Business performance assessments can be a powerful tool for determining the unknown drivers of performance; their effectiveness derived from the diverse knowledge and experience of the multidiscipline team and the vast amounts of information from causal evaluations, work performance observations, executive, manager, employee, and customer interviews, financial reports, independent analyst reports, performance measures, and condition reports leveraged to perform these assessments. So rich and robust are these assessments that their credibility often goes unchallenged, yet a single flaw in the business performance assessment’s initial execution can make this power tool for continuous improvement an instrument of disaster.
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Major changes in any established regulation cause great uncertainty and the recent revisions made to the financial industry’s governance are no exception. Indeed, the law firm of Davis Polk & Wardwell estimates that 243 new rules will be developed by 11 different government agencies as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.1 What is misleading, however, is the notion that the act focuses only on the financial services industry. In reality, this ‘financial reform’ represents a Washington power grab that extends far beyond the confines of Wall Street and will undoubtedly affect almost all Americans.
StrategyDriven questions whether these intrusions into non-financial sector areas will really help prevent future meltdowns like that which took place in 2008. The fact that other sectors are included simply broadens the span of government control and scope of market uncertainty which will further hinder economic recovery and growth as these other sectors must now also come to grips with the regulatory changes; changes that are not likely to be defined for years to come.
Service Providers
While StrategyDriven has already spoken out against the quota system enacted under Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we have not yet discussed the breadth of organizations covered by this rule. Under this provision, Congress and the President extended the regulation not only to financial institutions but to the many organizations providing services to these institutions. Service organizations named within this section of the regulation include accountants and providers of legal services.2
The Dodd-Frank Wall Street Reform and Consumer Protection Act also increases the legal liability of service providers; assigning them vicarious liability for the legal wrongdoings of their regulated financial institution customers. Specifically, the act:
imposes vicarious liability on any service provider processing consumer financial transactions as ‘aiders and abettors’ for operational support in some cases
encourages employees of shared service centers and outsourcers to file claims of violation so that they can reap a bounty in an enforcement case
makes mere ‘recklessness’ the equivalent of a ‘knowing’ violation of 1) the Securities and Exchange Act of 1934, 2) the Investment Company Act, and 3) the Investment Advisers Act of 1940
extends the extraterritorial jurisdiction of U.S. courts in enforcement of U.S. securities laws3
Non-Depository Institutions
In its attempt to be all inclusive in financial matters, Congress and the President provided the Bureau of Consumer Financial Protection regulatory authority over non-depository organizations such as payday lenders, debt collectors, and consumer reporting agencies. In these cases, the Bureau is provided the authority to prevent unfair, deceptive, or abusive acts or practices although the Dodd-Frank Act is vague about what this actually means. The Bureau also has the authority to “require reports, conduct examinations, require certain record-keeping requirements, prescribe other rules to ensure that such entities are legitimate entities and are able to perform their obligations to consumers.”4
It is of particular interest to note that several non-depository institutions and activities having at least an equally significant financial impact to consumers were expressly excluded from this regulatory oversight including real estate brokerage activities, accountants, and tax preparers.5
Publicly Traded Companies
Congress and the President reached far beyond the financial sector with the executive compensation regulations contained within the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many of these provisions appear to continue the Obama Administration’s challenge to the fairness of executive compensation. New rules regarding executive compensation include:
Say-on-Pay
Compensation Committee Adviser Independence
Compensation Committee Member Independence
Pay Disparity Disclosure
Pay versus Performance
Clawback6
It goes without saying that greater transparency contributes to greater accountability and that is a good thing. However, StrategyDriven questions whether employees in general or members of Congress and the President would themselves be willing to be held to these standards; particularly the say-on-pay, pay versus performance, and clawback provisions. It is also worth noting that no provisions of the Dodd-Frank Act directly address the awarding of large ‘golden parachute’ payouts to failed executives upon their departure.
StrategyDriven Recommended Practices
The significant marketplace uncertainty created by the Dodd-Frank Wall Street Reform and Consumer Protection Act will not end anytime soon – the need to define 243 new rules will see to that. It is clear the impact of this law extends well beyond the boundaries of Wall Street and that it is important for all company leaders to understand how their organization may be affected. In addition to our previously recommended actions, StrategyDriven suggests organization leaders:
Assess the new and heightened liabilities and administrative costs associated with their financial industry work against the rewards resulting from this work, particularly if they are service providers to the financial services industry; making adjustments to their businesses as appropriate.
Consider how the new executive compensation provisions will impact the organization’s ability to attract and retain top executive talent.
Evaluate the need to adjust the compensation structure of the entire executive team and potentially that of all employees in order to maintain overall equity and balance given the new executive compensation rules.
