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Trusted Advisers or Compliance Officers?

July 26, 2012

“Problems are not the byproduct of unpredictable events, but arise from a wrong turning in the culture of an industry that has come to prioritize transactions and trading over trust relationships.”

This comment comes from an analysis of what is wrong with the financial services sector by leading economist John Kay. It might have come from this blog, or the observations of many commercial practitioners, and it might also be applied to many other industries. For the points that Kay is making is that corporations have lost sight of their purpose and of social expectations.

He highlights the challenges of short-termism, of distorting incentives and of the resultant behaviors of executive management. In particular, the pressure for instant results means that business leaders no longer behave as the custodian of hard-built assets, but see themselves as risk-taking entrepreneurs – the difference being that entrepreneurs take risk with their own assets, while corporate executives do not. (And a further irony is that entrepreneurs who fail lose their assets; executives who fail receive a lump-sum pay-off).

It is this environment that is making life so hard for contract and commercial negotiators. It has driven erratic behavior at the top and destructive behavior at the bottom (in groups like Procurement, where the switch to ‘transactions and trading over trust relationships’ is most evident).

Kay also makes the point that regulation has switched from a system that sought to address conflicts of interest (e.g. separation of activities) to a system that seeks to regulate behavior. Yet that is incredibly hard to achieve – as the banking industry is proving. “The outcome,” he observes, “is regulation that is at once extensive and intrusive, yet ineffective and largely captured by vested interests.” He goes on to lament the growth of a ‘regulation industry – an army of compliance officers, regulators, consultants and advisers with an interest in the regulation industry’s expansion’.

A risk for contracts, commercial and legal staff is that they become sucked into this regulation racket and lose sight of their true role in value delivery. I agree with John Kay that the current environment cannot survive, because it is so far out of line with the public interest. We must ensure that we are active in defining and implementing the improved solution and do not find ourselves caught as the protectors of the old, inadequate risk and compliance regime. Because one thing is certain – top executives will very quickly move on to the new world and rapidly forget the people who were their friends in the former system.

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