The customer is no longer king

It seemed to me Goldman Sachs had forgotten the first rule of business stated by the late management guru, Peter Drucker

The Goldman Sachs fiasco should remind businesses the purpose of their existence

Whose business is it anyway – by John Zenkin

I WAS going to write about the rather dry subject of risk assessment this week until I watched the Goldman Sachs congressional testimony on Tuesday night and linked it in my mind with an article in The Economist of April 24 entitled “Shareholders vs Stakehol-ders: A New Idolatry” which deals with the old conundrum of where to focus in good governance: on shareholders, customers or employees.

The reason I changed my mind was that I was shocked to listen to three Goldman Sachs traders being unable or unwilling to answer a simple “Yes” or “No” question from Senator McCaskill of Missouri.

Her question was simple and to the point: did they have a fiduciary duty to their clients, which means looking after their clients’ interest first?

Only one of the panel of four said “Yes”.

The other three hedged their answers to the increasing anger of the senator as she repeated her question.

From the testimony it appeared that all that mattered was that Goldman Sachs made money at the expense of the clients it was supposed to serve, even going to the extent of shorting trades that they had sold to their clients as being good investments, even though internal memos described the assets involved as “shi**y”.

Whether their behaviour was illegal is the subject for the courts, though it certainly appeared that the senators believed strongly that what the traders had been doing was unethical.

As I watched, fascinated by the drama, it seemed to me Goldman Sachs had forgotten the first rule of business stated by the late Peter Drucker in 1946 in his book The Concept of the Corporation that “the purpose of business is to create and maintain satisfied customers”.

What is more, this rule of business was Goldman’s own rule as long as they were a partnership because they recognised that the long-term interests of the partners were to avoid alienating their customers in return for a short-term profit.

What seems to have happened since Goldman Sachs went public is that its employees have been able to look after their own interests at the expense of both customers and shareholders.

This is because the money they were playing with was no longer theirs, but that of other people – their investors and their shareholders.

This suggests that there are limits to how much a company can look after the interests of its employees, especially when they are paid enormous bonuses, apparently regardless of how much pain the shareholders are experiencing (as we have seen in the case of AIG or Merrill Lynch).

It is even more the case when the payout comes from the taxpayer in the form of bailouts.

It seems to me therefore that if there is an excessive focus on protecting shareholder or employee interests at the expense of the client or the customer, the company could put itself at unnecessary risk as far as its reputation and license to operate are concerned.

How soon Goldman Sachs will recover from the damage to its brand shown in the following quote from April 28’s Washington Post is anybody’s guess:

“There was a time when issuers would pay a premium to have Goldman Sachs underwrite their securities, just as there was a time when investors would pay a premium to buy into a Goldman-sponsored offering. Today, Goldman has fully monetised the value of its reputation, and anyone who pays such a premium is a fool.”

I was also struck by the fact that their style of defence bore similarities to those of Exxon in the Valdez case, Shell in the Brent Spar case and recently Toyota when it was found wanting on quality. When customers get upset or when NGOs go after companies, their argument is emotional – designed to be fought in the court of public opinion rather than in a court of law. Legal niceties, technical subtleties do not go down well with people who are looking for memorable soundbites.

What ordinary people want to see is someone who shows emotion and empathy, says he/she is sorry and that he/she will try to do better next time and then there can be closure. Lawyers, with their eye on court cases and damages, advise clients to never say sorry and to prevaricate and obfuscate. This merely increases the anger and frustration of the offended parties.

I have, however, yet to see a company suffer because it has focused too much on serving its clients or delighting its customers.

Perhaps a more correct approach in today’s world is that of the new boss of Unilever, quoted in The Economist article referred to earlier, where he says:

“I do not work for the shareholder, to be honest; I work for the consumer, the customer … I’m not driven and I don’t drive this business model by driving shareholder value.”

·The writer is CEO of Securities Industry Development Corp, the training and development arm of the Securities Commission.

Still at the centre of the world’s news coverage

A range of issues keeps China in its coveted position as the most watchable country.CHINA’S global profile remains undiminished this week, despite many other issues competing for international headline space.

The buzz among foreign investors is whether it is too late to “enter the Chinese market.” There is a strong implicit element of time for what will soon be, if not already, the world’s biggest market.

China Daily on Monday ran a piece on how opportunities still exist, particularly for SMEs. A consensus seems to be that while doing business in nominally communist China is better than ever because of improvements in institutional frameworks and the regulatory environment, competition from Chinese rivals particularly “tech companies” is getting tough.

The Google-Baidu competition could be an object lesson here. With incentives like the recent 4 trillion yuan (RM1.88 trillion) stimulus package for state-owned enterprises, China’s capitalist ethic is doing well.

The number of private companies grew more than 4,600% to 6.6 million over the past 18 years. Among foreign corporations, 96% of Fortune 500 companies are already operating in China.

Then there is the negative side as well, including that which reinforces negative stereotypes. This often involves Beijing’s attempts to control cyberspace, and what China’s 384 million Netizens may or may not do.

A Bill of amendments requiring Internet companies and telcos to report on users passing state secrets is up this week for its final reading in the National People’s Congress Standing Committee before becoming law. Associated Press reports that the move has already attracted criticism at home and abroad.

Officially, tightening the law on communications use is to ensure greater national security. Among the problems is that interpretation of what is a “state secret” is open to interpretation and abuse, so the law would be arbitrary and draconian.

More legislation attracting controversy this week concerns modifications to the law on the detention of suspects. When police have been required to pay compensation to persons wrongly detained, now compensation applies only to wrongful and prolonged detention beyond 37 days (one week and one month).

There would be no huge claims; sums derive from the average daily wage of a state employee in the preceding year. However, there are provisions for further compensation in cases of police brutality. Such laws may not be the best indicators of social change. A better measure would be the impact of public debate and argument on the policymaking process.

China’s next international extravaganza, following on the 2008 Olympics, is Shanghai’s World Expo that opens tomorrow. Singapore’s Straits Times bills it as the “glitziest and greenest” Expo of them all.

The organisers would make it the most glamorous World Expo yet. But, mindful of critics who would condemn a commercial showcase with doubtful environmental value, Shanghai’s show would also be the most environment-conscious.

For symbolism, there would be the world’s largest solar panel; for novelty, a restaurant would recycle excess food to produce electricity; and for visitors’ convenience, 1,000 vehicles powered by renewable energy would ferry people around the site.

Four large parks would act as “green lungs” while 3,000 inefficient factories have been closed. The Expo, due to run for six months, took nine years to prepare. The environmental aspects alone cost US$33bil (RM106bil), which is twice that of the Beijing Olympics. This indicates something of the scale with which China operates, ever since the Great Wall. Inevitably, the growing clout of a rising superpower would be reflected in its role in major multilateral institutions. Perhaps the most appropriate here is the World Bank, where this week China nearly doubled its voting power to 4.42%.

This places China as third-powerful in the bank after the US and Japan, reflecting its number three position in world GDP terms. That could soon change again: China’s economy is already bigger than Japan’s in PPP (purchasing power parity) terms, and is set to be number two even in GDP terms this year.

Every other country in the 186-member institution had its share reduced to make way for China’s increased strength except the US, which retained its share at 15.85%. But since the world’s largest debtor nation owes so much of its wherewithal to China’s economy, relations among Bank members may have to change further to remain relevant.

MIDWEEK By BUNN NAGARA