Lotteries: The Regressive, Oppressive Tax

August 20, 2012 § 8 Comments

One of the top stories in the US this week was the Mega Millions Lottery.  This state sponsored lottery is the largest of its kind in the US.  It spans a collection of states and its jackpot increases with each week that yields no winner.  So, this week the jackpot exceeded $300 Million and every major media outlet picked this up as a major news Imagestory, showing the frenzy of ticket buying while publicizing this jackpot as an exciting chance for some lucky future winner(s).  Just two months ago the media frenzy was even more frenetic as the jackpot exceeded ½ $Billion.

Heart Breaking News

This phenomenon of government sponsored gambling is troubling for the future prospects of general societal health and overall economic conditions.  While defenders of the lottery will argue that it’s a voluntary tax, the real wealth redistribution that occurs with lotteries is regressive.  What this means is that lower economic classes pay a higher proportion into the tax and yield a lesser benefit.  So, while the state may yield significant revenues from their lottery systems, the net impact on the general population is detrimental.  The working poor, lower middle class, middle class and senior citizens make up the vast majority of ticket buyers; some spending more on lottery tickets than on essentials.  The impact is not just on the individuals who buy the tickets, but on the families they support.  Children go without enough food while a parent continues to hinge future dreams on a lottery jackpot.  ImageWhat’s most egregious is that the lotteries are state government sponsored institutions and media outlets fuel demand through coverage.  Every major network morning show including ABC, NBC, CBS, FOX, and CNN recently aired this story with anchors saying they got their ticket and how exciting this all is.  Really?!  Is that what our news outlets have been reduced to?!  They are clearly acting as a platform for hawking worthless paper that effectively serves to bilk the lower economic classes of our society.  This practice is not unlike other legal practices such as predatory lenders (payday loans, auto title loans), pawn brokers, and not so legal enterprises such as loan sharking. 

 

Special Interests Trumping Public Good

I recently met with a public administration consultant who has worked nearly 40 years as town manager for several towns in New England, in municipal banking; consulting municipalities on business operations, financial management and negotiations.  His stories are incredible – anecdotes of collective bargaining agreements with labor unions, political arm wrestling with councilmen (board selectmen) and outright corruption on permitting and development contracts.  In an effort to protect the innocent, I won’t mention any names or exact places.  One such story of corruption he recently shared with me involved the development of a Massachusetts casino on non-native American land.  Powerful developer interests and local government tax interests push new laws that reject previous statues to keep gambling only on Native American lands. 

 ImageThe motivation for political leadership to support casinos is perhaps obvious as it can lead to new net jobs and increased tax revenues.  As the US becomes increasingly tolerant of gambling and casino activities, it is now tolerating exceptions to previously established boundaries that had kept gambling establishments on the periphery of large population centers.  To see how accepted gambling has become, one needs only to turn on any of a number of cable networks to see televised gambling such as World of Poker televised as a sport on ESPN, replete with “stars”; or visit casinos on Native American land in or near most every metropolitan area.  In Arizona, the pitchman for a local Indian Casio is the broadcast announcer for the Arizona Diamondbacks. 

 

A Public Gambling Addiction

The damage that gambling causes to the economically weak in American society is growing.  Local and state governments with large budget shortfalls become increasingly desperate to find alternative revenue sources.  Not only have state governments created policy that encourages gambling and sponsored lotteries, but also has managed to influence our news outlets.  The result is an entire generation of citizens sees gambling and lottery dreams as part of the American dream.  Shots in the dark, needles in haystacks, pies in the sky fantasies have replaced messages to young citizens that education, hard work, ingenuity, and family commitments are values to pursue.

 It appears that other states are likely to copy the acts of Massachusetts and allow greater integration of gambling activities in common public places.  With greater access, public promotion and celebrity endorsements, the great division of wealth that already plagues US society will only increase.  The most vulnerable are children who are dependent on parents or other caretakers who indulge in lotteries and gambling.  Their suffering is real.  One in five American’s are impoverished.  State sponsored lotteries and gambling is an epidemic in the US and leadership continues to take the easy political path rather than deal with the harsh realities that such policies are having on future generations.

