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Box Checkers, Bootlickers and Bureaucracy: What’s Killing America

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Box Checkers, Bootlickers and Bureaucracy: What’s Killing America

By: Steve Sadler, CEO, Allegiancy

July 20, 2015

The Currency of Savvy: A blog series from Allegiancy CEO Steve Sadler, featuring practical, provocative thoughts on business, economics, education and government policy. And whatever else is on his mind.

Two summers ago, a friend of mine traveled to the Caribbean on a mission trip. The mission? Work with a Haitian church to open up a school in a bustling city on the northwest coast of Haiti.

All he brought with him was plenty of American cash and high hopes for securing the licenses and registration needed to open the school.

Step one. Visit the local government office and meet with an official to secure the required licenses.

The scene, as it was described to me, was like something out of a movie.

The American stood by, listening to a rickety fan attempting to cool the sweltering room as his Haitian interpreter and fixer talked to the government official in French. Soon the government official beckoned to a second official in another room to join the meeting.

There didn’t seem to be any official government publications to consult, nor any readily available guidelines, or brochures, or a website to gain an understanding of how to obtain the necessary licenses and registration documents.

But there was money. With the proper amount of “licensing fees” — the basis of which remain a mystery — a license could be secured, paperwork signed and, once a notary is located and handsomely rewarded, documents can be official.

It’s so different in America, right?

Or is it?

American abundance of box-checkers bootlickers, and bureaucracy.

We’re not Haiti yet, but in some ways it is actually worse in the US. While Haitian officials require a sufficient amount of “licensing fees” to get things done, they are pretty straight up about it. America is flush with a bonanza of rules and regulations on the local, state and federal levels that can act as a noose around the neck of entrepreneurs. But in the US, we add a dose of self-righteousness to the officials’ attitudes as icing on the cake. The amount of money we spend just to navigate the American bureaucracy would dwarf most nations’ GDP, and that does not even begin to account for the opportunity costs associated with discouraged and harassed businesses. I can see the costs, so where are the benefits?

A ‘self-regulating agency. Or not.

Enter FINRA. The Financial Industry Regulatory Authority (FINRA) recently released its annual report, as highlighted — lowlighted? — by Investment News, which profiled the compensation of the top 10 employees. It’s a clear view of the price tag for the regulatory burden.

First, some quick statistics on FINRA. It’s a service organization that employs 3,500 workers in 17 offices across the country. FINRA isn’t a government agency, but rather operates as an “independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.”

Basically FINRA self-regulates the securities industry. Or is supposed to, as we’ll see later.

According to its 2014 annual report, FINRA referred more than 700 fraud cases for prosecution in 2014 and levied $166.3 million in fines and restitution. Anywhere from 30 billion to 50 billion transactions are processed every day by the 638,322 brokers under FINRA supervision.

The annual payroll? It accounts for 68 percent of FINRA’s expenses at $653 million. Throw in $149 million for professional and contract services — basically the FINRA gravy train is boss — and you have a bootlicking, box checking bonanza.

Just the top 10 employees at FINRA had total compensation exceeding $11 million, according to the report. The CEO has $2.5 million base salary.

Think about this for a minute. As a general rule, an enterprise needs to have gross revenue in excess of 10 times their payroll expense.

That means if FINRA were a “for profit” company producing an actual product you’d be looking at an enterprise that would need to add enough value to the world to convince people to purchase over $6 billion dollars of their products or services. It’s a Fortune 500 enterprise!

Bureaucracy as a growth strategy.

We’ll come back to FINRA, but it’s making me think back to grade school and the kid who would always suck up to the teacher. I certainly saw my share. They were the kids who ran to erase the board, complete some other chore for the teacher, or do something to curry favor other than just being a good student. That, my friends, is a bootlicker.

Those kids didn’t outgrow it. But they did recruit more people to their ranks.

Bureaucracy is rampant in our modern world and tragically, you might even find yourself sucking up from time to time just to get a job done. I confess, it has happened to me. I was waiting in line for an hour at the DMV recently, choking down my frustration and forcing myself to engage in conversation with the clerk about her children for another 10 minutes in hopes of avoiding some bureaucratic hiccup or demand for more documentation, just for the privilege of paying fees to register a used car. And it wasn’t even my car!

Then there’s the box checkers. We are flush with box checkers in this country, many of whom get paid handsomely for it. Not too long ago, I was working on a real estate acquisition and the lawyers on both sides were very busy making sure every possible risk was covered. They were so engrossed with arguing over phrases and clauses and triple checking that all the boxes were checked — the operative term here is “billable hours” — that we almost lost the deal as deadlines came and went. Legal fees exceeded $100,000 in this instance! OUCH!

When the process becomes paramount and the reason we are in business takes a back seat, it means the box-checkers are in control, not the entrepreneurs. And that ain’t good!

It is everywhere. Accountants want to audit everything, sending your staff scurrying for a receipt on a $34.67 lunch tab so they can fill their files and check off that box. Hundreds of documents get produced costing hours and hours of effort, but nobody actually reads the documents. They just get filed in the audit file. Box checked! But, you protest, audits protect investors and assure everyone that things are being done properly at the company. Really? How did that work out for investors in Enron or MCI WorldCom or Tyco or MF Global or Lehman Brothers? All had audited financials….all fell apart. Well, at least the lawyers and accountants all got paid.

