Sunday, February 20, 2011

Business turns purple.

It was a bit of Americanism in the 80’s to refer to the two cold-warring economic systems as blue for capitalism and red for communism. It was probably a play on the American political party colours but it was exported as popular rhetoric at a time of aggressive strategic rivalry between the two super powers. It was also the time when I had my most intense exposure to the business environment. The domestic and global ideological propaganda got to us all, tainting our objective assessment of the “greed is good” era.

This fundamentalism was tempered somewhat by perestroika and the collapse of the Berlin wall. Attention started to swing to blemishes within victorious capitalism culminating in near outrage at its behaviour in what can be described as the “Enronic” era at the turn of the century. Clearly, most of us have moved on from the rigid prejudices of the past.

Not all mind. To judge from some of the comments on various articles on MONEYWEB, many are still stuck in the 80’s. On the advice of my MONEYWEB mentors, I have tried to ignore these comments, but old fashioned courtesy has prevented me from progressing much further than using pseudonyms and personal attacks as the filter. One that missed this process was a response to what I termed the “schizophrenic” behaviour of business bad boys. This commentator rationalised and defended their acts as a necessary evil for survival in South Africa to counter the debilitating effects of AA and BEE. Apart from the fact that he/she missed the inclusion of global players in my examples of miscreants, the defence of contemptible behaviour is puzzling to say the least, especially when innocent folk are the ultimate victims. But I am sure he/she is not alone in a secure cocoon of outdated slogans. It’s a tough thing to be open-minded and admit to being wrong. Ask Alan Greenspan.

No point in asking Milton Friedman, though, even if he were alive. At the height of the Enronic period and before his death in 2006, he vehemently opposed the need for business to be involved in any form of “social investment”, proclaiming that the sole purpose of business was to maximise profits. It seems as if his legacy is still very much alive. So it would not be surprising that most would respond with an emphatic: “No!” if asked “whether business should be prepared to compromise shareholder value to align its interest with society”. The same response is likely to a question whether governments should intervene to ensure responsible business behaviour.

Or would they? Some? – Yes. Many? – Perhaps. But most? - No!


In fact, most informed adults in 23 countries surveyed for the 2011 Edelman Trust Barometer have stated the opposite (above graphic). The blue bar reflects responses to whether shareholders should be prepared to compromise shareholder value in society’s interest; and the overlaid purple bar their responses to the need for government intervention. The U.S. is always interesting because of the position it holds as the advocate of capitalism. Here 85% support business social alignment and 61% government intervention. The disparity in responses from Germans to the two questions is interesting and confirms disenchantment with European bail-outs.

The volatility of trust itself means that one must take care not to rely on one snapshot in history. But if I compare the informed views of the 80’s to those that have been expressed over a number of recent years, then there is no doubt that the red and blue of the past have become distinctly purple – both ideologically and in practice, and irrespective of a number of even highly respected commentators being dragged kicking and screaming into this new reality. Slogans and labels are simply no longer useful. Indeed they are counterproductive.

A new business model is evolving, both by voluntary response to social demands and by a legislative framework. It has always been good business to be responsive to society’s needs. It has never been a good thing to have to ensure this behaviour through laws. Sadly there is mostly no alternative.

The Edelman researchers define this new model as having moved from being focused solely on profit to having profit with purpose, engaging all stakeholders and being open and transparent.


The respondents (above graphic) have again ranked customer focus as the most important element in corporate reputation. Financial returns were ranked the lowest. It seems that even having a widely admired leader will not swing it for a company, although arguably such a leader would ensure that the most important other elements would be in place.

Customer focus and being service driven has rightly been voted the most important of all. I have always argued that service is the true purpose of business and that profit is a vital means to that end. By its very nature, a service driven organisation will be responsive to society generally with the odd exceptions such as tobacco.

Other interesting features of trust in companies are:

- CEO’s have moved up considerably as credible communicators of company affairs. But they still rank 4th below (1) Academics and experts, (2) a technical expert from the company and (3) financial or industry analyst.

- Most people seem to use an on line search engine as the first source of company information and the most popular second source is an on line news source such as MONEYWEB. Print ranks third, followed by broadcasters, the company website, friends and family and the social media last.

While I share the scepticism many have about the reliability of opinion surveys, Edelman have been in the game a long time and at the very least have been able to form authoritative views on trends. There’s no doubt that business has evolved from an aloof “get on with business” actor in the social scene to one that is becoming more involved in and sensitive to society’s needs.

Some are simply reluctant law abiders. Others are adept at spin and see trust as a means to an end. But I believe many (perhaps even the majority) really do care, are passionate about what they do and want to be good corporate citizens.