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Underground Markets: A Macro Risk Factor or a Better Supply Chain Model?

January 17, 2012 § Leave a comment

Recently, I read through the latest World Economic Forum “Global Risks 2011”  report which is an initiative of the Risk Response Network.  It’s an impressive assessment of global risks produced in cooperation with Marsh & McLennan, Swiss Re, Wharton Center for Risk Management, University of Pennsylvania and Zurich Financial.  What is compelling about the report is it is not simply a survey result or a list ranking, rather it details and illustrates the interrelationships between risk areas; identifying the causes in an effort to identify points of intervention.  The report highlights response strategies and even proposes long term approaches.

As with any risk report, it has a tendency to feel alarmist, but its value and content cannot be dismissed and its emphasis on response is encouraging.  The two most significant risks the report identifies are relative to economic disparity and global governance.  The main point being that while we are achieving greater degrees of globalization and inherent connectedness, the benefits are narrowly spread with a small minority benefitting disproportionately.  Global governance is a key challenge as each country has differing ideas on how to promote sustainable, inclusive growth.

The Rise of the Informal Economy

The report goes on to highlight a number of risks including the “illegal economy”.  The illegal economy risk includes a cluster of risks: political stability of states, illicit trade, organized crime and corruption.  Specifically, the issue lies with the failure of global governance to manage the growing level of illegal trade activities.  In a recent book by Robert Neuwirth entitled, “Stealth of Nations: The Global Rise of the Informal Economy”, the author estimates that off-the-books business amounts to trillions of dollars of commerce and employs half of all the world’s workers.  If the underground markets were a single political entity, it’s roughly $10 trillion economy would trail only the US in total size.   Further, it’s thought to represent in the range of 7-10% of the global economy and it’s growing.  To be clear, underground markets are not only dealing in illegal substances, crime, prostitution or drugs.  It’s mostly dealing in legal products.  Some of the examples Mr. Neuwirth provide include:

  • Thousands of Africans head to China each year to buy cell phones, auto parts, and other products that they will import to their home countries through a clandestine global back channel.
  • Hundreds of Paraguayan merchants smuggle computers, electronics, and clothing across the border to Brazil.  
  • Scores of laid-off San Franciscans, working without any licenses, use Twitter to sell home-cooked foods.  
  • Dozens of major multinationals sell products through unregistered kiosks and street vendors around the world.

A Global Risk?

Are the underground markets really a global macro-economic risk?  Mr. Neuwirth makes solid arguments that these markets provide jobs and goods that are essential to these populations and that it is the corrupt authorities in most developing countries that are being worked around.  In some ways, it can be argued that these unlicensed vendors and importers are the purest of capitalists; innovatively providing goods by avoiding intervention.  In a recent interview in WIRED magazine, Mr. Neuwirth points out that Procter & Gamble, Unilever, Colgate-Palmolive and other consumer products companies are selling through small unregistered, unlicensed stores in parts of the developing world.   He goes on to point out that P&G’s sales in these unlicensed market’s make up the greatest percentage of the company’s sales worldwide.  I found this tidbit shocking.  Really, a company that brings in over $80 Billion in revenue a year is actually pulling in most of its revenue through unlicensed channels?  Now, that doesn’t mean P&G is directly selling through those channels, but they sell through distributors that may use others that do sell through to unlicensed vendors who don’t pay taxes.

The WEF concludes that illicit trade has a major effect on fragile country states given that the high value of commerce and resulting high loss of tax revenues impinge on national salaries and government budgets.  An example that’s included in the report is that of Kyrgyzstan.  “Members of the Forum’s Global Agenda Councils argue that the undermining of state leadership and economic growth by corrupt officials and organized crime contributed significantly to social tensions which erupted in violent conflict in June 2010, causing widespread destruction, hundreds of civilian deaths and the displacement of 400,000 ethnic Uzbeks.” 

