CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 706 - i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PARLIAMENTARY COMMISSION ON BANKING STANDARDS

(SUB-COMMITTEE D)

PANEL ON CORPORATE GOVERNANCE: BELOW BOARD LEVEL

THURSDAY 1 NOVEMBER 2012

ALI PARSA

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Parliamentary Commission on Banking Standards

Sub-Committee D-Panel on Corporate Governance: Below Board Level

on Thursday 1 November 2012

Members present:

Mark Garnier (Chair)

Baroness Kramer

Examination of Witness

Witness: Ali Parsa, Chief Executive, Circle Partnership, gave evidence.

Q1 Chair: Mr Parsa, thank you very much indeed for coming in and seeing us. As you know, the Parliamentary Commission on Banking Standards was set up in the light of the LIBOR scandal to look at the wider issue of banking standards. The working of the Commission has been divided into a number of smaller groups, and this is one of those smaller groups, which is looking specifically at corporate governance from the bottom up, as opposed to from the top down. The purpose of the smaller groups is to inform the wider debate on the Commission itself when it meets as a whole. This is all about gathering evidence and opinions, as opposed to necessarily trying to find answers, so today’s session is not about finding answers; it is about trying to tease out everything we can learn about this very complex issue.

We are incredibly grateful to you specifically for coming, because it is certainly my view that it would be foolish if we limited ourselves to looking at banks and that it is very important to look into the wider world to see whether there are areas of expertise or experience that we can draw on at least to inform our debate. Simply looking at banks would be simply to look at the problem in a million different ways. If we look at it in a different way, we may find an answer that we weren’t expecting elsewhere.

For that reason, I am incredibly grateful to you for taking time away from running an organisation in an incredibly important industry to come and talk to us about your experience. We will stick with your area. We had a chat earlier, and perhaps we will leave health policy for another day if you feel tempted to mention it.

I would like to start with the staff culture at Hichingbrooke in particular, but also in the wider area. Starting at the very beginning, how did you determine the culture that you wanted at Hinchingbrooke? How would you describe it, and what methods did you use to embed it?

Ali Parsa: We actually started with out culture before we even knew what we wanted to do. I remember that even before we had a business plan, when we created Circle, we wrote what we grandly called our credo. We should just have called it our beliefs. It simply said what the values are, irrespective of what industry we were going to get into, that we would advocate. It said that we were, above all, agents of our patients, that everyone in our organisation matters and that we seek excellence-simple things that I think are accountable for any industry.

Having done that, we started building a partnership of those who believe in the same values, and it became a self-selecting group of people to a large degree. When we built a hospital in Bath or Reading, we attracted the sort of people who believed in those values. They may seem simple at their core, but they are rarely practised. If I take the value that everyone matters, health care is very hierarchical, and it is no different in banking, where I spent just under 10 years. Many people think that it is just the doctor or consultant who matter at the end of the day, but that is just not true. A consultant may do fantastic surgery; the cleaner may do a bad job, and the patient may get an infection. It is a continuum that everyone matters. It is also a basic human thing.

If I take a picture of you-as eminent as Baroness Kramer and you, Mr Garnier, may be-each person will probably look at their own picture if I showed it to you. We all think that we matter more because we and our family are the centre of our own universe. The same is true in an organisation, irrespective of your position, yet most of them do not practise that value. As you both know, during your careers prior to your parliamentary careers, and as I have witnessed, banks are no different. They are very hierarchical and all about the people at the top. The same is true elsewhere.

What we did first was to put our values, and they were appealing and, in my view, true. You are right in that we do not practice the politics of health care; we are just practitioners of health care, so politicians decide what they want to do, and we just do the result. When we were given Hinchingbrooke, we were asked to provide a business plan for the organisation’s strategy authority. We were told to provide it in a month, and we said that it would take us longer because we wanted to engage everyone in the plan. We then invited all the staff, and we were told that nobody would show up. We were also told "There is no hospital in the country where 20 people even know the business plan. Just grow up and run the business plan." We insisted, and it was not easy to insist, because they would not give you the time commitment. In any case, 1,200 out of our 1,700 staff showed up to write their own business plan.

People said that writing a business plan was a very complex thing, but, as you know from your careers, it is not. A business plan is simply, "Where do I want to be in two or five years time? What are the barriers to overcome? How do I overcome them?" Then there is, "What do the financials of this mean?" So we took groups of 50 to 100 staff through that, and at the end, we just distilled in a transparent way what they came up with-every suggestion was on the website-and passed it back to them for approval. What you had was a common start to a set of ideas and objectives that from the very beginning was set by the staff themselves and not by people above them. That story is the beginning of anything an organisation needs to do-to have a buy-in from the people.

People will say, "But your customers are not your staff," which is true, but the closest people an organisation has to its customers are the people on its front line. We all react in life to the pressures on us. I used to do physics before I was a banker, and it is very simple: the laws of physics apply to who we are. We react to where the pressure is, and our reaction comes from the pressure. My pressure comes from people like yourself, my shareholders or my associates in my customers, but the pressures of my doctors and nurses come from the people they see every day. If I am to make every decision, I will react to the pressure points that I have, but if my people on my front line are given the right and the ability to make decisions, they should make the right ones. That is a very long-winded way of saying that I think this is a continuum, and it is never about just the structures. It has to start with cultures and objectives.

