Monday, November 13, 2017

What the ancients knew.

An enduring principle that can help rescue the economy.

From a distance it looked like an ordinary broken stone. But when farm manager, Adrian Sutton, got closer, he realised that the piece of rock surrounded by cobbles of different sizes, was not shaped by accident. Its symmetrical design formed an axe-head that could fit into a large hand. It was later identified by experts as having been made during the earlier Stone Age between about 400,000 and a million years ago. They are often found in old river gravels, in this case between the Breede River and the Langeberg Mountains to the north; where the cobbles that were rounded by the natural tumbling action of water over millions of years were left on terraces above the river as it cut deeper into the valley.

The prehistoric creature that shaped that axe-head so long ago was one of the earliest manifestations of a social principle that has endured for millennia – that of adding value. The difference between the original rounded stone and the axe-head, and the time, effort and purpose it took to make it, represents value added for his or her particular circumstance. That principle has shaped the destiny of our species and remains the key underlying force that accounts for progress and the difference we make to others lives. It was only a small, but highly significant leap for those ancient creatures to start making such implements for each other, creating a powerful force of social co-operation and cohesion. Exchange and barter was a natural consequence of that, and soon a means of exchange, or money, was developed to ensure smooth transaction.

And so we can draw a direct line between that axe head and everything that underpins all of the complexities of our modern co-existence. 

It is no coincidence that the more we have moved away from adding value as the supreme principle of creating wealth and generating prosperity, the more we have created distortions and arguably many of the critical problems modern economies are facing. These include over-financialisation and the ability to accumulate wealth through rental income; contamination of price discovery through overwhelming speculative and derivative markets; critical levels of inequality and the growing displacement of labour as a significant contributor to and beneficiary of wealth distribution, which in turn feeds market demand.

The supremacy of the value-added driver over any other such as profit-maximisation; shareholder value or even standard productivity measurements is its three dimensional nature and broad inclusivity. These are: transformation; measurement and intent.

TRANSFORMATION: Common understanding of value-added is restricted largely to its physical transformative nature – in other words changing one item into another that is more useful – like a stone into an axe-head, or gold into jewelry. But of course it applies to changing situations or circumstances a well, such as retail, distribution and entertainment. What is mostly lost sight of is that value is always determined by the end user, and without a very determined focus on making that the purpose of transformation, value creation is restricted – in some cases even destroyed. One could apply the same argument to South Africa’s Radical Economic Transformation policy.

The transformation dimension of value-added is a far superior and robust productivity enhancement tool than the standard cost accounting approach. This is because it embraces not only scientific measurements but also subjective criteria that speak to meaning, or the meaningfulness of the transformation itself. Everything has to be tested against usefulness to the end-user, not merely to the agent or provider. That approach keenly questions much of wasteful assets and actions.  A conservative and intense interrogation of any expenditure or action that asks “what difference will this make to our customers?” quickly shows red-flags of unnecessary and wasteful activities. The less clear the usefulness can be defined, the bigger and brighter the flag should be.

Long held assumptions, such as ostentatious head-offices, huge ad-spending, lavish executive benefits, and even many of the employee fringe benefits should not remain holy cows. I have for some time held a rather contentious view that the adage that “happy employees make for happy customers” is demonstrable nonsense. It should be reversed to say: “happy customers make for happy employees”, especially if customer satisfaction is linked to employee benefits triggered by improvements in the value-added measurement.

MEASUREMENT. I have dealt with this at length in previous articles covering the Contribution Account, which is a purified version of the value-added statement or cash-VAS, such as this one extrapolated for the mining industry.

It should be noted that benchmarks such as market pricing for labour and capital, or meeting the legitimate expectations of those constituents, are important in assessing the appropriateness of their share of wealth. This is especially useful in identifying trends over a certain time. What is perhaps less appreciated is the significance of using value-creation as a productivity test, especially in teams and divisions, sometimes even at individual level. This is becoming easier with enhanced data gathering and sensible norms of transferring costs. Techniques such as throughput accounting, are also useful.

Beyond measuring, the subjective assessment of usefulness to the end user should always be a key concern. This focus is by far the best method of engaging employees and other stakeholders in the destiny of the enterprise. It may be a useless exercise, but at every turn, companies should make this dimension of value added known to government, and perhaps do their own calculations on the bang for tax buck they are getting. It’s a good conversation to keep alive. Shareholders too, should become more acutely aware that profitability and sustainability go hand in hand with creating maximum value. This, and the role they can play, should be a key focus at shareholder meetings and in executive remits.