Final Thoughts…
While the purpose of this editorial was to focus on the non-financial sector institutions included in the so-called ‘financial reform’ act we would be remiss for not identifying the unconscionable absence of Fannie Mae and Freddie Mac from this legislation. These two institutions played such a significant role in the financial collapse of 2008 that it is unreasonable to think Washington politicians wouldn’t conclude that some change in the regulation of these mortgage giants was needed. The fact that payday lenders and debt collectors are included in the Dodd-Frank Act and Fannie and Freddie excluded from meaningful regulatory change (Fannie and Freddie received two minor mentions in the 1,500 page Dodd-Frank Act)7 suggests Congress and the President are either not serious about preventing a future financial system meltdown or had their interests better served by the omission. Either way, the American public lost in this deal – $135 billion in outstanding debt to the American taxpayer as of this editorial’s publication.8
In the coming editions of the StrategyDriven Editorial Perspective, we’ll look at the potential impacts of several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act including:
impacts of ‘too large to fail’ provisions on market risk
proportionately larger burden of the new law on small companies
As always, we’ll provide our thoughts on how business leaders can best prepare for the implementation of the financial reform law and weather the storm in the long-term. We also hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.
Final Request…
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Thank you again for listening to the StrategyDriven Editorial Perspective podcast!
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Yet this personal reconciliation was by no means the end of the road. The corporate “greening” initiatives of the late 1980s and early 1990s—pollution prevention and product stewardship—were important first steps. They shattered the myth that business should treat societal issues as expensive obligations. Instead, seen through the prism of quality and stakeholder management, these issues could become important opportunities for the company to improve its societal and operating performance simultaneously. A growing body of research pointed to the potential for enhanced financial performance through well-executed pollution prevention and product stewardship strategies. Pioneers such as 3M, Dow, and Dupont realized significant cost reductions and enhanced reputations as a result of their activities. The World Business Council for Sustainable Development, with its mantra of “eco-efficiency,” helped to erase the false dichotomy between business and environmental performance.
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Stuart L. Hart, author of Capitalism at the Crossroads, is the Samuel C. Johnson Chair of Sustainable Global Enterprise and Professor of Management at Cornell University’s Johnson School of Management. Professor Hart is one of the world’s top authorities on the implications of sustainable development and environmentalism for business strategy. He has published over 50 papers and authored or edited five books. His article “Beyond Greening: Strategies for a Sustainable World” won the McKinsey Award for Best Article in the Harvard Business Review for 1997 and helped launch the movement for corporate sustainability. To read Stuart’s complete biography, click here.
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Organizational Alignment, its benefits and how to get it took center stage when StrategyDriven Podcast Host, Nathan Ives, was featured on a recent episode of Robert Thompson’s Thought Grenades. During their discussion, Nathan, Robert, and Mike talked about the key principles and benefits of an aligned organization and the actions leaders need to take to establish and maintain such alignment. The dialog was rich in content and steeped with examples, including:
What is organizational alignment?
What are the benefits and bottom line value of having a well aligned organization?
If one visited a well aligned organization, what observable organizational and behavioral characteristics would readily observable and why are these important?
What programs and processes must an organization have in place and running well if it is to be aligned?
What actions to the leaders need to take in order to establish and maintain the workforce’s focus on achievement of the organization’s goals?
What is organizational accountability and what is its role in achieving organizational alignment?
What in your experience is one programmatic and one behavioral challenge that keeps organizations from achieving true alignment?
Each Monday at 1 pm Eastern / 10 am Pacific, Robert Thompson’s Thought Grenades provides rants and raves about current leadership issues and practical ideas to unleash the leader within. Click here to listen and learn about organizational alignment from three of today’s foremost leadership and management experts.
Want Nathan’s show note?Click here to download an outline of Nathan’s key points and thoughts on organizational alignment.
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Business Performance Assessment Program Warning Flag 3 – Conclusion Bias
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StrategyDriven Editorial Perspective – Expanding Uncertainty in the U.S. Financial Sector, part 3
/in StrategyDriven Editorial Perspective/by StrategyDrivenStrategyDriven questions whether these intrusions into non-financial sector areas will really help prevent future meltdowns like that which took place in 2008. The fact that other sectors are included simply broadens the span of government control and scope of market uncertainty which will further hinder economic recovery and growth as these other sectors must now also come to grips with the regulatory changes; changes that are not likely to be defined for years to come.