Q2 Chair: You are talking about two separate things, one of which is the culture of a certain group, and then when you are starting a new hospital people will come to it. The other is where you are taking over Hinchingbrooke, where you are inheriting a problem and trying to turn it around into a more constructive and beneficial outcome. What has struck me as being very interesting is that I think you have 49.9% staff ownership of the Circle group, not necessarily just of the Hinchingbrooke hospital contract. To what extent do you think that that is incredibly important-that people feel that not only do they own the business plan, but they own the organisation as well?

Ali Parsa: I personally think it is very important, not because it gives them material gains, but because it gives them control. At the end of the day, in any organisation, ownership provides control, and control is what matters. From the point of view of an organisation, it matters, and I also think that from the point of view of national policy, it matters. We have created a society in which a single square mile here in Whitehall and a single square mile in the City control over 90% of all productive assets in Britain. That level of concentration is unique in any western country that I know of, so I think it is important that we do something about it. That means our civic society-the people who do the work-are left with less than 10% of GDP to own and control. I think that is just wrong, so part of what we do is to try to rebalance that.

There is a sense of, "If I own something, I will look after it better and I will feel a part of it." The best story I know about that, Mr Garnier, is when we built our hospital in Bath-a brand new hospital and a gorgeous place-we made a facility management agreement to keep it like that, and part of the agreement was a complete repainting or touching up of the place after a year. At the end of the year, people came in and they had almost nothing to do. There were no scratches or anything, because people took care of a place that they felt proud of. Do they have to own it in order to do that? I do not believe that; I think you can create a sense of ownership. Should they own it? Absolutely, because otherwise if I own it all, I am benefiting financially from everybody else’s work without them benefiting from it.

Q3 Chair: Earlier on, you said that 1,200 of the 1,700 members of staff at Hinchingbrooke had bought into creating this business plan. What sense do the remaining 500 have that they do not feel part of this programme? Has that caused a problem for those 500 people who did not contribute?

Ali Parsa: The truth of the matter is that we were lazy, so we should have done this having learned that we should have done it differently. We ran it during the daytime and there are groups of staff who just have evening or night shifts, so we should have run some during the night. Also, I think that people knew that they had the opportunity to participate. It is like saying that only 40% to 50% of people in Britain vote. That does not mean that the other 50% do not believe that the results of the votes are valid and that they are bound by it.

Q4 Chair: Having established this form of buy-in, how do you ensure that it stays really entrenched in the culture of the hospital? How do you continue to ensure that people do feel that they have value to add and are in control of their destinies?

Ali Parsa: With great difficulty. I remember drawing the share price of Amazon for our staff. If you look at the share price of Amazon through its history, it went up massively as it went public and then it completely collapsed. Then it teetered for seven or eight years, and then it started to go up. I think that is the graph of any transformation. At the beginning, you win hearts and minds and make promises that take belief. It is easy. People get really excited by what you do. However, then you need to make the changes. Amazon needed to figure out how to deliver a book to people’s homes at lower prices than somebody going to a shop and picking it up. That is a very difficult thing. I remember Jeff Bezos once telling me that posting a book used to cost them more than the price of the book. People see that reality, and the share price collapses. Then it took it seven or eight years to figure out how to do it. Eventually, they did what nobody expected, which was to sell books not only in America, but globally, and not only sell books, but also sell everything else. That is what happens in any transformation.

If you look at Hinchingbrooke, I am surprised that we have not gone down as much as I assumed. You witnessed it some time ago, and staff morale is still pretty high. By now, I would have expected it to be much worse. You just have to do it through persistence. The problem with power is that it is a zero-sum game, so if I pass it down to my lower executives, they now need to pass it down lower and lower. At every single stage, you will see that it gets stuck there. You then need to go back in again and argue that it should go down further.

It is a long process, and it would be foolish of me to suggest that it can be done easily. It never is. It is always a three, four or five-year process, but eventually it gets to a place, as we have in our other hospital in Nottingham now, where it becomes automatic. Everybody feels a sense of ownership. They are solving their own problems. They run their own little unit. It then becomes a self-running organisation. Then the job is to get the culture right, so the job of management at that stage is almost nothing else but to get the culture right.

I believe it was Nelson who used to say that, when at war, the job of the generals or leaders is absolute indoctrination and then leaving people to it. It was of course proven at his last battle, where he was mortally wounded and yet his troops went on to win the war without his participation. That is our job. Our job is absolute indoctrination. Going back to the industry that you are investigating, that is where people failed. They failed to advocate the values.

Q5 Chair: The values come from the top, and having met you before in front of many of your staff, what struck me as being very clear was that you have a certain persona that can be infectious. Your enthusiasm can be infectious. But you are not always going to have that in management teams. It strikes me that the biggest problem any organisation has is that if you do have an inspirational leader, that leader has to be able to find people who will transmit that effectively. How do you seek your next level down-your lieutenants-who can then go out and spread the word better?

Ali Parsa: It is very difficult in any organisation to do that. I am fascinated to see what is going to happen to Apple now that Steve Jobs has gone. We saw what gradually happened to Walmart after Sam Walton left. Every family has this problem. When the grandfather does something amazing, the son or daughter keeps it going and then the grandchild loses it. That is why every company has a lifespan. It is very rare for a company to live for ever.

Our jobs are very difficult because often entrepreneurs are very good at conquering and coming up with ideas and visions, but they may not be very good at then managing that. The Persian King Xerxes the Great was fantastic at conquering, and what made him Xerxes the Great was the fact that he had a whole bunch of nameless administrators who could run the cities that he had conquered. Genghis Khan did not have those administrators, so they looted, burned and moved on because they found that they could not manage these things and rebelled against him afterwards.