INTENT. The intention to create something useful for others is the whole purpose of adding value. Championing motives such as profit, wages, taxes, or any other self-gain as key drivers of wealth creation are counter-intuitive and detract from that essence. It’s an argument I have repeated many times over the years, and fits in with my understanding of humanity as being essentially empathetic creatures, and not the predatory cannibals often mistakenly attributed to Adam Smith’s view of humanity and depiction of the invisible hand.

Value-adding is at the heart of trade, innovation, evolution, competitiveness, social cohesion, progress and prosperity. It is powerful and simple. Adopting it in everything we do; as a life-style and purpose, is a near guarantee for success – at a personal, company and country level. If ancient creatures with limited cognitive capacity could understand that, then so can the modern child at a very early age.

And so they should. Because it is a principle that will add meaning to their adult lives.

Monday, October 30, 2017

Beyond share empowerment schemes.

Lessons from the failed SASOL Inzalo share empowerment scheme.

In their heyday, employee share option schemes, or ESOPS, were nothing more than an extension of the agency system: that much vaunted snake oil of the 80’s which enticed executives to “think like shareholders” and pursue the narrow dictates of shareholder value growth.

“The world’s dumbest idea”, declared American Industrialist, Jack Welch back in 2009. Adam Smith, if he were alive today, would no doubt concur. Perhaps even Milton Friedman, the ultimate champion of shareholders, would agree.  One can’t blame shareholders only. They are such a divergent at times perhaps even naïve group with varying interests that to attribute to them clearly defined expectations in the form of abstracts concocted in business schools, is misplaced at best.

At the same time it made them easy prey for a new mercenary breed of executives who understood those theoretical concoctions enough to create smoke, mirrors and myths around their exceptionality and exclusiveness and extract maximum short term gain from that body. Finally along came King and regulations. It is not appreciated enough that governance prescriptions were not triggered by a social rebellion against executive misbehavior, but by shareholder wrath. It’s a moot point whether the executive mercenaries have been curtailed by the outcry. They are by no means defeated and despite the mounting body of evidence against them, shareholder-value criteria, according to an article in Forbes Magazine, still predominates most of executive thinking.

The key lesson from Sasol’s Inzalo scheme is the limitations these programmes have in broad based black economic empowerment. The costly and complex nature of a massive multi-billion rand exercise such as the Sasol scheme must surely beg the question whether they can really deliver on their large promise, even if market conditions did not turn against them. From a labour perspective in particular, no one can still seriously consider ESOP’s as a method of enhancing employee involvement in the destiny of the enterprise. If you view a company as a feedlot; as a means of extraction then you will focus on where you can extract the most. As a worker the more you extract through wages, the less you can extract through profits. That creates an inherent conflict of interest.

But one could use the same argument against all of the three estates of labour, capital and government – all viewing enterprise as a means of self-gain rather than an opportunity for contribution. This has naturally swung economic emphasis globally from tangible wealth creation to wealth accumulation and ownership. It is value-adding, or wealth creation, and not wealth accumulation that encourages inclusivity and broader empowerment. Because the latter naturally encourages concentration, it will always end up in the hands of the few and exacerbate inequality. It’s a disastrous formula for a country like South Africa, where even wealth creation itself fosters huge disparities through skills shortages, unemployment and barriers to opportunity.

In a world obsessed with possession it may sound counter-intuitive to argue that possession on its own does not represent power. Ownership that exists purely for self-gain and self-gratification becomes barren as an economic factor, especially so when they are productive assets. Responsible major shareholders know this. And private owners of small and medium enterprises even more so.

Asset ownership, whether in the form of capital, land, property, equity, or companies themselves is a highly flawed cornerstone of populist rhetoric and regulatory thinking. I have often argued that business itself has invited this response through its own championing of shareholder supremacy, of profit maximization and of a narrow definition of purpose. But now politicians themselves seem to understand that power, or empowerment, cannot be narrowly confined to ownership, and have added “control” and “management” in their latest Radical Economic Transformation framework.

That does not make the framework better, but indeed even more flawed. It’s a classic case of where macro theory simply clashes, or is destroyed by the micro reality. And I’m not even talking about the obvious of the shortage of skills, experience, and expertise to change the current racial composition of “management and control”. The entire empowerment framework has to change or be redefined to embrace tasks, operations and ownership: and in that order.

