Thursday, June 30, 2005

Globalization of Finance - continuted


Noa_NAmerica_Gnab
Originally uploaded by DCGaymer.
Globalization of finance industry will also promote consolidation of the industry, hence ending up only very large corporations can survive.

These large financial institutions enjoy informational economies of scale. These large corporations, due to their size, will have difficulties in controlling operation of branch offices. Due to the financial strength of these multinational large financial corporations the amount of money they manage will sometime exceed the money supply of a small economy which will affect the stability of the financial system globally.

These large corporations will also have sufficient bargaining power that may influence policy of World Bank, Asian Development Bank, IMF and the like. Poor and developing countries in many cases were forced to open up their market to international corporations before they are granted loans to help the economy and fight poverty.

Financial superpower also in some cases involves in politics and influence government polices which in many countries promote corruptions and expropriation of the general public (depositors or investors). Some of these large corporations, in order to gain political influence, have also involved in “black money” politics and lobbying using their financial strength.

(a) Globalization can bring about economics of scale for manufacturers with competitive markets, gains from international division of labour and brings new producers onto world markets.

(b) Globalization of finance suffers a principal/agent problem in that agent incentives are based on performance measures observable by their principal. This has promoted hedge funds and arbitrage at colossal volumes which has led to the collapse of Barings and LTCM etc.

Wednesday, June 29, 2005

Sister & Ah Leung's baby

Sister holding Ah Leung's baby it was Chinese New Year 2005

Globalization of Finance


Aussie dosh
Originally uploaded by Broken Piggy Bank.
Globalization of finance is harmful because it alters balance of power between regulators and large financial corporations being regulated. These large financial corporations will be able to evade regulator scrutiny and arbitrage between jurisdictions with a goal to conceal wealth.

Examples are tax heaven and the use of paper entities to evade liability. Profits are moved between accounting books from one country to another to avoid disclosure and escape tax. The arbitrage operation between jurisdictions require large financial corporations to create subsidiaries under their control in different countries which discourage average investors to fully understand the complicated accounts behind them.

Tuesday, June 28, 2005

Russia


anchor chains
Originally uploaded by Kalense Kid.
Other countries such as Russia used to have planned economy with state owned enterprises. They have gone through the same process of transformation as in China. However Russia had done it overnight which caused more damage than good. In the UK many industries were stated owned, e.g. railway, water supply etc. these stated owned companies have been operating with low efficiency and their staff take benefits they enjoyed for granted. UK had to privatize these large enterprises. At the end many UK government industries used to enjoy government subsidies and support ended up in foreign ownership.

Monday, June 27, 2005

What is the long term dangers?

The goal of the reform is for China to move away from centrally planned economy. Large conglomerates should eventually be owned by private shareholders and operate to commercial principles, i.e. only the fit one survives. This is the only way that large state owned enterprises can improve on productivity and compete with the outside
world. Subsidies and government protections, if not removed, will scare away foreign investments due to unfair competition. This will also generate disputes with China trading partners after joining WTO.
Furthermore there are opportunities for conglomerates to expropriate the state during the transition to private ownership therefore in the long-term this could lead to corruption. Political units will arbitrage between themselves for personal benefits or for their cronies who hold managerial positions. Such corruption is a high cost to the state.

Saturday, June 25, 2005

Is it good for political units in China to sponsor private entities?

During the transition and before the conglomerates can be reformed/re-engineered to conduct their businesses by commercial principles sponsorship by the state political units will ensure the "change" to conduct smoothly. The "change" will affect moral of staff, welfare as well as profitability of the conglomerates. In China originally state owned conglomerates can be very large with hundred of thousand of staff and their families (sometime even the
whole town, a small city) who have been well looked after by the provincial governments. If the "change" is not smooth social and political unrest will affect central government leadership.

Friday, June 24, 2005

How do we get the best of 2 worlds?

