Tuesday, February 28, 2012

Masters of illusion.

Abracadabra! The veil of illusion lifts, only to find another, quicker sleight of hand; and out of the blue a growing number of shareholders baulk at poorly explained remuneration decisions.

There’s the case of cement producer PPC, where, panicked by the departure of the former CEO, one long term director, Peter Esterhuysen’s pay was increased by 147% to R9m. “We felt it very important to retain Mr Esterhuysen” it was explained. Another, CFO Tryphosa Ramano received a R1.2m “welcoming handshake”, repayable if she leaves within a year. Shareholder activist, Theo Botha’s request for clarity on pay policy had both the Chairman and head of the remuneration committee “groping for answers”, reported David Carte.

And then there is the case of Reunert, where Nick Wentzel former CEO of the electronics group walked away after just over a year R18.2m richer. R12m was “severance benefits”. There was also the demeaning behaviour of Remuneration Committee Chairman, Dr Len Konar at the JD Group’s annual meeting. In similar vein, and many spurred on by the presence of Theo Botha, we have also seen executive pay being questioned at Sappi, and Barloworld.

As an aside, and in the light of the hackneyed argument that executive pay is warranted on the basis of a “shortage of talent” and indispensability to shareholder value, I seem to be the only one a bit bemused by the reduction of the ABSA board by half. One would have thought that the share price would have collapsed at the loss of such indispensible talent.

But seriously, the most significant story on the subject in a long time was written by Moneyweb Editor, Monique Vanek this week. In her report on the PIC (Public Investment Corporation) voting against the remuneration policies of at least 5 major corporations, she highlights the important impact that King III is having. It is forcing companies to disclose the rationale behind these policies, and so far it has done little more than raise more questions that companies are finding difficult to answer.

We can only hope that this will gather momentum and that some of the arguments and features of remuneration based on shareholder value will be exposed as being a little short of absurd. They include retention bonuses, “welcoming” bonuses, and self-designed targets and budget-based pay criteria.

Remuneration should never be based on “hypotheses” but on real performance. The “target” approach is based on the pretext that one cannot be held accountable for things outside one’s control and that doing “better than expected” deserves some reward. This is senseless. If a company has not created additional wealth, no one (including general staff) deserves additional pay. I’ve never understood the logic of paying a bonus to someone when the company has done badly, merely on the pretext that it would have been worse if that someone had not been there.

Hopefully, in the new disclosure milieu the sweetheart relationship between Chihuahua packed remuneration committees and Company boards will also be scrutinized.

But here’s the real issue: it is time to let the real market determine executive pay.

This is not shareholder value, but real tangible value in the marketplace. The two are not the same. Indeed Enron and many others, including some company behaviour in South Africa, have shown that one can create shareholder value, albeit often short term, while neglecting the fundamentals of service and real market value. On the other hand, the recent performance of Shoprite (JSE:SHP) shows how tangible value can create shareholder-value, particularly if you examine the customer focused factors that drive the executive team headed by Whitey Basson. This clearly puts him in that rare group defined as creators or builders and that stand outside the “executive” market. Using the often quoted pop-star analogy, Basson can be described as the Michael Jackson of retailing. But you don’t create pop-stars simply because you pay them well!

The delinking of shareholder value from tangible customer value challenges decades of assumption about what really drives the free market system. But it goes much further: there’s increasing evidence that an exclusive focus on shareholder value has played a significant role in today’s global economic problems such as impatience, greed, immediate self-gratification, short-termism and in turn the financial crisis, social unrest, burgeoning public debt, unemployment and inequalities.

This has been recognised for some time, especially after Enron, and we have seen responses in the form of Triple Bottom lines, Balanced Scorecards, sustainability reports, integrated reports and of course, the King reports. Some remuneration committees are partly informed by these criteria in calculating executive bonuses, but for the vast majority share value formulae are either the exclusive, or the biggest determinant.

