Monday, December 9, 2013

Survival and empathy.

Where does business fit in our natural human instincts?

It must be one of the most intriguing questions that have faced humanity over the ages – what is the nature of humankind? Until we really get to understand ourselves, can we hope to understand all of the social, political, and economic constructs that we have created as a species and which ultimately are all informed by the answer?

In economics and business especially, it is important to have some sense of our basic nature and what drives behaviour. This in turn helps us to understand the very character of social interaction, transaction, purpose, and motives that account for the way things are, the way they should be, and the path of our destiny.

It is much more than an exercise in philosophical semantics. It could be one of the most important insights of all, because it is inconceivable that we could construct an order for our species that is in conflict with or deviates far from those basic attributes that make us human. Ultimately you can distil any debate or argument about anything to that essence –economic systems, political constructs, laws, and many more all end up in an assumption about the why; an assumption that many are ready to make simply because we have ourselves as reference and think we know who, what and why we are, and therefore also understand what others are or should be.

It’s a question that has occupied great minds over millennia: prophets, philosophers, psychologists, scientists, humanists and virtually every branch in the pursuit of knowledge. So I decided to revert to our helpful friend, Google. It was of little use and plunged me into confusion between instincts, reflexes, physiology, emotions and religion. Ultimately, it seems, to understand ourselves most of us fall back onto basic instincts to explain all behaviour and if you ask anyone to name these instincts you will seldom find any beyond that of survival.

That makes a lot of sense. Because from that one instinct we can link or extrapolate most if not all of our activity: including other instincts such as sex and procreation; reflexes such as fright and flight; emotions such as fear, anger and insecurity; physiological responses such as adrenalin and serotonin; and behaviour such as ambition, competiveness and control.

It’s only a small leap from there to make the same link for misbehaviours such as raw material self-interest, greed, envy, resentment, and acquisitiveness. At its core this encourages our understanding and facile acceptance of these behaviours as being part of “human nature” stopping short in condemnation and abhorrence only when these acts lead to outright crimes such as fraud, theft, or even robbery and murder. Then they become “anti-social” implying that they are not fitting for an evolved, civilised and enlightened being. In turn this implies that being part of a social construct is inherently in conflict with our natural individual selves.

But even a casual understanding of our basic selves will rebel at this narrow definition. It is obvious to all of us that we are social creatures, drawn to each other by nature, not evolvement or enlightenment and that we have another equally powerful instinct called empathy.

This instinct in humans is so powerful that it often overrides that of survival. I was reminded of this again by this video clip someone emailed me showing the extent to which people virtually routinely can place themselves at risk in saving another. In one of my first articles I argued that our basic instinct of empathy accounts for our majesty on earth, the most powerful of all creatures and custodians of the planet.

What deserves repeating is that evidence of this instinct can be found in our reflexive response to come to the aid of another in trouble; the fact that evidence has been uncovered of this instinct that accounted for the survival of a humanlike creature more than 200 000 years ago, and that scientists have identified the presence of mirror neurons in humans that far outnumber those found in other living creatures. More recently, scientists have determined that there is an area of the human brain (the anterior insular cortex) that accounts for empathy. Of course, as with any physical feature, these can differ from person to person and accounts for excessive empathetic behaviour in some, psychopathy in others, and many variations in between.

Where have we placed business and our economic behaviour? It is a trite cop-out to argue that it is both. Ultimately one will override the other either routinely or in a certain circumstance. It can be argued that we have placed business virtually exclusively in the survival context. It’s a natural thing to do because survival has always been seen as the basic motive behind behaviours such as storing, hoarding, acquisition and even barter and trading.

The basic instinct of survival and with it the self-interest motive is the most common assumption in explaining all business and economic behaviour, ultimately underpinning with highly sophisticated Nobel Prize winning Friedman logic the unassailable and near fanatical defence of the profit motive. Questioning that fundamental premise invites condemnation as an economic heretic, enemy of freedom and anti-capitalist.

It’s a legitimate question whether, under the mantle of the survival instinct, we have not too readily accepted dubious business behaviour such as poor customer service; that having a moral compass and ethics in business is seen as a “strategic” issue rather than its absence being seen as absolutely abhorrent behaviour; and that fraud, collusion, and corruption are seldom met with retribution reflecting deep disapproval and lasting outrage.

Yet I can think of no other institution that is more dependent on social goodwill than business. Indeed, within the rules of legitimate transaction, business is founded on the premise of being of service to another, without which it loses its right to exist. Tangible wealth creation itself is the outcome of that service, rooted in the principle that value depends on the contribution it makes to others.

It’s an intriguing question how different business would be, how company norms would change, how executives would be rewarded, how strategies would be adjusted and how accounting formats would be altered if our understanding of business would be informed by the instinct of empathy rather than survival.

Of course, for humanity the instincts of survival and empathy are mutually supporting. The more evolved we became the more empathy dictates survival.

Mandela: legacy and legend.

How different would the world have been without this one man?

The true mark of a human being is to ask the simple question: “what difference did this person make to my life?”

It is one ultimate tribute we can pay to Nelson Rolihlahla Mandela, and it should be based on a response spontaneously from the heart and also on deep reflection; stripped of judgement on recent and current events; an assessment of a legacy uncontaminated by the actions of his successors; and a return to that critical time between the late 1980’s and early 1990’s. For the South African nation it was a painful blend of despair and hope; of loss and gain; of doubt and trust. On the one hand for many there was a deep nostalgia for what we had known and on the other hopeful apprehension of what we could become.

We came from both sides of a structured apartness – villains once heroes, heroes once villains. We were brought together in lingering suspicion and tentative hope through a short and yet so long walk to freedom by a real and symbolic hero. Those steps inspired and united most of the citizens of a polecat country – from the warriors on both sides of the gulf to a vast middle that either voted or waited. All shared a dream of what they thought the country could become.

Mine is only a small modest reflection of many volumes of thoughts, tributes, eulogies and obituaries that will be written on the passing of this global icon. Its relevance is no doubt severely diluted. Its publication is an honour, and your reading of it even more so.

Among the countless awards, citations and accolades, “Tata” or “Madiba”, has as recently as 2012 been voted by Americans in a Gallup poll as the second most admired man in the world. He has also been listed as the 14th most admired person of the 20th century. It seems the American based Gallup research is the only one that is done regularly, and it’s a moot point whether the South African statesman would not be ranked higher in a global survey.

But it confirms that there are millions of people across the world who feel to a greater or lesser extent that Mandela has made a difference to their lives. He certainly made a huge difference to mine. And it was much more than the two brief encounters I had with him around the 90’s when he reflected that rare attribute that makes strangers feel as comfortable as if they were close friends.