The Threat to Quality and Public Safety

So, if you were guess what type of goods top the list of sales that take place in these underground markets, what would you guess? Cocaine? Opium? Software Piracy? Cigarettes smuggling? Small arms?  Topping the list with a rough estimate of $200 billion in value is counterfeit pharmaceutical drugs.  Just behind at $190 billion is prostitution.   Which leads me to the next serious risk issue if global efforts don’t improve to govern these markets: quality.  I’m not qualified to address the quality of prostitution, but let’s consider the quality of counterfeit pharmaceuticals and the general issue of public safety.  If these markets go unregulated and unmonitored, we are likely to see terrible abuse by profiteers whose only concern is to bring high value products to market quickly.  No regulation also means an inability to create safe work environments and to protect rights of laborers all along the supply chain.

On the other hand, the vast majority of workers and consumers in developing countries thrive because of these markets.  A strong effort to disrupt or disband these markets would cause a high degree of distress in communities that rely on these markets for access to essential goods.  But in return, without tax revenue that can only be gathered from legitimate, licensed businesses can governments function and provide oversight services that would benefit quality and public safety concerns.  It’s an endless loop as we say in the software world; a true catch-22.   Even relatively well functioning supply chain operations at pharmaceutical companies in developed countries are consistently challenged to maintain a high degree of quality (note recent impact of product recalls at Novartis).  Considering how much effort and money is spent on quality assurance, inspections, and FDA audits on legitimate pharmaceuticals, it’s beyond scary to consider the quality of counterfeit pharmaceuticals that are circulating in illicit markets.

Within the US, in the state of California, we’ve seen recent evidence of solutions such as bringing the trade of marijuana within the framework of the law.  Potential results include ensuring quality and safety for the public, raising tax revenue and reducing the profits of organized crime.  Still, the issue of economic disparity is a much tougher nut to crack.  Widening gaps in income within all economies provide incentive for lower income individuals to work outside of established trade structures.  This incentive leads to greater illicit trade which in turn hinders a government’s ability to effectively tax businesses and provide services such as regulatory oversight. 

Can We Govern Illicit Markets?  And If So, Should We?

These are obviously very difficult challenges, but ones that the WEF is analyzing in an effort to form solutions.  The relationships between economic disparity, illicit commercial trade, public safety and government corruption becomes glaringly clear.  How can the global community govern these illicit markets?  They exist everywhere to some degree, even in the US where informal markets are estimated to account for 10-20% of GDP.  One solution that WEF recommends is to strengthen financial systems.  The implication is that weakened systems are the result of the heightened volatility and risk deriving from the recent capital markets crisis.  With diminished confidence comes incentive to work outside the system.  Some suggestions include:

  • Better surveillance of the financial sector, including all systemically relevant players
  • Tighter capital and liquidity ratios for all banking institutions (including non-banks), with higher ratios for systemically relevant institutions
  • Risk retention for securitization (so-called “skin in the game”)
  • Improved transparency and counterparty risk management in “over-the-counter” derivative markets

Perhaps the most interesting part of this global risk challenge is how interrelated these issues are.  The influence that government corruption has on illicit markets is direct, but not the only factor.  Further, the ability of governments to regulate, control and tax this commerce is not straight-forward and overly severe policies can prove detrimental to workers and consumers.  And how much do other factors such as financial stability contribute to activity moving outside conventional channels?  There is no certain view on these underground markets as we must consider why they exist, for whom they exist and how valuable they are for the good of all.