But it really makes no difference whether they want to or not, whether it is sound economics or not and whether it fits into our Smithian or Marxist paradigms or not. Society itself will dictate the rules and preferably in such a way so as not to kill the golden goose. Conversely in can be argued that business will destroy itself by not being socially sensitive.

Business is an inanimate and inorganic entity. People bring it to life. Business cannot stand apart from a wider social conscience and the values that drive that society. It is hypocritical to expect business to follow a moral compass that we are not prepared to follow ourselves. There’s the rub.

Tuesday, February 15, 2011

When Trust Goes.

No society can tolerate a lack of trust for too long. This is one of many lessons unfolding in the unrest in the Middle East, North Africa and Europe. It’s not about the vote. The right to vote is no guarantee of trust – only the chance for those in power to earn that trust.

clip_image002Trust will be eroded to the point where citizens take to the streets when governments are not tangibly responsive to people’s needs, fail in the delivery of services, cannot enable a milieu where aspirations can be pursued, and are unable to contain envy and resentment that follow wide inequalities. Sound familiar? These shortcomings can happen in democratic societies as easily as anywhere else.

Of course, in many cases governments don’t have the resources or ability to meet civil expectations and all the stone throwing could be in vain. The real question is the extent to which they contributed to creating those expectations in their pursuit of popular support.

More than anything else, trust is the real fabric that holds a society together. That fabric spreads through virtually every facet of our lives to strengthen the tapestry of social co-existence. It has to exist between individual people, between groups, between individuals and institutions, electorate and government, business and customers, teachers and pupils and wherever we interact socially and in transaction. The stronger that fabric, the less chance there will be of the tapestry unravelling. Yet we play with it as if it is robust: rumour mongering, making false promises, relying on caveat emptor and legal recourse rather than our word and a sense of honour and the occasional act of kindness.

Trust is mostly very fragile. It is fickle, volatile and erratic. It is one of those human traits that confirm how complex and unpredictable we are as a species. Ultimately we give or withhold trust on our perception of whether the other has our interest at heart. That can mean many things at many different times. It makes the measuring of trust on a national or global level virtually impossible, let alone achieving a sensible interpretation of the data. This is a failing of all “opinion surveys”, especially those dealing with emotive issues like trust. Yet, given its importance to our lives, it can only be hoped that in time and with greater sophistication and comprehensiveness we can produce surveys that will come closer to reality.

In the meantime and with something of a health warning, one cannot ignore the annual research findings of Edelman, the most quoted in the world in this field. My real beef with Edelman is the exclusion of Africa. The survey is done in 23 leading countries and with a sample of more than 5000 “informed” adults. Its latest Global Trust Barometer says some quite revealing things against the background of civil unrest.

It is fair to conclude that given the informed nature of the respondents, the responses themselves will tend to be more rational and tempered. This implies that because it is an emotive issue, the level of distrust among the less informed masses will be even more intense.



Edelman concludes from the above graphic that trust in business has “stabilised”. I interpret the findings as showing a further decline, especially in the developed economies. In fact in most of the mainstream economies apart from Germany and France where it is still neutral to negative, the number of people who trust business to do the right thing has fallen. In both the United States and Britain it has declined to below half. It is more than a little ironic that in the bastion of capitalism, the United States, fewer than half of the informed public trust business to do the right thing and in China, the former bastion of communism and only a recent entrant into the free enterprise fold, more than 60% trust business.

The champions of greater government control and intervention may rub their hands in glee at these findings. But governments are still trusted even less than business to do what is right.


Apart from Brazil, China and marginally Japan, less than half of the informed public in the countries surveyed, trust governments to do the right thing. Germany has shown a sharp decline in trust in government, despite a strong improvement in trust in business. This is attributed to public distrust of European bail-outs. Trust in government in the United States has dropped to 40%, which is on par with Russia.

The results for China and Brazil are quite astounding…to the extent that the accuracy of the Chinese finding has been questioned in China itself. It may be partly explained by the focus on “informed” respondents who may have lost some touch with grassroots sentiment. But it could also be explained by both countries having fairly recently “freed” their economies. The restrictive practices of the past and the very low expectations held by the average person are still fresh in memory. So there is a honeymoon giddiness and flirting with, as Paul Merton’s BBC programme on China put it: “capitalism on steroids.”

On sectors, the Edelman Barometer shows trust in American Banks down a startling 46% to 25%, while trust in British banks slumped 30% to only 16%. On the other end of the scale, 90% of Chinese and 87% of Indians trust their banks to do the right thing.



But before we in the media start pointing our fingers at any sector, the above graphic shows an appalling distrust of the media in the developed world. Indeed, banks are trusted more!

Despite the inescapable shortcomings of the survey, there are some absolutes that can be argued. The inter-country comparisons show that trust is not inseparably linked to grand notions such as living standards, human rights, labour rights and the right to vote. Average incomes in Brazil and China (where trust is the highest) are way below that of the U.S, where trust is much lower. China also has no political freedom and an appalling human rights record.