It starts with the individual taking ownership and responsibility of his or her own destiny and at the very least be willing to make a meaningful contribution to their social and economic environment. That willingness is reflected in their daily tasks, mainly at work, which are part of operations that have a common purpose in adding value to society, or customers. Such a commitment removes any barrier to being part of “management and control” and it is a small and valid leap to being given equity in the company itself. Only then will share option schemes make sense. To summarise then, the progression of empowerment is from self-accountability; to ownership of task; to operations and then to assets. A lot of this presupposes the existence of means and abilities to pursue that process, but the most important is individual willingness and a shift from expectations to aspirations. Achieving this in society starts with parenting, then schooling and then proper skills development. In companies themselves, individual ownership can be much enhanced through appropriate strategic, transparent, and governance models such as the Contribution Accounting methodology.

Self-worth is not simply about self-gain. The ownership-equals-power assumption rests on a shallow understanding of power itself. Authentic and legitimate power is earned by its contribution to others. When it does not do that it is simply control, which relies either on seduction or coercion. Ultimate empowerment is that which enables one to make a positive difference to people’s lives. It’s based on the simple premise that our true value lies in our capacity to make a contribution to others.

That’s how we judge others. That’s how we should judge ourselves.

Monday, October 16, 2017

The wealth distribution obsession.

To the point of Incapacitating wealth creation itself.

It’s a cliché, I know, but one can only imagine the positive change that is possible if South Africa, or any economy for that matter, switches focus from wealth distribution to wealth creation. No matter which way one looks at it, one cannot share what has not been created. Eventually all the intangible vapour that has been created through debt, financialisation and asset appreciation, will have to find some anchor in the production of goods and services.

That means being market driven, serving customers and creating a link between meaning and money. In my first article (see here) on following meaning in wealth creation, I argued that  our customer focus is in an appalling state as shown by poor service delivery, customer neglect, streams of cases before the Competition Tribunal, lack of competitiveness, and poor levels of innovation.

One could argue further that all of that is due to a very narrow focus on wealth distribution; on reward rather than contribution, which translates into exploitive behaviour by the key “internal stakeholders” of labour, capital and state in the form of wages, profits and taxes. It spawns a relationship between them that is inherently antagonistic. That is highly counter-intuitive to wealth creation: detracting from the only common purpose that those stakeholders can have and which gives not only meaning to their involvement but fosters the source of all rewards.

No amount of stakeholder management, concessions and tolerance will be effective if each maintains a narrow self-gain purpose without swearing full allegiance to a common serving purpose. That will only happen when each appreciates that they all also have a common fate in the enterprise.

Given the unprecedented re-examination of macro-economic theory, the time has never been better to extend that to the micro; to companies and organisational theory itself. That world has been changing even more profoundly since the early 80’s, with South Africa in some respects ahead of the pack, and in others trapped in outdated theories and ideologies as well as onerous demands for transformation. When these externally driven forces translate into a tug of war between the main internal stakeholders of labour, capital and state trying to maximise their own benefit, the biggest loser is service delivery and customer focus. That has a far bigger impact on wealth creation than global economic conditions or the external economic environment.

There are laudable attempts at a national level, through organisations such as BLSA, Nedlac and others, to create greater economic cohesion between the three economic estates. But this is mostly in the form of a haggle around trade-offs, and often gets derailed by political rhetoric, distrust and exaggerated demands. Stalemating can only be broken by facing an existential reality: all have a common purpose in serving markets and creating maximum wealth, and all are dependent upon the value added for their respective rewards. That distribution can at the very least be pegged to some broad principles: it has to meet legitimate expectations and it has to encourage continued contribution.

That, in a nutshell, is the base of meaningful relationships between the contributors or beneficiaries of wealth creation in business. Those critical relationships, as I have argued before, are destroyed by having absurd theories, abstracts, metrics and aggregates define them. That demeans the entire venture to a mechanical money making process, away from its true nature as an eco-system of people serving people.

Largely through its own doing, labour has commoditised itself as an institutional abstract, priced according to supply and demand for skills and qualifications, and accommodated as a “cost to production”. That crass understanding simply disappears when one argues that labour has made a contribution to the market through the company structures and processes, and then receives a legitimate share of the value that has been added. In my consulting and training days, I was constantly struck by the extent to which the true meaning of all work, that of creating something of value for others, is simply lost in conventional expression. But more encouragingly, attitudes become far more flexible when the link between task and contribution is made, incumbents are involved in customer and productivity improvement processes, information is shared more openly and fortune sharing incentives are introduced.