Addiction to Prediction

January 3, 2012 § 11 Comments

With each year end, all forms of media spew a tidal wave of predictions.  From the apocalyptic to the mundane, we get predictions from prognosticators on who will win an Oscar to which Republican will win in Iowa to how well the market will do in 2012 to who will win the Super Bowl.  But it’s not only during year ends that we get a hefty dose of soothsaying. It’s a public non-stop obsession.  Dare I say, it’s an addiction.  Predictions are in every facet of society – within industry, we are constantly trying to get insight on the level of demand this month for our products; the level of prices within each product type; and which company will gobble up which other company.  The fact that foresight can be a key advantage when competing for resources and competitive superiority is not surprising.  What is surprising is the amount of noise pollution and the insatiable desire to listen to that noise.

What is an Expert?

I still hear my favorite finance professor lecturing during one of my b-school classes about “experts”.  He illustrated quite powerfully (obviously, it’s stayed with me for all these years), how poor predictions were made by economists on interest rates, GDP growth, oil prices, and stock prices among many other measures.  In article after article, economists, industry experts, political experts, scientific experts were shown to be just slightly better than random guessing.  What’s worse, most “experts” tended to influence each other, so that consensus predictions prevailed.  The group of economists’ predicting the direction of interest rates tended to lump together in narrow ranges which indicated that working from the same sets of data with the same sets of assumptions, they also tended to create the same range of estimates.

Risk and Probability

We all know that the future is uncertain and that many unknown factors impact future events, yet we go to great lengths to predict.  The bottom line is that we can draw conclusions that are more about probability than actual pinpoint calculation.  If we normalize probabilistic outcomes for earnings per share for Apple this coming quarter, we can estimate EPS outcomes within ranges.  If we believe published consensus estimates by analysts, we can find that mean estimates are at 9.81 with a coefficient variance of 4.39.  Statistically, this variance is only significant for historical relevance and should not be seen as a predictor, but given analysts do not have crystal balls, they still use it as the main factor for setting probabilities.  So, if we conclude there is a 95% chance that EPS will fall within the range 8.56 – 11.06 (or two standard deviations), we are essentially placing bets based on probability.  Now, the valuation of a share of Apple common stock will vary greatly depending on where in this range actual EPS falls.  Of course, there is still the 5% chance that EPS falls outside the expected range.  And further, these numbers are purely estimates based on one set of assumptions that no two analysts would ever agree on.

Critical Analysis

When looking at all these predictions, it can quickly become apparent which “experts” are really viewing their data through a critical lens and which are simply along for the ride by echoing other expert’s viewpoints.  What I find most discouraging is how confident some prognosticators are, especially those on television and web broadcasts.  They emphatically proclaim their view in an effort to persuade viewers they are right – trying to create self fulfilling prophesies through persuasion – perhaps the most egregious offense.  We see this regularly on political discussion panels where party-aligned or candidate-partial analysts make their case for persuading us what people really want and how they will vote.  Are they really giving us a scientifically sound viewpoint or simply trying to manipulate our view about what will be?

Predicting Human Behavior

The digital age has provided a powerful platform for gathering information on individuals’ behavior.  Companies can gain insight into buying behaviors as well as data on individual and group interests in entertainment, politics, as well as professional and social connections.  The usefulness of this information is at once obvious and complex.  For instance, if we know that there is better than 50% chance that a person buying a camera will also buy a camera case then it would be an effective sales practice to suggest a camera case at the point the buyer selects a camera.  This practice is quite common now with online purchasing.  We also see it fairly frequently with phone sales as well as with fast food ordering; e.g.: “Would you like fries with that?”.  Recently, I was shopping for a new lawn mower and researching options on the website homedepot.com.  Within several minutes, after performing a search on the site, a pop-up offer to chat with a representative came up.  I took that offer as I had some questions about the models.  After about five minutes, the rep offered me a 10% discount if I’d like to purchase the item online and he’d help me through the purchase process.  I had already made the decision to buy the item, so I was happy to get this discount, but I wanted to pick it up at a store near me rather than have it shipped.  Their process allowed for this flexibility as I could purchase online and the item would be instantly put aside for me to pick up that evening.  This process was ingenious.  What percentage of people shop to the point of sale and then drop, reducing the chance of buying the item through the original site or perhaps not buying that item at all?  This new discount offer through the chat rep can help homedepot.com reduce that drop percentage.  Now, Home Depot does not know if I would have purchased that item that day online anyway and they do not know if I would have gone to the store and been willing to pay full price.  The fact is: there will be some percentage of margin they relinquish for the sake of capturing a higher percentage of potential sales.  Home Depot, like so many other retailers, banks, insurance companies, and drug companies are in the business of prediction – predicting what you will do if they communicate with you in a certain way at a certain time.