By the mid 1980’s already, many of my generation of white South Africans, were haunted by a vague whisper from the past of Harold Macmillan’s “Winds of Change” speech decades before. For me, and I imagine a good number of my white contemporaries, it led to a self-inquisition of “what the hell had we been thinking.” There are perhaps few of us left prepared even to concede that. Many, I imagine, have re-written their own histories to include some or other “struggle credential” – which inexplicably has become the ultimate test of character. In truth few were warriors on either side, but in that vast middle that either voted or waited.

And in that vote or referendum of 1992, Mandela’s influence played as much, if not more of a role than any other in persuading the majority of those franchised to end Apartheid that many of us were born into. His chronology has filled many books. I’m going to simply reflect briefly on that pivotal period of the late eighties – a period when Mandela’s presence changed the course of history and fear into hope.

The turbulent national unrest from 1984 completely detracted attention from the tentative talks between leaders on both sides, including an imprisoned Mandela. At the time I was privy to some, albeit a small amount of “restricted” information and the imminent release of Mandela was one of those. The mixed feelings and apprehension were reflected in a prediction by a very senior news commentator that Mandela’s release would spark civil war. This foreboding and resolve to crush the revolution was conveyed in P.W. Botha’s famous Rubicon speech in August 1985. But in turn the generally negative response to that speech was a clear sign that most wanted change – indeed were expecting it.

What finally swung the momentum towards ending the world as we knew it was financial sanctions that led to the South African debt standstill and the collapse of Communism towards the end of that decade. But most of all for me was Mandela’s rejection in 1985 of his release from prison before “my people are free”. In an instant he cemented his global status as martyr. Some may have interpreted that as an expedient stroke of political genius. I saw it simply as the act of a true statesman and servant to his people – the ultimate quality of a great leader.

This assessment was strengthened many times by his behaviour and performance after his release in 1990 which not only catapulted him into the position of most revered statesman in the world, but achieved a great calm in a country that he was to lead as its first black President.

In later years, there have been a number of detractions from his legacy. The things that he represented to a great many of us: self-sacrifice, honesty, integrity, and servitude to his people are shockingly absent amongst his successors. His silence apart from some muttering after his relinquishing office seems to have given those detractors some licence to sling mud his way.

I believe this to be terribly unfair. I know all too well the position one can reach in life when you say: “I have done, and I am done!”

Legend and legacy often go together. The legend will live for all time. Who knows, perhaps a revived legacy will follow.

Sunday, November 24, 2013

Thula Thuli, thula?

A letter the nation should be writing to the Public Protector.

Our Dearest Thuli Madonsela,

We hope we are forgiven for using the plural in the salutation and the impudence to address you in an open column. But we simply cannot imagine there being more than a handful of people who do not share deep admiration and gratitude for your courage.

We heard on the radio this week, some analyst predicting that your latest spat with the powers that be will be your last. In taking on number one, he implied, you were inviting as much of number two as you could have found at Cape Town airport and the city’s official buildings not so long ago. This was before your soothing reassurances at a media briefing this week and yes, we know! Yet another analyst with some provocative outburst to capture attention in the hope that he will not be overlooked when next some junior reporter is using his “dial-a-quote.”

Decades ago “analysts” were restricted either to those chemistry fellows with thick lensed spectacles hidden in basement laboratories, or were sectoral specialists in broking firms. Now you find them in economics, politics, law, international relations and many more; as if every fibre of our society needs half-baked analysing based on equally half-baked research of some highly suspect data. Whereas what this country really needs are more psychology analysts to identify, analyse and treat the growing number of psychopaths and sociopaths that are consistently in our faces, homes and wallets.

But even if we take that analyst’s prognosis with a pinch of salt, it was enough to jolt most of us out of pre-conscious morning slumber. Could the tilting of your sharp legal lance, albeit some may say in an overly polite and wary manner, at the highest in the land turn out to be Quixotic and the prelude to your swan song? And will this not be the final leap into autocracy and authoritarian rule?

And then you have those who feel you were too contrite. Okay, it was only one reader that received some prominence for this view in a letter to Times Live. Can anyone really know what that inner spark is that heroes like you have?

In the mist of all the clamouring chirps, the bouquets and the brickbats, the encouragements and the discouragements, the friends and the foes that surround you, is a human being that at times must experience the task as being very lonely and onerous.

It may help to realise that just as solidly behind you is that clich├ęd silent majority. Many may not even know of you and some only vaguely so. Whenever public servant misbehaviour is discussed, someone is bound to mention that “Thula Lady”, blissfully unaware of the ironic confusion of your name with that serene and nostalgic Zulu lullaby that silences infants.

It may be ironic, but not totally inappropriate. Often when we see your mild-mannered and soft spoken discourses in broadcast interviews, we are reminded of that memorable event many years ago; when Archbishop Desmond Tutu embraced and covered with his cloak a young man fleeing from burning tyres born by a frenzied mob. As a lawyer using law to stop the lawless, (albeit with a velvet glove) there is little difference between what you are doing and the bishop’s robe, or the reassuring lullaby.

What is perplexing is that in your on-going war against corruption and acquisitive terrorism, you had to be drawn into the whole Nkandla affair. The spending of about a R¼-billion rand on a presidential palace, homestead, compound, fortress, laager, kraal, or whatever palatable “security” spin one wants to use in the midst of abject poverty, chronically empty bellies, poor schools, and poorly resourced health facilities is so self-serving, ostentatious, outrageous, hypocritical, bizarrely ironic and so patently unfair that it surely must gather a momentum of its own, a civil protest on its own, and an inflammatory spark far greater than e-tolls or labour brokers – unless our priorities are distressingly warped.

Hypocrisy is a king with no clothes. There must come a time when even the child sees that.

At the very least, may this not divert your and your team’s efforts from the much bigger task of building an anti-corruption and anti-misappropriation wall out of the many bricks of lesser known but equally detestable misbehaviours. Those that make up the estimated R30bn loss to the public annually; those that you recently described as having reached crisis levels; those that make Transparency International rank us 69th out of 176 in global corruption perceptions, and those that go on unabated as evidenced in the latest Auditor General’s report. Despite President Zuma’s assurances, the corruption glass should never be only half empty.

At the same time and giving credit where credit is due, the constitution, the existence of your office and others, and the undeniable reality that exposure of corruption increases public perceptions of its pervasiveness do give some solace.