There is an appalling lack of public trust in business -- less than half of informed respondents to the latest global Edelman trust Barometer say they trust business to do the right thing. The latest Accenture global customer satisfaction survey shows a further decline in customer satisfaction with more than 60% reporting that they had switched suppliers because of poor service. In South Africa, National Consumer Commissioner Mamodupi Mohlala told a TV programme that they were receiving four times more consumer complaints against companies than they had originally expected. Add to that our lack of global competitiveness, and then we can argue that most South African companies are not succeeding in being market, service or customer driven.

The “real” market for executive pay requires first that the scarcity myth be exploded. I am not going to repeat the arguments I used before in at least two articles: “Don’t tax it: fix it!”; and the recent one: “The manager myth apart from confirming that the “scarcity of talent” is largely either an illusion or self-perpetuated.

To have real meaning, executive remuneration, indeed arguably all remuneration in a company, should be driven by the value it adds in the product or service it provides to society as a whole. This is measurable in value added, or wealth created more robustly and less open to hypothesis or illusive and arduous remuneration reports.

It is really quite simple: shareholders and boards are not the ultimate paymasters: customers are!

Monday, February 20, 2012

Big balls and angry bees.

Denzel came charging around the corner of the house as if helplessly possessed. He was the first of many part time gardeners, all of whom absconded after falling victim to the effects of regularly consuming large quantities of moss, a home distilled “wine” that gets sold here in 2- and 5-liter plastic containers.

So for a brief moment I was convinced that Denzel had simply succumbed to delirium tremens. His arms were flaying about in all directions. His legs were pumping like pistons dislodged from their cylinders with his knees passing his ears as he desperately tried to take the biggest steps as fast as possible. As this apparition headed straight for me, I heard before I saw the real cause of his frenzy…an exceedingly loud, electronic like hum which was followed by a thick black cloud trying to engulf the hapless man. It was a swarm of angry bees and Denzel was bringing them straight towards me!

Not having Denzel’s youth, fitness or agility, I froze as they swarmed around me. Mysteriously, the swarm simply parted as if intent only on getting Denzel and treating me like some irrelevant minor obstacle. I could not trust this subterfuge to last, so I “ran” – if that’s how one can describe an overweight near septuagenarian making haste like a threatened walrus trying to get back to the ocean. Before reaching the front door, I noticed a strange, fairly large “log” on the lawn. It was making a puzzling “putt-putt” sound which I realised afterwards was the abandoned idling engine of the petrol lawn trimmer. The swarm had attacked and covered every inch of it, imbedding thousands of kamikaze stings in every non-metallic part and covering previously black plastic in a white blanket of tiny venomous bubbles.

It took hours for things to settle down. Denzel had found refuge in the garage and needed coaxing with a litre of the good stuff before being convinced that he could emerge safely. I never saw him again after that day. If he had returned I could have shared with him the fruits of a neighbouring farmer, Pottie Potgieter, removing the hive from where it had illegally squatted too close to my home for comfortable co-existence. Pottie is known as the Red Ants to bees here. He left me with a bucketful of honeycomb dripping with the clearest, sweetest and most palatable honey I have ever tasted and certainly never with the store bought stuff.

clip_image002One simply cannot beat nature at its benevolent best. Bees are a good example. Apart from nutritious and tasty honey as their unique product, they are also the chief pollinators on the planet and are the prime enablers of most of what we consume. It is estimated that about one third of all plants or plant products eaten by humans are directly or indirectly dependent on bee pollination. So it is understandable that panic close to a natural disaster is inflamed when strange fungi or parasites threaten the hives.

Reflection on the wonder of bees makes one realise how benevolent our world has been structured – indeed how important benevolence is to our very existence. I am by nature a pessimist, sometimes to the point of dysfunction. But even in my darkest hour, I cannot escape the logic that our world would simply fall apart if by and large, good did not outweigh evil, if benevolence did not exceed malevolence, if generosity did not overshadow greed. While popular media more often report on acts of malevolence and anti-social behaviour, it does not prove their prevalence over goodwill. Indeed it more likely proves the opposite because news by its nature is driven by the unusual, the unexpected and not by the mundane and routine.