If the corporation is not listed then it's the duty of the banks who lend the money to restrict how the fund is used. If the corporation is listed then a good set of listing rules with full disclosure transparency and good enforcement is required to ensure that fund raised is properly used. Recognition of credit rating is also required such that investors and finance institutions are fully informed of the default risks they are exposed to. In short corporate governance is essential.

Thursday, June 23, 2005

What if the Manager is also the controlling shareholder?

In the case when the Manager is also the controlling shareholder he can then expropriate the minority shareholders and use the fund raised for his own benefits instead of for the better return of the corporation because he is not personally liable to default. In this case ownership and control are mixed and the Manager will not be an effective agent for other shareholder. Due to informational asymmetry he'll have opportunity to exploit for his own advantage.

Wednesday, June 22, 2005

Shareholder's limited liability for a corporation's debts is good?

In a risky environment normally investments are high risk high return. Banks are willing to lend money to corporations for higher yield. In such risky environment corporations are therefore tempted to borrow more for higher debt/equity ratio because shareholders are not liable to debts and their equity is relatively small compare to the possible return of investment. This is the only way to fuel economic development by limiting the downside risk of investor and use unlimited upside return to satisfy greed.

Tuesday, June 21, 2005

Where do you prefer to see the banks, at the top of the Pyramid or at the bottom?

Banking industry, comparatively, has more stringent control in developed countries. These regulatory measures if properly enforced will enable the Government and the general public to see how Banks are operated. E.g. in Hong Kong banks are not allowed (or discouraged?) to have major shareholding in corporations other than those directly related to banking or finance industries. Banks will be allowed to hold shares for a reasonable period if shares were acquired due to corporate debt restructuring but shares should be deposed of eventually. Whereas if the Bank is at the bottom of the pyramid expropriation is easy by related-party lending since the Manager of the Bank is controlled by controlling shareholders.

Monday, June 20, 2005

Can Expropriation be stopped by regulators?

Rules, if required to be set by a regulator, should be set to strike a delicate balance between economic growth and protection of minority shareholder interest. This balance is difficult to maintain. The "tightness" of these rules would also be different in different countries and culture. If the investors in a community is matured then better disclosure and transparency with good accounting practices and enforcement would limit expropriation of minority shareholders interest. Simply disclose everything and let investor and media to decide and monitor.

Saturday, June 18, 2005

Blog network


Left Wing Blog Network
Originally uploaded by p373.
If this is a network of companies, can you trace?

Should we ban cross holding between companies?

A ban for company holding shares in other company will prohibit the company to grow and restrict investment for the benefit of their shareholders. This will in turn restrict economic growth generally. Corporation should be allowed to invest in other businesses to balance their risks. A conglomerate with diversified interests in different type of businesses will be able balance risks of the portfolio of different trades/industries to ensure stable return of investment. Many industries require also vertical integration to stay competitive by reducing transaction costs and gain from economic of scale.

Friday, June 17, 2005

Suppose that A controls B and C. B controls D and C controls E.

(i) With crossholding between B and C that will reduce transparency, hence higher information asymmetry. If the Manager of the pyramid is also the controlling shareholder then he can also reduce his risk of personal portfolio for diversifying across B and C while retaining overall control of these companies.

(ii) For the pyramid structure one other aspect is to make sure Manager of these companies will also be under control by the company A.With crossholding between key companies at lower level of the pyramid under A's control this would ensure that decision made by these subsidiaries will not deviate from A's direction by a Manager in one particular subsidiary. Deviation from the A's corporate directive is only possible when many Managers of subsidiaries are acting in concert.

If the controlling shareholder in A has personal interests in B and C that pyramid structure is likely built for reason (i) If the crossholding between B and C are by way of company shares then it is likely that it is for reason (ii) Another way could be by examining dividend payout and the ownership/control ratio. However in the stock market there are many other factors that may affect dividend trend.

Wednesday, June 15, 2005

Pyramid



Originally uploaded by Caramdir.

