InBusiness Issue 19

Functional stupidity Who’s in charge?

How the most intelligent Heading up professional employees are leaving service firms can present common sense behind unique challenges

Turning off the tap The stream of M&A leaks is running dry for City journalists

Issue 19

Say hello to your new stockbroker

How monkeys could outperform the financial experts

InBusiness Issue 19 Summer 2013

Contents 04

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The latest news and events from Cass

M&A leaks have become more of a trickle for City journalists

Snapshots

06

Who’s in charge here?

The challenge of establishing leadership in professional firms

10

We’re with stupid

Smart brains can still make big mistakes, according to Cass research

14

Monkey business

How indices randomly created by monkeys could conceivably outperform the FTSE 100

18

Where’s the beef?

Are canny marketing campaigns preventing us from choosing healthy produce over junk food?

20

Sail of the century

New Cass index gauges the mood of investors to predict tomorrow’s ship prices

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A welcome from the Dean

A watertight case against leaks

28

A winning formula for turbulent times

F1 provides a fascinating insight into successful corporate strategy

Opinions leadership special

32

Education, education, education... for MPs

They may be good at teaching lessons in leadership, but our politicians need training too

33

Sandhurst: lessons in leadership?

The Army’s officer training academy could help create more effective managers

34

Get out and about and be a winner

Networking should take place both up and down the corporate ladder

Back to root and branches

Charlotte Hogg is the outgoing head of Santander’s UK branch network and new COO of the Bank of England

Business schools are often criticised for putting academic rigour before relevance in their research. But as this edition shows, Cass research produces practical, real-world insights for managers.

In our cover story, Monkey Business, we enlist the stockpicking expertise of ten million primates to expose fundamental flaws in a popular investment strategy.

The study reveals how millions of investors would be better off tracking alternative share indices instead of a traditional index, such as the FTSE 100. Using more than 40 years of stock market data, and some clever analysis, the study’s authors offer intriguing insights for small and large investors alike.

Also in this edition, all firms need to innovate if they are to thrive. Yet a recent Cass

investigation suggests that pursuing radical innovation can actually be detrimental to an organisation’s performance. We study the twists and turns of technical innovation in Formula 1 racing and ask whether there is a right – and wrong – time to change.

And finally, forget complex economic theories: was the financial crisis the result of plain stupidity? We examine a new Cass theory which argues that some organisational cultures unintentionally encourage intelligent employees to leave logic at the door.

Enjoy this edition.

Professor Steve Haberman

Cass Business School In 2002, City University’s Business School was renamed Sir John Cass Business School following a generous donation towards the development of its new building in Bunhill Row. The School’s name is usually abbreviated to Cass Business School.

Sir John Cass’s Foundation Sir John Cass’s Foundation has supported education in London since the 18th century and takes its name from its founder, Sir John Cass, who established a school in Aldgate in 1710. Born in the City of London in 1661, Sir John served as an MP for the City and was knighted in 1713.

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InBusiness is produced by Cass Business School’s Corporate Marketing and Communications team. If you have any feedback, email cass-marketing@city.ac.uk

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InBusiness | Issue 19

04 | News and events What’s been happening at Cass

Snapshots

Cass Knowledge Access research for business www.cassknowledge.com

Cass Talks Hear our experts’ views www.cass.city.ac.uk/casstalks

What’s been happening at Cass? Here’s a round-up of the latest School news.

Leading from the front Cass has launched a new Masters in Leadership taught partly from the Royal Military Academy Sandhurst. The two-year, part-time course is a joint venture between Cass’s Executive Education team and the leadership and business performance consultancy, Inspirational Development Group (IDG).

“The syllabus aims to ready high-potential managers for the complex challenges of senior executive and board-level roles,” said Professor Colin Carnall, Director of Cass Executive Education. “It combines rigorous academic study with intensive leadership training. Managers won’t just study leadership, they will practise it.”

Stephen Bennett, CEO of IDG, said: “Our Masters programme provides the guidance and support required to develop the practical leadership skills and personal qualities a senior leader in a business needs.” www.cass.city.ac.uk/mscleadership

From left to right: Professor Roy Batchelor, Cass Business School; Roy Leighton, Cass MENA Advisory Board; Dr Sionade Robinson, Cass Business School; His Excellency Abdulla Mohammed Saleh, Governor of DIFC; His Highness Sheikh Ahmed bin Saeed Al Maktoum; Professor Paul Curran, City University London; Ehsan Razavizadeh, Cass Business School; Professor Steve Haberman, Cass Business School

Honorary doctorate for Dubai Sheikh A member of Dubai’s ruling family, His Highness Sheikh Ahmed bin Saeed Al Maktoum, President of the Dubai Civil Aviation Authority, Chairman of Dubai Airports and Chairman & Chief Executive Emirates Airline Group, was presented with an honorary degree at the Dubai Executive MBA graduation ceremony in May. The ceremony was held at Dubai’s DIFC Conference Centre

under the patronage of H.H. Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, Deputy Ruler of Dubai and President of DIFC. H.H. Sheikh Ahmed received the honour in recognition of his outstanding role in developing the UAE’s aviation, finance and banking sectors.

Ehsan Razavizadeh, Cass Regional Director MENA, said: “We were honoured to welcome

His Highness Sheikh Ahmed to preside over our 2013 graduation ceremony and to bestow on him an honorary degree. The Cass Dubai EMBA continues to attract talented, multilingual students from around the world as demonstrated by the 17 nationalities represented by this year’s graduates.” www.cass.city.ac.uk/dubaigrad2013

New Cass campus Cass will begin teaching its Executive courses from a new campus in London’s financial heartland from September.

The site, opposite the Museum of London at 200 Aldersgate Street, will offer exclusive teaching facilities for the School’s Executive Education, Executive MBA and Modular MBA programmes. Cass’s Consultancy and Enterprise team An artist’s impression of how the reception area of Cass’s new Executive campus will look

InBusiness | Issue 19

will also be based there.

The new campus – a ten-minute walk from Bunhill Row – will offer high-tech teaching spaces, social areas and a café. It forms part of the School’s plan to expand its Executive Education programme and provide dedicated space for EMBA students. www.cass.city.ac.uk/campuslaunch

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Cass events Register for forthcoming events www.cass.city.ac.uk/events

Cass in the news Keep updated with news from Cass www.twitter.com/cassinthenews

Cass connection Stay connected with Cass www.facebook.com/cassofficial

Global alumni get together Hundreds of former Cass students from across 28 countries joined up to celebrate the 2013 Alumni World Forum.

More than 400 took part in the main event at Bunhill Row with a further 450 staging events in countries such as Australia, Hong Kong and the US. The forum brings together some of Cass’s 36,000 alumni to network, share ideas and hear from worldclass thinkers.

Cass alumnus Liu Mingkang, former chairman of the China Banking Regulatory Commission and an Honorary Professor at the Chinese University of Hong Kong Business School, led the main event in London with a debate on the future of the renminbi. The debate was streamed live to seven countries, including Canada, China and India. www.cass.city.ac.uk/renminbi From left to right: Stephen Welton, British Growth Fund; Richard Anton, Amadeus Venture Capital; Professor Paul Curran, City University London; Dr Caroline Wiertz, Cass Business School; Sarah Wood, Unruly

City Unrulyversity pops up

From left to right: Professor Jo Silvester, Cass Business School; Dr Robert Davies, Cass Business School; Dr Amanda Goodall, Cass Business School; Greg Clarke, The Football League; Professor Cliff Oswick, Cass Business School

Extra fizz for undergraduates A new $528,000 undergraduate scholarship has been launched thanks to support from The CocaCola Foundation.

The scholarship, known as The Coca-Cola Scholars Programme, will offer eight students fully funded places across Cass’s business, management and finance degrees.

The four UK and four international students will receive full tuition fees

and a living allowance.

Cass Dean, Professor Steve Haberman, said: “We are delighted to join up with one of the world’s most recognised brands to help talented students continue their education and kick-start their careers.”

Muhtar Kent, Chairman and Chief Executive of The Coca-Cola Company, is a Cass alumnus.

A free ‘pop-up’ university has been launched to deliver business education to start-ups in London’s Tech City.

City Unrulyversity is a joint venture between Cass, City University London and the social video company, Unruly.

Academics from Cass and City University London are delivering bite-size sessions to start-up companies on topics ranging from building apps to raising venture capital.