It is a tough one. Those managers who are critical to an organisation’s success are often not about vision, enthusiasm and motivation, but about just getting the job done. Therefore, entrepreneurs need to think about both what they can and cannot provide while they are around. Every organisation has tightness around cash and senior people cost money, so one always has to balance these things.

Every kind of leader with every kind of aptitude can do the right thing. It is fundamentally about national culture. Twenty years ago, we in Britain believed that smoking was a good thing. Today, it does not matter what kind of a person you are: you do not smoke. We have changed the national culture. In banking or in any other culture, we need to do the same. We in the Anglo-Saxon economy in general-if not in the western economy as a whole-have become phenomenally good at the "what" and the "how" of business: what services we should produce and how to make it more efficient and productive. However, we have culturally forgotten about the "why" part of business. Why do we do what we do? Why do we get up in morning? What is the effect of our business on everybody else? That is the bit that we as a nation need to re-evaluate. It does not come about from 1%, 2% or 3%. It comes via a change in national mood. Changes in national mood have happened often in our history, and should happen again.

Chair: We have been debating professional standards in banking. Although there is the Institute of Bankers-I think that is what it is called-it seems that few people are subscribed to it. While a great many people who work in banks are FSA-registered, this does not necessarily mean that they adhere to a professional standard over and above that, in the same way as chartered accountants or, in the case of the health care industry, members of the BMA. Do you think that that is an important point? Is the health care industry different from the banking industry, in that, ultimately, if you are a bad doctor, you can be struck off the BMA? Or is that a red herring? Are we barking up the wrong tree?

Ali Parsa: The truth of the matter is that bad doctors do not get struck off. The country is full of bad doctors who should not be practising. However, they are a tiny minority: out of 200,000 people, even if is 1%, is a very big number. In health care, we have just introduced accreditation for doctors. We need to be careful about putting regulation system processes in place. It is tempting because it is almost the only thing we have the power to do. However, it never works. If one reads the systems and processes of banking, everything is there. There are some things that need to change, but not a lot. What really matters is that the values are not there. I am sure that there was nothing in Barclays bank’s manuals that says, "You will manipulate LIBOR." I am sure that there was nothing in there either saying, "If you want to do something, you check it here and there, and it goes to a particular committee."

When I was at Goldman Sachs-and I may have these numbers wrong-we used to do 700,000 trades every week. The average age of our employees was 29 and the minimum size of our trade was $10 million. My CEO was a health fanatic. He used to spend almost two hours a day in the gym if he could. I am talking about Hank Paulson.

How do you control that? It is impossible for anybody to control all of that. It just cannot be done. You cannot put systems in place that manage or control it. Today, with technology, maybe we could do a lot more than we could when I was around. Your job is not controlling it, but to create a set of values and behaviours that self-regulates. I think there is a job for regulation. Please do not think that, by self-regulate, I mean self-regulate nationally; I mean self-regulate internally in an organisation.

When a trader makes far too much money, they need to give it back. I was an investment banker. I did mergers and acquisitions, so not trading, but I remember very well what happened in one particular deal when we made far too much money. I remember that a very old-time partner in Goldman called me in and said, "You’ve just got this one wrong, and I’m going to ask you to give the money back to the client." That taught me more lessons than any manual or regulation and it was true.

Those values used to exist, but in a world in which the size of my house, the size of my car-it was also a generational thing, wasn’t it? These were the children who were born in the ’70s or even the late ’60s, who were brought up with the values of the late ’80s, which were all about maximisation of shareholder value, personal profit-all that kind of stuff-and which the generation before that did not have. It was all about stakeholder value, if you remember. I am old enough and certainly, as you can see, ugly enough to remember that there used to be a time when stakeholder value was what mattered. Then there was this barrage of attacks on that for it to be replaced by shareholder value, and then long-term shareholder value got replaced by quarterly profit.

If you create that environment, it is very easy to blame the bankers, but when was the last time that anybody in this room went and looked at his pension and said to the pension managers, "I’m not choosing you because you provide the best profit; I’m choosing you because you do things sustainably or for the long term."? Our whole society was about chasing the last digit in the profitability of your own thing.

Q6 Baroness Kramer: This is just fascinating analysis. I am far older than you, so I also saw a lot of that kind of change. I certainly remember a lot of the old managers and old company bosses, who had a much more complex set of values and objectives. How does the corporate governance work in the world that you describe? How does the organisation organise itself and how does it feed down?

Ali Parsa: The corporate governance we tried to establish-I must say that we struggle with keeping it every day, because pressure points from our investors on our side and from our various vested interests on the other side try to influence it one way or another. I hope that we can maintain it. I should start by saying that we have by no means managed to do that yet, but the right way to do it, in my view, is by structurally balancing all the interests. What are the interests? They are the stakeholders, our staff-employees-and our patients or our customers. By giving half of the ownership to our staff, we have secured their position, their control, over the organisation. In doing so, we have told them-it is written in our credo-that in return for that, they need to do their best for their patients. There are no excuses for mediocrity. Our patients influence our staff every day, and our staff can then relate that.