So surely the structuring of things on the basis of benevolence and generosity will be affirmed by creation; ensure its sustainability and likely success? This makes the assumptions about the self-interest motive in economics rather puzzling and counterproductive. Of course, followers of this column will know that I believe the assumptions themselves are wrong, and that economics and all transactions have a benevolent basis. But I must concede that behaviour too often counters the caring underpinning of business, which explains the global mess we are in.

It was procrastination in staging my own small protest against such behaviour that saved me from a million bee stings on Denzel’s day of doom. Pottie said the mysterious behaviour of the swarm in ignoring me and going for Denzel was because bees get terribly riled up by unwashed human bodies and the musky smell of days old human sweat and will attack the source. They also get very mad at the smell of petrol or diesel fumes, and tractors have on occasion been disabled by their ire.

On the morning of that fateful day, I had decided to discontinue using underarm deodorant. I was tired of changing brands in following my own preference for the small-ball roll-on. The small ball allows you to be far more precise and conservative in applying the fragrant liquid. But knowing this, and clearly dissatisfied with sales volumes, all brands have opted for the big-ball roll-on, creating a wet underarm mess from elbow to hip and depleting twice as fast. The container is also shaped like something from the shelves of an adult shop (or so I have been told). But the Scrooge in me decided to finish the bottle I had, before taking my protest further. So the bees left me alone on that day. Sweltering heat and prolific perspiring subsequently tempered my resolve. I am changing to the stick applicator, having tried the spray to the disgust of every benign insect in my bedroom.

The devil is indeed in the detail. Millions of rand spent on PR spin get trashed by constant small reflections of selfish, profit driven intent. Like those chocolate bars that shrink from 50g to 46g in the same wrapper; a covert increase in bank fees while the CEO gets a multi-million rand bonus; badly explained increases in medical aid premiums; and, and, and. It’s not only the big headline events such as bread price collusion, large scale corruption and gulf oil spills. It is the death of trust by a thousand cuts. It is also more real and tangible to the person who experiences it and as we have seen, can get a life of its own through the social media.

There is a very simple condition to the granting of trust: you earn it by having the interest of the other at heart. Behave as if you do, for it affirms your value in a world structured on benevolence.

Monday, February 13, 2012

The Manager myth.

We were a motley group if ever there was one – the class of ’83 that made up the Senior Management Development programme at the Oxford Centre for Management studies. It was later renamed Templeton College, and despite losing its more elitist nomenclature, it has remained one of the world’s leading “management schools”.

The thirty or so of us came from all parts of the world and were all senior employees of various organisations – some at executive level. The fellow student who stood out most for me was Jannie the Bulgarian mainly because no-one really knew what he did for a living or what position he held. At the time things at home were at a political knife’s edge, and I vaguely suspected that Jannie may have been on a secret mission to do me harm. So I started watching him closely to ensure that he did not carry an umbrella . Instinctively he started watching me back and the time spent in each other’s company was with increasingly uncomfortable and furtive vigilance.

Then there were the two Koreans, whose names escape me so I’ll call them Park Won and Park Tu. They did not understand a word of English and recorded every lecture to review each word and phrase with a Korean dictionary at night. At one time, Park Tu was determined to find a local barber, although he clearly did not need one. He returned rather disgruntled and subdued which puzzled us all, until someone explained that Korean barbers offered many “extras” with their hairdressing services. Others in the group included three senior British naval officers including an admiral, a BBC engineer, a Unilever economist, a senior banker, and a Japanese Tobacco executive. I was something of an outsider, having been the first recipient of the Rosholt fellowship in executive Journalism. I was certainly not earmarked for an executive career in an organisation that I was increasingly at odds with and because of my fraternal link to an anti-apartheid activist.