Tech City is a cluster of innovative

technology start-ups around Old Street roundabout on the edge of the City of London. The sessions aim to offer Tech City entrepreneurs practical advice and networking opportunities.

“We are committed to taking an active part in the growth of Tech City and have much to offer,” said Professor Paul Curran, Vice-Chancellor of City University London. www.unrulymedia.com/cityunrulyversity

Learn to master wealth management A new part-time Masters in Wealth Management is starting in September this year.

The programme is for students holding the CII Advanced Diploma in Financial Planning or the CISI Masters Programme in Wealth Management.

It offers CII and CISI members a fast-track route to enhancing their qualifications with a Masters degree.

They can opt to complete the course in a year or 15 months.

Professor Andrew Clare, Associate Dean of Cass’s MSc Programme, said: “This course aims to take experienced professionals to the next level in their learning and careers.” www.cass.city.ac.uk/ wealthmanagement

InBusiness | Issue 19

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I am!

I am!

I am!

Me too!

I am!

Isn’t it you?

I thought it was you!

I am!

IMAGE BY THINKSTOCK

InBusiness | Issue 19

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It’s me!

Who’s in

charge here?

Lawyers, accountants, management consultants – heading up a firm of top professionals presents unique challenges, according to a major new study by Professor Laura Empson. Caroline Scotter Mainprize reports.

I am!

InBusiness || Issue Issue 19

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Feature Leadership dynamics

E

mpson: Who is in charge here?

Senior Partner: (Pause) Well I suppose I am, I mean in a way, I mean I think, but it’s difficult to answer that question.

Empson: Who is in charge here?

Managing Partner: Hmmm. You want one name or you want…?

Empson: I just want your view of what the truth is.

Managing Partner: (Pause) I think it’s the two of us actually. We rarely disagree. It’s instinctive.

Leaders, by definition, must have followers. At least, that is the conventional assumption. But in an organisation filled with highly educated, independent thinkers, who don’t much like being told what to do, finding people who are happy to identify themselves as “followers” is not going to be easy. What, then, does leadership actually mean in this context and how is it possible to lead effectively?

Cass Business School’s Professor Laura Empson has been looking at this issue in an innovative research study, funded by the Economic and Social Research Council of Great Britain, on leadership dynamics in professional service firms. She argues that, while leadership in the conventional sense may not be immediately apparent within a professional service firm, it does in fact permeate all aspects of professional work and all levels of the firm. However, it needs to be thought about rather differently from leadership in conventional hierarchical organisations.

Professional service firms (such as consulting, law and accounting firms) are traditionally structured as partnerships, or as corporations that mimic many of the characteristics of partnerships. Their distinctive leadership challenges are based on two, interrelated organisational features: firstly extensive individual autonomy, and secondly contingent managerial authority.

Leading by consensus

Experienced professionals require, or at least expect, extensive individual autonomy. This autonomy is justified by the requirement for professionals to make choices about how best to apply their expertise as part of a customised professional service.

InBusiness | Issue 19

Leadership Constellation

Heads of Business Services

Heads of Businesses

Senior Executive Dyad

Key Influencers

Source Empson, 2012 ILLUSTRATION AIMÉE BASSON

The core value-creating resources of a professional service firm – the technical knowledge and client relationships – are often proprietary to specific professionals.

This emphasis on individual autonomy is associated with contingent managerial authority.

Professional service firms are often privately owned by the senior professionals who work within them.

Professionals elect their peers to the most senior leadership positions and can depose any leaders who fail to retain their support. As a result the formal authority of senior executives in professional service firms is limited; they can only lead by consensus.

A particular irony of professional firms is that accepting a leadership position potentially entails losing

power. In organisations, power comes from controlling access to key resources. In a professional service firm the most valuable resources are specialist professional expertise and lucrative client relationships.

An individual who takes on a major leadership role in a professional firm necessarily reduces their fee-earning work. By reducing their front line client work, they will struggle to maintain cutting-edge professional expertise. They risk exchanging their valuable assets for a title which brings with it very little formal authority and a great deal of responsibility.

Process of interaction

According to Professor Empson, this means that leadership in a professional service firm needs to be

conceptualised differently from conventional organisations. It needs to be understood as both processual and plural. In a professional service firm leadership is not necessarily something that an individual does or a quality that an individual possesses, but is a process of interaction among organisational members seeking to influence each other. This can be understood in terms of the concept of the Leadership Constellation.

Professor Empson argues that, in the context of a professional service firm, the members of the Leadership Constellation are: Senior Executive Dyad – typically a managing partner and senior partner, or chairman and chief executive.

Heads of Businesses – leaders of major fee-earning areas such as

specific practices, offices, and market-sector groupings.

Heads of Business Services – responsible for support functions such as Finance and Human Resource Management.

Key Influencers – have power derived from control of key client relationships, valuable expertise or a strong internal and external reputation.

Leadership is represented by the arrows that connect the members of the Leadership Constellation (i.e. the processes of influencing) as much as by the circles representing the leaders themselves.

The research study is based on detailed empirical analysis, including more than 100 interviews, into the leadership dynamics in three elite professional service firms. The case study firms were drawn from the consulting, accounting, and legal sectors, and each firm was ranked in the top four within its respective sector. Data collection and analysis is ongoing but already some intriguing insights are emerging.

Hidden dynamics

“What I found is complex, subtle and fascinating,” said Professor Empson.

“It is about the hidden power dynamics, about interpersonal processes, about longstanding loyalties and rivalries, the things that people never like to talk about or acknowledge to each other within a professional service firm.”

Focusing here on just one of the firms, the study identified a highly ambiguous authority structure, which is manifested in four ways.

First, the roles of the Senior and Managing Partner are not defined.

Second, the Board officially has oversight of the executive, but some of its members also perform executive roles. Third, each of the four major practice areas has two or three joint heads. Fourth, while the Partnership Agreement includes provision for an Executive Committee, this has never been established formally. Instead an informal ’management team’ exists whose composition and role is fluid and ambiguous.

Resolving conflict

As one senior business services staff member explains: “I think why we have this confusion around the management team, who’s in it and

who’s really important, is because we can’t quite bring ourselves to say, ‘actually you’re small fry in the general scheme of things’, because he’s my partner, he is my equal, and so that’s where we fudge things and we have lots of distribution lists and then things go wrong and there’s an embarrassment and everybody gets a bit cross.”

The professionals can function effectively with this profoundly ambiguous authority structure because many have worked together for years and built up close working and personal relationships. As one interviewee explained: “There is a sort of gentlemanly approach to resolving conflict. There is a bit of ‘let’s not go there, we’ll gradually sort it out and it will gradually get better’.”

But what happens when there is no time to gradually sort things out or wait for things to get better?

The study found that, confronted with the fall-out of the global

“... it is possible for a leader with no constitutional authority to wield considerable power under the ‘cloak of ambiguity’... individual leaders may actively construct... this ambiguity if they are... skilled at navigating it effectively.” banking crisis, the Senior and Managing Partner at one of the firms realised that the partnership would need to shrink. However, they did not have any authority to ask partners to leave without a full vote of the partnership.

The Senior and Managing Partner, together with six of their closest colleagues, decided to proceed with a partnership restructuring but to keep deliberations confined to a select group of senior executives within the

firm. In the process a hidden hierarchy was revealed within the ambiguous authority structure – and the leadership constellation became manifest.

Partnership restructuring

Selected Practice Heads began the process of identifying which partners should be asked to leave or accept a reduction in their equity. Over a five-month period they repeatedly cycled through a process of analysing, challenging, recommending and rejecting each other’s recommendations. The number of people involved in these discussions progressively expanded, with the Senior and Managing Partner co-opting an ever-increasing number of partners and management professionals into this secret process.

After five months of repeated cycling and progressive co-option, the small group of eight who had originally embarked on the restructuring process had expanded to 50. Fifteen per cent of the partners were asked to leave or accept a reduction in their equity and all accepted the terms offered to them.

The remaining 85 per cent of partners accepted that this decision had been made without any recourse to the partnership as a whole.

As Professor Empson observed, “This suggests that it is possible for a leader with no constitutional authority to wield considerable power under the ‘cloak of ambiguity’.

It is perhaps not surprising that individual leaders may actively construct and celebrate this ambiguity if they are particularly skilled at navigating it effectively.”

She also pointed out that, “somewhat ironically”, a plural model of leadership depends ultimately for its successful functioning on individual leaders.

