Monday, May 31, 2010
Wednesday, May 26, 2010
Wednesday, May 19, 2010
I have always eschewed chance and favoured certainty. If that makes me a boring person, then so be it.
While taking risks are part and parcel of the business world, those of you who are involved in new business development would understand what I am saying when when I say that in spite of inherent risks in embarking on new business ventures, sound acumen requires us to turn our minds to the reduction and minimisation of risk so that the chances of success (i.e. profitability) is more certain than not.
In this sense, the recent award (or, for the pedantic reader, re-award) of the sports betting licence by the Malaysian Government and, the subsequent corporate exercise, resulted in a positive market reaction (even if it has created indignation among socio-religious groups). The rewards of gambling to the promoters of gambling are a certainty.
On the flipside, the rewards of gambling to the gambler is uncertain; hence the public opprobrium on the perils of gambling.
So, here we are.
When there is a commercial motivation to understand and exploit the human mind, business gets there before science. Case in point: the power of near-misses to keep gamblers glued to a slot machine.
As anyone who has come oh-so close to winning a computer solitaire game and been unable to resist clicking "new game," or who has found it harder to walk away from a slot machine after spinning two bells and a lemon (a near-miss) than after getting a bell, a lemon, and a three-bar (a total miss), knows, near-misses are like crack. The reason, according to a paper in the current issue of The Journal of Neuroscience, is that near-misses raise activity in the exact same reward circuitry of the brain as wins do. And in a finding that offers insight into problem gambling, the brains of problem gamblers react more intensely to near-misses than casual gamblers do.
The reward circuitry runs on the neurotransmitter dopamine, which has been widely, if simplistically, called the brain's reward chemical. It is such an all-purpose molecule that it underlies the pleasure we get from (and, for some, the addictiveness of) drugs, alcohol, sex, chocolate, gambling, and (for the psychopaths among us) even causing others pain.
For their study, led by Luke Clark of the University of Cambridge, researchers recruited 20 volunteers. Their gambling habits ranged from buying a lottery ticket occasionally to making regular bets on sports. The volunteers played a computerized slot machine with two spinning wheels. When two pictures matched, the volunteer won 50 pence (about 75 cents). No match, no payoff. At the same time, the volunteers had their brain activity measured by fMRI, functional magnetic resonance imaging .
As expected, wins activated the reward pathways in the region called the midbrain. But so did a loss in which the second icon was right above or below the one that would have matched the icon on the first wheel—a near-miss. Since the bursts of dopamine indicated by the brain activity bring a sense of reward and keep people coming back for more, the fact that they are as intense as the bursts that follow a win suggests an explanation for the power of near-misses to keep people gambling. Although losing feels subjectively lousy, near-misses nevertheless spritz the brain with the dopamine that makes a behavior addictive.
The psychology behind this seems to be that people who play slot machines or the lottery, where wins and losses are the result of pure chance, often mistakenly believe that skill is involved. This illusion of control ropes gamblers into trying their luck after a near-miss. Compulsive gamblers have it worst: their brains reacted much more to near-misses than did the brains of casual once-a-month lottery players.
In a paper last year in the journal Neuron, Clark and his collaborators laid the groundwork for the latest finding. There, they reported that although near-misses while playing a slot machine felt less pleasant than wins (duh), they increased the desire to play just as much as long as players felt they had some control over their spins—supporting the idea that the illusion of skill underlies the phenomenon. (When the slot machine was rigged so that the computer chose what icon appeared on the first wheel, and thus what the second wheel would have to match for a win, players felt less control than when they were allowed to choose the left icon. Players seemed to feel that if they were permitted to choose, say, an orange as the icon to match, they had a higher chance of winning.) Near-misses, by activating the same circuitry that winning money does, "invigorate gambling through the anomalous recruitment of reward circuitry," Clark and his team wrote. But that study used ordinary people with no particular gambling habit, mild or intense. The current one shows that near-misses have even greater power over problem gamblers.
A little digging finds that although neuroscientists may be just figuring out the power of near-misses to keep gamblers playing, slot-machine makers have known about it for decades. In a 2008 study, scientists analyzed how "slot machine manufacturers use virtual reels and a technique called 'award symbol ratio' to create a high number of near misses above and below the payline"—that is, so that the losing icon appears right above or below the winning cherries, lemons, or whatever. Thus we see yet again that when there is money to be made by understanding the brain, business beats science.