The point is not to invite you on a nostalgic journey, but to highlight that in those days management training was a process that started in-house at first line supervisory level. As you progressed, you were encouraged or assigned to follow programmes at institutions outside. By then you had already proved your management and leadership potential and everything you learned could be tempered and made to fit with your real experience in the workplace. The “certificate” was never the issue. The purpose was to enhance experience with further empowering knowledge.

In the decades that followed, this approach was completely reversed and there was an explosion of “management” programmes, workshops, courses and degrees with the holiest of grails being the M.B.A. – the master’s degree in Business Administration. This brings me to the brink of the fires of hell which is the debate about the real value of these lofty titles in establishing or running a business, whether a panel-beating shop or a giant corporate. The fact is that such a debate is raging and this link is only one of many of authority that challenges the value of an M.B.A while the counter argument is offered here. The pertinent question is whether the M.B.A. bubble has burst and whether we are world-wide in a “certificate surplus”.

What may be interesting, more for its “gee-whiz” than scientific or empirical value is to determine the number of M.B.A. graduates among South Africa’s or the world’s 20 best and 20 worst entrepreneurs. Just an idle thought!

It is always extremely difficult to question the validity of any form of education or training. It is outright heresy in these days of “education above all else” and the “certificate culture” that sees folk buy them off the internet or forge them on their CV’s and are even prepared to practice medicine with false documents. Education and knowledge are not necessarily the same things. The former is a process, the latter an intellectual asset. Most comments to my previous article seemed to have missed the key postulate that ultimately passion and meaning are far more important than titles and certificates. This does not mean that they are mutually exclusive, simply where the emphasis should be. Sadly, we may have “evolved” to the point where meaning based on contribution is an out-dated concept.

In the end, only those who possess these certificates can attest to their real value – not from a reward point of view but whether it made them more productive. Was it enriching or was it enabling? And can they distinguish between the two? Whether they will do so absolutely objectively is another matter. One does not lightly denigrate a costly item in one’s possession. Education is a huge industry in any society. It is extremely susceptible to spin and the virus of vested interests with “management” training the most vulnerable of all.

Is there such a science? I found the following quote in the Wall Street Journal quite intriguing:

“The economic crisis has exposed long-standing flaws not just in the modern approach to business education but in the very idea of business education.”

One can’t overstate the value of operational or functional knowledge such as accounting, law, science or engineering, and one must also be careful not to understate the negative effects of the brain drain, BEE or affirmative action. But these affect skills across the board and the real question is whether the concept of a “management science” is a not a myth.

One manages things. One leads people. The most important role of good company leaders is to enable others – firstly their customers, and then in the care and development of subordinates. Leaders should cultivate leaders and this implies that their ultimate success will be reflected in the extent to which they have made themselves dispensable and have created worthy successors. These skills should largely be developed internally including providing for a healthy level of turnover and cross pollination within similar industries.

Being service driven requires a lot more than functional or operational knowledge – it requires passion, customer empathy and a thorough knowledge of one’s product or service. These attributes either exist naturally or take time to develop. One simply cannot recruit an executive from say the construction industry to head a retail giant if that company is primarily service or purpose driven and not profit or shareholder value driven.

The title “manager” can be found at all levels up to Chief Executives, many of whom head up companies today. The “professional manager” cannot be equated with business creators and builders, those with entrepreneurial flair who cut their own paths, often making a huge difference to the business scene and to our lives. They stand outside the market and are seldom for sale to the highest bidder. To subject them to the rules of supply, demand and price would be as silly as saying that Michael Jackson’s earnings were a reflection of a shortage of pop-stars.

To enhance shareholder value and the profit track record that inevitably follows the meteoric successes of great entrepreneurs, futile attempts are made to replicate this flair, through head hunting and misguided bonus and share option schemes. These have done little more than create an artificial shortage in this category and contribute to an explosion in executive remuneration and income disparities.