Specifically on corporate governance, when we take Hinchingbrooke, Bath or anything, we turn it into tiny little clinical units, no different from an investment banking unit or a management consultancy unit. Hopefully, it will be less than 50, but sometimes it has to be as large as 100. Everybody will know each other, and are responsible for the unit’s delivery, its objectives and its goals. They are also influenced everyday by their patients. To make sure that they are influenced everyday by their patients, you can go our website. We ask each single patient three questions after they leave: "What is the single thing that we should not mess around with?"; "What is the single thing we should fix?", and "Will you recommend it to a friend or a family?" Like TripAdvisor, we put it open on our website, so if a patient says, "You are rubish," having spelt "rubbish" with one b, that is what we put on our website.

Our staff are obliged to answer every suggestion for improvement within a certain period, make the improvement within a certain period and then deliver it. In Nottingham, when we started that, a third of our patients used to say that they were not sure about recommending us to a friend or a family. Today, 99.6% say that they will recommend it, and only a third say that something needs to change. Two thirds say there is nothing to change.

Clinical units elect a leader. They elect a nurse, a doctor, an administrator, and if necessary, they elect a matron in their leadership group. Among their leadership group, they choose one person as the leader, and that leader sits on the board of the hospital. A representative from the board of the hospital sits on the board of our partnership, which owns half of our business. In practice, we would like to bring the board of our partnership and the board of our investors into one unit, so that is it. I then report to that board. The only people who can sack me are, on one side, our investors, but on the other side are my staff.

Q7 Baroness Kramer: That is absolutely fascinating. How do you deal with the problems that spring to mind as you think about the units: the empire-building problem, which so many organisations suffer? The other difficulty that organisations suffer is that risk is raised to the appropriate level, rather than contained within the group because people want to protect themselves from criticism, challenge or whatever else. How do you deal with those issues within the structure that you have just described?

Ali Parsa: Your question is very thoughtful, because it is exactly where the problem is. The problem, Baroness Kramer, is that you often cannot help people against themselves. We all have fears, ambitions and ego, and those things come into play all the time. One of the things that we have just put into our company is a corporate Facebook. The idea is that everybody-it doesn’t matter what they do-puts down their activity. I would say, "Today, I came and provided evidence" here and write a couple of lines about it. Everybody in the organisation can then almost see what everybody is up to. Interestingly, the take-up of the day-to-day recording to the entire organisation of what you do is not huge.

Instead of just having structures that monitor, we are thinking how to create a set of behaviours to monitor. My daughter is 11. I am not on Facebook; she is. My wife knows everything my daughter does, because they are friends on Facebook. It is a fascinating thing. I could get my daughter to report to me what she does, but actually she self-reports everything she does on that thing. If my wife wants to check, she checks. I am far too lazy to do it.

In our society, our youth are far ahead of our organisations in the way in which they self-govern and manage themselves at the moment. Our organisations are still stuck in the era of, "What processes can I put in place in order to manage you to do your job?" We need to think about what values to put in place, and what values do I judge you by and trust you to get on and do it? You then create an environment in which you self-regulate and self-police each other to make sure you stick to that set of values.

Q8Baroness Kramer: That is absolutely fascinating. It sounds like a sort of gentle, early-stage whistleblowing without the drama. I think that Mark will pick up some of the whistleblowing later. That is a really interesting area. Can I move slightly off that and come back to it later? I don’t want to talk all the way through this. You talked in the various articles about reward. The banking model, as you know, has relied very heavily on incentivising staff by compensation: many would say, completely out of proportion and excessive compensation. If now we are going to look at a banking model where compensation plays a much lesser role, what are the other kinds of satisfaction you have found have worked towards getting staff to commit to an organisation or to focus on performance.

Ali Parsa: A lot of studies have been done on staff behaviour and staff satisfaction. To me it is very interesting because-please, this is just the thoughts of a non-qualified person-I have never met anybody who says, "I am really satisfied with my job because I get paid a lot." There are two parts to satisfaction. There is the hygiene factor. Your boss needs to be a nice person. You need to get paid a fair amount. There needs to be no racism, no sexism, no homophobia-all that kind of stuff-in the job. Those are just hygiene factors. Those hygiene factors do not make you satisfied. They just stop you feeling dissatisfied. What makes you really satisfied in a job are three things in my view: one is autonomy; two is complexity; and three is proportionality or relativity between rewards and efforts. Those three are critical, and in that comes a sense of mission that I am doing something.

I talked the other day to somebody in a hospital. It is true story. She was cleaning the men’s bathroom. I walked into it and she said, "Sorry, I want to stop you and I’m going to tell you something. I work for one of your subcontractors and I want to move to work for the partnership. I want to be part of the partnership." I asked her why and she said, "For my subcontractor, I am cleaning the hospital. If I was part of the partnership, I am creating the best patient experience anywhere in the world and that is what I want to be part of." So she never saw herself as somebody who cleans our facilities. She saw herself as somebody who was there to prove that hospitals can be like a five-star hotel. That was in our Bath facility. To me that is critical-that sense of mission that I go to work believing that I am doing something.

Now Blankfein went as far as saying that Goldman does God’s work, didn’t he? But he probably personally believes that. He probably personally believes he is doing a phenomenal piece of work. My point is that everybody in an organisation needs to have that sense of belief, whatever those beliefs are. As I was coming here, I passed by Cromwell’s statue. As you know, capitalism was created almost in that period by people like Webber and Francis Bacon. One of the largest capital raisings ever done by that time was done in 1629 to 1630 by the Puritans who migrated to create New England. They put 30,000 people on 190 ships and went to a massive sense of achievement. They created a prospectus. It is a fascinating document, because it has two objectives. One is to provide a fantastic return to its shareholders, and two was to create the kingdom of God on earth. My question to so many of my fellow chief executives and my fellow investors is, where is the kingdom of God part in what we do? We all focus on this part. So I think pay matters. But almost the same thing matters in the other two areas.

