Friday, May 25, 2012

Greece: Containing the contagion.

Is Europe kicking the can down the road to another global meltdown?

It’s amazing how often, when you strip economics from its jargon and pseudo-complexities, you end up with the wisdom of ages, simple logic and basic rules of good housekeeping. Indeed, “good-housekeeping” I’ve been told, translates into “economides” in Greek, from which the word “economics” has been derived. That’s surely irony above all ironies. Equally amazing is how often these rules get ignored, mostly by the practitioners of the jargon and pseudo-complexities.

The current Greek crisis illustrates the point. A 19th century aphorism that says: “You cannot strengthen the weak by weakening the strong” is a very apt description of what’s happening in Europe. For more than 30 months now, a crushingly debt ridden Greece has been propped up by bailouts from other members of the euro-zone, the European Central Bank and the International Monetary Fund to the tune of 250bn euros, with the Financial Times reporting this week that a further 100bn has been advanced through a covert ECB facility. In turn, all eyes are on big brother Germany, which is the only big economy strong enough to hold the euro-zone together. With its own history of post war deprivation, Germany has insisted on stringent austerity measures for Greece.

The Greek’s are clearly baulking. They have been in a 5 year recession, hardship for the population is increasing daily, the government debt is simply too burdensome, the fiscal measures too severe, and political leadership too fractured and indecisive. Greece, according to New York economist Nouriel Roubini, is “stuck in a vicious cycle of insolvency, lost competitiveness, external deficits and ever-deepening depression”. So Roubini and many other commentators are increasingly feeding the financial news headlines with the inevitably of a Greek exit (Grexit) from the euro-zone – within days, some say.

This has been fuelled by euro-zone officials on Wednesday advising members to prepare contingency plans in case Greece decides to quit the bloc. So far, the majority of Greeks have shown a preference for staying in the zone, but have rejected the bail-out conditions.

But there are still those who believe the fears of an immediate exit are overblown. After all, they say, we have been through this all before, with the same brinkmanship being displayed and with Greece not being able to fully meet its commitments, but still being advanced further bailouts. Already, German Chancellor Angela Merkel appears to have been influenced by some badgering from key European partners and other G8 Economies all favouring a growth friendly approach. “Maybe our rhetoric (on austerity) has been too dogmatic”, said Nick Clegg, British Deputy prime Minister.

How is it possible that a member country, representing only about 2% of the economy of the euro-zone, can hold such sway on the rest? The answer is to be partly found in another bit of ancient logic: “If you owe the bank a million bucks and you can’t pay, you are in trouble. But if you owe the bank a billion bucks and you can’t pay, the bank is in trouble!”

But, as Felicity Duncan pointed out in her article on Moneyweb this week, the implications go further than avoiding throwing good money after bad. A Greek exit will plunge Europe deeper into recession and countries such as South Africa, with Europe being our largest trading region, will feel the effects. But then, at least we have art to distract us!

Not so the Reserve Bank’s monetary policy committee, which is clearly very concerned and spent a large part of its meeting this week on discussing the implications of a euro-zone fallout. It could leave the Bank with a policy conundrum in the wake of capital leaving emerging markets for “safer-havens”, downward pressure on the Rand, and lower growth prospects. It then has to juggle between higher interest rates to counter inflationary pressure or lower rates to encourage growth.

Despite German Central bank assurances that a Greek exit would be “manageable”, there are fears that the contagion could go much wider with the possibility of an eventual implosion of the euro-zone and in turn a global financial meltdown similar to, if not worse than 2008. Apart from the agonising financial burden of European and other institutions holding worthless Greek paper, what has started as a “bank jog” in Greece with private interests withdrawing their euros from banks in case they had to convert to drachma’s, could spread to banks in other euro-zone countries such as Italy and Spain. Together they make up 28% of the euro-zone economy and there’s not enough money in the EU bailout fund to prop them up.

The United States, as a major Western economic force, will not be immune. It may not be significantly exposed to Greek sovereign debt (less than $6bn) but it’s exposure to countries such as Spain, Ireland, Italy and Portugal amounts to just under $130bn. European holdings represent 35% of the assets of prime U.S. money market funds. Then there’s trade with Europe that makes up 13% of American exports and losses for American companies operating in Europe. In short, a threat to European welfare poses a significant threat to America’s hesitant 2.2% economic growth. China too, could have a further chilling of its already cooling economy.