Though the individuals in the study would adamantly eschew the rhetoric of ‘heroic’ leadership, their colleagues are clear that the skills of these individuals were fundamental to the success of the initiative.

As one Board Member reflected: “[The Senior Partner] managed to bring a tricky group of people to unity over the course of two months. The way he executed the delivery was exemplary.

It was his finest hour.”

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What makes an effective leader in a professional service firm?

So what sort of leader can effectively negotiate their way through the ambiguities and social structures of a professional service firm? During the course of the research, Professor Empson has identified ten qualities that the most effective leaders share: • Highly respected for his or her skills as a professional • Does not appear to be seeking power • Able to inspire loyalty and commitment • Strong personal vision – able to communicate it • Able to build consensus and act decisively • Transfers responsibility but intervenes selectively • Comfortable with ambiguity and conflict • Spends a lot of time massaging egos • But does not expect to have his or her own ego massaged • And above all, the ability to identify and navigate the Leadership Constellation.

Caroline Scotter Mainprize is a writer on management issues. She can be contacted at caroline@csmcommunications.co.uk For the full research report, see www.cass.city.ac.uk/cpsf or contact Robert Whitelam for further information at robert.whitelam.1@city.ac.uk The research is funded by the ESRC. www.esrc.ac.uk

InBusiness | Issue 19

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Feature Functional stupidity

ILLUSTRATION ROGER PENWILL (WITH APOLOGIES TO GARY LARSON)

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We’re with

stupid The most intelligent workers often make the stupidest mistakes, but there are ways to beat corporate brain failure, according to Cass research. Ian Wylie reports.

A

lbert Einstein is best known as the absentminded genius who gave us the theory of relativity, but he also developed a more humorous hypothesis of human foibles: “Only two things are infinite,” he concluded, “the universe and human stupidity… and I’m not sure about the former.”

Stupidity chimes with many anecdotal reports of corporate life, from Henry Ford’s refusal to listen to minions who said he should update the Model T, to Coca-Cola’s launch and subsequent withdrawal of New Coke in 1985.

And organisational cultures that unintentionally encourage stupidity may have contributed to the current financial crisis, according to André Spicer, Professor of Organisational Behaviour at Cass, and Mats Alvesson, Professor of Business Administration at Lund University in Sweden, whose theory of “functional stupidity” aims to explain how intelligent and knowledgeable employees often leave logic at the office door.

A Stupidity-Based Theory of Organizations, their new paper for the Journal of Management Studies, suggests organisations that make a virtue out of the cleverness of their staff and sell intangible services – accountancy firms, consultancies, banks – are particularly prone to stupidity, assuming that their intelligent staff act logically yet at the same time incentivising rash behaviour based on intuition rather than deliberation.

Professors Spicer and Alvesson have spent years studying knowledge-intensive workplaces: research and development labs, management consultancies and even schools, where the nuts and bolts of what key employees handle is knowledge. “The mantra of the ’90s was, if you want to be competitive, work out what your unique knowledge is and harness it,” says Professor Spicer.

He points to the weighty body of research on organisational knowledge, information, competence, wisdom, resources, capabilities, talent and learning that has emerged in

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Feature Functional stupidity

recent decades. “Once inside these organisations we discovered that, yes, there were lots of very smart, intelligent people with degrees and PhDs from top universities, but when we looked at how they behaved and used that intelligence day-to-day, it seemed to be highly limited. They were either using intelligence in myopic ways, or doing things that were downright stupid and didn’t make much sense. And when they stood back and looked at it, they admitted that this was the case.”

Professors Spicer and Alvesson came across management consulting firms, for example, which would recruit top university graduates, only to have them spend their first few years inputting data to Excel spreadsheets and PowerPoint slides.

The financial crisis prompted them to take a closer look at whether evidence and literature pointed to some kind of organisational stupidity.

“When we were interviewing people inside some of these organisations, many would say, ’This is just stupid’,” recalls Professor Spicer. “We disregarded it at first as

just a sign of exasperation, but as we did some additional reading around the topic, we realised there was quite a history of philosophers trying to figure out why humans are often determined by their stupidity.”

Non-rational or irrational decision-making in organisations has fascinated Nobel prizewinners for decades, from Herbert Simon’s theory of bounded rationality (the rationality of individuals is limited by the information they have, the cognitive limitations of their minds and the finite amount of time they have to make a decision) to Daniel Kahneman’s discovery that when we process information, our brains interchange between two different systems: deliberative processing and intuition, our default position in daily life.

But Professors Spicer and Alvesson believe these works miss a set of deviations from smartness, which are neither semi-rational nor purely stupid. Functional stupidity in organisations, they reckon, is demonstrated by the absence of three processes: reflexivity, justification and substantive reasoning,

Case Study 1: HBOS

The not-listening banks A report this year revealed the cause of the near-catastrophic collapse of one of Britain’s largest banks.

HBOS, which had joined the race for growth during the boom years of the early 2000s, was bailed out by taxpayers in 2008, at a cost of £20 billion.

The HBOS report, by the Parliamentary Commission on Banking Standards, focused its criticism on the incompetence of Lord Stevenson, the former Chairman, and two former Chief Executives, Sir James Crosby and Andy Hornby.

Ian Fraser, a financial journalist who is writing a book on the Royal Bank of Scotland, says: “Insiders used to think James Crosby was hyper-intelligent. But perhaps the reason he seemed an intellectual giant was that those around him were intellectual pygmies.”

InBusiness | Issue 19

Paul Moore, who was fired as Head of Group Regulatory Risk in 2004 after warning that HBOS was taking excessive risks, told the commission there was a “threatening” culture with executives “resistant to challenge” from risk managers.

“Many organisations look to staff only for good news and are very poor at dealing with criticism,” says Professor André Spicer. “A common refrain in many of the recent reports on the banking crisis is that junior employees censored information as it filtered upwards. There was an expectation that people lower down the chain should solve problems themselves. So when they came across something insoluble they played it down because they didn’t want to anger their bosses.”

Lack of reflexivity means an inability or unwillingness by employees within an organisation to question its dominant beliefs, norms and expectations. For instance, employees may not consider or question organisational morality because “what is right in the corporation is what the guy above you wants from you”. And this suppresses an employee’s capacity to use reason.

Lack of justification entails employees neither demanding nor providing reasons and explanations.

This allows practices to be accepted without any significant critical scrutiny. For example, organisations will often adopt new practices with few robust reasons beyond the fact that they make the company “look good” or that “competitors are doing it”.

The final warning sign of functional stupidity, a lack of substantive reasoning, happens when the focus is on achieving a given end, while ignoring the broader substantive questions about what that end actually is. For instance, an accounting firm may compress a broad range of issues into recordable numbers, but ignore many of the more substantive debates around what those numbers represent and the moral implications associated with using them in decision-making.

This is a form of stupidity, say Professors Spicer and Alvesson, because it halts reasoned investigation and consideration of the implications of actions.

“Our argument is that stupidity is different from irrationality,” says Professor Spicer. “Irrationality is an outcome, but stupidity is a process.”

There are several steps, say Professors Spicer and Alvesson, that organisations can take to escape the functional stupidity trap. In knowledge-intensive workplaces, for example, organisations can be more specific about desired outcomes, and give employees greater responsibility for and ownership of outcomes.

“Think of architects who used to work with physical models, but now do almost everything by computers,” says Professor Spicer. “Organisations should redesign their processes to bring back tangibility to the work being done.”

Secondly, Professors Spicer and

Alvesson say organisations must encourage employees to step back and ask reflexive questions, allow for devil’s advocates and remove taboos (and threat of punishment) from the airing of criticism. They argue that corporate strategy must move beyond meaningless mission statements. “If organisations were more honest about the substantive work they do, and that was reflected in the goals they set, that would help give more substantiveness back to the workplace,” says Professor Spicer.

And finally, the two academics make a plea for organisations to value expertise once again. “What strikes me when I examine many of the grand failures of the last few years is that financial market experts were marginalised and discouraged from giving their opinions,” says Professor Spicer. “There has been a degradation of professionalism in many organisations, with professional knowledge being used in only the most narrow of ways.”

He points to research by Dr Amanda Goodall, a Senior Lecturer in Management at Cass, whose study showed that Formula 1 team bosses who started out as drivers or mechanics won twice as many races as their rivals. “Or consider what makes Michelin three-star restaurants maintain excellence over long periods of time – it’s the chefs who started right at the bottom, cleaning the pots and pans.”