Even amongst us the grateful, there may be a few sceptics who will question your deeper motives. Let that not concern you. You are our Joan of Arc. History will treat you kindly. Whatever transpires, and whatever your future holds, your task is far from done, dear Thuli.

May you continue to sing your reassuring lullaby for years to come.

Monday, November 11, 2013

Under the dome.

When the small blame the big for their smallness.

Followers of TV series will no doubt recognize the title. It alludes to that Stephen King sci-fi series in which a small American town is enveloped in an invisible dome that some alien force created to protect a mysterious butterfly cocoon.

The dome was impervious to any onslaught, including nuclear devices, and created the setting for producers to fall back on the old themes of good versus evil, black hat against a white hat, and villain against hero in portraying the behaviour of the town’s residents. And of course, in true “who shot J.R.?” style, the series exasperatingly ended with the hero at the point of being lynched when the dome came down.

Being a sucker for a good metaphor, my attention was fully captured by an anonymous e-mail from “Swellendammer”, a local with an axe to grind against the Sentraal Suid Co-operative, commonly called S.S.K. He likened the doings of this agricultural co-op and dominant force in the Overberg district to that of the enforcers of the dome, stopping short of accusing the organisation’s leaders of being the big black hatted villains lynching the small business heroes.

He asserts that the size and power of SSK and the number of its tentacles that stretch into every activity in South Africa’s third oldest town and beyond is an unfair obstacle in ensuring the livelihood of many other small and struggling businesses. Those tentacles reach into retail of produce, hard and soft goods; credit provision, hardware, arms, clothing, property, liquor, motor sales and repairs and many more. The co-op is the major shareholder of the town’s largest shopping mall.

All of the above is in addition to the co-op’s and its subsidiaries’ core businesses of supplying products and services to farmers, oil extraction, refinement and marketing; and animal feed production. On top of that SSK has just absorbed the interests of Mosselbay’s Tuinroete Agri Ltd (TRA) which increases the co-op’s presence from Robertson in the West to Plettenberg Bay in the East, and will boost the group’s annual turnover to about R2bn with the co-op itself contributing at least half of that.

Not willing to let go of a good metaphor and with the merger hot off the press, I decided to explore the David versus Goliath theme and forwarded Swellendammer’s mail to SSK. Within an hour I received a reply from its Finance and Administration GM, Villiers van Veen suggesting a personal meeting.

The first thing that struck me was the modest co-operative head-office, housed in an old two story building that somehow belied the co-op’s R800-m assets, and contrasted sharply with those majestic foyers that hallmark the Sandton premises of financial institutions that I used to frequent regularly. Van Veen himself is equally incongruous. He is a refugee from those very same august Sandton premises, where he used to be an investment risk specialist and asset manager. He took flight, he says, from a seemingly meaningless life to become involved in his first passion, agriculture. In his current position he has joined a group that can be described as visionary co-operative trail blazers.

A one-hour appointment became two hours of animated discussion and I left convinced that SSK represents much more than a co-operative or a different way of doing business. Within this, one of the oldest (founded in 1931) and biggest agricultural co-operatives in the country, lies a business model that is fresh yet very old, that is unique but the same and that is definitive proof that the oldest economic principle known to man – that of adding value to other’s lives – is the ultimate foundation of what all transaction should be about. It is the only valid source of tangible wealth creation.

The potential of co-ops as an alternative to private and public companies in creating sustainable wealth and employment has long been known and it’s a subject I will have to return to in a future article in the broader context of agriculture, labour and others. To determine what has made SSK successful where many others have either failed or converted to limited, profit driven companies, one has to reveal the human story against the metrics. The only way to do this is to examine its Contribution Account extrapolated from the Value-added statement in its latest annual report.

What is clear from the outset is that no-where in essence does the co-op transgress sound business principles of efficient use of capital, maximum productivity and competitiveness against some very big actors, including discount retailers and other agricultural suppliers . On some of the social dictates such as CSI and BEE it is ahead of its equity based peers. Its operational model is a mix of trading, processing and manufacturing and of every R100 of supplies it uses from others, it adds R14 value. This may appear small, but it hides the exceedingly important feature of the enabling and empowering relationship with those suppliers, a large part of who are local, albeit incestuous in some instances.

More than half of wealth created goes to employees and 7% in cash to its owners. This is part of bonuses based on a member-ownership structure in which all of its nearly 1000 members have the same number of “shares”, big or small, old or recent as long as they can prove being part of the agricultural value-chain. These bonuses are calculated on members’ dealings with the co-op itself and only 20% is paid in cash and the rest ploughed back into the co-op. This accounts in part for the large 38% allocation to savings and in turn its vigorous local capital expenditure in agricultural infra-structure which also explains the relatively low tax share of wealth of 2%.

This is a fairly marked deviation from conventional corporate capital behaviour where they sit on billions of reserves and seek short term returns in non-core speculative investments. Farmers baulk at such trifling things!

Apart from access to Landbank capital, for which SSK has to jump through onerous hoops, and which is used to fund farming ventures of its members, SSK has proved that a co-op needs no special treatment – not from government, society, consumers or business. It does have its complexities and intricacies and hurdles in its founding have been huge compared with a normal company. Van Veen relates with a touch of emotion and pride that these were overcome with sacrifice, patience, prudence and perseverance – the antipathy of the accepted behaviour of most companies today.

But its real success lies in a very, very simple principle: its owners are also mostly its customers and servers are served. It encourages above all else full appreciation that its existence is dependent upon the value it adds to others.

So in answer to Swellendammer, I could find no evidence that SSK represents a malevolent monopolistic dome. Indeed the opposite: without it this region would be very much the poorer. SSK’s growth and size is less of a threat to the community than it is to itself. In growth and takeovers of companies it is perhaps treading unchartered waters for a co-operative. Large assets and huge turnovers become a potential breeding ground for greed and predatory behaviour, the nemesis for an institution that relies heavily on the patience and goodwill of its participants. It becomes increasingly difficult to resist the temptation of changing to a limited company and converting its members’ interests into tradable equity.

We all have a special empathy for small business, the small supplier and the mom-and-pop ventures. But another of Boetcker’s “cannots” says: “You cannot strengthen the weak by weakening the strong.”

Tuesday, October 29, 2013

For whom the roads are tolled.

Why the user-pays argument for e-tolls is invalid.

There was more than a touch of unintended satire in Agriculture Minister Dipuo Peters’ comparison between paying a toll for the use of roads and depositing a coin in a facility where you want to deposit something else.

