Bankers' Bonuses, Purchasing Problems, and a Christmas Campaign…

The big news here is that the UK government has announced it will tax bankers' bonuses at 50%, a measure supported by most of the public (but, not surprisingly, by many bankers). It looks like France may follow, but in Germany Angela Merkel says she thinks it is a "charming idea,"which we understand is German shorthand for, "we have to show some support for our EU comrades, but we will also be delighted if disaffected bankers would like to relocate to lovely, charming, dynamic, exciting Frankfurt, our own competitor to horrible, smelly, crowded, inefficient old London."*

What does this have to do with purchasing? Well, I wrote some time ago in my blog (in response to a London Evening Standard article) about whether clients of the banking and finance industry are at least partly to blame for the huge earnings in that industry, and some of its consequent problems.

The Times last week featured another piece on the topic: big investors are "preparing an assault on the 'exorbitant' fees of advisers on both sides of company takeovers." These fees are apparently around 3% of the value of the takeover; that means 3% of the total shareholder value is gone just like that ... and of course we are often talking about billion-dollar values here. The article reported one investor as saying, "It is egregious. The pensions and savings of our customers are being used to pay ludicrous investment-banking fees, which are leading to supernormal profits at the banks and then leaving the door as excessive bonuses."

As a purchasing person, my obvious question is: why do the buying organisations allow this to happen? Firms don't allow suppliers of any other service to rip them off so obviously. Our cleaning contractor -- or even our strategic-consulting advisor -- would be greeted by hysterical laughter if they demanded 3% of the company's value in return for doing a few weeks' work. For a start, there is no reason at all for the fees to be linked to the size of the deal -- that is totally illogical. The amount of work is not related to that, so why would we accept a payment mechanism of that nature? And what about competition? Why doesn't that drive down the fees to something more economically justified?

The reason, of course, is that competitive processes are almost unheard of in this industry. Furthermore, professional purchasing people rarely get close to the process, so there is no opportunity for us to apply our processes and discipline. This is a failure of procurement -- a failure of procurement governance, process, the credibility of our profession. And once competition is neutered, cartel-like behaviour becomes much more likely. Not that I would for a moment imply anything illegal, but it is interesting how quickly something like this 3% fee becomes the "norm."

So why do CEOs and chairmen act in this way and agree to these deals? It is partly the genuine concerns around time and confidentiality; you can't hold off defending a takeover while the purchasing department runs a 3-month tendering process. But that could be addressed by putting in place pre-arranged agreements. It is also, I'm sure, the Board's genuine belief that it must have the firm or people that it believes are "the best." If it is defending the whole future of the organisation, paying a few tens of millions to advisors is the least of its worries and seems a "fair" price to pay.

But a Board's definition of "the best" often means nothing more than it's worked with them before, or they play golf together. That leads us into what we could define uncharitably as "corruption." The trips to sporting events, the opera or ballet for the older Chief Executives (and the strip clubs at the younger end of the market), the Christmas hampers, the lucrative consulting assignment or non-executive role offered with the advising bank once the chairman steps down ... all unethical, if not corrupt.

So what can be done? My suggestion is that we start a Campaign for Proper Purchasing of Investment Banking Services (CPPIBS -- so the acronym needs a bit of work...) I am sure we could get buy-in from investor bodies and others (maybe even government), to implement either laws or at least strong guidelines that would enshrine proper purchasing and governance into these decisions.

And I think we would only need three key statements to make a real difference.

1. Organisations will put in place and publish their procurement policies and processes, which will be applied to all external expenditure, including spend that falls into this "City" or banking category.

2. Everyone in an organisation who is involved in spending money on suppliers will sign up to the Institute of Supply Management (ISM) or Chartered Institute of Purchasing and Supply (CIPS) ethical code, as many buyers already do. The Code sensibly defines what is and is not acceptable around gifts, hospitality, and so on. And no, hampers are not allowed. Board hospitality will be declared in the published annual corporate accounts.

3. All expenditure over a certain level -- say $100,000 -- including banking and related fees, will go through some competitive process before a contract is put in place (with any exceptions to be listed in the annual report).

Is this workable? Shall we start the campaign? What do you think? * (Editor's note to readers: please do not decide to take an expensive trip to or vacation in Frankfurt based on the irony contained in the above sentence...)

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Peter Smith

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