I will give you an example from my industry. Look at health care. Again, I will stay away from the politics of it; I just want to focus on the economics and staff satisfaction. Only 10 years ago, we used to spend £40 billion a year on health care; today, we spend £120 billion a year. We have tripled the expenditure in health care. So 70% of that increased money went to the staff, so we almost tripled the staff pay in the past 10 or 12 years.

Interestingly, the majority of the staff in the jobs are dissatisfied. Why is that? That is because although we paid them a lot a more, we took away the relativity between effort and reward and we put them all on the same growth things. So if you work really hard and I do not, it does not matter; we both automatically get promoted at the end of every year, and we are on the same pay scale. You get dissatisfied if you are working very hard, because I am just getting on, and even I get dissatisfied because I think that the system is stupid and I can just free ride on it.

Because we do not trust our staff, we have taken the autonomy away by micro-managing their every effort and treating them in a way that makes them say, "Well, if you tell me what to do, I will just prove that you are wrong, and I won’t participate in this." We have taken the complexity of their work away by taking management and mission away from it and just saying, "You do the one thing you need to do." As a result, 83% of our consultants in Britain would not recommend that their children go into medicine. That is an astonishing fact. You do not incentivise just with money; you incentivise with a sense of mission and by being fair, and giving people autonomy.

I argue that this is what you would like, Baroness Kramer, in your job. You like autonomy; you like complexity and stimulation; and you like relativity between rewards and effort. That does not necessarily mean financial reward; it means recognition and all that.

Q9 Baroness Kramer: I think it is certainly true that none of us does this for the money. I am very interested in the argument that you have made for much more performance-related pay. I am interested to know how you measure that and decide that, and whether there is something in that that would be relevant for the banking industry. The other issue is that many people in banking, particularly those involved with structuring complex derivatives or whatever, take the view, "If the product earns an enormous fee for the bank, why should the shareholder have all of it and why shouldn’t I get a big chunk of it?" So there is an absolute pay issue there as well. Is there some risk, when one says that satisfaction is as important as pay, that that can be read from the other side as, "Satisfaction is nice and soft and easy to give people. It does not cost you much."? Then the shareholder gets to hold a greater part of the actual financial return. I wondered what your thoughts would be around those questions.

Ali Parsa: I actually agree completely with the idea that if I do something amazing, I should get a very big chunk of that and it should not all go to the shareholders. I actually think that the system of payment in banking, where everybody who worked there took 50% of the profit in the bonus pool and the shareholders took the other 50%, was correct. It had fantastic results. Just ask yourself why a small organisation of professionals such as Goldman Sachs would have such gigantic effect on society and the economy. It was because their system was working. It was their values that went wrong, not their system. I am a big believer in that.

My problem is almost in another place. I think that industry as a whole takes far too much share of the financial value of our society. When I go on holiday, because I have been lucky and I have been an investment banker and have a little bit of savings, I can still go on the holidays that I used to go on. But now when I go on holiday to a resort, everybody that I see from every other country comes from all over that country. The Germans come from all over Germany, and they are in all sorts of professions. All the English men, women and families I see come from London, and they are all in financial services. The share of the profit-of added value-that financial services has taken out of our society is far too much.

You just think about an organisation-I would not name it because this session is being recorded-but it is one of the most successful entrepreneurial businesses set up in the last 10 years. It did phenomenally well. But the entrepreneur in that business was left with just about 10% of the business. The staff were left with a single digit percentage and the investors took all the rest, and that was just because at some stage they made an investment. Remember, when an entrepreneur or a company goes for an investment, they are at a time of need, and therefore, unless you are a Facebook of this world, the power sits on the other side. I think that industry as a whole is taking far too much of the share of the financial added value created in Britain, but I do not think that within industry the division is wrong. That is on one side.

On the other side, I think that the way they are divided is wrong, so that giving the bonus as a cash incentive at the end of the year advocates all sorts of wrong behaviour, of which I am sure you are aware. One should do what we do, which is say, "Here is what you have done. We are going to give it to you not in cash but in shares. Your shares will be invested for the next three years, so you do very well if this organisation is doing well in three years’ time." So all your decisions are now made on a three, five or 10-year time horizon. It is interesting for me. Even in our organisation-we have been around now for seven or eight years-there is a generation of people who are thinking, "Perhaps I want to retire in one, two or three years’ time." Sometimes they come to me and say, "I’m worried that my behaviour is all dictated by a two or three-year time span, rather than a 20-year span."

Q10 Baroness Kramer: If I can ask one last question; I am trying to understand better what kind of role the investors play and how they and their interests are represented in the organisation. I have noticed that you have traditional investors in your business. How do their typically short-term views mesh with what you have described, which is a much longer-term scenario of the staff employees? Is there anything that you can tell us around those two kinds of issues?

Ali Parsa: I actually believe that the problem with our banking system-the way in which we finance our businesses-is not the banking system itself. It is the financial institutions and investors that are the problem. The bankers are only a reflection of what the investors need and want, and that is a major problem for Britain. I am often amused that everyone is looking at the bankers and not at the people who actually control the money, which is not the bankers. The bankers are only the agent of the money; they are the intermediary of the investors or the investment community, and that is where the problem lies.