One also cannot ignore other risks -- such as civil unrest in Greece itself that could destabilise the whole region, the threat of escalating xenophobia in Europe, and of course, jittery speculation-driven world markets that have an enormous propensity to over-react and exaggerate underlying problems to become self-fulfilling prophecies.

While many of the fears about a Greek exit from the euro-zone may be hypothetical, they do, at this stage, appear to preclude a sudden and disorderly departure from the euro-zone. The European preference for growth rather than fiscal and monetary austerity, also favours a compromising approach to Greece. Next month will be critical as the Greeks vote for a new government, debt repayments fall due, and the government starts running out of money.

In the longer run, saying goodbye to Greece is not unlikely. Nouriel Roubini believes it is essential, and the sooner the better. Though painful, the contagion, he believes can be contained by a well-managed and sensibly financed process. “Like a doomed marriage, it is better to have rules for the inevitable divorce to make the split less costly.”

It’s only when we see Greece in the wider context of a global economic malaise and how we got there, that we can appreciate its significance. The western world had two choices after 2008 which followed decades of financial excesses and recklessness: it could accept a period of severe austerity to blow off the froth of speculative non tangible wealth, or it could go deeper into debt to “economically grow” out of its problems. It chose the latter. Until that course proves to have been the correct one, we will continue to live in a rather insecure world with its sporadic Greek tragedies.

Then another bit of old world logic comes to mind: no matter how many credit cards you have, you can never borrow to get out of debt.

Or, as Boetcker put it more than a century ago: “You cannot establish sound security on borrowed money”.

Thursday, May 24, 2012

Heroes in the workplace.

Getting labour more involved in their companies is essential and possible.

Most human resource or industrial relations experts will agree that getting workers fully involved in the destiny of a company is the ultimate goal of sound employee relations. But, as Moneyweb reported this week, the 2011 Global Entrepreneurs Monitor (GEM) shows that a mere 0.32% of South African employees are actively engaged in Entrepreneurial Employee Activity. At the same time only 16% of employers offer “high” support for new ideas and 52% offer “some” support.

Employers often go to great lengths, through skills and development training, employee benefits, incentives, care services and intense internal public relations, to establish a commitment that transcends the formalised contractual relationship. Yet, even those with the best labour practices fail to unleash true employee involvement and rarely will you find a collective employee loyalty that is prepared to make real sacrifices in the interest of a company’s sustainability or even survival.

Rare, but not impossible.

One such case has been playing out in South Africa in the form of Aurora Empowerment systems. Thousands of words have been written on Moneyweb and elsewhere on this amazing saga of modern day owner larceny that has destroyed mining assets and operations worth millions, and left more than 5 000 people out of work. The story has been reported on extensively enough for me to skip the detail apart from saying that it has been an intriguing if not bizarre story going far beyond company news, especially because of the political connections of those involved.

Of course, this is exceptional, if not criminal shareholder behaviour. The first thought that comes to mind is that you can never create laws to stop this kind of misconduct. The Mervyn King rules on governance, as well as company and other laws were clearly incapable of preventing the mess.

But the real story, the difficult one to tell, is the human one. Again, many words have been written about the suffering of employees, the “cops and robbers” games that were played on the sites, and the deadly illegal mining that followed after formal operations came to a halt. The angle that fascinated me most, and which was told on M-net’s Carte Blanche some weeks ago, was the heroic response of some of the employees. There is Gideon du Plessis (Deputy Secretary-General: Solidarity) whose catchy quote "There are people who are crying, there are people who are dying, because we deal with people who are lying" has underpinned his fight with Aurora and made him a hero to the miners.

Then there’s the Grootvlei mine manager, Herbie Trouw: "These people are just raping the mine; they were stripping for their own benefit." Trouw created a modest profit share scheme from gold still found in the old smelter plant to keep some security people on site. His smuggling of some clandestine gold smelter records to the new liquidators earned him a “suspension” from the owners. He also hid pumps to save them from being cut up and scrapped, in case they could salvage mining operations.