For example, how much do you think it cost to compile and produce the slick, 70-page 2014 FINRA annual report? And who will actually read that report outside of the well-paid staff? Though frankly I have serious doubts they will even read it. Our expert sources indicate that FINRA’s annual report cost at least $200,000 to produce….what with outside creative agencies and printing and photography and such.

But here’s the real mind-boggling fact about FINRA: Despite years of examining Bernie Madoff’s broker-dealer operations, somehow they managed to completely “overlook” his $50 billion Ponzi scheme. How on earth was that possible? Wait for it …

Bernie Madoff had been a president of FINRA’s predecessor organization, the National Association of Securities Dealers (NASD). The word “bootlicker” comes to mind. As pointed out by the “Investor Watchdog” blog, Madoff’s broker-dealer operations had been examined every other year for 20 years by FINRA and its predecessors.*

You read that right. Apparently the FINRA/NASD forms didn’t have a “Suspected Ponzi Scheme” box to check.

And oh, one other thing. Madoff’s brother had also been a vice-chairman of the NASD. Maybe, just maybe, that had something to do with NASD/FINRA signing off — box checking — on Madoff’s massive illegal operations. (To be fair, the SEC also ignored written warnings about Madoff….but that just means we have twice as many bureaucrats failing to add any value!)

We feel the pain.

Here’s where all of this hurts me and you. Every interaction with box-checkers, bootlickers and bureaucracy is, in effect, a tax on entrepreneurs and is cutting into the profits of the business. All of these costs, both the direct ones and the opportunity costs, are bleeding small businesses to death. Remember, those profits are the resource that is used to pay investors and to re-invest in growing our companies. Tax and regulate the profit away and you make growth more difficult, maybe even impossible.

The tyranny of box-checkers and bootlickers that serve the bureaucracy — defined by American professors Charles Heckscher and Paul Adler as “valuing conformance and control above all else”— is smothering the energy, drive and creativity of the entrepreneur.

They are also adding layers of new, unfathomable and unlimited RISK. Failure to comply with some obscure regulation and WHAM….an obscure Federal agency sends a SWAT team replete with fully automatic weapons to your front door. It happened to Gibson Guitar Company not long ago. Or maybe you are the unfortunate guy that imported lobster tails from Central America that were delivered to your door, unbeknownst to you, improperly packaged. That poor SOB actually spent time in JAIL! You want to talk about risk! Now entrepreneurs have to worry about losing all their money and losing their freedom because they unknowingly transgress obscure regulation buried in the tens of thousands of new regulations issued every year? Say it with me: “I’m outta here!”

Jesper B. Sorensen, a Stanford Graduate School of Business professor, specializes in the dynamics of organizational and strategic change and their implications for individuals and their careers. He writes frequently about entrepreneurship and in a 2007 paper made this statement: “Entrepreneurs are made, not simply born.”

So what are we making in America right now? World beating Entrepreneurs or world-class box checkers, bootlickers and bureaucrats?

When growth leads to cancer.

Famed naturalist, essayist and author Edward Abbey, who railed against development of his beloved outdoors, wrote during one of his escapes into the vast, wild and enchanting desert wilderness of the American Southwest, “Growth for the sake of growth is the ideology of the cancer cell.”

Abbey was on to something. With a little tweak to his words, his famous quote can be adapted to describe the cancerous growth of bureaucracy: Rules for the sake of rules is the ideology of the bureaucrat. We are awash in a Byzantine world of imposed rules, regulations, codes, acts, laws, bylaws, statutes, edicts, decrees and, yes, even the dreaded bureaucratic joy of the fiat.

States and localities have even discovered the joys of bureaucratic text — that is the text of rules and regulations. From local sign ordinances that outline to the square foot and style the size, shape and style of business signs, to the unending Securities Exchange Commission regulations, to the fine print that FINRA specializes in, bureaucracy is way more than a cottage industry. It’s become the dominant trade, with the ultimate outcome being conformance and control.

“Where all think alike there is little danger of innovation,” Abbey wrote. They are frightening words that resonate today.

Oh, if only navigating the US bureaucratic maze were as easy as walking into an office and paying some creatively established “licensing fees”. Kinda makes you long for a simple banana republic!

*Here’s the link to the Investor Watchdog blog post on Madoff and his relationship with FINRA.

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  • Louis DeCuir

    World’s dumbest post. Yes, we live in a world of byzantine rules, laws and regulations — especially in the financial services industry — but they’re intended, for better or worse, to serve a worthy purpose. Despite this, an occasional Bernie Madoff or Enron manages to get away with bad deeds. I often find investors whose brokers sold them holdings that are obviously unsuitable, despite FINRA’s onerous regulatory system. Based on this, one could argue that FINRA is too lax, rather than too powerful. America has the world’s greatest economy and is still the best place in the world to invest. It’s not whether there’s too much or too little regulation, but the question should be: how can rules should be designed and enforced to promote business while still protecting the investing public? This is a question the anti-regulatory crowd is usually too lazy to answer.

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