You are absolutely right; they are short-termist, because society as a whole is short-termist. We do not reward the pension fund because in 10 years’ time they do something really good for us. We just have to open up any comparative table among pension funds, and see that it shows the performance last year or even in the last three years, but certainly not in the last 20 years or 10 years. That shows that our whole value is based on short-term returns by these people.

I think, Baroness Kramer, that there is a structural reason for why Britain does not produce the Facebooks or the Amazons of the world. If you look at Amazon, it consistently lost money for about 12 years, yet its investors, notably Warren Buffett, turned back and said, "It doesn’t matter. I am not here to make money in a year or two; I am here to make money for my fund over a much longer time period."

The same is true of Rupert Murdoch. He is one of the greatest entrepreneurs that this country has seen, and yet I completely disagree with his values. If you think about what Murdoch did with Sky, it was not a one-year, two-year, three-year return, it was a 10 or 12-year return. I was lucky enough to sit next to him at a lunch, and he was analysing my business. He said, "The problem with you guys is you need capital for a very long period of time, and therefore you are at the mercy of very short-term investors to be able to provide you that capital at the time." Yet the reason he could do what he did was because he had the cash flow from News International, so he could make a decision for Sky to lose a billion a year or whatever it was that it lost for a very long period of time, so that today it can make what it does.

I think there is a structural reason why Britain does not create Googles or Facebooks and Groupons of the world. Our investor community culture, in spite of whatever they say, is not based around a 10-year return rather than a two-year return. I think it was Bezos who said in a lecture that I read somewhere that if you compete on a one-year business plan, you are competing with the whole world, including the public sector. If you compete on a three to five-year business plan, you are competing with far fewer people, and that is often why private equity guys do very well, because they have a three to five-year plan. If you are competing on a 10-year plan, you are on your own and you will definitely win. That is what Amazon and Sky did. That is what I hope people like Circle can do.

We have been unbelievably lucky. Out of every 100 doors that we knocked on, one opened on us. We were very lucky. What is very interesting, if you look at our list of investors-some of the best-performing investors out there, and some of the smartest-it took their vision to see what we were trying to do. But they are by no means the average in the investment community. They are very rare-very few-and the only reason we accessed them was because of our background and knowing where to look.

Q11 Baroness Kramer: So, by definition, you have investors who are closer to your culture, rather than the typical on-the-street investor. If we were looking at something like a banking institution, which is unlikely to be able to find the quantity of a kind of long-visioned investor, would your perspective be that there is an embedded conflict between the expectation of the shareholder and the pressures that the shareholder is going to exert and the kind of strategy to build a business in the way that you describe? Is that how you see it?

Ali Parsa: I do. I absolutely do. I think the problem in Britain-again, this is on the record, so I would not name the company, but you would all know who I am referring to. One of our greatest financial institutions-financial companies, insurance companies-had a long-term plan of moving its business from a mature part of the world into a growing part of the world: Asia. All its American investors rallied behind the chief executive and said, "Why don’t you go ahead?" All its UK investors said, "I’m sorry, that will affect this year’s dividend and therefore I don’t want you to do that." At the end, he was lucky to keep his job, but he certainly could not do the thing. That is the problem.

Microsoft took 28 years before its investors asked for a dividend, even though it was largely printing cash. In our culture, that does not happen. Even our investors are extremely generous and patient. They would even from time to time look at us-the pressure is on them-and say, "How long before you guys do what you gotta do?" We have only six years of taking investment, which in the view of many is too long, but compared with the Murdochs or Amazons, 12 years is only half of the time that those guys took.

Q12 Chair: I am very interested to carry on this shareholder point. I look back on my time in an investment bank on an equity sales desk selling to pension funds and investment trusts. Although you are mindful of the long-term relationship, because you do not want to have to keep going out and finding new clients every day, although you do hunt around, you are also mindful of the fact that you get a bonus at the end of each year. So what you are interested in doing is two things: you want to hold on to the long-term customer, but you also want to make sure that they trade as often as they possibly can, so absolutely at the very root of the stock market is the incentive to churn-to seek short-term returns. Is it coming from there that you start with the equity sales desk? That culture then gets pushed into the pension funds and all the rest of it to keep turning things over, and then you ultimately get to the situation in which the only shareholder involvement in a company is through stock market activity, and if you do not like the company, you do not phone up the management; you simply sell the shares.

Ali Parsa: I think that is a very good point. I am very curious and amused when I read the mass press and the statements that say, "Oh, the problem is our entrepreneurs are getting too much money, or our chief executives are getting too much money." Nobody talks about the fact that actually, for the value they create, or the work they do, they get, in my view, a decent proportion. I don’t believe they get too much.

To me, it was fascinating when Martin Sorrell was given all the hassle for making £6 million. If you think about it, this is a man who created a global corporation in Britain. He created gigantic returns for his shareholders. So he makes £6 million. Big deal, compared to-what is the value of his company: £2 billion or £3 billion? Whatever it is, I have no idea. Nobody talks about what his funds are doing-how much the hedge fund guy is getting-who are sitting there, and actually what do they do in creating that value? They argue that they efficiently distribute capital and therefore they create that value, but actually if you look at most of their activities, it is not about the distribution of long-term capital efficiently; it is about trading on the noise of that capital movement.