There’s also “Oom” Douw van Niekerk, the veteran smelter who kept his own “secret” records at great risk to himself, and finally, the 120 man maintenance crew that went without pay for months simply to prevent the mine from flooding and causing a fall out in the local town.

One of my favourite labour hero stories goes back some years to the United States, where a metal factory Trade Unionist, Joe Scanlon, managed to save his company by getting labour and management to agree to a flexible pay programme. This later became the well-known and fairly widely used Scanlon Plan.

I saw something similar in South Africa at the Ergo gold reclamation plant, where a flexible pay scheme was hammered out between a shop steward and a middle manager. And then, of course, there was Cash Build, which was saved from severe labour unrest when Albert Koopman introduced a ground breaking participative management system. There have been many more.

Yes, it is indeed possible to get a committed labour force prepared to make sacrifices in the interest of the company. But this requires much more than soft “touchy-feely” programmes and employee benefits including pay incentives.

In my consulting years, I saw employee aspirations crushed the most by an absence of empowering leadership, especially at first line supervisory level. In one case, I had just completed a basic customer care workshop for general staff at a tyre fitment centre. Inspired by the programme, one tyre-fitter suggested that a stronger link be established between the fitment team and the customer, and that the team leader should be allowed to call the customer the following day to check on his or her satisfaction with the job. A supervisor in the workshop immediately shot the idea down on the grounds that it would be too costly. The proposer was left feeling stupid and discouraged.

In another case, a supervisor at a large mining company informed me with great pride how his empowering policy was working. He had enhanced a tea lady’s job satisfaction greatly by teaching her how to capture data on computer. The only thing that concerned him was that she might ask for a pay increase! This supervisor forgot a simple rule – contribution has to be supported by recognition and reward, even if it is not expected.

More recently, we read about loyal bank employees with decades of service, being marched out of their workplace after a staff reduction process. This was followed by a report of multi-million rand executive pay outs at the same bank.

This is the more serious hurdle to employee involvement. It impairs all others and cannot easily be removed. It is the simple and broad understanding that companies exist to make money for shareholders, and that all other resources, including labour, are costs in the process.

It is the long out-dated but persistent one dimensional commodity view of labour that it is little more than a “factor” of production – a view that is still being taught widely today. No matter how well intended other efforts are, including the human resource proclamation that “people are our greatest asset” (also something of a commodity interpretation of labour), the overriding message will come from the accountants that “people are our greatest cost”. The only way to remove this barrier is to forge a common focus on service to customers. In turn a unifying common purpose cannot be sustained and encourage real involvement unless it is underpinned by common fate which implies some or other fortune sharing system. Then Entrepreneurial Employee Activity will be far more firmly grounded.

Ultimately labour involvement is going to depend upon labour itself and its willingness and ability to claim its rightful position in the wealth creation process. This implies sacrifices and a willingness to put pay at risk in exchange for greater job security.

Its real benefit lies in greater labour empowerment because involvement and empowerment are the same thing.

Thursday, May 17, 2012

Jobs: Creation or retention?

We will lose the unemployment battle without serious emphasis on job retention.

We have had some sobering, if not frightening statistics again on South Africa’s most critical problem – unemployment.

According to Stats SA, the economy shed a net 75 000 jobs in the first quarter. This was despite growth in the agricultural sector, which gained 26 000 jobs, and in private households, which created 33 000 jobs in the first quarter of 2012. In the last quarter of 2011, the formal sector shed 107 000 jobs.

Paul Joubert, economics researcher at the Solidarity Research Institute has calculated that there are about 421 000 fewer jobs in South Africa compared with the start of the recession three years ago, while the number of South Africans of working age (15-64 years) has grown by about 500 000 every year. The formal unemployment rate has risen from 23.9% to 25.2%, while the broadly defined rate has gone up from 35.4% to 36.6%.

We clearly need some real innovative if not revolutionary thinking on tackling the problem. One idea that could halve unemployment overnight and at the same time add many tons of maize to our food supplies, is to irrigate the 300 000 square kilometres of the Kalahari desert with millions of people lined up from the Orange river and passing buckets of water to each other. Then a few million more with umbrellas would have to be used to shield the crops from the scorching sun.