Trust is far more strongly influenced by unrealistic expectations, an absence of hope and the squashing of aspirations. Give people some hope for the future with a healthy dose of self help aspirations and trust is restored. With it too comes a good measure of personal serenity. These things are more easily found within ourselves than sourced from others. They are seldom found in throwing stones in the streets.

Sunday, February 6, 2011

Integrated Babbling.

For a while now the business reporting environment has been moving from nudge to shove and from suggestion to prescription. It illustrates again how behaviour creates systems, structures and policies. In turn, these policies often have unintended adverse consequences because of an inability to accurately predict human responses.

Integrated company reporting is the latest manifestation of this syndrome which is part of the wider social disenchantment with business behaviour since the “Enronic” scourge at the turn of the century, and the hype around governance, transparency and sustainability that followed it. It is ironic that a full 8 years after Enron, and despite all the governance ballyhoo, poor judgement on the part of financial institutions led to the biggest financial meltdown since the great depression. This has given more pencils to the architects of regulation.

A discussion document on proposals to enforce integrated reporting, as envisaged in King III was launched last week. It is intended to consolidate the growing number of separate accountability documents into the company annual report and reconcile interaction between them. This covers the traditional annual reporting information and others such as the sustainability report, remuneration report, risk disclosures and the ethics statement.

I share David Carte’s scepticism. Few will deny the need for a radical shift in business behaviour, but before one rushes into new rules and onerous prescriptions, one should be fully aware not only of the unintended consequences but the efficacy of the measures themselves. As David suggests, too often the designers have a vested interest in the product and the new requirements hold the threat of red tape overload. Indeed it is valid to ask whether King is not overdressed.

Of course, prescriptions can never guarantee compliance as we saw with Cynthia Caroll’s appointment to the Anglo Platinum chair. At best the Integrated Report will encourage companies to “think on these things” and perhaps promote a kind of “fake it until you make it” milieu. But it has severe shortcomings as a pro-active tool for convincing stakeholders and the broader society of a company’s goodwill. Ultimately that will be determined by customer service and public behaviour more than statements in a report.

For one thing, the value of the annual report itself is often overstated. It is not a popular read even in its target market. The media seldom use them as a source of news but occasionally for background information. Most of the information is historic and if the company has something really important to say, it would not hold this for an annual report. This is particularly so if the information can affect the share price. The time and number of people involved in using the information before publication creates too many opportunities for insider trading.

So far there’s also been limited media and broader interest in the other instruments such as sustainability reports.

The primary interest in company annual reports is from the investment community. Even here, the efficacy of the annual report is often questioned. Interest is still largely focussed on the numbers that give a historic perspective. An American study showed that most of the respondents did not find the directors’ report and analysis sections very useful. The chairman’s statement too was found to be useful only if it contained tangible information about future prospects, which is a requirement under the Integrated Report. In turn, the reliability of this information will clearly depend on the general stability of trading conditions.

Additional information has seen company annual reports evolve from the provision of some statutory and mostly statistical information to multi-page glossy publications with narratives, photographs and graphs. Recent research reported in the Investment Analysts journal confirmed that this has opened the door for substantial editorialising. “Managers use accounting narratives in a self-serving manner, rather than reporting performance objectively”, the writer said. King III tries to address this by insisting on independent verification which is much easier said than done.

clip_image002There are many other issues that question the effectiveness of the annual report such as accessibility and more importantly trustworthiness. History is full of examples where even audited information simply did not reveal the full truth. Company information sources, including executive statements have always ranked low in trust amongst information sources, according to the Edelman Trust Barometer. Indeed, this barometer shows that less than half of the respondents in the United States and Britain trust business to do the right thing. As long as people distrust business, they will not trust what they say. Trust has declined in these two countries despite some years of recognising the importance of a stakeholder rather than an exclusively shareholder approach.

Then there is the unsolved problem inherent in the Integrated Report of reconciling the quantitative with the qualitative, the numbers with the narrative. This problem dogged the Triple Bottom line, and simply remains unresolved. There is a huge difference between integrated reporting and integrated accounting.

Above all, the most important drawback is one of intent.

The concept of sustainability is not new. In the 1980’s it was standard management school teaching that the strategic intent of any company should be “short term profitability for longer term wealth creation.”

A vastly more competitive environment for capital, investor appetite for quicker returns, uncertain times, shorter horizons and executives with even shorter term personal goals, have created a conflict between profit maximisation and sustainability - as the schizophrenic behaviour such as the B.P. oil spill, Toyota’s quality problems, Pioneer Foods’ bread price collusion and the construction bid-rigging has shown.

Will the Integrated Report make a difference?