Statistical Sampling – A Foundation for Predictions

Statisticians often tell a joke about a man with his head in a refrigerator and his feet in an oven – on average he feels about right.  Sampling is used to determine probabilities and to make decisions on the level of risk we are taking.  It’s sampling and probability that determines the rate we pay for life insurance, car insurance, and all other types of insurance.  So, when we try to predict Apple’s earnings per share for next quarter or  whether a catastrophic disaster will strike an Asia Pacific country next year, we must calculate the odds, the percentages, the probabilities.  The fact remains, however, that not all outcome distributions fall into a normalized curve and highly unlikely events can be game changers.

Question Authority

Prediction should be all about risk, uncertainty, and likelihood, but what you’ll hear this week and throughout the year is a chorus of experts telling you with great certainty what the future will bring.  Don’t believe them.  If you’re jonesing for advice, try listening to those who are providing detail on probability, risk and trends.  But know that the future is never about certainty and always about probability.  When prognosticators get it right, they were just plain lucky.  They may have played the odds.  They may have had some truly intuitive insight that others did not.  But there is never a sure thing.

Creating Your Own Reality

November 7, 2011 § 2 Comments

On my white board sits a list of topics that are near and dear to my heart; topics that I think about often and want to espouse, pontificate and illuminate.  Most often, I think I have original ideas on these subjects and while I don’t feel I have the time to get it all out at once, I keep this list with the intention of banging them out slowly – one by one.  And almost without fail, in my regular reading or research, I’ll come upon an article or book on one of these topics and then suddenly, like a bolt of revelation, someone’s beaten me to the punch; made the key insights that I thought were my domain.

The Surety of Fools

One such happening this past weekend as I perused the New York Times Magazine, a gentleman by the name of Daniel Kahneman wrote an article entitled “The Surety of Fools”, an adaptation from his upcoming book entitled “Thinking, Fast and Slow”.  He hit on a key observation that is at the core of what I’ve been writing about over these last few months; misperceptions of risk.  I won’t rehash the whole article, but in essence, Mr. Kahneman points out how we often hypothesize based on logic, but when empirical evidence belies our theories, we simply don’t believe the facts.  He calls this phenomenon the “illusion of validity.”  I love this premise as I see it so often with investment managers, news reporters, mortgage brokers, sport team coaches, politicians, voters and prognosticators in general – they all create their own reality. 

Creating Your Own Reality

We ALL do it to some degree.  We watch the news channel that validates our set biases.  We befriend people who support and validate our opinions and views.  On the topic of investment risk, operational risk and risk in general, how does that phenomenon play out?  Do we see the facts and are we able to evaluate data without bias? Mr. Kahneman illustrates the reality of investment bias with examples of studying investment managers and how their performance is measured.  The vast majority of investment managers he studies do not perform better than a purely random pick of stocks.  Yet, the illusion of validity causes the management of the largest investment firms to bonus and commission those managers as if they are keenly skilled; as if the fund managers have brought tremendous value to their client’s interests.  They create their own reality – instead of accepting that the unbiased data shows no value in their management of investment assets.