The absurdity of the idea is only one of degree, albeit massive, from some of the solutions that one hears today. One such is Cosatu’s favouring large scale job creation in manufacturing. By its very nature, manufacturing mostly requires huge capital investment, which could mean paying anything from R250 000 to R500 000, to create one job, according to IDC numbers. It is also obstructed by the skills shortage.

Ultimately, jobs cannot be “created” in a vacuum. They are born out of people needing and wanting things and by people responding to those needs and wants in the provision of goods and services -- which on the surface appears to support the popular labour argument for more pay, lower interest rates and easier credit to promote consumption. But this too, has to be tempered with the realities of global demand, recession, international competitiveness, inflation, pressure on resources and environmental issues.

It is indeed unfortunate that seeking solutions is stuck in oversimplified political rhetoric, firmly entrenched vested interests and out-dated ideological posturing. A good example has been the internet debate on labour productivity that you can access at this link.

What this debate shows is that we are firmly committed to the concept of an inherent conflict between labour and capital in which labour is viewed as a cost and the purpose of capital is the pursuit of maximum profit. Labour clearly cannot win this conflict unless it is with the help of government and laws which in turn often lose touch with economic realities of the times.

Why, we need to ask, do we put so much emphasis on job creation when our failure at the much easier route of job retention more than wipes out the number of new jobs created? And if we cannot keep people employed in their current jobs, what makes us believe that we will be successful in keeping them in new jobs? We clearly have to do a thorough appraisal of what causes job losses and what can be done about it before spending vast amounts of time, effort and money on creating new jobs.

The most obvious reason is that in their “legitimate” pursuit of maximum profitability, companies will always be cutting staff wherever possible. This explains why company profits’ share of national income has risen from less than 40% in 1995 to more than 47% in 2011. At the same time, the share of wages and salaries has fallen from about 56% to just over 50%. This is total wages and salaries, and does not reflect growing pay disparities in individual companies.

So in the “battle” for income between labour and capital, capital is clearly winning, despite salary and wage increases, and all of the Union efforts in enforcing “decent work”. But the cost of this conflict is growing numbers of people on the streets without wages and other benefits.

At one point something has to give, and capital cannot remain aloof in pursuing its traditional motives. For one thing, the singular focus on profit is rapidly becoming out-dated and more and more people are expecting business to take a broader stakeholder view, including the introduction of governance and other laws to ensure greater alignment with society’s needs.

Another serious concern about profit maximisation is one raised by Bobby Godsell of Business Leadership who I quoted recently: “As we moved to fund-manager capitalism and a focus on short-term returns, companies that cut costs dramatically were seen as winners. Often the easiest way to cut costs was to reduce employment.” Short-termism has not only been a major force behind the financial collapse this decade, but it is a serious threat to employment and ultimately social harmony. It thoroughly discredits the argument that profit maximisation encourages employment and customer care.

Another obvious anomaly which is a global one challenges one of the basic tenets of profit maximisation – that most of the profit gets allocated to reserves which are used to expand and invest in new ventures thereby creating more employment. Sitting on a pot of cash has become a global phenomenon for companies and in South Africa it is estimated that company savings currently amount to just under R500bn.

Job retention is a far greater priority than job creation in dealing with unemployment. Employers have to revisit their emphasis on short term profit maximisation, and labour has to consider the advantages of flexibility in income and employment conditions in exchange for greater employment security and job retention. A fortune sharing system can address both issues.

Otherwise, we really are on a road to social Armageddon.

Tuesday, May 8, 2012

Labour and a new World economic order.

Can a redefined “labourism” create a new viable global economic model?

Two words, one concept, is all it takes to produce a revolutionary and exciting potential blueprint for a new economic model that breaks free from hackneyed ideological rhetoric, yet is rooted firmly in logic and accommodates best known practices. And they have come from an unlikely but authoritative and widely experienced source: that of Bobby Godsell, Chairman of Business Leadership.

Singing the praises of labour in a recent article in Times Live, he used the term “wealth creators” in referring to the 50 million people in this country. “Work” he says, “has always been a central and valuable part of the lives of men and women. From hunter-gatherer societies, to settled agricultural communities, through the industrial age, and now in the knowledge society, the capacity to create value in a way that improves the individual's life circumstance has been central to the human story. Homo Faber - man the maker - is as central to this story as Homo Sapiens - man the knower.”