The hard nut to crack, is the dogmatic approach to capital interests, and the absolute holy cow of shareholder supremacy. A good example of this can be found in an attempt by BLSA research (see here) to debunk the corporate cash hoarding “myth”. Apart from some magic with metrics that can be challenged, the key trap that the researchers fell into is the assumption of a “generic capital model” that applies to all investment in business and that has unshakeable and invariable expectations. Even if that were true, the whole construct of investment in business has changed dramatically in the past few decades. It is simply impossible for normal ventures with even acceptable risk profiles to compete in financial markets with quadrillions of dollars incestuously looping around for quick and lucrative returns. American author and columnist, Rana Foroohar estimates that only 15% of the money in the financial sector is invested in business.

That demands a review of old paradigms around enterprise funding and even some of the dogmatic expectations captured in key measurements such as EVA, ROI, ROCE and the plethora of others. It may even need a new approach to capital formation in productive capacity generally, including more partnerships between capital and state, like we have seen in Asia and specifically the South Korean Chaebols. But let’s be clear: no-one can accuse these nations and their companies of not being truly market- and customer driven. That is a non-negotiable and it virtually rules out the South African government with its SOE track record as a trustworthy partner.

Most psychologists and life skills experts argue that meaning is to be found in having an external focus and making a difference to others. Business is the ideal and most inclusive platform to do that. But, if business is simply about making profits, it has little true meaning. If work is simply about earning a living, it has little true meaning. And if government sees companies simply as a means of generating revenue, that too has little meaning.

And because enterprise and work is such a significant part of most of our daily lives, it renders a significant part of those lives meaningless.

Monday, October 2, 2017

Follow the meaning.

And get a better idea of company health than following the money.

“Follow the money”, they say, “and you will get to the essence.”

Do that with any company or business and you will confirm a self-evident truth: it comes from the customer.  But here’s a more relevant proposition: follow the meaning! Do that and you are most likely going to arrive at the same point – the customer. Imagine, if you will, what an honest response would be if you asked any business leader: “what’s the meaning of your business?” or “what difference does your business make?”, and “what value do you add?” Will that not reflection their real calibre? Compare the possible answers of Tesla’s Elon Musk and Enron’s Jeff Skilling. It was a similar question to Skilling that brought the Enron empire down.

It’s a question I regret not asking enough on the Business programme Diagonal Street many years ago. But it’s certainly a question that’s become far more relevant today against the background of King IV, and going back further to Ed Freeman’s “stakeholder theory”; John Elkington’s Triple Bottom line; and Kaplan and Norton’s Balanced Scorecard. And in their wake: clutter, clutter, clutter: sheets of brown paper with endless bulleted scribbles plastered floor to ceiling on walls of conference rooms, offices and barely missing the office loo. I was present at one of those sessions, when Martin Rosen of Pick ‘n Pay exclaimed: “For heaven’s sake; we are not trying to invade Spain!” The clutter clearly has some value, but all can be distilled into one powerful postulate:

The health and success of a company depends on the meaningfulness of its relationships.

They include the mutually empowering relationship between meaning and money; meaning and means; and meaning and form. The above theories don’t do that very well. Indeed in some cases they create huge volumes of work, resentment, conflicting positions, inappropriate definitions, activities and targets that are difficult to reconcile, especially with the final shareholder accounts that drive the organisation. The Contribution Account© (see format examples here) is the closest you will get to the shareholder accounts; is absolutely reconcilable with them and condenses all of the volumes of information crammed into an integrated report into 6 or seven lines: income; (less) outside costs; (gives) value-added; (shared with) labour; capital, and state. The abstracts take human form in: customers, suppliers, employees, government and shareholders.

Customers. Hierarchical rankings are mostly juvenile and silly, but if psychologist are right in arguing that meaning is found in the contribution we make to others, then following meaning and following money both lead to customers. That makes them the most important relationship of all. MBA schooling that often defines the market as an “exploitable resource” in profit pursuit is crassly inappropriate, and simply untrue. Perhaps equally inappropriate is to relegate customers to “stakeholders” under Freeman’s theory, or one of the beneficiaries in “creating value for all” under King IV. Being market driven means being driven by customers’ needs and wants within the rules of ethical, mutually fair and legitimate transaction. That is subject to only one higher order, and that is the interest of society as a whole as expressed in its values, norms and laws.

Those rules do not detract from business’s natural external focus and being the most inclusive institution we have devised. Indeed, those who see the service driver as a “mushy”, soft and ill-disciplined act of charity, fail to recognise that it actually supports sound business principles of prudence, sustainability, productivity and maximum efficiencies. That’s rooted in the understanding that going out of business is the ultimate customer let-down and inefficiencies are mostly paid for by the customer.