Life Sciences’ High stakes

There are even greater risk examples.  Life Sciences companies such as pharmaceuticals, biotechnology and medical device firms have huge investments and pressures to produce new products.  Each development stage requires rigorous testing and massive volumes of data.  While the FDA enforces regulations and these companies are regularly audited both internally and externally, the pressure to produce is high.  Time is of the essence when it comes to bringing a new drug to market; both for the sake of patients as well as profits.  How well is the data reviewed and scrutinized before passing each validity stage?  Is there a bias that errs on the side of validation ahead of rejection?  Absolutely.  Kahneman’s Illusion of validity is at play and the consequences are immense. 

The Supply Chain Fog

For Life Sciences companies the risks involve patient health as well as immense risks to the company including product recalls, regulatory findings, lawsuits, and ultimately, reputation damage.  The organizations I’ve worked with over these last few years are extremely diligent in their processes and methods for R&D, trials, manufacturing as well as distribution.  But other operational risks do exist.  In a post last year by Daniel R. Matlis entitled, “Life Science Executives Concerned about Outsourcing and Globalization Unintended Consequences”, Mr. Matlis notes, “In the drive to lower costs, manufacturing and sourcing of ingredients and components in countries such as China and India are playing a more prominent role. Yet, according to the research, outsourcing to manufacturers in developing economies carries significant operational risks.  Industry Executives surveyed for the research said that Raw Materials sourced outside the US represented the greatest risk to the Value Chain, with 94% of those who responded seeing it as a significant or moderate risk.  When comparing the risk profile of US vs. foreign raw material Suppliers, United States Suppliers were classified as low risk nearly 10 times as often as foreign Suppliers.”  Any Life Science company’s ability to define, monitor and track each and all of their third party providers adds a level of complexity and difficulty.  This difficulty stems from what consultants at Nimbus have labeled the “fog of process accountability, control and oversight.” 

To be certain, this fog exists to some degree everywhere and obviously with supply chain partners even more so, but how well an organization tries to create clarity of process definition and clarity of quality both from within and beyond the enterprise is critical when managing operational risk.  Perhaps the biggest concern I have with the phenomena of “creating your own reality” is the fact that the “fog of accountability” provides a condition for pushing forward; an excuse for not accepting what the data is revealing; and a scenario wherein doubt can always be cast on outliers.

Focus on the Facts

I spent part of last week with a biotechnology firm’s scientific directors, their CIO and colleagues from TIBCO, briefing them on my company’s software technologies and how they apply to the wide variety of process areas they represent.  The volume of data and the complexity of that data as it applies within their product trials is tremendous.   Next week I’m with a medical device company who’s in the process of a major transformation and will need to address most every operational area as part of a corporate spinoff.  These are just a couple of quick snapshots, but they epitomize the speed with which organizations change, adapt, and grow.  Speed and volume is only increasing – further escalating the demands for validation of each initiative. 

I can only hope that Mr. Kahneman’s “illusion of validity” is tempered when organizations manage operational risk and the key decisions that drive product development.  The stakes are indeed high when it comes to Life Sciences, but every industry is predisposed to this condition.  In short, we can never be to too sure.  Let’s not fall too in love with our own marketing slogans.  Let’s understand the complexity that we’re faced with, make our best, valid judgments and do the best with the facts we have.  While there is never purity in our judgments, we can at least try to be aware of the propensity to fulfill objectives through maintaining a blindness to the facts.

Active Governance

August 1, 2011 § 2 Comments

What is true oversight?  How much oversight is prudent?

Governance, much like Business Process Management is a term that is thrown around in a variety of contexts, but rarely is understood.  The term often refers to a structure that enforces rules.    The most even handed definition I could find states that governance is: the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled.  I like this definition for the fact that it tries to encompass “processes, customs, policies, laws and institutions”, but the most telling word is perhaps “affecting”.  Governance may provide some sense of structure, but only so far as it attempts to “affect” behavior of the organization.  Also, what is key to understanding what I will call “active governance”, is not just putting a structure in place, but actually putting an enforcement structure in place.  Governance cannot have much effectiveness to “affect” behavior without a complete cycle of structure and enforcement.  Further, governance is not an end-state condition.  For any company to state that they are well governed is simply a relative judgment that is meaningless when proclaimed from someone within that organization.   Organizations can establish thorough and sophisticated methods for sustaining specific levels of governance, but the degree that such governance is adequate for employees, management and investors is variable. 