He then puts labour at the very heart of wealth creation: “Work is about creating value. The best definition of entrepreneurship is the process of combining resources in new ways to make more. This more, in order to be sustainable, must create goods or services for a customer in a way that brings acceptable benefits to the provider. This, indeed, is what real wealth creation is about”.

My interactions with Godsell go back to the days when he was Human Resources Chief at Anglo American and when he and N.U.M. founder Cyril Ramaphosa were regular guests on TV news and actuality shows. It does not surprise me that despite his subsequent “capitalist” public image he has always held a somewhat different view about labour from his executive colleagues and contemporary capitalist moguls. But what has surprised me is his denunciation of the current economic model and its “side-lining” of labour.

He writes: “In the past few decades, a mind-set has developed, particularly in Anglo-Saxon capitalism that has viewed employment in precisely the opposite terms to those described above. As we moved to fund-manager capitalism and a focus on short-term returns, companies that cut costs dramatically were seen as winners. Often the easiest way to cut costs was to reduce employment.”

I first used the concept of labour as “wealth creators” in my earliest basic economic courses for company employees. But it was not even my idea. It came from a barely literate participant in one of my pilot programmes who made the connection after I explained the process of wealth creation or adding value in the most basic of terms. It showed me once and for all not only how simple the concept of wealth creation is but how easily the mantle is adopted by employees -- and with pride. It is not only “an entrepreneur” that creates wealth, but entrepreneurial behaviour, a willingness to make a contribution, which can be displayed and unleashed at all levels within the labour ranks or as individuals, self-employed or unemployed.

In this context, the term “labour” means all “doers”, from sweeper to chief executive.

Ultimately, only doing something (including rational thinking), and not simply owning or investing, creates wealth. For it means transforming one situation, circumstance or set of resources, into another. It is the oldest economic concept known to mankind – predating even trade and dating back to purely self-sufficient individuals or families. When barter and trade became part of social co-existence, then a “value” or price could be placed on the process itself.

Since the beginning labour has been the centre of creating value. Yet, only in rare pockets, or time frames in some countries, have we seen labour adopt this central and dominant role. Under the known systems, labour has been enslaved either to capital or governments.

Today still, the concept of “labourism” is not broadly defined as potentially another economic model, but rather as an activist movement within the understood ideologies, as a class war, as a struggle for worker’s rights. Despite his criticism of capitalist behaviour in modern times and some useful suggestions on social and individual behaviour adjustments for a better employment environment, Godsell understandably does not offer an answer to the need for breaking down current ideological paradigms and putting labour onto the pedestal it deserves.

The hurdles are quite daunting. We have to at least start with recognising the huge deficiencies in the labour market which in its present commoditised form simply cannot capture the three dimensional essence of labour. One dimension is skills and qualifications; the second is willingness and passion, and the third, the most important by far, is simply that the value of labour, as in all things is not determined by its own needs, ability to mobilise, haggle and extort, but by the usefulness to someone else of what it collectively does – for the customer, the market.

The conventional labour market places most emphasis on the first commodity dimension, and rather crudely. Some recognition is given to the second dimension, again mostly inaccurately by focussing on shareholder rather than tangible customer value, through bonus and merit schemes. But the third and most important, that the value of those efforts is ultimately determined by what the end customer, or market, is prepared to pay, is largely ignored. I have in a number of previous articles suggested some practical ways this can be done, even if only moderately and at an individual company level, through concepts such as common purpose, common fate and fortune sharing.

Labourism implies the unthinkable to most labour champions at present: embracing as a collective a market orientated approach. It has to be willing to allow its collective value to be determined by its usefulness to others, the contribution and difference it makes, the value it adds to other people’s lives. This, we know, is volatile and seldom set in stone. Real labour flexibility implies an ability of collective adjustment. This can be done while still accommodating a differentiating template for the supply of and demand for skills and qualifications.

Capitalism has (falsely in my view) claimed to be the exclusive champion of free markets. The real essence of capitalism is not market led but profit led and capital dominated, to the extent that it has created devious instruments for delinking wealth creation from tangible value based on contribution to the broader market.

