Running a business requires maintaining relationships with various stakeholders. But many businessmen end up making relationships the very foundation on which they build their business. In the process, the lines between fact and fiction gets blurred and allow for questionable practices. It raises the question of how much schmooze is too much?
The fundamental issue is about bridging information asymmetry and trust deficits to facilitate economic transactions with outsiders. In public systems, such transactions with outsiders happen mostly through formal procurements. But this comes with the problems of delays and constraints on the selection of the right kinds of sellers/partners. These are prohibitive costs in the competitive world of businesses. Businesses overcome the problem by preferring deal-making or transactions which hinge on non-formal procedures. Relationships are an important tool to bridge information asymmetry. But it also comes with serious risks of relationships abuse.
Lex Greensill of the now bankrupt supply-chain financier, Greensill Capital is a good example. This article highlights how he build relationships with people ranging from the former British PM David Cameron to Greg Bererton, an executive with an obscure Australian insurance firm. Cameron lobbied hard for state-backed emergency Covid 19 loans for Greensill despite strong resistance by the UK Treasury
Public records show Greensill representatives had 10 virtual meetings between March and June last year with the two most senior officials at the Treasury as they sought access to a Bank of England loan scheme... Cameron also intervened personally on behalf of the company. Treasury officials were reluctant to include Greensill in the Bank of England’s Covid Corporate Financing Facility... Greensill then deployed Cameron to lobby his former colleagues. The former prime minister approached the Treasury and 10 Downing Street — through both his personal email and at least one phone call.
Greensill's main borrower, Sanjeev Gupta, of GFG Alliance, is himself a schmooze and build business operator, with several questions now hanging around the solvency of his businesses following the demise of his main lender.
Or the examples of Markus Braun of Wirecard or Adam Neumann of WeWork, both of whom were expert purveyors of the relationship strategy to drive business growth. In fact, if we analyse examples of business collapses, chances are that their business growth was most likely underpinned by questionable relationships.
As I have blogged earlier here and here, such relationships are at the heart of transactional (or access money) corruption in developed countries. It's also central to the related disturbing practice of revolving doors between government and corporate world whose perverse incentives are becoming increasingly evident, especially involving those at leadership positions in the two parts.
An extension of the schmooze culture is the old-boys network that emerge from reputed organisations like McKinsey, Goldman Sachs etc. For sure, such networks play a positive role in reducing information asymmetry and helping facilitate business transactions. But this is a double-edged sword, in so far as it promotes corrupt business practices and raises creates closed loops of transactions. Contract-fixing over dinner table at a Michelin star restaurant by corporate attired executives and Congressman's Chief of Staff is no less corrupt than doing the same in a seedy joint by the local contractor and the junior government official. It's worth remembering Adam Smith
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.
This also highlights an important difference between the cultures of public and private sectors. The former's process adherence culture and the latter's deal-making culture are fundamentally different. What passes off as outright corruption in the former is sound business practice in the latter. What's often decried by the private sector as red-tape in governments is considered inside the former as good governance.
In case of government bureaucracies, the problem is less with adherence to processes. It's about taking things to the extreme - too much of process becomes red-tape and too much of deal-making becomes corruption. Large swathes of government and the private sector suffers from this 'excess' problem. In case of private companies, especially the biggest ones and at the highest leadership levels, the problem is with too much discretion and whimsical decision-making. It is a testament to the break-down of principal-agent compacts and the abuse of managerial control (for self-aggrandisement) in the face of dispersed ownership.
The underlying reality that, unlike a private company spending its limited owners resources, public spending comes from taxes and private spending comes from shareholders cannot be wished away.
This also means that those entering the higher levels of government after a career in the private sector also bring with them deeply internalised norms of the relationship culture. In governments, again at the highest levels, this can have a corrosive effect. Some time back I had written,
How do we know that there was no corruption when Lloyd Blankfein and Co had such privileged access to Hank Paulson when he was designing a program to bail them all out? How do we know that there was no corruption when Obama met the Chief Executives of Honeywell and GE 30 and 22 times respectively in the 2009-15 period and those visits were accompanied by favourable regulatory or other benefits and abnormal share price increases for the respective companies?
These are examples of relationships gone rogue.
Apart from business growth pursued by charismatic leaders, another widespread area of relationships abuse is insider trading based on internal information. See my earlier posts here, here, and here. Experience demonstrates that the belief that business relationships are at arms-length and there are internal controls and Chinese walls to police their abuse is mostly fiction.
Closer home, there are several examples like Rana Kapoor of Yes Bank and Kapil Wadhwan of Dewan Housing. Readers can easily identify several other examples from corporate India, whose relationship trails raise several questions. In fact, the consequences of relationship banking, where bankers establish cosy partnerships with certain preferred clients and continuously roll-over their debts, is now well-established. As some recent high-profile examples show, if anything, India's private banks appear equally inclined to such transactions.
So a simple smell-test for validating the credibility of a businessman is where does he/she figure on the Schmooze-meter?
Update 1 (07.05.2021)
Unherd.com has a good article on the problems with post-retirement activities of British Prime Ministers. This is an FT story on the impending Treasury Select Committee appearance of David Cameron. This is the list of 56 mails, SMSes, and WhatsApp messages sent by Cameron to high-ranking UK government ministers and officials lobbying for Greensill.
Update 2 (15.05.2021)
Ian Osborne, the founder of the $1.5 bnVC firm Hedosophia, and one of the architects of the idea of Special Purpose Acquisition Company (SPAC), is a great example of networker. Fellow VC and SPAC founders Chamath Palihapitiya has described Osborne as
“extremely, exceptionally discreet and unbelievably trustworthy. He’s unbelievably connected. He is our modern version of a homeless billionaire. Ian is constantly working, is constantly travelling, and he collects people.”
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