Leaders who know – really know – how their organisations create value will be less likely to lead their employees into functional stupidity, say Professors Spicer and Alvesson.

Ian Wylie is a freelance journalist.

He can be contacted at ianjmwylie@gmail.com For further information on the research, contact Professor André Spicer at andre.spicer.1@city.ac.uk

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Case Study 2: Unruly Media

The first rule is to share How can you guard against functional stupidity? Or create a culture where challenge is welcomed?

Unruly Media, a fast-growing video technology company based at London’s Silicon Roundabout, helps big brands track and improve the impact of their online videos.

Employees work under a peer review system. Sarah Wood, a co-founder, spoke to InBusiness: InBusiness: Functional stupidity describes smart, intelligent employees making stupid decisions.

How does Unruly Media try to avoid that?

Wood: We use project squads to ensure we bring together the right people to focus on key outputs. We also have a Pioneer initiative, where volunteers stay up-to-date on special interest topics and then share knowledge with the rest of the company.

We also make full use of global knowledge sharing and collaborative tools, such as our own wiki, Yammer and Google docs. It’s important, too, to create space and

time for everyone across the company to suggest ideas.

InBusiness: How does the peer review system work?

Wood: We use pairing across many teams to ensure knowledge is shared. We also have two people reviewing key deliverables, from coding and campaign delivery to managing Unruly events and employment contracts. The main challenge is keeping the bar high enough on recruiting the top talent who are able to produce consistently strong results in a collaborative way.

InBusiness: Is your way of working unique to your context?

Wood: No – other organisations can adopt these working practices too.

We have introduced these methods across a variety of teams and have adapted them as appropriate. The main thing is to keep visibility on decision-making and ownership of results. It’s important then for teams to keep checking back in on progress, reviewing what’s going well and what needs to change, and supporting them to update as they wish.

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Feature Market capitalisation

Monkey business Is it worth tracking benchmark indices such as the FTSE 100, or would an alternative index created randomly by monkeys produce better returns? A Cass team found some surprising answers, writes Simoney Girard.

IMAGE BY iSTOCKPHOTO

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M

ost people are aware of the so-called infinite monkey theorem, which states that a monkey hitting keys at random on a typewriter keyboard for an infinite amount of time will eventually replicate the entire works of William Shakespeare.

Mathematicians thrive on statistical theories such as this and gamblers hope that random combinations of numbers will enable them to live in luxury. But could random combinations not only achieve a stated goal, but do so almost ten million times a year for 43 years?

The answer is yes, according to research by Andrew Clare, Professor of Asset Management, Dr Nick Motson, Lecturer in Finance, and Steve Thomas, Professor of Finance, a Cass team that set out to find whether investments following randomly

constructed indices could outperform traditional market-cap weighted indices such as the FTSE 100, and whether investors could be best served by using nontraditional indices.

The study*, commissioned by the consultancy Aon Hewitt, comprised two series of experiments: part one focused on heuristic and optimised weighting schemes, and part two focused on fundamental weighting schemes.

Most stock market indices around the world are constructed according to market capitalisation; that is, their larger components carry a larger percentage weighting. It is the simplicity of these indices that has made them so popular with investors.

Passive tracking

The research team set out to establish whether passively tracking a market-cap index did indeed

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Feature Market capitalisation

produce the highest possible returns.

A sample of 1,000 companies with traded equities was used.

Professor Clare says: “We programmed a computer to randomly pick and weight each of the 1,000 stocks in the sample; we effectively simulated the stock-picking abilities of a monkey. The process was repeated ten million times over each of the 43 years of the study [1968-2011].

“The results of this experiment showed that many of the monkey fund managers would have generated a superior performance than was produced by some of the alternative indexing techniques. However, perhaps most shockingly, we found that nearly every one of the ten million monkey fund managers beat the performance of the market-cap weighted index.”

Simian benchmark

He adds: “One of the implications of our work is that we should perhaps be benchmarking our fund managers against monkeys rather than against a cap-weighted index!”

From the sample of 1,000, each randomly chosen stock would be allocated a 0.1 per cent weighting into a portfolio. This was repeated 1,000 times, to create a 100 per cent invested “index”.

A stock could get picked more than once but, according to Professor Clare, it was “highly unlikely” that a single stock would be picked so many times within one index construction that it could hold a 10 per cent or 15 per cent weighting.

He says: “The probability of creating the sort of concentration by chance that an investor would get by investing in a market-cap weighted index like the S&P500, is extremely small.”

The Cass team then tested a host of alternative indexing strategies.

One was to weight stocks equally.

Instead of, say, the FTSE 100 having an 8 per cent weighting in BP, each stock was given equal importance.

Another was to take the stocks with the lowest overall price fluctuation and give these a proportionately higher weighting in the index. This is called inverse volatility.

Measuring risk

The team also constructed indices

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PROPORTION OF MONKEYS BEATING MARKET-CAP

using optimisation techniques such as inputting certain variables. This would provide an expected return given certain parameters, such as risk measurements, or diversification based on a Sharpe ratio (an indication of how much the return on each stock can be attributed to risk).

The team weighted stocks based on fundamental company information other than its share price and determined the index weights of US equities every year from 1968 to 2011. For this, four alternative measures of company size, or scale, were used: total annual dividend; total annual cashflow; net asset value and total annual sales.

According to the report: “Each of these criteria produces a different weight for each company and, therefore, a different index. For example, when we use total dividends as the indicator of company scale, the company that made the largest dividend payment over a particular period would have the highest weight in the index, while the company that paid out the smallest dividend would have the least weight.”

The team applied the same criteria to the other measures of scale to produce four fundamentally weighted indices. Would the monkeys generate a superior performance?

Superior performance

“The results were incredible,” says co-author Dr Nick Motson. “The experiment showed that many of the monkey index constructors would have generated a superior performance than was produced by some of the alternative indexing techniques.

“However, perhaps most shockingly, we found that nearly every one of the ten million monkey fund managers beat the performance of the market-cap weighted index.

“It is almost impossible for the monkeys to come up with a set of weights that matched the real market-cap weighted index. So we knew that an investor would not come across a market-cap weighted portfolio by pure chance.

“What we hadn’t known, what hadn’t been certain, was that the performance of a randomly generated index would beat the market-cap index. We were expecting the market cap index to beat at least some of them. It beat hardly any of the ten million monkeys over the 43-year period.”

The study confirmed what Aon Hewitt’s pension consultants had long believed: that investors – institutional or retail – who unwaveringly follow a market-cap weighted benchmark index in the hope of generating good returns, are doing themselves a disservice.

Yesterday’s winners

Dr Motson says: “One of the criticisms of market-cap weighting is that investors are buying yesterday’s winners, despite the industry repeating the mantra ‘Past performance is not a guide for future performance’.”

John Belgrove, senior partner at Aon Hewitt, believes the “consistent academic rigour” of this research will help investors to understand better the opportunities and risks available in “smart beta” funds, which create their own indices based on variables

such as volatility, value or dividend and track them.

He says: “This work sheds fresh light on the age-old active/passive industry debate. Inherent weaknesses in cap-weighted investment strategies are well documented, although they have been an enduring and challenging benchmark for active managers to beat.”

Even though alternative ways of index investing have been shown to offer lower risks and higher rewards, the product range is still considered esoteric. Institutional players and trustees are suspicious of change, and the retail market is a generation behind, according to investment advisors.

Default option

Jason Butler, a director at Londonbased Bloomsbury Financial Planning and author of The Financial Times Guide to Wealth Management, says: “We have been using alternative ways of providing passive investment strategies for our clients for years.

“There are many ways to track an index, such as using tilts towards higher dividends or value stocks.

Market cap is the default option and with this option, market dynamics also dampen performance further by charging on the spread or forcing you to buy initial public offerings.

“There are far more effective, efficient and intelligent ways of getting passive strategies – but so far it is an evolution that is yet to happen. Hopefully the Cass study will help prise the door open.”

Simoney Girard is a News Editor at the Financial Adviser. She can be contacted at simoney.girard@btinternet.com *An Evaluation of Alternative Equity Indices by Professor Andrew Clare, Dr Nick Motson and Professor Steve Thomas, all of Cass. For further information on the research, contact Professor Andrew Clare at a.clare@city.ac.uk This research was produced by Cass’s academics via Cass Consulting. To learn how Cass Consulting can help your business, contact Dr Christina Makris at christina.makris.1@city.ac.uk

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Feature Health and advertising

Where’s the beef?

