Too big for its breaches?

When Guambat was just knee-high to a platypus, his mum put him over her knees, took a belt to him and whooped the bejeezus out of him because he was just getting too big.

Too big for his britches, that is.

In today's economic world, with individual companies having revenues greater than the gross national product of many countries, and with globalisation making it more and more difficult to localise or even know the full extent of the worldwide presence of companies, hidden as much of them are in tentacles reaching into various havens around the world, some are questioning whether these gorillas are capable of being regulated at all by mere nation states.

And, apart from the notion of the diseconomies of scale, some are wondering whether these corporate behemoths are just too big to be allowed to fail. In the aftermath of Enron, which resulted in the breakup of Arthur Anderson and the complete rearrangement of accounting and auditing services worldwide, you begin to wonder if you can even punish these beasts in a way that gets its attention and befits an appropriate penalty but does not do more harm than necessary to provide justice for the violation. A fine that would be ruinous for a smaller entity would hardly be a slap on a wrist for one of these King Kongs.

Andrew Cornell also wondered aloud about such matters as these in a comment piece in yesterday's AFR, entitled, "Size really does count against Citigroup". He says,

When you're an organisation as big as Citigroup, with a market capitalisation approaching 10 times that of Australia's biggest bank, every week's bound to bring its ups and downs.

In the space of just a couple of days, Ciit in Australia was pinged by the corporate plods for its proprietary trading, with allegations of inappropriate conflict management systems and insider trading. Meanwhile, back home in the USA, Citi was given the green light by its primary regulator to resume acquisition activities following a ban after concerns about risk management systems.

For Citi though, the overriding pooint really is that all this stuff happens. Australia today, Europe tomorrow, Japan next week, Latin America next year. Citi is the laboratory case for the theory that in modern banking size matters. But is the organisation now so huge it simply can't be controlled in any meaningful sense? Maybe a bank of this scale is simply too complex to manage.

Citigroup is an enormous monster of an institution, the like of which has never been seen. It is unfathomably complex and there are those who argue this is the overriding flaw in Citi's -- and other mega-institutions' -- make-up.

This is fundamentally what chief executive Chuck Prince has been grappling with since he took the reins a couple of years ago. The early days of his tenure, when he took over from Citigroup's Dr Frankenstein, Sandy Weill, who pieced the monster together with acquisitions of wealth management, investment banking, insurance and broking giants. [Which, by the way, required the cooperation of US lawmakers who were happy to oblige with tearing down many of the banking walls created from the Great Depression days which prevented such aggrandisement of finance.]

Monster is just one analogy. Another, of course, is "super group", as Weill and his predecessor, John Reed, did indeed merge organisations that in their own right were market leaders.

Prince took over at a time when the slings and arrows were hitting Citi fairly regularly and indeed had led to a battered Weill leaving the fray. Private bankers had run amok in Japan, rogue bond traders in Europe, corrupt brokers in New York and a crooked client in Italy.

Prince memorably summed up Citi's involvement in the collapse and financial scandal surrounding Italian dairy giant Parmalat when he said: "We were defrauded by a milk company. If you can't protect yourself against a milk company you are not doing a very good job."

Prince is not foolish enough to pretend he can be across the fine detail of all Citi's businesses and instead he has focused on institutionalising a culture of ethical banking and self-management. He's right to do so as culture is the ether in which all institutions function and it's an intangible but crucial componenent of their success and sustainability.

But the complexity issue remains fascinating. Prince's intentions are sound but the day to day, minute to minute running of his organisation is still reliant on technical systems, written policies and the ad hoc infrastructure of an organisation that has grown very big very fast.

According to American business academeic Stephen Wilson, author of the book Conquering Complexity in Your Business, complexity creeps into internal systems, adding layers of costs while eroding customer focus and profitablility unless carefully managed.

The decision by the Federal Reserve Bank of New York to lift Citi's year-long ban from mergers reflected the regulators' view that the bank had made significant progress in implementing a new compliance risk management program. The Fed will no longer ban sizeable acquisitions but it said any expansion proposals would be carefully reviewed.

Citigroup is the stand-out financial institution of its generation and has already rebuilt itself from near disaster once in the past decade. Today, many would argue it comes under the category of too big to fail [or even be allowed to fail]. Yet it has a recrod of perseverance that is exceptional, hving, for example, never pulled out of a country once it had set up -- in stark contrast to Australia's big banks.

The bigger question remains, however. Do the complexities of an institution this size, the challenges of being across myriad businesses, the necessity of dealing with thousands of spot fires and eager regulators, outweigh the scale advantages of such an institution?