We have made a huge leap when business leaders such as Godsell, entrepreneurs, investors and others, can acknowledge the basic tenet that labour is at the heart of all wealth creation.

All it needs to give expression to a new world economic order is for labour itself to accept the risks, responsibilities and accountabilities that go with claiming this position.

Wednesday, May 2, 2012

The enduring lessons of Titanic.

100 years on and the same behaviour mistakes get constantly repeated.

An obsession with superlatives seems to be an inherent part of being human; everything must be bigger, better, faster. We extrapolate this to many facets of our lives – the structures we live in, the vehicles we drive, the companies we own or work for. They say it is our natural competitiveness without which we would simply not evolve, innovate and prosper. We would simply stagnate and become extinct.

At the same time, it contains within it a seed for its own destruction: a seed I suspect that germinates in the need to be in control not only of our own destiny, but every moment in it and every element that can affect it. It is one thing to be in awe of a towering majestic mountain. It is another to marvel at the foot of a huge man built tower block. The former gives one a sense of humility, the latter a sense of majesty. I got a taste of this after 9/11, when I remembered having stood at the top of one of the twin towers, more than 100 floors up of the World Trade Centre. One loses a sense of height, as if flying in a small aircraft. I marvelled at how many natural elements had to be conquered to achieve this engineering feat. A few years later it was all gone, and the illusion of anything permanent went with it.

This is what makes the Titanic tragedy so enduring and repetitively illustrative of our human strengths and weaknesses. I found it a fitting introductory metaphor in Value through Values which was published on the eve of the financial crisis:


“When the Titanic set sail from Southampton 100 years ago it was more than the biggest and best passenger ship of its time. It represented both the best and the worst of contemporary society. It was the epitome of grandeur, opulence, refinement and innovation. It was also an engineering marvel and was hailed as a symbol of man’s mastery of the elements. It stood for the notion that out of man’s hunger for material wealth comes greatness. In its variously classed cabins were cocooned the desires, dreams, aspirations and, later, courage and cowardice of both the elite and the common people. It was the embodiment of profit-driven greed, competitiveness, pride and arrogance. These things, not the iceberg, were what sank it.”

Titanic has become a microcosm, more a “slice” of the human condition that can be extracted at any time, probably for centuries to come, and its DNA matched with any failure of a human endeavour, from a disappointing small bankruptcy to a collapse of Enron, Lehman Brothers or even the breakdown of a global financial system. When things become “too big to fail”, we have clearly allowed arrogance to outstrip reality. When things appear to be at their most secure, we have reached the point of our greatest vulnerability. When we believe in our own permanence, we have passed our sell by date.

clip_image004Each of the “sub-plots” that make up the Titanic story contains its own reflections and lessons. Such as the contrasting behaviours and fortunes between the veteran Captain Edward Smith, who went down with the vessel, and Joseph Bruce Ismay, the owner’s representative, who was one of the first rescued from a lifeboat. It reminds me of the modern day executive ability to escape full justice in major failures while professionals down the line take the full brunt. Ismay certainly did not fully escape justice, having been vilified to live out the rest of his life in disgrace, albeit in secluded material comfort.

There are many similar side events: the disgracefully inadequate number of lifeboats, their lack of readiness, the use out dated cheap and fast iron rivets instead of steel rivets, the huge disparities in conditions on board itself between the wealthy top decks and the migrant passengers on the lowest decks, the imprudent speed in dangerous ice-berg conditions, and of course, the assumption that the ship itself was unsinkable. These were the ultimate reflectors of profit-driven greed, competitiveness, pride and arrogance that made of Titanic the tragedy that it was and not the triumph it could have been.

Despite all these valuable lessons for still often repeated mistakes, it is doubtful whether the Titanic saga will be used as a classic case study in learning material of organisational, managerial or business studies for a long time to come. For the most important elements are too intangible, too behavioural, too unscientific, and too “soft”. Still today, many believe that raw material immediate self-interest is by far the best driver of human endeavour.

We may be running out of tolerance to repeating those mistakes. The social harm of inappropriate economic behaviour has grown exponentially and with the contamination the global financial system, different insights are clearly needed.

But the Titanic story will endure, to be told again, and again. Perhaps in some future telling of it, we will come to those different insights.