People can form an emotional attachment to brands of fizzy pop and sugar-coated cereals. But they can also be nudged towards a healthy diet, says a Cass lecturer.

Jeremy Hazelhurst reports.

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oca-Cola recently announced that it would feature the calorie count of its drinks more prominently on cans. Its strategy is designed to head off increasingly serious moves from governments and regulators to reduce people’s intake of sugary drinks, most notably from Michael Bloomberg, the Mayor of New York, who recently tried but failed to ban very large bottles of pop.

The problem with junk food is not only that the products are hard to resist, says Dr Paul Connell, Senior Lecturer in Marketing at Cass, but also that the appeal of the brands can be so powerful that some people develop a parasocial relationship with them: they treat them like friends, forgiving transgressions and defending them against negative stories. People quite literally love their junk food.

In a paper* co-written by Lauren F Mayor, of the Zicklin School of Business at Baruch College, City University of New York, Dr Connell says that conventional campaigns have highlighted the benefits of healthy eating, but junk food brands produce “resilient preferences” that are resistant to information about healthy alternatives. Muesli just can’t compete head-to-head with branded sugared cereals that make people feel pleasure and comfort. So, Dr Connell wondered, is there another way?

Think healthy

Dr Connell and Mayor carried out two studies in which people reported the positive emotion they felt towards 7 Up and Kellogg’s Frosted Flakes

(Frosties in the UK). A group of the participants was “primed for health”, that is, unconsciously made to think about healthy food. This involved doing a word-search that contained 13 words, six of them neutral (such as green, lamp, plant) and seven related to health (nutritious, strong, thin, and so on). Afterwards, these participants reported their attitudes towards the branded, so-called unhealthy foods. The outcome was that, once primed for health, people who had previously expressed positive emotion towards the unhealthy foods found them less appealing.

This has important implications. “We suggest that it is possible that one way to prod people into making better decisions is not to increase the attractiveness of healthy options, but decrease the attractiveness of unhealthy ones,” wrote Dr Connell and Mayor. “Our results indicate that activating a health goal in a subtle manner has the potential to strip junk foods of their fun and sensory pleasure.”

Dr Connell and Mayor’s studies are part of a growing body of research that is looking at whether preferences can be changed through priming, prompting or exploiting unconscious biases.

Children’s TV

The UK Government’s Behavioural Insights Team is looking at exactly this. It is often called the nudge unit, after the book Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler and Cass R Sunstein, which argues that encouragement is more effective at changing behaviour than legislation.

Governments in other countries are already doing it. In a Mexican scheme parts of shopping trolleys were marked out for fruit and vegetables.

Shoppers bought more — and the retailer saw no decrease in profits. In Iceland the Government teamed up with the children’s TV show LazyTown to promote fruit and vegetables. Sales increased 22 per cent and Iceland is now one of the few countries where childhood obesity is falling.

The idea of nudging people into healthy eating certainly has legs, says Rory Sutherland, a

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behavioural expert and Vice-Chairman of Ogilvy & Mather, the advertising agency. He thinks that governments should promote diets that exclude certain foods on certain days because, he says, they are easier to follow than “cognitively demanding” calorie-counting diets.

“Religions show a good understanding of human psychology in this respect,” he says.

“When Moses went into the desert he didn’t live off 1,700 calories and limit himself to 21 units of wine. He fasted.”

Sutherland adds that something as simple as changing the order of foods on menus can change choices. Advertisers are well aware of this, but governments are catching up.

Bizarre result

Does nudging hold the key to fighting obesity?

Maybe, but it’s not that straightforward.

Behavioural studies are notoriously hard to replicate in real life.

Plus, the mind is unpredictable. A second, bizarre result of Dr Connell and Mayor’s studies was that, when primed with healthy eating messages, people who felt negative emotion toward the food brands actually became more attracted to them. Food preferences are complex, and are tangled up with extraneous influences such as social norms, class and self-image.

Nudging can work, but it is an inexact science.

If policymakers take the behavioural route, they must be prepared for unforeseen consequences, odd results and failures.

Jeremy Hazelhurst is a freelance writer. He can be contacted at jeremy.hazelhurst@gmail.com *Activating Health Goals Reduces (Increases) Hedonic Evaluation of Food Brands for People Who Harbor Highly Positive (Negative) Affect Toward Them, by Paul M Connell and Lauren F Mayor For further information on the research, contact Dr Paul Connell at paul.connell.1@city.ac.uk

IMAGE BY JAMES LINCOLN / STYLING BY VICKY SMALLWOOD

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Feature Asset play in shipping

Sail of the century S

hipping is going through the fifth year of its worst peacetime downturn – and some people will do extremely well as a result, thank you very much.

That sounds counterintuitive. But for many ship owners, operating vessels on the spot or time charter markets is essentially a secondary source of profit. The real money, particularly in the field of dry bulk ships (ones designed to carry bulk goods such as grains, coal, ores and cement) is made from asset play – buying and selling the ships themselves. And those who get the timing exactly right may find themselves extremely rich in a few years’ time.

Conventional wisdom is as simple as “buy cheap and sell high”. But that is easier said than done, and anything that can assist the process is always welcome.

Step forward Nikos Nomikos, Professor of Shipping Risk Management at Cass, who has put together a unique sentiment index* for the market with three colleagues: Dr Nikos Papapostolou, Lecturer in Shipping Finance; Dr Panos

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Pouliasis, Lecturer in Energy/ Commodities Finance; and Dr Ioannis Kyriakou, Lecturer in the Faculty of Actuarial Science and Insurance.

Market temperature

The idea is to offer an indicator of the future direction of the value cycles of dry bulk carriers up to six months in advance, allowing investors to beat the pack.

“In essence, we are trying to capture something that is not captured by what you could call rational economic models. We are trying in a sense to take a measurement of the temperature of the market,” says Professor Nomikos.

The basic insight that optimism and pessimism are key drivers of investment, household consumption and saving – and are therefore worth measuring – is not new to economic theory.

The Confederation of British Industry regularly produces a business confidence survey, and the accountancy firm Moore Stephens publishes a quarterly confidence survey directed specifically at global shipping.

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The real money in shipping is made buying and selling bulk freighters. A Cass team has worked out how to predict tomorrow’s prices, reports David Osler.

But these are based purely on subjective survey criteria. Professor Nomikos and his colleagues focused instead on quantifiable proxies for sentiment using the methodology applied to the US stock market by the behavioural economists Professor Malcolm Baker, of Harvard Business School, and Professor Jeffrey Wurgler, of the New York University Stern School of Business.

Size matters

Variables such as the availability of finance, asset valuations and liquidity were used to construct indices for the four main sizes of dry bulk carriers – in descending order capesize, panamax, supramax and handysize – and an index for the market as a whole. In all cases, these were computed back as far as 1996.

“We didn’t look at survey data, but rather the actions of participants, as reflected through changes in market data and fundamentals, to measure how confident they were about the market,” Professor Nomikos says.

All of the indices are expressed as a positive or negative numerical value, showing how far they differ

from the mean average, which tends to zero over time. This makes it easier to correlate the indices visually with what is actually going on in the market.

The team discovered that the overall index did indeed efficiently capture price turning points, particularly for capesize vessels – so named because, at 150,000 tonnes or more, they are too large for the Panama Canal, and therefore sail via Cape Horn from the Pacific to the Atlantic and used to sail round the Cape of Good Hope before the recent enlargement of the Suez Canal.

users a noticeable edge.

To highlight this point, the Cass team modelled what would happen to a hypothetical owner using movement of the market index across the zero line from above as a buy signal, and across the zero line from below as a sell signal.

Following such a strategy between 1999 and 2010 would have generated a profit of $121.4 million on a capesize and $86.8 million on a panamax, the largest bulk carrier that is able to fit through the Panama Canal.

Sector sentiment

Indeed, in all four size segments, returns would have been higher and risks lower than those arising from a standard buy-and-hold model.

In three cases out of four the system also beat returns from a probabilistic model of ship prices that “goes with the flow” of the market, although the latter proved superior for handysizes (usually 15,000-35,000 tonnes).

What now? Professor Nomikos says: “We are hoping to publish the market index commercially on a monthly basis, jointly with a

Further regression analysis developed a model incorporating market sentiment, sector sentiment and a variable to allow for the phase of the shipping cycle.