Many jesters have had a field day with that postulate, which no doubt must have attracted a snigger or two from the august gathering of the country’s top business practitioners that she was addressing. It revived a vague memory of some graffiti I saw on the door of such a facility many decades ago that read: “Here I sit, sick and dishearted (sic); I paid a penny, and I only farted.”

Another dating to the same era when pennies still had value, I adopted as a childish chant: “If you want a wet surprise, pull the chain before you rise.” That only makes sense if you can remember the days when you were forced to sit under the threatening weight of a huge cast-iron cistern, from which a long chain was suspended to perform a very loud thumping flush. In those days they were mostly consigned to outhouses as a step-up from long drops. The reason was simple: if you had one in your home and someone in the household was having a metabolic nightmare, the entire extended family would have a sleepless night.

I’ve always studiously avoided taking issue with many of the ludicrous utterances on matters economic of our politicians from all persuasions. There are just too many of them and mostly their dripping irony and risibility needs no highlighting. It’s only when they are uttered in defence of official policy and represent a terrible twisting of basic economic logic, that it becomes much more than some fertile material for a verbal cartoon.

For one thing, and this purely as an aside, it does not take an accounting genius to know that the coins used for relief in a public loo can never cover the cost of building and maintaining those facilities. The charges were intended purely to keep layabouts from misusing the cubicles for other purposes such as a night of peaceful repose. It’s a bit surprising that someone has not taken this issue up with the Constitutional Court after not being able to hold it in any longer following a desperate but fruitless search for an appropriate coin.

Perhaps it is time that someone rescues the e-toll debate from heading for the toilet and the quagmire of complexities covering its accounting, fiscal and legal parameters. They have all been well-documented and debated in the public domain. What has not been challenged sufficiently and is the cornerstone of its defence such as Minister Peters has again done is the validity of the user-pays principle itself and its relevance to toll roads.

It’s a very seductive argument, seemingly paying homage to free market principles; holding people to account only for those services they directly use; avoiding inefficient cross-subsidisation of government costs; allowing price to dictate allocation of resources, and avoiding the dirty word “tax”.

That’s the first sleight of hand that must be unmasked. A toll is a tax. It is not a price. In principle it is not very different from VAT, where you are forced to pay if you purchase. A road toll is just more specific, confining that tax to a more specific purpose. But it is still coerced, unilaterally and bureaucratically set and not free-moving according to supply and demand. I suspect the whole hullabaloo around e-tolling would have assumed a very different colour had the toll simply been called a “road tax”.

In theory, there’s not much wrong with that. A tax applied for a very specific purpose is arguably much better than where its costs are covered from a massive central account that can hide all kinds of corruption, misappropriation, and inefficiencies. Already our fiscal affairs, controls, allocations and accountabilities are in a mess. The government’s inability to be prudent with general expenditure naturally questions its ability to be so with targeted revenue and expenditure. That’s one of the key issues of the current debate and needs no repeating here.

The principle of user-pays means that the cost of those facilities is covered by the user of those facilities. Investec strategist, Professor Brian Kantor pointed out in Business Report this week that Sanral’s toll structure is not based on cost recovery, but on traffic volumes, implying cross subsidisation of low volume roads by those with higher volumes. He accuses Sanral of blundering by seeing commuters as cash cows.

The deliberate paralleling of the road toll with a legitimate price is highly disingenuous if not deliberating misleading. Pricing is one of the most important principles in economics. It stands on an unassailable and self-evident logic that we all instinctively learn from the day we start swopping marbles. Its primary and vital purpose is to balance supply and demand and move resources to where they are most needed. It underscores the need to keep resource allocation as much as possible in a free environment and out of bureaucratic controls. This does not imply the unbridled reliance on market forces. Markets do not fail; behaviour fails markets, driven by a flawed construct of the role of business, profits, motives, incentives and others, and in turn inviting interventions and social dictates.

Despite the many calamitous economic lessons of the past and present, free moving prices are the one principle that societies flout the most, not only through misguided controls and a contamination of money as a denominator of value, but also through distortions caused by protected monopolies, collusion and other forms of misbehaviour.

Free moving prices are at the heart of legitimate transaction and transactional fairness, of which other pillars are maximum choice and optimum number of alternative suppliers, as well as broad consumer awareness.

At various levels, toll roads simply do not meet the conditions of legitimate transaction.

Tuesday, October 15, 2013

The casino next door.

Have we created a dual economy of gamblers and others?

One does have some lighter moments even in the weighty world of economic journalism. At a pre-budget briefing long before many of my readers were out of high school, a battery of the country’s top fiscal and monetary policy makers spent some arduous hours with the financial journalist elite going into the finer details of the upcoming budget.

At question time, one of our colleagues got to his feet and asked: “Mr Minister, what does all this mean?” What followed was a stunned silence, until the school masterly Reserve Bank Governor, Dr Gerard de Kock, was instructed to take the confused fellow aside and brief him privately on fiscal affairs. It turned out that he was a junior sports reporter who had been assigned to cover “some meeting” at parliament.

Sometimes the simplest questions are the most difficult to answer, taxing not only your understanding of the subject, but the basic and self-evident logic that should underpin it. Which may explain why many “experts” are not only a bit at sea when it comes to explaining the complexities of our modern financial state, but often disagree about its detail and where it is headed.

Such as: what will happen when the deadline for raising the U.S. debt ceiling runs out? Can the world sustain mushrooming debt without avoiding a massive global depression? Or: with constantly increasing government debt and historically low interest rates why is there no rampant inflation? Related, but just as important questions ask why have low interest rates and government spending not encouraged stronger economic growth and job creation? Why are income disparities at socially unsustainable levels? How can the global economy sustain an exchange system based on increasingly worthless paper?

Try answering those questions at a family braai, and like that posed by a junior sports reporter, you revert to stunned silence. But I take some solace in the fact that even some of the world’s economic elite are not confident of their analyses and predictions. They range from the world heading for a depression; heading for hyperinflation; or both depression and inflation implying unprecedented stagflation; or – as the mainstream guru’s seem to believe – modern monetary management possesses the tools and instruments to keep the ship on a course that will gradually extricate it out of current turbulence onto a growth path where budget balances will be restored, debt repaid, and surpluses and prosperity created once more.

Frankly, despite lofty titles, I don’t think anyone really knows. The conflicting views themselves reflect a global economy that is in unchartered waters. Growing unease can reach a point where faith is lost in those instruments and the ability of those using them -- to ignite a spontaneous reaction from the broad masses that have always marked great economic calamities.