Expropriation Using Corporate Pyramid

A corporate pyramid is the best way to use minimal amount of equity to control vast amount of assets. For a very simple example that a controlling company A at the top and it holds 2 subsidiaries B and C with A holding each of them only 10%. Repeat the same structure for another layer down then company A will be able to control 22 = 4 companies. Repeat this for the 3rd layer will enable company A to hold 23 = 8 companies. For 3 layers of simple 1 to 2 split, this will enable the controlling company A at the top to control 30 companies with only 10% of total equity. With minorities shareholders of these companies having no say in the operation of these companies, company A will be able to use inter-company trades and transactions to rip off minority shareholders. If company A is managed to sell overpriced product from the top to a 3rd layer company in the pyramid then the amount that can be expropriated will be X(1-OP) where OP is the Ownership Percentage, i.e. 0.14 = 0.0001 in this case, and X = overpriced amount. Therefore people tend to build complicated group structure to evade scrutiny by regulators for inter-company trading for expropriation purposes.

Tuesday, June 14, 2005

Leadership - relevant example at work

May be I am unlucky as I have not met a Level 5 Leader yet. In my organization I shall be lucky if any of our top executives could make it to Level 3. Company culture, nepotism, lack of vision and failure to see the need to be an expert beginner perhaps explain why most Chinese family owned enterprises are so difficult to "take off" to Greatness. Most companies that were originally a family owned start-up, grown big and listed do not have the integrity to put company objectives ahead of their own personal agendas. In some cases majority shareholders who are also managing the company mingle ownership with management which became major hurdle to capable managers to transform the company for better performance.

Monday, June 13, 2005

Conclusion

The rareness of a Level 5 Leadership is well understood. Finding someone who has the personality trait like a stoic and with paradoxical mix of personal humility and professional will is like finding a Saint in 21st century. Canonization while someone is alive is indeed rare in modern history. What are we after in fact? Are we saying if a CEO is not similis to one of those 11 Level 5 Leaders that company is not going to take off to greatness? Are we saying if a big corporation is led by one of those Level 5 Leaders will surely take off with better than average performance for 15 years? What circumstance will enable a Level 5 Leader to perform? What company's bad practices and organizational structure will hold back Level 5 Leaders? I think there are yet a series of related questions remained unanswered which Collins has not yet investigated into. Finding a gem does not mean you could make it shine. This is true especially for big corporation where making changes, shaping culture are not easy tasks for a willing individual but for a core team of near Level 5 executives.

Friday, June 10, 2005

Climbing to Greatness with Jim Collins - continued

Another interesting point is that the term "stoic resolve" has been repeated few times in Collins' articles. Stoic resolve was used to explain the Stockdale Paradox, the resolve to never give up no matter how strong the opposition. Stockdale Paradox is named after Admiral Jim Stockdale who was the highest ranking US military officer imprisoned in Vietnam. He was held in the "Hanoi Hilton" and repeatedly tortured over 8 years. Apparently Collins lunched with Stockdale and tried to find out how he survived the 8 years of torture. Here's how Stockdale put it. "I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade." According to Stockdale there were the optimists who did not make it at the end, he said "The optimists. They were the ones who said 'we're going to be out by Christmas'. And, Christmas would come and Christmas would go. Then they'd say, 'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. Then they died of a broken heart." "You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be." That was why in Collins article he keeps repeating the concept of "Facing the Brutal Facts" and separate probability from consequences. James Stockdale may be himself is a supporter of Stoicism as his profiles and article can be found in Stoicvoice

Thursday, June 9, 2005

Climbing to Greatness with Jim Collins

In this article by Art Kleiner, Jim Collins is being analyzed from Jim Collins' grandfather down to Collins' childhood in San Francisco's Haight-Ashbury district. Kleiner termed Collins' turn from a mathematical sciences graduate to an MBA student in Stanford as another "epiphany" (Kleiner may have the Christian meaning of this word in his mind). Collins' rock-climbing experience helped him talking off, said Professor Porras whom Collins studied Interpersonal Dynamics course with in Standard Business School.