Its performance in capturing the phase of the shipping cycles up to six months ahead is good, with an average correct prediction rate of more than 75 per cent in all cases.

So while Professor Nomikos sadly does not have a foolproof means of becoming a dry bulk billionaire, his work may offer

Higher returns

sponsor, and we are also working on counterparts for tankers and container shipping.”

And if you are thinking about buying a bulk carrier, now looks like a good time: “The index is higher than its lowest point, so sentiment seems to be picking up since March, and has more or less remained at the same level.”

David Osler is Finance Editor at Lloyd’s List. He can be contacted at david.osler@informa.com *Investor Sentiment for Real Assets: The Case of the Dry Bulk Shipping Market. For further information on the research, contact Professor Nikos Nomikos at n.nomikos@city.ac.uk This research was produced by Cass’s academics via Cass Consulting. To learn how Cass Consulting can help your business, contact Dr Christina Makris at christina.makris.1@city.ac.uk

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Corporate profile

Back to root

and branches Stefan Stern meets Charlotte Hogg, the head of Santander’s network of high street branches in the UK. InBusiness certainly knows how to spot rising stars – shortly after this interview was completed, Charlotte Hogg was appointed Chief Operating Officer at the Bank of England. She started her new role just as we went to press.

questions politely and encouraged her young visitors to speak up – “You’ve been very quiet,” she said, in a friendly way, to a more reserved member of the group.

Finally, it was over to me for the more formal part of the meeting.

t is said that when, in days gone by, journalists arrived in Whitehall for a briefing by a minister, a private secretary would announce: “The press, sir, and the gentleman from The Times.”

Sometimes the press just has to know its place.

So it was when I arrived from InBusiness to meet Charlotte Hogg, Head of Retail Distribution and Intermediaries – i.e. head of the branch network – at Santander UK. I had to wait. At the head of the queue was a group of Cass MSc Finance students who had come to find out a little more about the person in charge of operations at this newish but sizeable player in the competitive UK high street banking market.

Hogg displayed good customer service skills as she answered

Conservative dynasty

I

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An interview like this could not hold too many terrors for the experienced executive. Although only 42, Hogg has already held a number of senior positions. After university (Oxford) she worked at the Bank of England, then joined the consultants McKinsey, working for the financial services division in their Washington DC and New York offices. A client, Morgan Stanley, hired her and, after a stint in a strategy role with the bank, she came back to the UK to run Discover’s credit card business before becoming Managing Director of Experian, the customer credit business, for three years. She was hired by Santander in April 2011.

The other reason Hogg is unlikely to be daunted by media interest is that being the focus of attention is in

her blood. Her late grandfather was Quintin Hogg, later Lord Hailsham, the Conservative politician, while her father Douglas was also a Cabinet Minister and her mother, Sarah, is a distinguished former journalist and businesswoman.

Santander UK was formed from the merger of Bradford & Bingley, Alliance & Leicester and Abbey (formerly Abbey National), all three essentially savings institutions. This merger was part of the tidying up exercise required after the great financial crisis. But now Santander UK is establishing itself as a serious rival to the more established UK lenders such as Barclays, HSBC, NatWest and Lloyds TSB.

Understanding customers

“Ana [Botin, Santander UK’s Chief Executive] was very persuasive,” Hogg says. “She wants to get back to traditional banking, understanding customers, who they are and what they need.” The chance to get involved was clearly too attractive to resist.

In September 2011 the company convened a large “customer

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Corporate profile

first” event at Wembley stadium to launch a culture change programme under the same name. This was serious stuff: staff, customers and the leaders of all the top 150 retailers were there, as was one of the bank’s brand ambassadors, the golfer Rory McIlroy. The message was clear: banks need to change, and Santander needed to change the way it viewed its customers. It would not be just the culture that was changing – it was also the roles of the people in the retail bank.

The real point of this reorganisation and culture change, Hogg says, is to get back to the future – to make banking more human again, to recognise the needs of customers better, and to respond to them.

She brings a McKinseyite’s analytical skill to this task. “Banking went off track,” she says. “Captain Mainwaring [the bank manager in the BBC sitcom Dad’s Army] ceased to IMAGE BY JAMES LINCOLN

InBusiness | Issue 19

exist. Banks became more sales driven and processes were automated. But this disempowered staff, and almost prevented them from helping customers properly.

Incentives were poorly designed, too.

This all combined to give the customer a bad experience. Now we need to stand in the customers’ shoes and work hard to serve them better.”

Cultural shift

Hogg is keen to stress that the bank’s journey is not just about the Customer First programme. “The launch of the 123 current account in March 2012 further embedded our cultural shift. It’s more than just another product – it’s supported a change in our thinking whereby our focus is on our customers and the value we can offer them. And this value is different for each and every one of our customers.”

Hogg expands on the theme of the

value of a personal touch by telling a story which was included as part of the “customer first” event in September 2011. Ten years earlier, on 11th September 2001, she had been working in New York for Morgan Stanley. The bank had offices in World Trade Center 2, one of the twin towers.

“One of my colleagues was disabled, and she was working high up above the 80th floor,” she says.

“Two other people who worked with her just left her there. But a mailman carried her down 68 flights of stairs to get her out.

“It’s an example for us to think about: what do we want to be, and what do we not want to be? We are there helping people make really important decisions in their lives.

Now we are getting back on a journey to be the best bank we can be.”

As part of Santander UK’s investment in the future the bank has

a relationship with 50 universities in the UK, including City University London and Cass. It offers 500 scholarships in this country and funds internships for students at small and mediumsized enterprises.

A flotation for the UK bank is on the cards. And the mission for the bank, Hogg says, is to operate on a basis that is “simple, personal and fair”.

The woman in charge is pretty clear about those goals, too.

Stefan Stern is a Visiting Professor of Practice in the Centre for Professional Service Firms at Cass. He can be contacted at stefan.stern@edelman.com

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Feature M&A leaks

A watertight case

against leaks Details of mergers and acquisitions used to turn up regularly in the papers during negotiations. There is a very good reason why that has changed, says a Cass study.

Jill Insley reports.

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ity journalists in Fleet Street used to call it the Friday-night drop. PR firms would deliver information about merger and acquisition discussions to Sunday papers to ensure wide weekend coverage for their clients.

Companies that had begun talks with a potential takeover target would use the drop to smoke out interest in their bid. And if the chairman and board of the takeover target were dragging their heels, news of an approach could spur shareholders into asking why.

But leaks, as opposed to pre-planned announcements, appear to be on the wane. A study

by Cass’s M&A Research Centre found that the number of merger and acquisition deals being leaked had dropped dramatically in the past two years in response to tighter regulation and an increased danger of leaked deals failing to complete.

The number of leaks globally fell from 11 per cent in 2008-09 to 7 per cent in 2010-11, according to the study commissioned by global virtual data room provider Intralinks. Leaked deals took an average of a week longer to execute and, in the most recent period analysed, were 9 per cent less likely to complete than deals that were kept confidential.

Reasons for decline

Dealmakers interviewed by Mergermarket for the report, M&A Confidential: What Happens When Deals Leak, said there were three key reasons for the decline in leaking.

Firstly, regulation has become stricter and enforcement more active. This is particularly noticeable in the UK, where leaks have fallen from 22 per cent of deals in 2004 to 13 per cent in 2010-12. A UK investment banker questioned for the report said: “Earlier everyone just accepted deal leaks in the UK, but not now. The government has come down hard and I believe there will now not be a large disparity in the number of leaks in the UK and US.” Secondly, better tools for maintaining confidentiality have been developed and adopted, such as virtual data rooms and secure file sharing.

The third and perhaps most significant reason

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has been the subdued dealmaking environment following the collapse of Lehman Brothers. This may have encouraged those involved in M&A to play it safe and not complicate a deal by leaking.

survey believed that leaking a deal could backfire.

One, a partner in a German law firm, said: “If the leak has seriously damaged the prospects for the deal then bidders will end up walking out.”

Spotting trends

Impact on deals

The Cass study looked for significant preannouncement trading (SPAT) in the shares of target companies as an indication that information about a prospective deal had been leaked. While this is not absolute confirmation of a leak, SPAT across a large sample can be used to examine patterns and trends. Cass’s research team, led by Professor Scott Moeller, Director of the M&A Research Centre, looked at more than 4,000 transactions from 2004-12.

“Leaks have fallen from 22 per cent of deals in 2004 to 13 per cent in 2010-12.”