The cracks are severe and it may take little more than the jitters surrounding the running out of time for the U.S. Federal government to raise the debt ceiling on the 17th to trigger a run on the world’s biggest reserve currency and spontaneous de-combustion.

That uncertainty is based on a break with logic and wisdom that has informed our economic lives since Adam Smith. In effect we have created two economies: a money economy and a real one: a casino next door to a productive economy.

Analogies contain a huge risk of oversimplification, but it is an appropriate way of illustrating the human story in the midst of the complexities of the money mischiefs that have become the predominant driver of our socio-economic destiny.

The main casino is in the United States, with “satellite” operations in many other parts of the world. The owners of the house consist of the American Treasury, the Federal Reserve Board, and the operators, croupiers, card dealers and gamblers themselves made up of banks, stock markets, investment houses, and many others. They issue their own chips on players’ markers from a seemingly endless supply and in an incestuous exchange environment. For the most part, those chips stay in the casino, making a select few winners extraordinarily wealthy.

But there are two major problems: those chips are not little round plastic discs, but are indistinguishable from ‘real” money; and eventually they have to be covered from incomes earned in the real economy. The same way that a casino mesmerises its patrons into believing that wealth can be created at the press of a button on a slot machine or being dealt a good hand of cards, the world has placed that casino at the centre of fiscal and monetary policies and has made the destiny of the real economy dependent upon it.

It should, of course, be the other way around. Real and tangible wealth can only be created in the production of goods and services exchanged with fellow human beings. Real money, if not anchored in something of tangible value like gold or silver, and even if it is based on government backed I.O.U.’s, has to be balanced by the equivalent value of those exchanges. In time, that debt has to be paid for, either by income earners or taxpayers. Postponing that repayment simply by rolling it over, raising a debt ceiling, or borrowing money to pay due debt is nothing more than a giant Ponzi scheme.

The casino analogy explains many of the imbalances and disconnects that have developed over the past few decades.

As long as the chips stay in the casino and are not allowed to inordinately contaminate “real money” in the real economy, inflation can be contained. It’s become part of monetary policy to “manage” that contamination either through interest rate manipulation or releasing chips -- to encourage economic growth or maintain price stability. Its ability to do so over an extended period is, however, being seriously questioned. One statistic that puts this in perspective is that the value of trading in casino chips is now about 18 times more than the value of goods and services traded in the real economy in a year.

It explains widening income disparities, jobless economic growth and the absence of a tangible “trickle down” effect, where the demand for goods and services by the rich should be passed on to others in the form of wages and salaries – what’s happening in Wall Street, it is said, is not happening in Main street.

Low employment financial services form a major part of GDP in many developed countries. It is 25% in the United States, compared with 15% in high employment manufacturing. There are just too few who benefit from these activities to have a tangible effect on demand for goods and services – that’s if they are willing to part with their chips elsewhere but in the casino.

It explains too the disproportionate growth in profit relative to the wage and salary share of wealth. Shares are part of the casino, pushing many share prices to inordinate levels unwarranted by the subdued economic environment. In turn this inflates shareholder expectations of earnings to beyond reasonable price/earnings ratios with the inevitable outcome of containment, including labour’s share of wealth.

There are many more. It may not be the most suitable analogy and avoids the complexities of how the casino itself operates. But then, what else do you tell your friends at a braai?

Their guess at the outcome is as good as mine – indeed as good as those who profess to know.

Thursday, October 10, 2013

The chicken run

Does Minister Davies know something many small poultry producers don’t?

Not more than 20 meters from my idyllic rented farm house nestled between the slopes of the Langeberg Mountains and the Breede River is a forlorn abandoned chicken run.

It’s a nostalgic shrine to fruitless attempts at self-sufficiency -- that deep and irrational urge that tugs at one’s conscience in troubled times – when politicking can stymy one of the world’s biggest national budgets; when a debt laden populace loses faith in its means of exchange; when poo is thrown in protest and when violent political springs are sprung.

That chicken run played no small measure in my decision to become an urban refugee. I had comforting visions of roosters heralding the dawn and copious feasts of eggs and drumsticks harvested from scores of fowls running freely in the considerable expanse around the renovated “opstal”. The potential abundance could be shared with friends and neighbours in exchange for cabbages and corn, offsetting potential protein overload.

What followed was a long and sorry struggle. First we discovered that our locally acquired motley clutch refused to seek refuge in the badly fenced run, let alone the decades old zinc chicken house. Attempts to get them to lay eggs in nests fashioned from plastic crates were fruitless. They chose rather to hide their passion fruit under thorn bushes and stinging nettles in the surrounding hectares and sleep in trees to show us that contrary to popular belief they can be quite accomplished fliers. Catching them for the table was beyond any geriatric capability.

Then came the day that one of our pet Jack-Russells proudly dragged in a headless carcase, followed soon by another, and then another. Disbelieving that nature could be so wasteful, we concluded that it was our two spoilt Jackies who had lost the art of hunting for food, emulating humans in killing for sport. Our decision to let them go was supported by their over-zealous appreciation of freedom to disappear for days and form packs with other dogs in terrorising everything that moved in the area.

We had little time to mourn their departure, before we found another carcase in the same headless, blood-drained state – and then more until our clutch of fifty or so was reduced by half. The Draculas were none other than fat otters from the Breede River, already overfed on guinea fowl. So like humans, our fowls were imprisoned in the name of freedom. Free range became semi-free behind a fenced 500 square meters of fertile bug and foliage carrying land. The house itself was cleaned and renovated but retained its original reed and bamboo fixtures which clearly had served its previous inhabitants well.

Then they all got sick. We thought they were overwhelmed by the loss of their freedom and were going through the four stages of grief. But then one died and soon all were gone apart from the wily old rooster. It took a local to inform us that they died of anaemia caused by blood sucking lice. The tiny creatures were dormant for years in fixtures we preserved in a misguided salute to bygone days.

At the grave of our dear departed feathered friends, we resolved to “do things properly”. The fence was replaced with costly professionally installed 1.8-m high heavy gauge jackal wire and the “hok” stripped, refitted, debugged and repainted with bitumen that’s the nemesis of any creepy crawly.

Without costly machinery, slaughtering would be a hurdle, so I studied various means of killing, de-feathering, and dressing to prepare them not only for the pot, but perhaps sell to the local mom-and-pop stores. The best, clean and bloodless method, Google informed me, was to stick a steel knitting needle in the beak and shove it into the miniscule brain. But one clearly mellows with age, to the point where one is repulsed by the killing even of sworn enemies such as spiders and snakes. The decision on slaughtering was postponed – indefinitely it turned out.