Art Kleiner is also a business book authors who wrote "Who Really Matters – The Core Group" and "The Age of Heretics". Kleiner quoted Harvard Business School professor Morten Hansen saying that Collins' study aimed at Managers and best methods of academic research was followed. In fact Collins himself said he wasn't aimed at Manager at the beginning. It was the Chimps (Collins' research associates) who championed the inclusion of the Level 5 Leadership concept. Kleiner pointed out in this article that Collins' study led to a series of questions about virtue and when the 11 companies were singled out for in-depth analysis the key factors were found one of them being the Level 5 Leadership. Indeed Collins' methodology was uncommon. He didn't pick companies with continuous growth such as Coca-Cola, GE, Intel or even Microsoft. This possibly has made Collins' book stood out because most management books used stories surrounding glamorous companies like those mentioned above or charismatic leaders working for these companies to attract readers. Collins picked companies that took off suddenly after many years of flatten performance then 15 years of accelerated growth. One can tell the meaning of this from the choice of the verb "catapult" in Collin's 2001 article. In the description by Kleiner on how Collins managed to write his book "Good to Great" you will know Collins was doing what Nick Sagar did on "The Crew". Collins was determined to climb that rock (research and write the book) his way by having no faulty appointment and rejected punditry financing scheme of taking consulting jobs. $750,000 of Collins' own money was spent in the research and writing of his book "Good to Great" and while collaborating with Professor Porras the Collins couple lived in a small Palo Alto cottage on an annual income of $33,000. Kleiner also called Collins a perfectionist. The 7 key factors found by the Chimps were

  1. First Who….Then What

  2. The Stockdale Paradox

  3. A Culture of Discipline

  4. Technology Accelerators

  5. The Flywheel

  6. The Hedgehog Concept

  7. The Level 5 Leaders


Collins refused to get a Ph.D and he made no secret of his contempt for the specialization (he called them, the "churches") of management theory. Ironically the churches like Collins' idea as you can tell from the number of results you may get by putting "fallure + church" as your search texts in a Google search. Few churches and Christianity groups have quoted Collins' climbing experience as metaphor of life in their webpage.A few is listed below:

agcmcc.org
homileticsonline

Wednesday, June 8, 2005

Chimp


zoo 096
Originally uploaded by aracay.

Level 5 Leadership

The term "Level 5 Leadership" is the conclusion drawn on a 5 years (1996 – 2001) research led by Jim Collins. It was said a total of 1,435 companies have been examined, only 11 companies stood out from very stringent qualitative and quantitative analysis. The research pursued an answer to a question: can a good company become a great company and, if so, how? Collins originally gave explicit instructions to his "Chimps" (research associates) to downplay the role of top executives. However the answer to Collins' question seemed to have evolved itself in the result of the study, i.e. at the time of transition (taking off from good to great) those 11 companies that met the standard all had a Level 5 leader. Level 5 leaders have duality in personality: modest and willful, shy and fearless. Collins used example such as Abraham Lincoln and Gillette CEO M Mockler to demonstrate the necessary attributes of Level 5 leaders which are paradoxical mix of personal humility and professional will. One very distinguishable difference between great companies and other comparison companies is best described as "the Windows and the Mirror". Level 5 leaders running great companies are inherently humble so they would look out the window to apportion credit; if they couldn't find a specific person or event they credit good luck. When things go bad Level 5 leaders look at the mirror to assign responsibility to themselves, never citing bad luck or external factors. Collins hypothesized that you either have Level 5 seed in you or you don't. If you have Level 5 seed you may still need an exceptional life experience such as caner, 8 years imprisonment as POW or religious belief etc to nurture the seed. There is no weekend crash course or things like ten steps to Level 5. However the message is clear, i.e. despite the odds you must commit to ascend then you will succeed without reaching the top.

