Why society is increasingly at odds with its business institutions.
Picture this: The Absa stadium in Durban packed to capacity with more than 50 000 people. Outside, 50 000 more are waiting to get in. Listen to the crowd chirping and you discover that they were all Absa clients who, for some or other reason, had left the bank in the past year or so. Then imagine that after waiting under the glare of Absa stadium billboards for some bank executives to address them, the executives do not pitch.
No, these executives are not following up the more than 5000 comments on hellopeter.com, which have an overwhelming number of “frownies” next to them. They are on their way to explain to shareholders why headline earnings are down 6%. But they do hold a placating card in the form of an increased dividend indirectly funded in a small part by covert retrenchments over the past year or two but mainly made affordable by capital levels above those of the other banks.
Of course, the above bit of fiction has been constructed somewhat out of context – one being that the stadium crowd still represents only a small percentage of the bank’s total client base. Branding experts maintain, however, that clients who have a bad experience will tell 12 others about it. A good experience is shared with only 3. With social media you could probably multiply those numbers many times.
But the dripping irony of my little story was based on some of the real bullets of
· clients lost,
· earnings down,
· dividends up,
· staff retrenched and
· uncomfortably high capital levels.
I find it difficult to connect these dots, but one is certainly left with a taste of an unbalanced mix between shareholder, employee and client focus. It was starkly underscored by the media coverage of Absa results which literally deluged us with shareholder information and I found only one, in Die Burger this week that covered client migration. In bygone days this would have been crucial shareholder information. In response the bank has launched “Values Bundles” in an attempt to woo back those phantoms in the Absa stadium. And even here, Finance Director David Hodnett found it necessary to caution shareholders that this “could further dent non-interest income” but with benefits in the longer term. It reflects the partly self-created quandary facing many executives today – investor pressure for quicker delivery. It’s a modern disease called short-termism.
In the meantime, it seems, holding company Barclays has had its own eureka moment after its Libor woes. According to The Telegraph the bank has now confessed that it needed a culture change that would see it “affirming key values” with “reinforcing mechanisms” to ensure staff behaved appropriately. Alluding to management and pay, it added “visible leadership” and rewards would have to be aligned to these values.
This is not about Absa, or even Barclays. I’ve never quite understood how the gap between shareholder and customer interests has been allowed to develop to a point where trust in business has dropped so low. Or how is it possible that despite all our economic woes and growing unemployment in most of the West, corporate earnings in the United States for example can be at 60-year highs?
It came to me after an interchange with a well-informed Moneyweb reader which again confirmed how deeply capital has been entrenched as an untouchable golden calf. This has been accompanied by two strongly held assumptions: that capital is a very scarce and precious resource and that profit represents wealth creation.
The second assumption: that profit equals wealth creation is simply an accounting fallacy. Value-added (sales less outside costs) is wealth creation as a result of adding value to people’s lives. Profit is only one part of that. While some argue that wealth creation is the result of profit creation, I’ve consistently challenged that view on the basis of volumes of research and the stated intent of a very large body of the best known entrepreneurs. These are the people who should be writing business theory and not economists, academics, accountants and consultants.
If profit maximisation automatically increases wealth creation it is mathematically implausible to have a slackening in GDP accompanying general above inflation increases in company earnings. Then the latter is only possible through squeezing out the share of other stakeholders such as labour, or impairing longer term customer service. In turn it increases the gap and conflict between the 1% and 99%. We could argue that lower growth has been caused by increasing government involvement in economies, but the nature of this involvement has been to act contra-cyclically; to soften the decline and prevent it from falling further. The real caveat here is that governments have done so largely through increasing debt. Only tangible value-adding and not debt can create sustainable prosperity.
The first assumption, that capital is a scarce resource, is a theoretical hypothesis that has really taken hold of corporate business since the 70’s. Its legitimacy is defended on the basis that axiomatically assuming its scarcity is the best way of ensuring maximum productivity and competitiveness. Of course that is partly true, but the assumption of real scarcity is questionable and there are many other ways of ensuring maximum productivity than by creating a lean, mean profit producing machine, which Bill Kellogg once described as “dreary and demeaning”. As for competitiveness, there are many examples of customer neglect due to profit maximisation, ultimately eroding competitiveness and leading to self-destruction.
In this context capital is defined as money applied in productive capacity or shareholder funds, the returns on which have to be competitive with other uses of money. Any scarcity has to be reflected in supply, demand and price and we do not need complex P.E. calculations to prove that entrepreneurship, innovation and stable companies, especially the larger institutions, have little difficulty in attracting capital. Just two indicators already show this: the relatively high level of corporate savings and the flow of money to stock markets where on the JSE alone we have seen regular record highs in the All Share index these past few weeks.
The real harm that the capital scarcity assumption has done has been to encourage short-term profit maximisation, to shorten performance horizons and aggravate social divisions. In the process it has created a golden calf based on a theory, a rule or an institution which has literally dehumanised a crucial body of people in wealth creation – investors who enable great people and great ideas to serve mankind.
Of course this fits in with a dehumanised view of economics itself – where transaction is not seen as people serving people within the rules of legitimate transaction and to the mutual benefit of both, but as supply exploiting demand; where customers are not seen as people who have needs, wants, expectations and aspirations that can be served by others in business, but rather as an exploitable entity known as “the market” and where labour is not seen as a partner in this service and in creating wealth, but as a commodity, costly bags of kilojoules that eat away at scarce and precious capital.
Ultimately society, whether misguided or not, will dictate what it expects from its institutions, including business. Conventional assumptions around business are being challenged regularly through social pressure and protests, and new rules and regulations such as governance, transparency, and ethics requirements.
It is such a pity when one has to slap restrictions on something which could and should be a benevolent process. But that’s what happens when you pay homage to a golden calf.