri) during the Goldman Sachs hearings3 and the other seemingly inappropriate relationships between members of Congress and various financial institutions.

Final Request…

StrategyDriven Editorial Perspective PodcastThe strength in our community grows with the additional insights brought by our expanding member base. Please consider rating us and sharing your perspectives regarding the StrategyDriven Editorial Perspective podcast on iTunes by clicking here. Sharing your thoughts improves our ranking and helps us attract new listeners which, in turn, helps us grow our community.

Thank you again for listening to the StrategyDriven Editorial Perspective podcast!

Sources

  1. Senator Dodd’s Regulation Plan: 14 Fatal Flaws,” James Gattuso, The Heritage Foundation, April 22, 2010 (http://www.heritage.org/research/reports/2010/04/senator%20dodds%20regulation%20plan%2014%20fatal%20flaws)
  2. Lawmaker Accused of Fannie Mae Conflict of Interest,” Bill Sammon, Fox News, October 3, 2008 (http://www.foxnews.com/story/0,2933,432501,00.html)
  3. Video: Sen. Claire McCaskill Talks S**t to Goldman Sachs Execs,” Keegan Hamilton, Riverfront Times, April 28, 2010 (http://blogs.riverfronttimes.com/dailyrft/2010/04/video_senator_claire_mccaskill_talks_shit_goldman_sachs.php)

StrategyDriven Editorial Perspective – How to Respond to the Government’s Takeover of the Economy

Recent government action ignited a new debate regarding the extent of Federal control over the marketplace. While some would collate the government’s degree of control to that of its spending, we believe this relationship to be inappropriate because purchasers exert indirect influence over an organization. Instead, we suggest the government’s direct control over an industry or organization stems from its majority ownership position or significant regulation of those groups. Therefore, we believe the Federal government controls approximately fifty-one percent of the nation’s economy as derived by its ownership and regulatory controls of:

  • U.S. Financial Industry – representing approximately 33 percent of the U.S. marketplace, the U.S. Government gained control through the Troubled Asset Relief Program (TARP) and separate bailouts of mortgage giants Fannie Mae and Freddie Mac.
  • U.S. Healthcare Industry – representing approximately 17 percent of the U.S. marketplace, the U.S. Government gained control through the passage of healthcare legislation in March 2010.
  • Other Major U.S. Businesses – representing approximately 1 percent of the U.S. marketplace, the U.S. Government gained control through bailout purchases of stock from companies such as General Motors and Chrysler.

“Now we have the federal government taking over ownership or control of 51 percent of the American economy.”

Michele Bachmann
U.S. Representative – Minnesota (R)


Why is all of this important?

The Federal Government has shown itself to be anything but a passive owner. After taking control of General Motors, the Federal Government expelled the CEO of that company.1 Similarly, the Federal Government has limited and in some cases reduced the compensation packages of the senior executives of those companies that have received financial bailouts.2, 3 Thus, the government and not the private marketplace is now dictating these business rewards.

Why should this be a concern for any business other than those directly involved?

Activist government participation in the marketplace suggests that politicians may take other actions to the benefit of those organizations the government owns. In fact, they already have. Aggressive attacks against a competing organization as was evident by the recent General Motors ad campaign specifically targeting its besieged competitor, Toyota, and the extensive public Congressional hearings involving Toyota executives over its cars’ sudden acceleration problem. None of Toyota’s other competitors waged ad campaigns specifically targeting the automaker nor was the government as publicly vocal when poor maintenance practices at one of its Tennessee Valley Authority coal plants created one of the worst environmental disasters in U.S. history on December 22, 2008.4

This past activism suggests politicians may be willing to aggressively seek to dictate terms to suppliers of its organizations; not only in the name of good business practice but for political reasons supporting those in government. Combined this with the fact that the Federal government exerts significant direct ownership and control over approximately fifty-one percent of the U.S. market and it becomes evident that government officials will influence a vast number of businesses within the United States.

StrategyDriven Recommended Practices

  • When at all possible, organizations should consider conducting their financial business with only those financial institutions not controlled by the U.S. Government, namely those organizations that have not received and do not appear to be at risk of receiving government bailout funds such that the government could the dictate the terms of their business operations. The goal is to minimize the organization’s exposure to government imposed stipulations associated with any borrowing that cannot be immediately paid back to avoid such stipulations.
  • Businesses should seek to diversify their portfolios such that they are not overly reliant on the sale of products and/or services to controlled organizations. The goal is to provide flexibility such that the organization could shift of cease business relationships with those government controlled organizations should unacceptable terms be demanded.
  • Businesses should factor in an additional risk if entering into the market of a government controlled organization. The goal is to account for the almost unlimited financial backing the Federal Government provides controlled organizations and its apparent willingness to use that funding to succeed in the marketplace.
  • Minimize consumption of government controlled organizational products. The goal is to minimize the risk exposure the organization faces should politicians seek to exert influence through the restriction of needed products or services. Additionally, this practice recognizes that government employees are typically better compensated than their private sector counterparts.5

In principle, these actions are not to suggest an organization not do business with the Federal Government, government controlled organizations or within government controlled industries. Rather, we suggest an organization not become overly reliant on the business transactions conducted with such entities in order to be able to resist government dictates over the organization’s business operations. Such standards, quantity, and pricing dictates do come from other large organizations such as Wal-Mart. Unlike these cases, however, politically motivated government officials are more likely to build in additional social program requirements as a part of their dictates thereby inflating a company’s overall costs and subsequently jeopardizing its ability to provide market competitive products and services to its other buyers. The only way to avoid such government intrusion is to ensure sufficient diversification exists in the organization’s financial support, supply chain, and customer base.

Final Notes…

StrategyDriven is aware that several reputable organizations such as FactCheck.org and CBS have refuted the notion that the Federal Government controls fifty-one percent of the U.S. economy.6, 7 All of these organizations base their position on the fact that annual government spending accounts for approximately twenty percent of GDP. We respectfully disagree.

A purchaser, even a major purchaser, of an organization’s products and services exerts an indirect influential control over an organization. The greater the percentage of an organization’s output that is purchased, the greater the force of indirect influence that can be exerted. While the Federal Government’s twenty percent of GDP purchasing power gives it significant marketplace influence, this is not the type of direct control referenced in the assertion that the governments owns or controls fifty-one percent of the U.S. economy.

Direct control is very different. With direct control, an individual or institutes gains the authority to dictate the actions of the controlled business. Direct control comes from one of two means, ownership or regulation. Through its bailout purchase of a majority share of corporate stock, the U.S. Government has gained control over numerous businesses such as General Motors. Through the recently passed healthcare regulation, the government has dictated the product and service offerings and prices of numerous companies as well as the purchasing habits of all U.S. citizens within this space.

The government’s direct control over numerous businesses, begotten through ownership and regulatory policy, is why StrategyDriven believes the U.S. Government has control over fifty-one percent of the U.S. economy. The firing of GM’s CEO and caps and reductions of CEO salaries as cited above further illustrate the government’s use of its direct control over businesses that were once part of the private sector.

As always, StrategyDriven is not taking a position as to whether or not this degree of ownership and control by the Federal Government is appropriate. Instead, we simply highlight the consequences of these actions, namely that political forces will now intermingle with market forces to dictate the course of business. Given the extent of the government’s control over the previously private marketplace, this introduction of political drivers will have significant ramifications and warrants consideration and responsive action by business executives and managers.

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Sources

For an up-to-date listing of U.S. Government bailouts, see: “Eye on the Bailout – Bailout Recipients,” Pro Publica (http://bailout.propublica.org/main/list/index).