Our run was restocked with a mixture of 3 month old layers and broilers purchased and transported from Malmesbury and each costing as much as a dressed fowl in the supermarket.

Then we again found a headless carcase, and the carnage resumed. Those fences may have kept out otters, but not local musk cats and mongooses that burrowed under the fence and found other forms of entry. The run was fortified with below surface chicken wire.

And then came the hawks. They would swoop in and claw at our precious poultry before realising that not even their splendid wings could lift their prey, leaving a dead bird behind. We planted a long pole in the centre and suspended nylon cord from it to the fence, attaching blank cd’s at various intervals to blind their superlative vision. It did not deter their entry, only their exit, leaving us with a terrible conundrum of dead fowls and trapped predators. We covered the larger gaps with fish net and the hawks gave up. So did the otters: mongooses, musk-cats, ferret cats, meerkats, stray dogs, and the occasional wine-fortified human.

What finally killed the venture was economic. Having denuded their semi-free range of all goggas, creepy crawlies, and foliage, our expensive clutch had to be fed from locally bought crushed mealies, the price of which doubled to R60 for 10kg in less than a year. The ROI simply did not warrant the venture, including its rustic value of outside moving wall-paper and a nostalgic crowing at dawn.

So when Trade Minister Davies asks “If we can’t produce chickens in South Africa then what can we produce?” I am deeply mortified and have to hang my head in shame. My attempts were clearly unsustainably amateur. Perhaps I should try again after giving him a call. Perhaps too, he can pass on that something he clearly knows that many small, cottage producers might not, adding advice on combatting infectious diseases such as bird flu; quick, clean, inexpensive and precision slaughtering and dressing; avoiding health risks and coping with rising feed costs.

But one part of his question I can answer -- what we can produce.

Those things that we are good at; that we can competitively excel at. Those things where we can create more productive jobs; that will earn us the income to afford cheaper imported poultry that is the primary source of protein for the vast majority of South Africans and that do not burden beleaguered consumers with tariffs that only fill government coffers and protect domestic inefficiencies.

If we cannot compete in a race, we should not run in it but rather enter those where we can, and not handicap runners in the former. Of course it is not that simple in the dog-eats-dog world of international trade, rife with tit-for-tat protectionism. But the underlying principle is sound. We have to learn that we should always act in the interests first of the customer not the producer; the buyer, not the seller.

The world has had enough of commercial xenophobia and protecting the interests of a relatively small group at the expense of the consumer.

Monday, September 30, 2013

Phiyega’s real problem.

Not appreciating the difference between management and leadership.

Just how much egg can one face take? If that metaphor is applied to Police Commissioner Riah Phiyega, then her head must surely resemble an omelette. Her litany of personal faux pas since taking office needs no repeating here and her positive spin of “crime is under control” on the latest crime statistics is just another reflection of an imprudent reliance on her management team to guide her on public pronouncements in her attempts to confirm her status as South Africa’s top cop. Others described those figures as “the worst in ten years”.

The statistics themselves have always been highly controversial and suspect, and have again led to Disraeli’s famous assessment of “statistics and lies” featuring in a number of headlines. They have scant credibility globally and in South Africa far more so because of a lack of expertise and effectiveness in reporting, gathering and interpretation. Yet they could have been the ideal platform for the Commissioner to demonstrate true leadership.

I can think of no other position in South Africa that is in greater need of decisive and inspiring leadership than chief of the police force. Perhaps that need even outranks the presidency itself. One is tempted to overlook Phiyega’s stumbling attempts at her job because she really has had a baptism of fire. But that disguises a more fundamental issue – was her appointment the right one in the first place? She and no doubt those who appointed her, defend the appointment on her track record as a “top manager” in the corporate sector. She herself has professed that there is no difference in managing an organisation like SAPS and a big bank.

This inevitably reminds us of the failed two year experiment in recruiting a top manager from the private sector to “shake up” the police services in the late 1990’s. That was none other than the “boykie from Britz” Meyer Khan, who had a stunning record as South African Breweries chief. Repeating that experiment with someone of a different colour and gender is something of a mystery.

We see it too often in many organisations, including companies and large corporations – a failure to distinguish between management and leadership. There certainly is a huge difference. Broadly speaking, one manages things but one leads people. But those criteria are not always clear cut. One can, for example, manage things around people that motivate and inspire them, creating an image of inspiring leadership. In addition, one can learn certain skills that are required in leadership that can support a profile of being a good leader.

Indeed, the “art” of leadership is the subject of countless books, treatises, colleges, universities, and is an important component of organisational theory. Leadership Consultancies abound everywhere, and “leadership interventions” are the order of the day in many organisations.

Biographies of great leaders both in the public and private sector from Genghis Khan (no relation to Meyer) to Winston Churchill and from Henry Ford to Steve Jobs are all eagerly devoured by aspiring young executives. All are looking for that magic and seemingly elusive quality that will propel them to the top.

One would think that if leadership could be taught or nurtured, the numbers of skilled and qualified leaders that are churned out by educational and training institutions would ensure an adequate supply of competent leaders in all of our institutions – apart from the political arena that has a completely different dynamic susceptible to all kinds of contaminants that blur the important difference between being a good politician and being a good statesman or woman.

Yet the most common lament in virtually all spheres of society is the dearth of leadership. In my consulting days, I was intimately involved in the subject through the work of my brother, Etsko Schuitema, who developed our care and growth model after extensive research in the mining industry. In essence it was not very different from the Servant leadership model developed by Robert Greenleaf in the early 1970’s and which became a popular framework world-wide. In addition, I was an avid reader of leader biographies.

Learning leadership skills and emulating leadership behaviours such as those expounded by Stephen Covey are important. But there is something in the makeup of the outstanding leader that is elusive and often not transferable in time, place, circumstance and sector. The best any institution or business can do is to be on a constant lookout for those qualities and give them the opportunity to lead without encumbrances – something most institutions are simply not equipped to do or prepared to risk. Mostly those that have these qualities cannot be bought – a feature that seriously questions our executive pay models and recruitment processes.

On reflection these past few years, when I am asked what makes a good leader, a perhaps highly inappropriate if not flippant image that comes to mind is from that 1965 movie “King Rat”, in which a nondescript prisoner of war gains power, respect and the adulation of his fellow inmates above that of senior officers through his black market enterprises, including disguising rats as other forms of protein. After the prisoners were liberated, he returns to obscurity.

The question is can and when will Riah Phiyega pull a rat out of a hat.

Monday, September 23, 2013

Monthly and Quarterly indicators.