There can be no tougher test of any action, behaviour, asset or measurement than simply asking: “does it add any value and is it in the customers’ best long term interest?” The perfect order is when the interests of society, customers, and the company are aligned.

Customers’ interests should also inform any regulator, policy maker, lobby group, trade union and outside supplier or even a competitor whose actions may impact on a company that is providing a product or service to their society. Including competitors may seem to be a paradox. But only an insecure, immature, inwardly focused organisation will view competition as an enemy, and not as offering customers a choice while creating benchmarks for excellence and innovation. Enlightened business practice distinguishes between competitor co-operation and collusion, with the former in the interest of customers, and the latter for self-gain.

Outside suppliers: A meaningful relationship with suppliers goes beyond text book theories of being supportive and empowering. Ultimately they have to be subjected to the same customer interest lens, which, if taken seriously enough, will preclude questionable practices such as nepotism, bribery and corruption. (As an aside, I include environmental care in this section, albeit not always quantifiable.)

Here’s an example of how being service driven supports sound business practice: because outside suppliers are mostly the biggest cost to value added or wealth creation (income less outside supplies = value added) it is tempting to follow the trade union call to eliminate outside contractors or outsourcing and do everything internally. Taken to extreme, you could also argue that all companies should generate their own electricity, make their own paper, build their own computers, etc. None of this would make sense in ensuring the customer gets the best product or service at the best price. It would also not make business sense. Suppliers have become a favourite instrument in economic transformation policy. The question seldom, if ever asked is whether it’s in the customer’s interest.

In this article I have dealt only with the two main categories of wealth creation: customers and outside suppliers. There’s even a bigger problem of dysfunctional relationships in wealth distribution, which I will cover in a future article. But we don’t need more evidence to demonstrate that most companies, and even the country as a whole, simply do not get it. Our customer focus is in an appalling state as shown by poor service delivery, customer neglect, streams of cases before the Competition Tribunal, lack of competitiveness, and poor levels of innovation.

Some may argue that we are essentially a free market economy. But that’s a very far cry from being market driven or even market orientated. It is the latter that gives meaning … and money.

Monday, September 18, 2017

Gold, BitCoin and the Dollar.

Connecting some scary dots in the undercurrent of market turmoil.

Are we seeing signs of a return to gold backed currencies? It’s a valid question in the light of a deal now being implemented between China and Russia. China, the world’s biggest oil importer is de-dollarizing its oil bill with its biggest supplier, Russia, by paying in Yuan that can be converted into gold. That, in effect, means gold backing for a major currency in a highly significant international transaction and which will be extended to cover the total $116 billion p.a. Chinese oil bill.

China is expected to buy 1000 tons of gold this year, India a further 900 tons, and Russia has been consistently topping up its gold reserves from an average 715 tons to more than 1700 tons in the last quarter. Together, these three countries have been absorbing gold nearly equal to annual newly mined gold. In addition, China has launched Yuan denominated gold contracts in exchanges in Shanghai and Hong Kong.

These developments have hardly featured in explaining gold’s 11-month high in past weeks, focusing rather on geo-political tensions. It’s another reflection of the short term perspective of derivatives and paper trading which now set a global gold price totally removed from physical supply and demand. This graphic by the London Bullion Market Association published by Zero Hedge and the Bullion Star shows that 15 000 times more unallocated gold is traded than there are reserves. 

Following derivative short-term thinking, gold seems for the most part to be viewed as a palliative for paranoia, ignoring its significant monetary potential as an alternative to paper currencies, especially the United States Dollar.  Yet, how strong is the mighty greenback? And can deliberate de-dollarization by large countries be ignored?

Recent market trends reflect again a simple link between Dollar strength and the performance of the American Economy. GDP growth is the ultimate rain-maker and statistical indicators move markets in short term bursts. Largely ignored is the most important ultimate health of an economy and strength of its currency – the national debt. In the wake of hurricane havoc, $15 billion in victim relief gave good cause to waive the United States government $20 trillion debt ceiling until December. The fact that U.S. Federal government debt has nearly tripled in about 10 years, with little prospect of a slowing down in the next five, must pose a threat to the country’s long term health.

Debt creation is contained by raising interest rates. But that means a substantial proportion of government revenue has to go to debt servicing. (A 1% increase in rates adds $200 billion to interest payment.) It also curtails consumer demand and therefore economic growth. Until recently the Federal Reserve Board has been acting completely counter-intuitively to that but when you approach zero interest rates and keep on adding more debt, you have clearly reached a cross road. The hesitant and modest Fed rate hikes reflect the difficulty in reversing that trajectory.