As I say, I think we just got in Britain-if you think about it there is a gigantic sum of money. We say the financial institutions are responsible for 10% or 12% of our economy. That is true, but I question how much of the value-added incremental profit available in the country as a whole are they taking. So if you look at any company, like the entrepreneurial business I was referring to earlier on, and the value added by that company; that company is now today worth nearly £2 billion-all its staff and everybody who contributes there take £200 million of that £2 billion; the shareholders are taking £1,800 million out of the £2 billion. Was their decision to allocate that share really the single reason-or 90% of the reason-why that company is worth £2 billion today? That is where I think we have gone wrong.

You are absolutely right, Mr Garnier, that you as an agent of the capital are thinking short-term and long-term all the time as you are doing that, but the question is never about you; the question is who that person is who is taking the capital, who is distributing it. I think we need to get to a place where we start looking at them and their cultures, and their values, as opposed to just their intermediaries’ cultures and values. I think they have done very well at staying out of it for a very long time.

Q13 Chair: I wanted to come back to the issue of staff for a moment. One of the things you said with the wider Circle group is that you create a culture and then people come and subscribe to it, so you are self-selecting the right type of people. When you went to Hinchingbrooke, you did not have that choice, but what you did have was people who were loyal in some form to Hinchingbrooke, because they had been there for some time. It is this longevity of service that I think is something which also we need to look at.

I asked somebody the other day how many gold watches Barclays gives out every year for 25 years’ service, and I got a quizzical look as I don’t think anybody remembers the idea behind giving gold watches for 25 years’ service any more, because it is such an unusual thing. There is an important point with this. Within the City, you have a lot of people moving as teams or as individuals to an organisation where they think they can get the most out of it-where you can get a symbiotic relationship-but it is very much a team as a franchised business moving within another organisation. So they are working at a bank, rather than for a bank. It is a different thing.

I was very struck when we met and I visited Hinchingbrooke by the number of people who had been there for 25 or 30 years, and I was very touched by one particular thing where one of my fellow MPs came along and said, "My daughter was born there," and the midwife turned around and said, "Yes, that was me who delivered her 25 years ago," which is extraordinary. I think that long-term loyalty is key. To what extent do you think that that is an important part of this whole analysis of what’s going on in the banks-that actually there isn’t any loyalty to the organisation, and part of that is through this churn of staff?

Ali Parsa: I think you are absolutely right. I think a certain amount of churn in any organisation is necessary in order to bring fresh ideas. Sometimes, when people stay in an organisation for very long but the organisation is not acting very well, you need to ask why they are staying. Sometimes, if an organisation as a whole is cruising, individuals can cruise alongside too; life is made very easy and they stay. We all have seen examples of those organisations.

It is also certainly true that the culture of banking was, "Who pays me most today?" I was a victim of that. I remember that I did not stay in any bank I worked in for very long, because I spent my 20s in academia doing a PhD, so when I got into banking, I was older and, by definition, you do better than your peers, because you are that much older and wiser. I was constantly offered something, and I had no connection to the bank I was in; it was, as you said, a place at which I worked.

It is fascinating that everybody looks at the boards of hedge funds and says, "Where did that come from?" When the technology enabled the trading desks of the banks to leave, they left. They had no loyalty to that bank. They said, "Ah, now I can do it myself; I don’t need a couple of billion pounds of technology investment." When I started at Merrill Lynch, it had just signed a big cheque for technology. They did not need that anymore, and so went and set up their own funds.

There is very little loyalty, and that is because, why should they be loyal? If you think about it, there is no value to being loyal. There is no sense of mission to be loyal to. There was no financial structure to be loyal to. I was getting paid cash at the end of every year, so there was no long-term thing that kept me there.

Some of the smartest people I knew-I remember a very good friend of mine who grew to become a very significant member of one of the banks that I worked with, used to tell me, "If I stay here 20 years, I get all these benefits-all my shares, and this happens and that happens-so when I add all of that, put it in my spreadsheet and look at the net present value versus all the changes, this adds up to more." The reason he stayed had nothing to do with a sense of loyalty; he was smarter than everyone else and did the maths, but you are absolutely right.

Q14 Chair: Let’s turn to whistleblowing, because I noticed that you have the Stop the Line initiative, which I think you took from a mining model. Is that right?

Ali Parsa: Yes.

Q15 Chair: Whistleblowing is very important. I really want to get to the bottom of how it works with you. For example, what are the consequences for somebody who reports a mistake that they make or that someone else makes?

Ali Parsa: Hopefully, we celebrate it. I do not want to come across as saying that we have got this perfect, because it has just started, particularly in Hinchingbrooke, where we inherited the situation.

Interestingly, we first put it into Hinchingbrooke because it had some clinical issues that needed to come out. The very first instance of it, when something was left inside a patient, two nurses stood up and said that something was left inside the patient. People said, "No, we have an X-ray. I don’t think so." They said, "Sorry, we just did this Stop the Line. I have the power to stop the line." And they stopped it. They exercised their power. The whole organisation was watching to see what happened to those people, and we celebrated it. We brought it to the media. We did everything. That showed that you should do more of it. We do that all the time.

We allow people to speak up and speak out, but that does not mean that, where our leadership is not watching in the wards and the theatres here and there, there is no pressure not to do it. Very interestingly, when we did this in our facility in Nottingham, where we have been for five years, the take up was much faster and much more open. I think that if people had the power in a bank-what does an organisation that tells its people, "You don’t have the right to publish or speak openly" have to hide?