Tuesday, June 7, 2005

Blogger is talking

Today I was flattered to have received an email from Blogger.com who was responding to my complaint about Blogger's problem. This is what I have said in my reply.

Dear Sxxxxxxe,

It's so warm that I get reply from a human.

I use firefox and my blog is one of the home pages that I would open. Every morning I start firefox at round 9:30am Hong Kong time. During the last 2 weeks perhaps I have only 1 day with my blog successfully opened.

Almost everytime I tried status.blogger.com but it disappointedly failed. At the time of this writing both my blog and your status page can't be read.

Interestingly in the last few days I have asked my sister in Malaysia to view my blog, it was OK in most days.

I think you may have a technical problem somewhere that your internet load balancing has put Hong Kong in low priority during your US night time. It's understandable that Blogger has scheduled shutdown and maintenance during those hours.

I have read newsgroups and others and found that I'm not the only one feeling this frustration. Blogger must put this right quick.

On becoming an expert beginner

Collins used climbing again to explain one thing, i.e. the world is evolving and things have changed that most people who thought they have mastered what they have been doing do not often see changes. Although Collins has been a climber for 25 years he explained how challenging routes differed in today's sport and he had to learn freshly from a coach in order to grow as a better climber. This is the sort of mistakes being made by a lot of veteran Managers. Their reaction to problems is normally by answers already in their head instead of a clear mind led by smart questions. Collins believes that any creative or entrepreneurial endeavor requires the precision of a scientist and the wonder of a child. Collins also uses a story on Sam Walton of Wal-Mart to demonstrate the importance of life time learning and humility.

Monday, June 6, 2005

Rock Climbing


Daddy Cool Crack - the full view
Originally uploaded by Adski.
Photo from Flickr

Hitting the walls - continued

The concept behind each of these lessons was further elaborated with climbing experience and a real life example in his book.

Fallure, an invented jargon for climber may be, is a bit of wordplay derived from a decision that rock climbers make if they know they cannot complete the route they have chosen for a climb. They allow themselves to fall, knowing that the bolts attached to the side of the rock face through which their climbing ropes are threaded will break their fall. In fallure, a climber still fails to get up the route, but he or she pushes to the ultimate limit. Fallure means a climber made a commitment to make the ascent, despite the odds. See more at Leadership.

Saturday, June 4, 2005

Hitting the walls

Collins used the story of Nick Sagar to demonstrate the attitude of "never give up". Climbing (the kind of sport or endeavor is not relevant) is not really about climbing but a metaphor for life. Reaching the top/goal or not did not matter but the lesson learnt in the process is far more important for life long learning. The Sagar's goal to conquer "The Crew" has also another meaning which is that once you set your target there are necessary sacrifices, i.e. in the case of Sagar, he lived on small sponsorship and had to give up his quest when the money failed to come through.

Collins is an avid climber himself. He used his lessons learnt in climbing to map into other aspects of life, e.g. business, management, leadership etc. He summarized what he learnt into these 5 key lessons in life.



  1. Climb to fallure, not failure: Succeed without reaching the top

  2. Climb in the future: Frame your mind

  3. Separate probability from consequence: Know the true risks

  4. Form the Partner's Pact: First Who, Then What

  5. Don't confuse luck and competence: How to not let success kill you

Commentary on Collins' article

I'm going to post my assignment here, bit by bit each day, about few articles I read and wrote about on Jim Collins about Leadership.

Friday, June 3, 2005

Blogger is getting better

Looks like that Blogger is getting better and is recovering slowly. After a day or so of searching lots of people are aware of Blogger's reliability problem. I think I'll try paid hosting later and WordPress. Enemy's statement of defence and counterclaim has just arrived before I left office, looks like I'll be busy for couple of weeks.

Wednesday, June 1, 2005

The Blogger server is asleep again

Oh no the server is sleeping again. Wonder why its sleep hours is always our day light hours, may be they'll get less complaint from US users. Wake up quick Blogger.