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Sep
17 2011

Rogue Trader – You get what you measure

Syndicated from: Paul Bridle

There is an expression, ‘Be careful what you wish for, you might get it’, and in business I say, “be careful what you measure, because you might get it”. As long as banks are measured on their ability to make money, to increase profits and to provide shareholders with maximum profits, then guess what the focus will be? How can we be surprised that banks create sub-prime mortgages that take the world to the edge of collapse or another rouge trader at UBS Bank trades deals that nobody knows where the bottom lies and now costs the bank $2billion! Of course they are going to do this, that is what they do. They find ways to make more money from money so they can make a profit. I can’t help feeling that fundamentally society is crazy to allow the real value creators (farming, manufacturing, mining, etc) to be suppressed in how much profit they can make, while non value creators (institutions, banks, insurance, etc) are allowed to generate vast sums of cash – not added value – and run the world as a consequence. What do I mean by “value”? Value creation is the process of taking raw materials and making something of value from it or growing and extracting raw materials from the planet that can sustain and develop life. Typically we are talking about manufacturing, farming, mining, etc. These are value creators that the rest of business live off. For example, retail can’t sell anything unless it is made, mined or grown first, and so forth. Yet retail dictate to farmers, manufacturers etc, how much they can sell their products for! Farmers struggle to make a living while retail makes vast sums of profit. The worst of all is the ones that provide the least added value (banks, insurance, institutions like lawyers, accountants, etc). At some stage society needs to recognize that value creators are more important. Stop measuring a banks success on the profits they make and start measuring them on the contribution they make to the development of value creators. The infrastructure of most countries is poor and needs investment. Governments can’t afford it (thanks to the banks), so why can’t banks be measured on how good they are at supporting the development of the infrastructure than the returns to shareholders or profit to the bottom line only. Please understand me, I am not advocating nationalization or socialist principles, I am suggesting that while all the banks are measured on is how much money they make, when they are not value creators and they are the furthest down the chain from the value creators, then that is what they will focus on.

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