And then there’s the diminutive bitcoin, now in its third bubble deflation/burst/correction in as many years and punching way above its weight in terms of public attention. It’s a bit sad, really, because it detracts from its still promising potential of revolutionising money. Paul Donovan of UBS Wealth Management believes that it never had and never will have that potential (See Moneyweb Article here). Others, such as J.P. Morgan’s Jamie Dimon and our own Mike Schussler, have weighed in on its alleged fraudulent nature.  

Howard Marks, The Oaktree Capital co-chairman shared that view until a few days ago when he wrote: "Bitcoin fans argue that it qualifies as a currency under these criteria: most importantly, it's something that parties can agree to accept as legal tender and a store of value. That actually seems right."

But then he comes to the crunch: “… I found myself admitting that much of the criticism I had levelled at bitcoin is applicable to the dollar as well.”

The two main functions of money, a stable means of exchange and store of value are flawed even in existing fiat currencies, and crypto has already shown that an alternative is possible. The current rush reflects, at least in part, growing distrust in alternatives. People confuse “store of value” with “appreciating investment”. Store of value simply means being able to store and preserve the value of your cow, chicken, or labour in a safe way. Only then does it live comfortably with means of exchange. When it is subjected to speculative investment its M.O.E status is disturbed, but not necessarily lost.

Crypto is such a new, complicated phenomenon that any speculation about transaction costs, booms and busts, bubbles and bursts, usage, security, ultimate winners and losers, regulatory framework, taxation and indeed the real value of the crypto itself is premature, albeit valuable to its development. With its widely trusted block-chain technology, bitcoin may well morph into something different, or even be replaced. But it will be difficult to replace the decentralized nature of bitcoin. Control of money through central banks, banks and governments is simply no longer trusted. Likewise, central control of a crypto currency will suffer the same fate.

Despite extreme volatility, bitcoin’s price has clearly shown explosive demand. Until one can clearly determine where that demand is coming from, how long it will be sustained and at what price, can one start predicting and charting its course. The same goes for the plethora of other cryptos, some good and some absolutely rotten, that enter this space and dilute the offering.

But it’s a huge playground, as shown in this table of investment and speculative deployment of money. It was extrapolated from a graphic worth looking at here, and published by the Visual Capitalist. The figures are not fully comparable with each other because I updated some of them.

One simply cannot begin to calculate crypto-currencies’ share or potential share of the total and much of the criticism levelled at crypto currencies can be levelled at many of the instruments shown. But connecting some less apparent dots creates a much more disturbing picture: the overwhelming weight of finance over the real economy, which is GDP and key influencing factors such as debt. Clearly finance is no longer being informed and driven by GDP, but is driving it! And in the worst possible way of trying to extract maximum short term, speculative gains! It reverses an old and wise economic law – enterprise leads and capital follows.

It explains a lot about what is wrong with the world.

Monday, September 4, 2017

An age of economic soul-searching.

Was the great recession a bigger game changer than we realise?

In women’s month, on a cold Sunday night in the farm-workers’ compound, cheap wine-fuelled joviality again turns to discord. A stone is thrown in drunken fury. A skull is crushed. A young women dies. A young man ends in jail. One life is ended, another destroyed. Neighbours and co-workers become sworn enemies. Tranquillity in the small community is shattered.  

A few more decibels are added to the clamour about gender violence. Another line is written in the tome of hazy hopelessness that is the life of a very large part of a young generation. And just as many in the final generation, those whose formative years were marked by much post-war deprivation but large promise of “never again”, reflect sadly on what has been done to that promise. It’s a global story. The content may differ, but the context is the same: a fractured, disconnected, economically malfunctioning world.  Is the new normal, as Dutch economist, Servaas Storm says: “radical inequality, suffocating debt, job uncertainty, secular stagnation and a vanishing middle-class”? Theories abound. Purists argue that their elixirs were never purely administered. Solutions exceed the problems themselves, but none has proved to be a lasting absolute truth. Some hope that the current few green shoots in the desert will still the dissent.

We are not too afraid of “unchartered waters”, drawing some comfort from history that we have been in unfamiliar places before, and somehow emerged with new approaches and discoveries. This time is no different. But perhaps it is in the scale and depth of questioning all assumptions about economics and about ourselves as a species. The view increasingly being seen is through an evolutionary rather than the traditional reactive quantitative lens – do we evolve or construct on statistical models? This lens is being captured in research directions and discoveries within evolutionary economics and complexity economics, and driven by a number of institutions and scholars.

