Tim van Gelder

Two recent articles in the business press underscore the importance of unearthing and challenging the assumptions which are shoring up your inferences.  They also provide fascinating insights more generally into organisational decision, a topic which always becomes more interesting when things go badly wrong.

The first, Potash: The deal that didn’t have to die appeared in the Canadian newspaper The Globe and Mail in the aftermath of the failed attempt by mining behemoth BHP Billiton to acquire Potash Corp.   Potash Corp makes a lot of money digging up – you guessed it – potash in Sasketchewan and selling it around the world.  Potash Corp is part of a cartel, the existence of which helps keep the Saskatchewan state coffers replenished.

As authors McNish, Bouw and Reguly state, in the lead-up to the bid,

[BHPB CEO] Mr. Kloppers had every reason to believe that the takeover odds were on his side. Potash prices were still climbing out of the cyclical basement, and few other companies in the world could match BHP’s financial heft to top the bid. A government-backed company from China probably could, but no Chinese entity has ever tried to make such a large acquisition in a developed, democratic country. Even better, the widely held Saskatchewan company had no blocking shareholders. The Canadian government had never rejected a foreign takeover of a major resource company, and just three years ago allowed Rio Tinto PLC to take over Alcan Inc. of Montreal in a deal of similar size.

Focusing on one aspect of this, it appears that BHPB were reasoning that if the Canadian government had never rejected a foreign takeover of a major resource company, then they’d be unlikely to disapprove the takeover by BHPB of Potash Corp.   Which seems a perfectly reasonable argument.

Of course there is an unstated premise in this argument, viz., that Potash Corp is a major resource company.  This seems so obvious that it is hardly worth mentioning – and ipso facto hardly worth challenging.  But often the critical weakness in a case can be disguised as a truism even after we take away the cloak of invisibility.   Sometimes the highest level of critical scrutiny is not challenging the dubious but daring to question the obvious.

The real force of the assumption “Potash Corp is a major resource company” was the idea that Potash Corp was just another major resource company, just like all the previous ones that had been taken over.  That, in other words, there was nothing special about Potash Corp, in Canada in 2010, that would prevent it being taken over just like others before it.

But that assumption was wrong.  Potash Corp was in fact, at the time, quite special due to the close connection with Saskatchewan state funding, and the special connection of Saskatchewan politicians to the Canadian federal government.

As Andrew Mackenzie, a key BHPB executive, conceded after the failure of the takeover bid: “We didn’t grasp how significant potash is to Saskatchewan.”

If the authors are correct, this “failure to grasp” – a kind of unchallenged assumption – was the critical error leading to a failed bid.  Some of the consequences: immediate waste of some $350 million dollars, loss of potential billions in future profits from selling Canadian potash, embarrassment for BHPB, and a major headache: what now should it do with the mountains of money it is making due the resource boom?

The second article appeared in today’s edition of the Melbourne paper The Age.  In AXA deal could bring $2.6bn headache David Symons recounts how some financial sharks spotted a design weakness in superannuation giant AXA’s offerings and tricked AXA into granting them the right to exploit that weakness mercifully for decades to come – hence the $2.6 billion dollar lawsuit.  The details are of course somewhat complex but on Symons’ account AXA management – apparently lurching from one feat of incompetence to another – repeatedly made assumptions which turned out false.  For example:

“anxious to resurrect a faltering product, AXA ignored the embedded option risk. AXA management had referred the special terms to the legal department and the board product committee, but not to the chief actuary. The three-day option was considered a tweak that didn’t require costing. Nothing could have been further from the truth. AXA had effectively written a multibillion dollar series of puts over the equity index.”

Quite a different domain, but the same basic point: sometimes an unquestioned assumption comes back to bite you in a very costly way.

Of course in both these cases we have the wonderful benefit of 20/20 hindsight.  It is relatively easy to spot a false assumption after its falsity has caused a calamity.  It is much harder to expose all the assumptions one is making at the time of decision, and to know which of those many assumptions need to given especially rigorous scrutiny.

One of the great benefits of argument mapping, rigorously applied, is its utility in the former challenge, i.e. exposing hidden assumptions.

Before closing it is worth noting another kind of assumption in play in the AXA case.  The aforementioned sharks clearly devoted much of their exquisite intellectual power to figuring out how to exploit the financial system so as to attract to themselves vast amounts of money of unearned and undeserved money.  Rather than doing anything productive, anything that might generate tangible value for society, these knaves are prepared to follow their greed to the point where they might even ruin an enormous institution (cf Equitable Life), with presumably masses of shareholders and policy holders and perhaps even taxpayers to take the hurt.   They are assuming that this is reasonable, legitimate conduct.   That assumption may not come back to bite them in this particular case.  But when large parts of society unconsciously and unconscionably adopt that assumption, it can be disastrous for almost everyone – as Ireland’s current problems illustrate.

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