A Dangerous Follow-Up Post - Obama and Bankers Bonuses

When I started this blog, I was advised that being occasionally controversial was a good idea.
So here's the thing. Today Barack Obama has launched a stinging attack on the US banking system. By the time you read this, you are bound to have heard all about it. You might not quite have managed to wade through the headlines to hear about Goldman Sachs results.

Goldman anounced it will pay $16.19bn in compensation and benefits for the whole year, up 48% from 2008. But its compensation as a percentage of net revenues was 35.8%, the lowest since it went public in 1999.

As I mentioned below, there are very few people intensive businesses which manage a salary bill which equates to that percentage of total income. Certainly not football clubs, and also not quality HR consultancies which offer value for money.

Therein lies the rub for me. I have no issue at all with bankers bonuses. In my mind they are no more controversial than Richard Branson or Anita Roddick using their intellect to build and then sell their businesses for equivalent fortunes. The days of a City job inheritance are long gone - most of our City's bankers are intelligent people with immense talent who have grafted hard to get where they are.

The issue for me is not the P&L of the investment banks, but the balance sheets. If these annual profits are generated via excessive balance sheet risk, the man in the street gets hurt. I imagine less than 1% of this country's bankers have willingly endangered the health of their organisation's balance sheet.

In my view investment bankers should be able to pay their people as much as they like as long as they can manage the downside risk. Obama is absolutely right to push for stronger regulation of the banking sector, but politicians who petition for smaller bankers' bonuses are simply pandering for cheap votes and big headlines.   

It's a Dodgy Old Game: Debt versus Equity

I enjoyed the Sunday Times article yesterday on the parlous state of the finances of Premier League football clubs. While the Sunday Times business section can regularly veer into sensationalism, the Premier League continues to reflect a truth that is stranger than any fiction.

http://business.timesonline.co.uk/tol/business/industry_sectors/leisure/article6991053.ece

The article, subtitled ‘How Manchester United became a piggy bank for its American owners’, confronted head on United’s attempts to restructure its financing (total debt of £700m). United are not alone. Liverpool are in a similar boat (net debt of £300m), with Chelsea and Manchester City’s owners having recently swapped their loans for equity stakes to stay on the right side of football’s traditionally impotent rule makers.

There is a certain irony of course that the Sunday Times is a Murdoch business – the same parent company that has funded the Premier League gravy train via Sky and some core international TV rights deals. I recall leading part of a due diligence process for Newcastle United some 12 years ago now. Even then, player salary levels were a significant, limiting concern for future value of cash flows. Now this has become a concern for current profitability.

It is widely expected that one Premier League club will default on its financials obligations this season. Hot favourite is Portsmouth. It is extraordinary to think that the England goalkeeper cannot get any games for his club in a World Cup year because that club is scared of triggering a clause in his contract which will commit them to paying another year of his salary. In particular when you think they are bottom of the Premier League and leaking goals.

The hard reality is the business model for professional football – where salary levels are typically 65% plus of total revenue and net profitability is marginal or non existent – simply cannot sustain that level of debt. It might survive it in the short term, but it cannot sustain it or thrive on it.

This brings an interesting reflection for those of us who work in professional services businesses. There are not many businesses in our sector where costs of our ‘talent’ are less than 65% of our total revenues. It is impossible for the average professional services business to make a debt versus equity swap on a week’s notice should things get a bit sticky. I know many who would envy Chelsea’s agility!

Many in our market continue to struggle. This will continue to be the case as demand remains flat, in particular if interest rates rise. It has been interesting to see the increasing number of clients who request our full company accounts when we are pitching for work – and rightly so. Several suppliers in our market have run the debt gauntlet to capitalise on early to mid noughties growth – developing their own software, buying competitors and so on. Any client would want to be sure their 2010 suppliers can continue to fulfil their obligations without needing to do the equivalent of dropping their England regulars.

Balancing Personal and Professional Goal Setting

I mentioned in December the need to lead Lane4 with a balance of optimism and realism. That is an important line to tread as we set goals and objectives for 2010.

Of course, an additional challenge for all of us is not just to find appropriate balance in our goals at a Lane4 level, but also our aspirations as family members, friends, sports team members and so on. Sometimes balancing the personal and the professional is easier said than done. It felt particularly tough at times in 2009 to keep that balance.

I spent time last week finalising my own set of goals for the year…setting the personal alongside the professional. It is the first time I have really set about making sure I look at both together. I would definitely recommend it.

Initially it can feel a little odd to have life ambitions (write a book), sporting goals (which I hope will include a sub 40m 10k run and a return to competitive tennis) next to working aspirations and most importantly some family and friends goals. That is why it is such an interesting and thought provoking process.

Obviously there are tensions between the different areas, which is where the thinking really begins. It leads me to reflect that goal setting professionally in the absence of the personal dimension just isn’t being honest with yourself, your colleagues or most importantly your family. It’ll be a busy year, but hopefully very rewarding one.

Unfortunately this busy year starts with a shoulder op on 13th Jan. That will mean a period in a sling and a crash course in one (left) handed typing …so please accept my apologies if my blogs are somewhat less frequent for a while!

2010 (or 'Why Robert Peston Reminds me of the Ribble Valley 10k')

And so to 2010 – Happy New Year!

I started to rev up for the New Year this weekend. The first thing I ended up reading was the blog of BBC Business Editor Robert Peston. The usual under-stated Peston approach : ‘A cheerful first thought for the New Working Year.

Viewed across all economic sectors, the UK and the US are still submerged in debt: the aggregate borrowing of households, companies and government is equivalent to more than three times the value of everything we produce, still greater than at any point in peacetime history.

We have all read and heard several variations of the same story told in the Business Press. In the absence of any real news, time for the media to become crystal ball gazers. Predictions of hung parliaments; loss of AAA ratings; costly government borrowing; resultant cuts in state and household spending..and a second dip to make the first look like a hiccup. All this by the end of Q2. Looks like the business journalists have had a nice break and are all revved up to talk us into more financial difficulty.

As I have said in previous posts, we have focussed Lane4 not just to cope with the challenges of any future dip, but also to capitalise on any steady recovery. I’ll say more about how we are doing this in the next few months.

On the subject of a steady recovery though, as befits the return to work I have included a festive holiday snap (of sorts) below. This picture was taken by my wife Claire during the Ribble Valley 10k on December 27th. It shows some of the 900 hardy souls (me included) making their way across the freezing Ribble on their way out to a snowy adventure in the Lancashire countryside.

 I include the photo because the way I felt when it was taken - 800m into the race - mirrors pretty well how I feel today starting the working year. It was already clear that the conditions were going to be a bit tricky underfoot, and I definitely wasn’t sure how I would fare on a course I had never seen before. But I also knew I had done my preparation and was ready for a tougher workout. At least I thought I was.

As it turned out the race went pretty well in the end, but only after I struggled badly in the first half. It was not until I realised at the 5k mark that I had been going just slightly uphill since we crossed the Ribble that I began to understand why. When we turned for home, things really picked up for me. I actually went quicker in the second half than the first - which is very unusual for me.

So – back to 2010. The training and preparation is done, and the gun has just gone off. The Robert Pestons are talking up the course, and we sense the first few kilometres might well be tough. For all we know, the whole race might well be uphill. But here is hoping that the Q4 2009 hill repetitions will pay dividends!