Q16 Chair: How do you stop the pendulum swinging so far the other way that you get malicious, trouble-making whistleblowing?

Ali Parsa: Mr Garnier, nobody gets more malicious whistleblowing than we do. You just have to open the pages of Twitter or Facebook to see what goes on. It is fascinating to me.

Q17 Chair: But do you think that is acceptable?

Ali Parsa: You just have to live with it. By the way, where it is done maliciously, there are laws to deal with it and companies need to take it on, otherwise it becomes very difficult. We have never taken it on, but I am increasingly of the view that one needs to, because in today’s life, every blogger can put anything on paper that they want, without anything; then they call the journalist, because they are all after fame, and the journalist picks it up and it becomes reality. It is very important for companies to protect their things. It is no different from when you had to protect yourself against the press. Now it is just a wider, more democratic group of people to do it against.

Q18 Chair: What are the consequences? You talked about Stop the Line, where two nurses identified that some swabs had been left inside a patient. What were the consequences for the nurses? Presumably, the patient had a happy outcome, but for the surgeons, or the team who created the problem, were there any repercussions against them, or was it seen as a good thing that they identified it without fear and, therefore, you rewarded that without fear?

Ali Parsa: It was a very good thing. Unfortunately, in that particular instance, we made a mistake, because it was our first thing. We celebrated the two nurses, as opposed to celebrating the entire team, and unfortunately, it came across to some, quite inadvertently, that the surgeon did something wrong or was a bad surgeon. The truth of the matter is that we all make mistakes, and the point is not to crucify somebody for making mistakes. One of the challenges you have in the public sector is that we are all after a who-to-blame kind of culture.

I think that you need to start anything in life with the assumption that, at best, half of what you are going to do is right, and the rest, you are just going to do it wrong. I remember once reading a piece by George Soros who said that he is lucky that 55% of the trades he makes are correct, and that makes him one of the richest men in the world. It is just a reality of life. In the civil service, unfortunately-or in public service-everybody is focusing on that 40%, or 10%, or whatever it is, and I think it is wrong. If you start with the assumption that we are all fallible human beings and we are all going to make mistakes, and we are lucky if our mistakes are less than what we get right, it is what it is.

Q19 Chair: You have had extensive experience of investment banking and the financial world, and now you have gone into a completely different area, where you have brought in a number of-revolutionary is not necessarily the right word-very radical changes in the management approach to the culture. If you were to go back to investment banking-maybe you would be setting up an investment bank or a bank in the future-how would you do it differently? What do you think the financial world can learn from what you have learnt in the health care industry?

Ali Parsa: I would do everything we have done in Circle. I would make everybody co-owners-by the way, investment banks used to be like that; they used to be partnerships. I would not just limit it to the people at the top; I would have everybody in there. I would spend a gigantic amount of my time doing what I do today, which is advocating the set of values our organisation was based on, and I would give my people a lot of autonomy and complexity in their work, and reward according to their performance. I would set up the same kind of structures, but our units can run their own things.

I do not think that management is actually different from this: as I said, I used to do physics and I left academia because I was not a very good physicist, but one thing that helped me through all my years in physics was a simple understanding that it is all about atoms and molecules. Get that right and everything else is right. An aeroplane flies not because its engines make it fly, but because engines make it go fast enough to move billions of molecules of air, which lift it up. That is what every organisation is about, and management is exactly about that. It is never about the people at the top. It is about whether the people at the top can create the environment for every single person to do a little bit more. If they can, you can break that window over there-smash it-with a gigantic hammer with a gigantic amount of pressure, but the tiniest amount of extra pressure, if applied by every molecule on that thing throughout will smash it into pieces in a way that that hammer can never do. That is just the truth of the laws of physics, which is true also in management.

Again, I go back to where it has gone wrong in banking: it was not about structures, regulations, or this, that or the other. Those are all kind of prison rules that you put in place if you do not trust the values of the prisoner. The issue in here is how do we get there. I also think, by the way, particularly in our banking system, but also in our financial system as a whole, that there is not enough competition at all. There is no competition. There is a very small number of banks and they all act and behave in the same way, and it is pointless to work with that. One of the consequences of the crash, of the financial things that happened, was that, unfortunately, instead of bringing the barrier to entry down, it increased the barrier to entry. Unfortunately, what we are going to have is even less competition now.

Everyone looks at one of the industries that is doing fantastically well for its customers-technology. We all look at it and say, "Well, it’s natural, isn’t it? Technology should do that," but we all forget that back in the 1950s, ’60s and ’70s, 90% of global profitability in technology was by one single company, IBM. There was a global monopoly and, as a result of that, hardware-mainframes-got more complicated and expensive every year. In 1975, a single event happens: the PC gets invented and the barrier to entry goes from millions of dollars to thousands of dollars. Kids who no one would have given a penny to before could afford to do it. Microsoft did what IBM could never do; Yahoo did what Microsoft could never do; Google did what Yahoo could never do; Facebook did what Google could never do, then YouTube and so on and so forth.

I just think that in banking, if we want to get this industry going, we need to advocate a culture-to get the industry to be ashamed of its culture, and then have a different culture. We need to lower the barrier to entry, so that people can come in and create banks of that culture, rather than trying to change IBM to be different.

Chair: Mr Parsa, thank you very much indeed. That was incredibly interesting and very useful. I am very grateful to you for taking so much of your time to come and talk to us about an industry that you thought you had left years ago.

Ali Parsa: Thank you so much for your time.