If management as a science is a myth, then so is the published shortage of 216 thousand “managers” in South Africa. At the very least, the shortage of managerial skills, experience and knowledge cannot be blamed on anything else but on a failure by business to develop these skills themselves and on poor succession planning.

In essence, the shortage of these skills reflects a failure of the most important tenet of sound company leadership – the care and growth of subordinates.

Monday, February 6, 2012

The Trust in Leadership crisis.

Trust holds the fabric of society together. When trust in leadership in particular goes, it affects all levels and aspects of social behaviour and, as we have seen, promotes growing levels of social unrest.

Global trust in leadership, both in business and government, has fallen sharply again At levels well below 40% of people who trust these leaders, the level of distrust can only be described as a crisis, and the latest Edelman Trust Barometer researched in 25 countries and among 25 000 respondents, deserves close attention.

While South Africa was not included in the survey report, there can be little doubt that we will mirror, if not show a worse trend than that seen in the sample countries. A rather strange phenomenon in this country is that while the ruling party is clearly trusted more than others by the general public, its leaders and particularly those in government are just as clearly losing the trust battle. We need not look much further than the ongoing service delivery protests, Cosatu’s anti-corruption efforts, and regular media coverage to illustrate this.

People have been skeptical about the credibility of politicians for as long as I can remember. It took an exceptional leader or statesman to bridge this gap and win general popular trust. But few would have expected global trust in the credibility of government officials or regulators to fall by 14 percentage points to below 30% in the past year. This is not only the biggest slump for this group in the Barometer’s history, but makes them the least credible by far of any leadership group.

clip_image002The sad thing is that no leadership group has gained credibility. Business CEO credibility has fallen nearly as dramatically – 12 points to 38%. Just a year ago, about half of the informed respondents trusted CEO statements as being credible. The report says the fall in the credibility of CEO’s in mature markets such as the United States, the U.K., France and Germany was as, if not more pronounced than the fall experienced after the 2007 global financial crisis.

Circumstances obviously play a huge role in people’s perceptions. It can be argued that skepticism is a product of the times and should not be attributed only to the behaviour of those attracting the skepticism. In good times people will trust leadership more and in bad times less. This is an expedient view at best. Leaders who ignore the distrust of their subordinates and general public do so at a terrible risk. I doubt too, whether distrust in business leadership is a passing phase. I remember a survey done in the 1990’s by CNN/USA Today which showed that company chiefs ranked second-lowest among people that could be trusted; they were just above second-hand car salesmen!

What has eroded trust more than anything else are the coinciding behaviours of declining service, near exclusive focus on profit maximisation, excessive levels of executive pay and increasing wealth disparities. These are all within the control of business itself, and as I wrote last week offer opportunities for business leaders to take a greater initiative in building new customer focused business models and shaping society in future.

So who do people trust? When it comes to information, the credibility of “someone like yourself” has risen from 43% to 65%. Information supplied by a regular employee in a company or government institution ranks as trustworthy by 50% of informed respondents. The most trustworthy sources are still an academic or expert and a technical expert in the company. The credibility of financial or industry analysts has slipped from 53% to 46%.

Traditional media are still trusted the most as sources of information, although at 32% they are not much ahead of online multiple sources at 26%. The huge 75% leap in social media as trustworthy sources of information confirms the challenges facing business leaders in managing perceptions. Social media by their very nature tend to encourage and fuel skepticism rather positive spin. 14% of the informed respondents said they trusted this source, compared with only 8% the year before. This is close to the 16% that said they trusted company sourced information.

There are no surprises in the survey regarding trust in specific industries. Financial services rank lowest with banks second lowest. Media are only marginally ahead of them at third lowest spot. Technology is still the highest trusted industry.

The rise in credibility of ordinary folk, whether peers, pals, employees, Facebook or Twitter, shows that institutions have lost much of their control on information, how it is distributed, received and interpreted. In an age where greater transparency is demanded, this must be a frightening challenge for many. It becomes infinitely more so when behaviour is indefensible.