The wisdom of the crowds

By Leong Sze Hian

I think we may need to re-think our mindset to not over-concentrate the smartest like our scholars and the most successful elite, in the decision-making hierarchy of our GLCs.

Otherwise, the silliest of costly blunders not just in money terms, but to Singapore’s reputation and relationships, may happen, has happened, and we should try harder to not let it happen again in the future.

In the Business Times articles of 26 April, 2007, titled “Why corporate transparency matters: Transparent companies are better able to reap the benefits of harnessing market forces“, Nations with huge reserves should be spending” and “No change in Temasek, GIC leadership: MM Lee” (April 25), the first article states:

“IMAGINE this: everyone within a corporate environment being able to access information they need from their computers; and information, moreover, that has not been adulterated, so that they can be assured that what they get is the truth. With such access, everyone will know what the true drivers of the business are.

In fact, the company’s business planning process will no longer be a ‘best guess’ effort but a collaborative one where every manager can see how his or her decision will affect the other aspects of the company – immediately. With such clarity and visibility, the organisation will be able to predict with almost absolute certainty how the market will respond to the various corporate activities.

In such a scenario, companies will be able to better understand their strengths and competencies. This understanding will then lead to creating strategies that are so uniquely linked and intertwined with the corporate values and skills that they simply cannot be copied.

This is a goal that we believe organisations would like to achieve – to run a transparent organisational process where people can make informed decisions that will benefit the growth of the firm in a responsible manner. This is also known as Corporate Nirvana. Why then has this subject suddenly become the ‘flavour of the month’? But does corporate transparency really matter here? Trust and confidence in any relationship grow from transparency and accountability.

With government regulatory boards growing more stringent with their regulatory policies and corporate shareholders also demanding more clarity and transparency, companies will now have to furnish information in a timelier manner”.

The third article states that :

“However, in the past year, its performance would have been hit by its $3.8 billion investment in Shin Corp which it bought from Thailand‘s former prime minister Thaksin Shinawatra and his family, and has halved in value”.

Since I understand that Singapore does not allow our telecom companies to be majority owned by foreign companies, what made us think that Thailand was any different ?

What is perhaps enlightening and relevant to our investment forays in the region, is Francis Galton’s book “The Wisdom of Crowds”, in which he said :

“the simple, but powerful truth that is at the heart of this book : under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest of people in them. Groups do not need to be dominated by exceptionally intelligent people in order to be smart”.

Most of us …. believe that valuable knowledge is (should be) concentrated in a very few hands or, rather, in a very few heads …. the argument of this book is that chasing the expert is a mistake, and a costly one at that … the conditions that are necessary for the crowd to be wise : diversity, independence, and a particular kind of decentralisation …. diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromise”. The importance of the periphery should not be understated. Most studies have shown that the number one strategy pitfall is overconfidence.

On reflection, I think we may need to re-think our mindset to not over-concentrate the smartest like our scholars and the most successful elite, in the decision-making heirachy of our GLCs, otherwise, the silliest of costly blunders not just in money terms, but to Singapore’s reputation and relationships, may happen, has happened, and we should try harder to not let it happen again in the future.

Perhaps we may need to heed the immortalised quote of the legendary television star, Will Rogers, who said “Its not what we don’t know, but what people are sure of, that ain’t so”, and Charles Darwin’s “It’s not the strongest of the species who survive, nor the most intelligent, but the ones most responsive to change”.

Many failures may be prevented or their cost contained if senior management approached innovative ventures with the right planning and control tools like “Discovery-driven planning” over “Platform-based planning”.

For Temasek’s latest takeover offer of STATS ChipPAC, the Wall Street Journal Asia (March 2 – 4) reported :

“One analyst said it is ‘puzzling’ that Temasek is buying a company with a return on equity that is lower than the state investment company’s own target of 12% …. The offer price, however, is still a steep discount to the S$ 3.55 of STAT ChipPac’s January 2000 initial public offering and the stock’s high of about S$ 10 …. has been aiming to reduce Singapore investments to one third now, was tightlipped about its reasons for making a new investment in a Singapore company”.

The 18 per cent per annum return over the last 30 years, may to some extent, be due to the transfer of assets at what may appear to be generally perceived as somewhat less-than market valuation (using generally accepted valuation techniques for similar companies in the same industry).

Examples may be POSBank at $ 1.6 billion that was about 137 per cent more than its net tangible assets, in November 1988, and HDB Corp at $ 117 million in November 2004. The rate of return is partly dependent on the original costs of acquisition. This may in a way, gave an otherwise higher rate of return from the time of acquisition to divestment or current valuation.

According to the Asia Times of April 13,:

“According to independent financial analysts who spoke with Asia Times Online, Singapore‘s outsized surpluses are habitually hidden away off-budget, often through the use of accounting gimmicks that diverge from internationally accepted norms. They note that government-linked companies and investment corporations buy and sell among themselves at undisclosed transfer prices, obscuring their profit and loss profiles”.

The Key Performance Indicator (KPI) of returns may need to be broken down into Performance Indicators (PI), to enable the staff, managers and other stakeholders, to better understand how and why the KPI was derived, so as to know what to do and the lessons learned to avoid, in the continual quest to improve future performance.

For example, it may be helpful to know the components of the return that was attributed to realised capital gains, unrealised gains, income, perceived less-than market valuation differential, etc.

The second article states that :

“Instead of seeking ways to maximise the returns on their vast holdings of foreign exchange reserves, Asian and other surplus nations might be better advised to consider whether it is prudent to accumulate such reserves in the first place. And, now that they do hold large amounts, whether it might be better to start spending at least part of them on assets with a high economic return, such as better physical infrastructure and improved services such as education and health for their people, instead of chasing higher financial returns”.



About the author:

Sze Hian has 5 degrees and 13 professional qualifications. A Wharton Fellow, alumnus of Harvard University and the United Nations University International Leadership Academy, he has served as Honorary Consul of Jamaica, President of the Society of Financial Service Professionals, Representative of the Inter-American Economic Council, Chairman of the Institute of Administrative Management, and founding Advisor to the Financial Planning Association of Indonesia. He has been invited to speak more than 100 times in over 15 countries on 5 continents, authored 3 books and quoted over 700 times in the media.

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