Tuesday, 16 September 2008

The current financial crisis - is Jon Moulton right?

OK – so this is a bit Off Topic for this blog – but I recommend viewing Jon Moulton's short video on TelegraphTV. Jon is head of Alchemy Partners, the Venture Capitalists, that backed Radius' buy-out off the Stock Market in 1997. Whilst I wouldn't necessarily recommend Jon's comments on the operational management of software houses, I have great respect for his abilities in acquisitions and brilliance in the analysis of financial situations.

I'll leave you to view the clip on TelegraphTV, but in addition to agreeing to his comments that the current financial crisis is "quite frightening", I have to agree with his comments that "much of it driven by greed of the bankers and the bankers individually" and "greedy investment bankers chasing bonuses".

But unfortunately this is a wider problem than just the Banks and financial institutions – and in my opinion in this country it is more widespread than in the USA - all too frequently companies and their senior managers focus on a very short business horizon – typically the current financial year, rather than the longer term. Very simplistically, bankers have been motivated by their annual bonus for selling a new financial instrument with a large up-front arrangement fee, rather than worrying about the customer's ability to pay it back over the next, say, 25 years.

The skill is for Directors to set bonus schemes and their performance criteria that truly reflect a company's longer-term objectives, whilst also rewarding short-term targets. Focussing on just the short-term targets can lead to just the sort of problems the financial institutions are suffering now.

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