Tuesday, May 18, 2010
Obviously the Sime board had formed the view that the CEO had failed to manage the matter, leading to his removal.
Was the Sime board misled by senior executives to lull them to a sense of complacency on this issue between 2008 to the time when the working group was formed?
Monday, May 17, 2010
Sunday, May 16, 2010
This near-billion Ringgit provision is constituted by RM200 million from the Qatar Petroleum (QP)project, RM159 million from the Maersk Oil Qatar (MOQ) project, RM459 million from the MOQ marine project and, RM450 million from the Bakun Hydroelectric project. All of which comes under the Sime Energy Division.
How that happened is an interesting tale that is likely to be kept under a shroud of secrecy until stakeholders and public pressure demand a full disclosure. It may be that one highly charismatic and persuasive Division CEO prevailed over his superiors through sheer charm and wile. Or, it may be something else.
What we know is that way back in 2008, Sime's internal audit team had red-flagged the QP project to the Sime audit committee at group level.
The reaction was the formation of a "work group" comprising Sime Group-level directors. In other words, in true "Yes Minister"-style, a committee was set up to look into the issue.
Why it took between 2008 to May, 2010 for major action to be taken is, in my view, as serious a matter as the issue of the losses itself. (Errata: I just learnt that the working group was actually only formed in October 2009. So, to be fair, the working group has worked at an urgent pace given the complexity of the matters at hand.)
It is also reported that the Chief Financial Officer Tong Poh Keow had recommended provisions to be made for the losses. This was not done. Had it been done, investors and stakeholders would have been alerted to the escalating losses. Why the provision was not made is also a mystery. Some may tersely surmise an attempt to bury the issue or, worse still, an expression of sheer naivete that by ignoring the issue and, leaving it to the "work group" the issue will, in Zen-like fashion, go away into another Universe.
So, while some may now say that it took great courage for the Sime Group board of directors to get rid of Zubir and, before that, the Sime Energy CEO, the question that will linger for a long while is, why it took so long?
Why did a high-powered "work group" that was tasked to look into the growing financial debacle of QP (and, very likely the brief expanded to include MOQ and Bakun) take such a long time, almost 2 years, to take any action?
The Sime honchos can argue until the cows come home that since action is now being taken, investors and stakeholders should have any fears allayed. It may not play out in this way.
Granted that the decisions made at Sime Energy were done prior to the great merger of Sime, Golden Hope and Guthrie. But, it will not escape the notice of many that corporate exercises are de riguer in corporates the size of Sime Darby. It happens all the time. The difference is in the magnitude, that's all.
The concern here is the issue of failure of corporate governance at 2 levels, namely:
- The obvious matter of strengthening the governance of new project proposals, especially, the risk management issues. No doubt, ex post facto, this is in place to more rigorously examine new project proposals.
- The less obvious and, more immediate matter is, how a multinational corporation like Sime dealt with the issue. Why did it take so long before facts could be gathered and necessary advice obtained? This is especially intriguing when the blogosphere was already rife with chatter about the QP and MOQ debacle for nearly 2 years.
I, for one, prefer to bite my tongue and, call upon Sime's corporate leaders to come up with more disclosures and provide more background and context to the debacle so that investors and stakeholders can make a more informed decision.
This is the time to say more rather than less. In a sense, if one has come out of the closet fully nude, one may as well point to each wart and explain it!
One final matter that needs looking at, not just at Sime but, within the corporate and regulatory community is whether independent, non-executive directors need to be given a more substantive role and, be remunerated in commensurate terms with greater responsibilities?
In an organisation the size of the Sime behemoth, independent, non-executive directors should be devoting at least 20 hours a week and, working very, very closely with the Internal Audit Department so that the chain of command is independent of the line and division managers.
As I understand it, in most large corporates, Sime included, the Internal Audit Department reports directly to the CFO and, nominally to the board of directors. There are so many possible conflicts of interest in this structure that I don't even know where to begin.
That said, I should end with a reminder that, in this saga, it was the Sime internal auditor that red-flagged the matter from the outset.
The real story, as the journos would say, is why it took the Sime Group-level senior management AND the board of directors soooo long to gather facts and, make hard decisions. That is the story that needs to come out at some point.