Mergermarket conducted interviews with 30 M&A practitioners in Europe and the US to help to understand the reasons for some of the trends identified.

“Most deal leaks appear to be deliberate,” says Professor Moeller. “In the early period analysed, 2004-07, 9 per cent of bids displaying SPAT attracted a rival bid, compared with 7 per cent where no SPAT was detected, so leaking appears to be a way to flush out a higher bid. This tends to push up the price of the company: on average, leaked deals complete with premiums 18 percentage points higher.” The interviewers found as well that buyers often use leaks as a tool to scupper a deal they no longer want to complete without having to pay a penalty for breaking the agreement.

But the Cass research shows that since 2008 there has been no benefit, except for an increased premium for the target, for either side to leak, with both leaked and non-leaked deals now having only a 5 per cent chance of attracting a second bid.

Moreover, nine out of ten respondents to the

This seems to be borne out by M&A figures for the past two years. While there is little evidence of impact on the likely success of deals which have been leaked over the entire survey period, during 2010-12 transactions involving leaking completed only 80 per cent of the time, compared with 88 per cent of those which had not been leaked.

“In the vast majority of cases, neither the buyer nor the target want the deal to leak, with both parties usually benefiting from keeping a takeover secret until they are ready to announce the transaction,” said Philip Whitchelo, Vice-President of Strategy and Product Marketing at Intralinks.

“It is clear from our research that the risks associated with leaks are rising. As a result there is evidence that sellers and their advisers are taking the issue of pre-announcement deal confidentiality much more seriously.”

However, Anna Faelten, Deputy Director of the M&A Research Centre and co-author of the report, does not believe the decline in leaking will be sustained once M&A activity recovers.

“When the global economy and, therefore, the general environment for M&A activity picks up, it will be easier to get away with leaking as there will be more transaction activity, making it harder for regulators to pursue suspected leaks, and there will be more incentive to leak as more buyers will come forward to make a competing bid,” she says.

“However, I still think deal leaking in the UK will remain lower than historic levels.”

Jill Insley is a freelance writer. She can be contacted at jill@insleymedia.com For further information on the research, contact CassMarc@city.ac.uk

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Feature Innovation in F1

A winning formula

for turbulent times

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F1 racing reveals the right and wrong times to rely on radical change, Cass research shows. Steve Coomber reports.

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hen the cars lined up on the grid in Abu Dhabi for the final race of the 2010 Formula 1 Grand Prix season, motor racing fans were expecting a thrilling finale, with four drivers still in contention for the championship. Paolo Aversa, the Marie Curie Research Fellow of Strategy at Cass, was interested in the outcome for a different reason: he believes the F1 industry provides important insights into organisational innovation and corporate strategy.

All firms need to innovate in some way if they are to thrive. Many strategy experts suggest that the route to competitive advantage is via game-changing innovation that challenges orthodoxies and transforms industries. Yet recent investigation by Aversa and his co-researchers suggests that pursuing such radical change is not always the right option and can actually be detrimental to an organisation’s performance.

“There is a tendency to overemphasise the importance of radical innovation. It is very important, but not in all situations,” says Aversa. “We need to understand when it is beneficial.”

Aversa and his co-researchers analysed data from almost three decades of F1 Grand Prix racing, and studied the relationship between innovation and performance, given different operating environments.

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Feature Innovation in F1

Changing the rules

Formula 1 was the perfect industry for the research*, says Aversa. For a start, the operating environment changes from year to year when the Fédération Internationale de l’Automobile (FIA), the governing body of F1, releases a set of rules for the following season. Changes from one season to the next usually fall within three main areas: changes to improve safety; changes to ensure that races remain entertaining; and rule changes designed to advance certain technologies – traction control, and computer-based engines are past examples – that will eventually find their way into mass-production cars.

The degree of change from one season to the next represents the level of turbulence in the industry. In some years rule changes are minimal, so the operating environment is more stable. In other years they require considerable car redesign. It is rare for teams to be able to foresee next year’s changes or assess whether the new regulations will be valid for a long time or will be quickly modified.

F1 teams tend to respond to these rules in two ways, says Aversa – adaptive innovation and pioneering innovation.

“Adaptive is solution-driven technological innovation that is tailored to a changing environment.

So if the FIA proposes new regulations in a particular year, let’s say that they reduce the size of the engines or require every team to use the same tyres, then you have to rethink the design of your car without sacrificing performance.”

Changing the cars

Pioneering innovation goes beyond the minimum adaptive requirements.

Instead of improving existing technology it involves new, different, and disruptive routes to better performance.

To evaluate the impact of the different types of innovation on performance, the research team assessed the data from all the F1 seasons between 1980 and 2010. “We analysed the blueprints of each car from year one to two to three and so on, and looked at how much the cars changed,” says Aversa. “We coded the changes, section by section, that were required by the regulations, and

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those that were going beyond the regulatory requirements.”

Innovation that went beyond the changes necessary to meet the FIA’s new rules was classified as pioneering. The level of turbulence in the operating environment was determined by the extent of the changes required by the FIA in any one year. Performance was assessed on the results of each race, and controlled for a range of factors including different teams, drivers and team experience.

The results were surprising. In times of turbulence – radical regulation changes – pioneering innovation put the brake on performance. The more turbulent, the more pronounced the effect. The significance, suggests Aversa, is that in turbulent times companies are less able to handle pioneering change at the same time as trying to discern future trends in technology. The chances of making the right innovation are reduced.

Changing the technology

In the 2009 season, for example, the FIA announced significant changes, one of which was to allow racing teams to use a new kinetic energy recovery system (KERS).

KERS technology was not mandatory, but it offered cars temporary power boosts and, in theory, a competitive edge over rivals.

Four major contenders – Ferrari, Renault, BMW and McLaren – adopted it. However, other teams, including Brawn GP and Red Bull focused on adapting to the rule changes by improving existing technology (Brawn’s controversial “double diffuser” for example).

Brawn GP won both the constructor and driver championships that year, winning 6 out of the first 7 races. Together, Brawn and Red Bull won 14 out of 17 races.

“It turns out that the next big thing may not even be the right thing to do.”

So what relevance does this have outside motor racing? “These are important findings,” says Aversa. “In technology industries, for example, I would say when you don’t have a clear idea of the technological trajectory, it makes sense to stick with the existing one. But when the existing trajectories are fairly stable, then you can push boundaries and engage in pioneering innovation.”

It’s good news for corporate strategists searching for ways to overtake their rivals – and for finance directors. The next time the chief innovation officer proposes spending billions on developing a new

market-conquering widget, the FD will be able to refer them to Aversa’s research.

“In times of crisis, like now,” says Aversa, “with some companies struggling to find the money to launch the next big thing, it turns out that the next big thing may not even be the right thing to do.”

Steve Coomber is a freelance writer.

He can be contacted at s.coomber@virgin.net *Driving Innovation. Determinants of Performance in the Formula One Racing Industry. Paolo Aversa, the Marie Curie Research Fellow of Strategy at Cass; Alessandro Marino, a doctoral management student at Wharton Business School at the University of Pennsylvania; Luiz Mesquita, Associate Professor of Strategic Management at the WP Carey School of Business at Arizona State University; Jay Anand, Professor of Corporate and Global Strategy at the Fisher College of Business at Ohio State University.

For further information on the research, contact Paolo Aversa at paolo.aversa.1@city.ac.uk

Opinions

Leadership Special Education, education, education‌ for MPs p32

Sandhurst: lessons in leadership? p33

Get out and about and be a winner p34

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Opinions Leadership special will survive and rise to positions of power. This contrasts starkly with business and the professions where billions of pounds are spent annually on preparing future leaders and developing existing ones.

Research suggests that political leaders – just like other leaders – need to develop a range of skills and abilities if they are to perform political roles with competence.

Over the past decade I have worked with political parties and political organisations such as the Local Government Association to help to create a range of tools and methods to support political development.

Education, education, education… for MPs

P

Jo Silvester, Professor of Psychology at Cass, says politicians need training, too – but they could give businessmen and women lessons in leadership.

InBusiness | Issue 19

oliticians regularly score among the lowest of professions considered trustworthy by the public. In an American poll they came just above insurance and car salesmen.

They are berated by the media and scorned by the public – so who would want to be a politician?

Yet the work they undertake is arguably among the most important for the economic success and social well-being of nations. We need good political leaders to represent our needs in government and take the decisions that will have the most benefit for ourselves, our families, our communities and our countries.