Some important measurements to look out for.

Remember the theory of reflexivity in economics? It was one of George Soros’s pet subjects which the controversial hedge fund guru developed to explain his approach to trading.

This may be an oversimplification, but essentially it implies that trading is largely based on individual biases that ultimately form self-fulfilling prophecies. This has an inherent danger of disregarding economic fundamentals, or put even more simply, having a herd of traders shape the economic destiny of a country within an environment of short-termism and nano-second electronically generated trading.

Trading today is constructed on a number of “triggers”, such as daily, monthly and quarterly indicators and statistics, agency ratings, routine events such as interest rate announcements, statements by authorities or experts, deviations from expectations, tips, rumours, bad lunches, and “gut feelings”.

On top of that, these triggers themselves are not immune to massaging, insider trading, fraudulent manipulation as we saw with the LIBOR scandal, and simple downright mistakes, absence of context and misinterpretations, highlighted recently by economist Mike Schussler in his significant spat with Stats SA.

And that madness is what controls your economic destiny.

Or does it? It all comes down to that basic interplay that I dealt with in a recent article, between the measurable and immeasurable; the way we calculate and the way we behave; the way we think and the way we feel. And within that interplay, a very large measure is within our own control – the key attributes of which are awareness and resolve, or perhaps knowledge and patience. Those, over a longer term are far more powerful in shaping one’s destiny than following a manic-depressive herd. They also provide a deeper level of serenity and an ability of keeping cool while others flay about in frenetic frenzy.

Of course, very different rules apply if your approach is short-term trading or longer term investing. The dangers of the former are legend, yet many are drawn into that casino by large and quick returns that are promised in irritating pop-ups on various internet sites. Inevitably, most fail. A number of people I know carry significant scars from such gambles.

While a solid argument can be made for the view that behaviour drives our economic destiny, structures, systems, policies and measurements, it is clear that the latter also strongly influences the former, creating a circular relationship between cause and effect. So investment, as opposed to short term speculation has to be informed by these measurements. But they also have to be useful in guiding many aspects of economic life, such as when to extend or reduce debt; buying or selling a home; changing jobs and many more.

We are overwhelmed by hundreds of such indicators, each with their own relevance in time and place; all interrelated and yet at times conflicting and reflecting mixed signals. Too often essential context is missed in the reporting, not only in critical detail such as whether the metrics have been smoothed or seasonally adjusted to eliminate aberrations, but the strength of their influence and validity of comparisons.

If you are a glutton for statistics you can have a feast on the Bulletin of Statistics published quarterly by Stats SA. However, some other very important indicators are sourced by other government bodies such as the Reserve Bank and SARS.

Like the daily indicators I dealt with previously, I believe that if you become familiar with just a few of the essential monthly and quarterly statistics and indicators, you will have the critical tools to put all of the others into context and have the essential ingredients for sound investment and other economic life decisions.

GROSS DOMESTIC PRODUCT (GDP). Everyone is obsessed with this measurement. It reflects the total value of goods and services produced in a year and is released quarterly by Stats SA. “Economic growth” means simply changes in this number compared with the previous year. I personally believe it has some severe flaws, over and above the interpretation traps that Mike Schussler alluded to, but that will be an article on its own. Flawed or not it triggers a number of important assessments and decisions in board rooms, international rating agencies, foreign and domestic investors, government, the Treasury and the Reserve Bank. In turn these influence a very wide spectrum of our economic lives such as jobs, interest rates and taxes. Many of the routine monthly and quarterly statistics are components of GDP so GDP is a good composite reflector of economic performance as a whole.

COMPOSITE BUSINESS CYCLE INDICATORS. (BCI). This is a surprising omission from general coverage of economic indicators. Published monthly by the Reserve Bank, they come in three self-explanatory separate parts: leading, coincident and lagging. The strength of the leading BCI (which can be found on this page of the SARB website) is that it is a 12 to 15 month predictor of future trends. In addition, its 12 components capture not only the most important monthly indicators that receive far greater individual coverage, but also some of the mood measurements such as business confidence.

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PRICE TRENDS. We’ve all heard about the Consumer Price Index (CPI) which is published monthly by Stats SA. I’ve yet to meet anyone who believes that their cost of living has increased in the past year by only the 6.4% measured in August. That’s the trouble with averages – no-one is average! But its veracity is vehemently defended by Stats SA and that aside it has a key influence on our economic life such as on wages and salaries, jobs, interest rates, and taxes.

An earlier indicator of price movements is the Producer Price Index (PPI) which is also published monthly by Stats SA. The PPI tracks the rate of change in the prices charged by producers of goods.

The major factors that drive prices in an economy are: labour (wages and salaries) capital (interest rates and profit expectations); government (taxes and municipal rates); electricity (Eskom tariffs); fuel and other imports (the Rand exchange rate).

FOREIGN TRADE. To the chagrin of many a politician, we are an “open” economy, which means that a significant source of our economic welfare comes from trade with others. The key indicator that has to be included in a basket of monitoring measurements is the current account of the balance of payments (BOP) published by the Reserve Bank. This comes in two components, of which the most significant is the Trade Balance published monthly by SARS. It reflects the difference between the value of our exports to and imports from other countries in physical goods. The other component of the current account is the exchange of services such as insurance, dividends and interest paid and received, but trading in physical goods is the overwhelming number in the current account. An important part of the balance of payments is the capital account, drawn down by trade deficits and topped up by surpluses as well as reflecting foreign investment flows.

Foreign trade impacts directly on many economic factors such as jobs, prices and the exchange rate. A sustained deficit ultimately puts pressure on the flow of capital which in turn puts pressure on interest rates.

PURCHASING MANAGER’S INDEX. (PMI). This indicator has become a keen favourite for many economists since it was launched in 1999. Also known as the Kagiso PMI, it is viewed as perhaps the best early signs of economic trends, and is based on a monthly survey amongst purchasing managers in manufacturing. While manufacturing itself forms only about 15% of GDP, the sector is the most sensitive to underlying forces in the economy. So of all the other sectoral measurements, surveys and indices, the PMI arguably trumps them in relevance.

Of course there are many more measurements that could be included in your own economic telescope. In keeping with the intent of restricting a dedicated following to just a few of the most significant, I would stick to the above five. Get to know and understand them, and follow them regularly and you will have a better grasp of economic events around you.

At least you will have more confidence in not following the whims of the hysterical.

Tuesday, September 10, 2013

Businessman or conman?

Is the only difference the absence of ethics?

I thought I had heard it all, until this comment confronted me on the TV programme Carte Blanche recently.