Eric Beinhocker Executive Director of the Institute for New Economic Thinking at Oxford University, believes the financial crisis of 2008 and the momentous global political shifts last year, have heralded a collapse of major economic-political ideologies that have dominated the 20th century. Older economies in particular are searching for a completely new paradigm that can show a better way for all. Such as the OECD’s NAEC (New approaches to Economic Challenges) which says: “We need a full re-vamp of our analytical frameworks and the assumptions that we make, to better capture the reality. Economic models that rely only on inputs such as GDP, income per capita, trade flows, resource allocation, productivity, representative agents, and so on can tell a part of the story, but they fail to capture the distributional consequences of the policies we make, and do not address the  fact that the growth process has only benefited a few.”

It will be a mistake to see these shifts in economic introspection in an ideological context, and brand them as “socialist” or “left”. Indeed our sometimes powerfully drawing biases are the biggest barriers to discovery. According to Beinhocker, it’s time for new economic thinking based on the best science available, not Ideology. “It should be highly interdisciplinary” he says, “involving not only economists, but psychologists, anthropologists, sociologists, historians, physicists, biologists, mathematicians, computer scientists, and others across the social and physical sciences”. He notes that over the past several decades a number of Nobel prizes have been given to researchers working in what today might be called the new economics tradition.

Beinhocker reflects a common thread followed by economic evolutionary advocates in developing a view of the economy as an evolutionary system of cooperative problem solving. Prosperity is seen as “solutions to human problems” and cooperation is the key to solving more and more complex problems thus increasing prosperity.
“Economics has painted itself as a detached amoral science, but humans are moral creatures. We must bring morality back into the centre of economics in order for people to relate to and trust it,” he says.

Oxford and Cambridge Research Associate, Kate Raworth in following that thought in her latest book, suggests dumping GDP as the holy grail and setting a “far more ambitious and global economic goal: meeting the needs of all within the means of the planet”. She then explores a seven step approach to achieving that.

In this article, David Wilson, renowned biologist and anthropologist at Binghamton University, suggests not only that Adam Smith’s invisible hand is dead, and always fails, but that the metaphor itself has caused much harm. “We are different from other primate species,” he argues, “because we are so cooperative. Why are we so cooperative? Because it is so easy to regulate each other’s behaviour in small face-to-face groups.” Wilson’s brave challenge of the “invisible hand” has another context: Smith’s assumption of high moral standards in humanity, which precluded seeing “the hand” as an instrument of pure self-gain and unbridled selfishness.

“Moral systems evolve in societies because they enhance group cohesion and survival.
Implications of evolutionary thinking for economics and the social sciences have only partially been explored.” (Geoffrey M. Hodgson, research professor at Hertfordshire Business School, University of Hertfordshire, England.)

One of the more telling indictments of orthodox economic models is from complexity economics of which Steve Keen, Kingston University economist and author of Debunking Economics is a leading advocate. He believes economists have to embrace complexity to avoid disaster and the fact that they don’t, explains why most were caught flatfooted by the speed, depth and length of the great recession. “Macroeconomic models are painstakingly derived from microeconomic foundations, in the false belief that it is legitimate to scale the individual up to the level of society.” Using his own simulations, Keen shows a number of cases (see essay here) where generally accepted assumptions at a micro level, including important ones such as price and demand, simply don’t hold true at a macro level.

It is extremely difficult to do this important subject justice in a broad sweep such as I have made here. Essays and articles on the website bear testimony to the weight, depth and breadth of a perspective that is perhaps not new but compelling, profound and refreshing in today’s context. It does offer a framework of thought for South Africa’s own Radical Economic transformation, but with a huge caveat – the need for a trustworthy government. I have frequently argued that radical government transformation is an absolute prerequisite for RET. (See article here.)

What remains unchallenged and perhaps gains significance is that economics itself is built on the enduring principle of adding value to each other’s lives. This should put business and companies at the core of any economic construct seen through any lens.

From a relationship point of view, they are after all, and irrespective of motive, an inclusive collective of people serving people. 

Monday, August 21, 2017

Destroying company relationships.

By having absurd theories, abstracts and aggregates define them.

If economic theory holds true, you could have a good business selling Johannesburg big Mac hamburgers in New York. For the latest Economist big Mac Index shows that New Yorkers pay about twice as much than Jo’burgers, and that’s a healthy margin by any standards.