But what is good political leadership and what makes a good political leader? I have been interested in the answers to these questions for the past decade.

A remarkably consistent pattern emerges from analysing interviews, focus groups and questionnaires capturing the views of more than 2,500 national and local politicians, their political colleagues and appointed officials from all UK

Cross-party project

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political parties. While the values held by members of different political parties vary, the competencies they identify as important for performing political work do not.

A clear vision

These include leadership (being able to inspire others and communicate a clear vision); analytical skills (the ability to understand and prioritise complex information); representing people (engaging with and representing the needs of different sections of the community); relating to others (being seen as approachable, empathic and trustworthy); and, perhaps not surprisingly, resilience (the ability to withstand criticism and cope with the pressure and demands of a 24/7 role).

In 1882 Robert Louis Stevenson wrote in Familiar Studies of Men and Books: “Politics is perhaps the only profession for which no preparation is thought necessary.” For most politicians little has changed. There is still negligible preparation for political roles or support once elected: in politics a Darwinian process exists that assumes the fittest

Projects have included creating new competency-based assessment procedures for approving prospective parliamentary candidates for the Conservative and Liberal Democrat parties; a cross-party project to develop a political skills framework for newly elected councillors; development centres for local council executives; and 360-degree review systems for parliamentary candidates and local politicians.

Working with politicians has given me privileged insight into the nature of political work as well as increasing my respect for the unique challenges faced by political leaders.

There has been something of a quiet culture change in politics over the past decade. Politicians are recognising the need for better preparation and support in order to cope with demanding and important roles. There is an opportunity to draw further links between leadership development in business and politics.

However, much might also be gained by studying political leaders.

Rather than accepting Aristophanes’ assertion in Thesmophoriazusae, his parody of Athenian society, that “under every stone lurks a politician”, perhaps we need to recognise and learn from their expertise at working in political environments.

Political skills and political awareness are undoubtedly important in business too.

Professor Jo Silvester is an organisational psychologist who specialises in the assessment and development of leaders in public, private and political organisations.

She can be contacted at jo.silvester.1@city.ac.uk

Sandhurst: lessons in leadership?

DOMHNALL DODS / SHUTTERSTOCK.COM

DR IAN STEWART

DAVID MELLOR

I

n 2012 the Royal Military Academy Sandhurst celebrated 200 years of preparing officers for the British Army. A national institution, it attracts attention from foreign military forces, the public services and from the private sector.

All ask the same question: what can the Academy teach us about leadership development?

Sandhurst aims to induce high levels of self-discipline, selfregulation and personal resilience and to engender a sense of unity and purpose, creating a culture in which students monitor and police each other’s behaviour. The year-long course is designed to develop the professional knowledge and skills of soldiery. Leadership is the key to applying these skills wisely in the best interests of the organisation.

For the Army, leadership is a well-articulated set of priorities and values. At Sandhurst, great emphasis is placed on a shared understanding of its culture, identity and organisational objectives. Leaders in the Army must be in tune with its values, practices and codes of conduct and subscribe to its worldview and outlook. Alumni with this common understanding can be relied on to reference the same set of core values and priorities to support or change the Army’s culture and practices. Put simply, leadership development provides the capability to manage the organisation’s culture.

The aims of the Army’s officer academy and the techniques it uses could help to create more effective managers in a commercial environment, say Dr Ian Stewart and David Mellor.

Strategic goals

To provide a business with the capability to drive, refresh or radically change its organisational culture, leadership development needs both to establish greater social capital and be more directly linked to the strategic needs of the business.

In a commercial environment in times of stretched training budgets, development programmes must not only be aligned to the business’s strategic goals, they should drive the culture towards those goals.

Leadership is fundamentally about priorities. Not only does a leader have an obligation to help make sense of a situation, he or she also has an obligation to give it meaning – to communicate what is most important and why.

Sandhurst’s motto, Serve to Lead, sums up its message that the men and women you are responsible for are your first priority. Their interests come before yours. It is a lesson that is easily crowded out in large, high-tech enterprises where leaders are invariably results-driven.

Integral integrity

Sandhurst is training leaders, but it also teaches its students when and how to follow. While some of the failures of large financial institutions can be rightly described as failures of leadership, they were also often failures of “followership”.

The academy places integrity at

the centre of its daily practice. A cadet is unlikely to lose his place on the course because he has not yet learnt to read a map, but a lack of integrity can get him dismissed instantly. It is rare for a lesson – whatever the subject – not to involve a consideration of values.

This creates a culture where those values are actively accessed and referenced. The peer policing that is integral to Sandhurst is often prompted by a value being ignored or not acted on to the observer’s satisfaction.

Viscount Slim, who served with great distinction in both World Wars, was once asked to define leadership.

He replied that it was “just plain you”. Sandhurst graduates, for whom personal values and those of the service have become so deeply enmeshed as to become indistinguishable, may well agree.

Dr Ian Stewart spent 18 years on the academic staff at Sandhurst. He is now Head of Leadership Studies with the Inspirational Development Group, which is partnering Cass on the new MSc in Leadership Programme. He is a Course Tutor. He can be contacted at ian.stewart@inspirationaldg.com David W Mellor is a Client Director with Cass Executive Education and is also an MSc Course Tutor. He can be contacted at david.mellor.1@city.ac.uk

InBusiness | Issue 19

Get out and about and be a winner Neo-networking should not be the preserve of senior management – spreading the opportunity to connect down the corporate ladder gives a company a competitive edge, says Julia Hobsbawm.

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Neo-networking has overtaken the outdated silo culture which has dominated corporate behaviour for the past 30-50 years: stay at your desk; be a subject specialist; use PR and marketing to control external messages. None of this works anymore. Now everything is two-way.

Sales are made and relationships forged and developed outside HQ, not by email alone from within it.

agency. Social advantages and privileges accrue to those who prospect for network ties the way effective sales agents prospect for clients.”

Leadership culture in the workplace has been contradictory.

Leadership development aims to cultivate more leaders, even though the funnel through which they can pass is, by definition, statistically small. Worse, the main drivers of leadership – the networking that underpins access to a wide range of ideas and connections, and the time and trust to develop these “weak tie” connections which Mark Granovetter, the Stanford Professor of Sociology, identified 40 years ago as critical to career success – are often denied to those stuck below in the second-tier “marzipan manager” layers.

More recently the case for the benefits of a healthy, porous network has been skillfully made by the model of “structural holes” described

by Ronald S Burt, Professor of Sociology and Strategy at the University of Chicago Booth Business School, in Brokerage and Closure: An Introduction to Social Capital.

Social advantages

Lateral thinking

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elcome to the new world. The corporation of tomorrow must look and feel completely different in terms of human capital and the social capital skills which leaders have and those they look for in their employees. Welcome to the world of neo-networking.

Of course some things stay the same. Bosses want employees who work hard and demonstrate aptitude, ability and understanding. And businesses will always need good products, strong markets, sufficient capital, excellent marketing and a fairly managed, flexible workforce.

But today’s business world is turbo-charged, frantic, hypercompetitive, hyper-mobile: every global business is shadow-boxing a counterpart in another time zone with a workforce that is faster, smarter or cheaper – and sometimes all three.

InBusiness | Issue 19

Handling information and relationship-building are key components of leadership. Lee Rainie, Director of the Pew Research Center’s Internet & American Life Project, and Barry Wellman, Professor of Sociology at the University of Toronto, say in their book Networked: The New Social Operating System: “This is the era of free agents and the ethic of personal

How many people marked as “high potential” or “top talent” are allowed time away from time sheets or meetings to think and act laterally and to neo-network? Sub-prime mortgage traders were not doing business in a neo-networking way when they acted so disastrously in the first decade of this century. Had they done so they might have come into contact with what the trader-

turned-philosopher Nassim Nicholas Taleb calls “black swan” thinking, i.e., think the improbable.

Good leaders do not deny neo-networking to those below them. Leadership in the second, third and fourth decades of this century should move out of a restricted global green room of elite networks for those at the top and encourage a culture of mobile thinking and acting across all layers of human capital.

The corporation that has curiosity and lateral thinking etched into its mission statement will be the one that succeeds soonest.

Julia Hobsbawm is Honorary Visiting Professor of Networking at Cass and leads the Connecting for Success programmes as part of Cass’s EMBA careers provision. She runs the knowledge networking business Editorial Intelligence. www.editorialintelligence.com

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