It’s similar to stating a risk management position.  Organizations, as well as individuals, may assess risk and make decisions to take specific risks based on value judgments.  It’s not the fact that organizations take risks that is an issue.  The challenge for risk management is how much effort goes into understanding and mitigating known risks and how much investment in mitigation is needed.  Further, an organization’s ability to address the unknown unknowns and to plan for unknown events is an important part of what active governance is. 

In 2003, the vast majority of US public companies moved with furious pace to try to “comply” with regulations that were enacted to ensure executives were accountable for the financial disclosures of their respective companies.  With sections 403 and 204 of the Financial Reform Act of 2002, also known as Sarbanes-Oxley (from the sponsoring senators) or SOX, companies throughout the US and most global organizations with significant operations in the US suddenly found they did not have an adequate governance structure and could not reliably show compliance with SOX.  Part of the challenge that companies were facing had to do with the vagueness of the law itself, but regardless of those issues, companies throughout the US did not have adequate governance to reliably and confidently verify the numbers and statements on operational controls in their organizations.  As I began work in this area, each week I was ushered into large organizations, most with global operations that were treating SOX as a major headache that was being imposed upon them that they needed to “get through”.  In most cases, the task of dealing with SOX was managed under the chief financial officer’s role and a “director of compliance” was either tasked or newly established to address SOX compliance.  In every case I worked; cases that spanned industries from construction, financial services, consumer products, energy, and healthcare, organizations universally saw compliance as a problem imposed upon them by government.  It was a box to be checked, a hurdle to be cleared.  It was not seen as something that should be necessary within the organization, in fact, it was most widely reviled and criticized as a huge waste of time, resources and money.  Millions were being spent within each organization to accomplish SOX compliance and to most every executive it was viewed as a major waste and a major imposition.

Now, there are quite a few papers and books published detailing the variety of frauds and scandals that led to the enactment of SOX, so I won’t attempt to rehash the events within Enron, Arthur Andersen, WorldCom, Tyco and others.  These events also contributed to a view that slack governance undermines investment confidence.  And if investors cannot be sure that management disclosure of financials and reports can be trusted, then investors will turn away from holding equity or debt stakes in public companies.  This is logical and reasonable.  So, why should corporate executives take such issue with improving their governance models?  A key point I will draw out in a following post discusses how important process governance is and how it serves as a foundation of the organization.  In other words, the formula for success – I call this the “secret sauce”. 

Meanwhile, with little appreciation for the value of governance, the need to rush into place a formal structure for reporting was not trivial.  Not a single organization I encountered had a governance structure that allowed process owners to confidently attest to the performance of their financial controls.  Beyond risk-control structures, organizations also could not reliably attest to the financial reporting within every operating unit.  Given the nature of my work and the confidentiality of my relationships, I am not disclosing the names of the organizations I’ve worked for, but the issues were universal.   With such a condition of governance immaturity, the level of investment required to approach the requirements of SOX reporting was massive.  The investment would need to be made for advice from consultants, software systems that could aid attestation, reporting and internal resources to spend time dealing with such requirements, and ironically, external auditors to provide additional advice and services.  But rather than look at this challenge that was originating from regulations as an opportunity to improve risk management, operational effectiveness and investor confidence, executives became mostly defensive.

Now, that was 2003 and this is now 2011.  A lot of maturity has occurred during this stretch of time and I’m encouraged by the understanding that now exists about corporate governance.  There is still, however, a failure of public companies to fully appreciate the value of governance toward the leveraging of process information.  The ability for executives to fully appreciate the value of harvesting process information and controlling those assets is at the core of establishing a successful BPM strategy.  BPM is about harvesting process assets and fully leveraging them as key organizational assets.

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