Of course, even the most ill-informed will protest that it is much more complex than that. It may not be the best example, but it is some reflection of how often theories, abstracts and aggregates lose touch with underlying complexities, when a macro-assumption not only does not fit a micro situation but its imposition as an absolute can cause more harm than good. The best examples we have are the dominant drivers of economic policy such as Gross Domestic Product and the Consumer price index.

Markets are messy. People are messy. They become even messier when you add to the mix those powerful intangibles and immeasurable such as hopes, fears, expectations and aspirations. These are the real driving forces behind human behaviour and simply cannot be captured by an economic model or economist’s spreadsheet. It has given birth to a recent serious field in economic study called complexity economics, which is questioning many of the assumptions of neo-classical economic theory. The driving forces behind human behaviour are not shaped by these theories, or even the way we try to construct and institutionalise them. They are shaped by relationships at many different levels and in different forms and that are seldom, if ever fully recognised in the way we understand and measure business specifically and economies generally.

Recognising, understanding and shaping the relationship dynamics in companies could hold much promise in solving many of the issues confronting them. I can remember in my early days of financial reporting being troubled by the bland way company figures were presented and the failure to reflect behaviour and relationships that were the real essence behind the figures. In the early 80’s I was exposed to the U.K. accounting format, the Value-added statement, which went quite a way in doing that, but still did not seem to appropriately reflect the relationship between the main role players or stakeholders. But a significant conclusion that could be reached was that the value-added measurement itself not only reflected a figure (income less outside costs), but a magnificent metric of contributory behaviour. To repeat a previous postulate: adding value is the oldest activity known to man. It is also the most powerful business principle.​
·        It is behind all positive transformation
·        It is the source of wealth
·        It measures contribution
·        It measures reward
·        It links contribution and reward
·        It drives all contributory behaviour
·        It is the base of GDP, the nation's wealth
·        It is the source of profits, wages and taxes
·        It affects all company measurements

By way of illustration, I’m including the Contribution Account© that I extrapolated and indexed for the mining industry.

The full strength of this form of accounting is the way it defines relationships – first between the enterprise and its market, where it creates and receives value, and then between labour, capital and state, where that value is shared. It is in that relationship where things can be contaminated and logic lost. I was reminded of this by a comment to my recent article “Debunking monopoly capital” where the reader equated debt with equity to satisfy the conventional abstract of “providers” of capital and, of course, sustain the myth of the supremacy of capital. To be fair, the UK VAS format does this as well, but in the European format interest paid was moved to “outside supplies” in what became known as the Cash value-added statement.

The latter format also moved depreciation and amortisation to outside supplies. Both not only make technical sense, but even more so from a contributory relationship point of view. Allocating depreciation to outside costs is based on the logic that the item being depreciated was invariably purchased from an outsider, but the cost advanced is set-off over time through the balance sheet. Regarding debt, no-one can logically see interest paid as anything but a cost. A lender’s relationship is as a supplier of a service – the use of money, and seldom, if ever extends beyond that. The risk of advancing that money is covered in the interest rate.

Equity also cannot be generalised as a single abstract called capital. It can have many forms such as owner’s money, crowd funding, inherited funds, use of friends’ and acquaintances’ money, majority and minority shareholders, holding companies and institutional investors. All have different relationships with the enterprise. Many will take no heed of esoteric formulas such as capital or labour productivity. When these are imposed as rigid benchmarks they often disturb and sour relationships. There’s also a stark relationship difference between retained income and dividend, with the former being a commitment, and the latter a cash receipt. As a shareholder, you don’t get a debit card to draw on the company’s savings. The relationship between retained earnings and dividends, or dividend cover, speaks volumes about company intent.

I used the Cash value-added statement as the basis for the Contribution Account©, simply to reflect its behavioural qualities. More recently I have moved personal income tax from labour to state, again as an accurate reflection of the relationship between state and the enterprise. One could argue that the state itself should be viewed as an outside supplier, but apart from its variable share of wealth, the state generally does not (or should not) create wealth in its own right and relies on that created by others for its income.

But here’s the exciting part – nothing prevents or should prevent stakeholders or contributors from defining their relationship with the collective and between themselves. Of course all have a specific context for their existence, but their validity and ultimate strength lie in a common value creating purpose and to be as free as possible from external prescriptions and pressures. Even then, relationships with anything or anyone are still highly manageable and flexible and are defined by expectations which in turn are self-defined. Increasingly companies are starting to see that.

What hinders this process are the absurd theories, abstracts and aggregates that we try impose upon them.