Service Providers
While StrategyDriven has already spoken out against the quota system enacted under Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, we have not yet discussed the breadth of organizations covered by this rule. Under this provision, Congress and the President extended the regulation not only to financial institutions but to the many organizations providing services to these institutions. Service organizations named within this section of the regulation include accountants and providers of legal services.2
The Dodd-Frank Wall Street Reform and Consumer Protection Act also increases the legal liability of service providers; assigning them vicarious liability for the legal wrongdoings of their regulated financial institution customers. Specifically, the act:
Non-Depository Institutions
In its attempt to be all inclusive in financial matters, Congress and the President provided the Bureau of Consumer Financial Protection regulatory authority over non-depository organizations such as payday lenders, debt collectors, and consumer reporting agencies. In these cases, the Bureau is provided the authority to prevent unfair, deceptive, or abusive acts or practices although the Dodd-Frank Act is vague about what this actually means. The Bureau also has the authority to “require reports, conduct examinations, require certain record-keeping requirements, prescribe other rules to ensure that such entities are legitimate entities and are able to perform their obligations to consumers.”4
It is of particular interest to note that several non-depository institutions and activities having at least an equally significant financial impact to consumers were expressly excluded from this regulatory oversight including real estate brokerage activities, accountants, and tax preparers.5
Publicly Traded Companies
Congress and the President reached far beyond the financial sector with the executive compensation regulations contained within the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many of these provisions appear to continue the Obama Administration’s challenge to the fairness of executive compensation. New rules regarding executive compensation include:
It goes without saying that greater transparency contributes to greater accountability and that is a good thing. However, StrategyDriven questions whether employees in general or members of Congress and the President would themselves be willing to be held to these standards; particularly the say-on-pay, pay versus performance, and clawback provisions. It is also worth noting that no provisions of the Dodd-Frank Act directly address the awarding of large ‘golden parachute’ payouts to failed executives upon their departure.
StrategyDriven Recommended Practices
The significant marketplace uncertainty created by the Dodd-Frank Wall Street Reform and Consumer Protection Act will not end anytime soon – the need to define 243 new rules will see to that. It is clear the impact of this law extends well beyond the boundaries of Wall Street and that it is important for all company leaders to understand how their organization may be affected. In addition to our previously recommended actions, StrategyDriven suggests organization leaders:
Final Thoughts…
While the purpose of this editorial was to focus on the non-financial sector institutions included in the so-called ‘financial reform’ act we would be remiss for not identifying the unconscionable absence of Fannie Mae and Freddie Mac from this legislation. These two institutions played such a significant role in the financial collapse of 2008 that it is unreasonable to think Washington politicians wouldn’t conclude that some change in the regulation of these mortgage giants was needed. The fact that payday lenders and debt collectors are included in the Dodd-Frank Act and Fannie and Freddie excluded from meaningful regulatory change (Fannie and Freddie received two minor mentions in the 1,500 page Dodd-Frank Act)7 suggests Congress and the President are either not serious about preventing a future financial system meltdown or had their interests better served by the omission. Either way, the American public lost in this deal – $135 billion in outstanding debt to the American taxpayer as of this editorial’s publication.8
In the coming editions of the StrategyDriven Editorial Perspective, we’ll look at the potential impacts of several provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act including:
As always, we’ll provide our thoughts on how business leaders can best prepare for the implementation of the financial reform law and weather the storm in the long-term. We also hope you’ll share your thoughts, lessons learned, and recommended resources with us and the StrategyDriven audience.
Final Request…
Thank you again for listening to the StrategyDriven Editorial Perspective podcast!
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Leadership Inspirations – Proper Preparation
/in Leadership Inspirations/by StrategyDrivenAbraham Lincoln (1809 – 1865)
16th President of the United States
Capitalism at the Crossroads – Beyond Greening
/in Management & Leadership, Strategic Planning/by Stuart L. HartBeyond Greening
Yet this personal reconciliation was by no means the end of the road. The corporate “greening” initiatives of the late 1980s and early 1990s—pollution prevention and product stewardship—were important first steps. They shattered the myth that business should treat societal issues as expensive obligations. Instead, seen through the prism of quality and stakeholder management, these issues could become important opportunities for the company to improve its societal and operating performance simultaneously. A growing body of research pointed to the potential for enhanced financial performance through well-executed pollution prevention and product stewardship strategies. Pioneers such as 3M, Dow, and Dupont realized significant cost reductions and enhanced reputations as a result of their activities. The World Business Council for Sustainable Development, with its mantra of “eco-efficiency,” helped to erase the false dichotomy between business and environmental performance.
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About the Author
StrategyDriven Podcast Host Featured on Robert Thompson’s Thought Grenades
/in Announcements/by StrategyDrivenEach Monday at 1 pm Eastern / 10 am Pacific, Robert Thompson’s Thought Grenades provides rants and raves about current leadership issues and practical ideas to unleash the leader within. Click here to listen and learn about organizational alignment from three of today’s foremost leadership and management experts.
Want Nathan’s show note? Click here to download an outline of Nathan’s key points and thoughts on organizational alignment.