“The traits to be a really successful business person are in fact almost identical to what you need to be a really successful conman. There’s just one issue … you have to remove ethics.” Cynthia Schoeman: MD: Ethics Monitor.

No matter how many hypotheses and how much context Ms Schoeman puts to that statement, it is a very sad reflection of the general state of trust in business.

There is a mushrooming industry that is finding lucrative incomes in advising companies on how they should behave, prescribing “codes of ethics”; monitoring committees; training programmes; and highly lucrative “bosberade”.

On the other hand, we should not be surprised. The near fanatical defence of the exclusive profit motive in business in the last four or so decades, bringing with it short-term profit maximisation; obsessive focus on shareholder-value; indefensible executive rewards and at times disgraceful behaviour that severely tainted business reputation since the turn of the century, has left many with a similar view…a view that has gone way beyond Bill Kellogg’s description of the profit motive as “dreary and demeaning”, to comparisons with the attributes of a conman.

All one needs, it seems, is a clearly defined code of ethics, prescribed and shaped by an expensive outsider – rules of the game that eventually have to be enforced through a big brother government. More rules. More regulations. More Mervyn Kings.

Ethics are what you wear. Values are what you are. I can prescribe a suitable dress code. I cannot prescribe your desire to be clothed. I can prescribe what utensils you must use at table. I cannot prescribe what and how much you must eat. These definitions may differ from those of the conventional behavioural scientist, but it clarifies a very important distinction between how you behave and why you behave. It speaks to the important issue of intent, and to remotely suggest that the intent of the conman is the same as the intent of the businessman, entrepreneur or company, is quite astounding.

This is where the most dangerous assault on free enterprise and free markets comes from – not the financial shenanigans that left the global economy in crisis, although they were arguably sourced by similar motives – but from a general assumption that the primary intent of any business activity is to maximise self-gain; and that the only difference between that activity and a “con” is in the clothes that are worn.

This is much more than a “dreary and demeaning” description of any business. It is an affront to many an entrepreneurial giant that has made a tangible difference to our lives. I have met many over the past number of decades. I have studied as many others. While they have amassed huge fortune, I am fully persuaded that that is not what drove them.

What drove them and what ensured their success was passion and love for what they could do – a desire to make a difference, and thereby fulfil a fundamental principle that unleashed their true value – their capacity to make a contribution to others. They saw profit as a means to an end, not an end in itself. Indeed, many, after achieving great personal wealth, simply gave most of it away.

They should not be confused with over-paid professional predatory managers who mostly ride on the backs of their founding entrepreneurs under the false guise of being able to replicate their achievements and have largely contributed to the trust problem.

Of course success breeds envy and attracts suspicion. The envious and suspicious assume that they are privy to the real motives behind those acts; that those who profess to be driven by something else than maximum self-gain are simply lying. The fact remains that not only did they promise to do; they actually did!

This is the essence of business. It is the fundamental principle behind supply – that it has to meet the needs and wants of others before it can even remotely think of self-gain. That it owes its very existence to being of service to others. The fulfilment of that condition is ultimately not interested in motive. At the same time it is obvious that aligning motive with that condition, where rewards are not seen as an end in themselves but as an indispensable affirmation of contribution, then that success is not only more likely to be assured, but also sustained and expanded.

It is that intent that will shape behaviour, not an imposition of a code. The “why” always shapes the “how”. Attention always follows intention.

Those focussed only on what they can get restrict their capacity to add value because of their limited knowledge, fears and insecurities. They restrict their ability to identify clearly the needs of others, thereby often missing opportunities. The opposite is true for those constantly exploring the needs and wants of others and caring enough to make a difference.

It is indeed unfortunate that the benevolent underpinning of the relationship between supply and demand has been redefined, both in understanding and often in practice; that the sole purpose of economic collaboration is seen as maximum gain for one constituent, often at the expense of others; that behaviour in the last few decades has led to severe imbalances and disparities, and that the motives of business and conmen have become synonymous.

That will surely invite the wrath of society and ominously so through government.

Tuesday, September 3, 2013

Strikes and ignorance.

Blaming labour disruption on lack of economic awareness amongst workers.

Of all of the volumes of comment and statements regarding the disturbing industrial action of the past few weeks, one that comes close to the heart of the matter was from well-known labour authority, Andrew Levy. He told the eNCA TV news channel that the wide gap between the parties in negotiations could be attributed to the “appalling” lack of economic awareness among workers.

Many will be tempted to deride Levy’s response as stating the obvious. This poses the question whether if it is so self-evident, why was it not addressed many years ago? Why, as Levy rightfully points out, has information in the workplace been hi-jacked by an ideologically driven Union movement to subject recipients to what he called “propaganda”?

And there’s the first problem. Our entire national economic debate is still firmly held in the stranglehold of severely out-dated cold-war ideological rhetoric on both sides; much of it based on highly questionable assumptions that inform the debate from the lowest levels of economic awareness in frenzied mobs to the highest in hallowed halls of academia.

Far from settling the ideological divide once and for all, the collapse of the Berlin Wall led to some critical re-examination of the key tenets of capitalism itself, which gained momentum after the financial crash some five years ago. The “crisis of capitalism” is now a familiar topic in many authoritative discussions and news media headlines and the merits of a tainted system are not so easy to sell any more.

The other question which is posed by Levy’s postulate is what has company leadership been doing to address this shortcoming? The appalling lack of economic awareness in the workplace was a key factor that prompted me to leave a well-established broadcasting career and establish a “developmental” employee communications consultancy more than 20 years ago. At that time I not only had to sell the critical need for information sharing, but faced great resistance to openness and transparency. Since then we have had the King recommendations, sustainability reporting, integrated reports, vastly advanced communication techniques, and internet media that negate many of the excuses of cost and distribution difficulties of that time.

Despite the consultancy’s success as a business venture, it clearly failed to make much difference in solving the awareness problem itself. That ran into prejudicial issues such as employee rights to information versus shareholder rights. Many a time we had to couch critical information, (even in harmless formats such as the Value-added statement or Contribution account) into averages and indices because of their “privileged nature.” Today still, these critical formats are relegated to complex and brief coverage in the occasional sustainability or integrated reports.

Internal communications are largely geared to enhancing empathy with shareholder interests and the paramountcy of capital. Despite the unassailable logic that labour is a substantial, in many cases the biggest, contributor to the creation of wealth, companies seem simply unable to express it as anything else but a cost and a drag to profits.

Of course, the Union movement itself plays a significant role in ensuring that this expression is maintained by relying on a “commodity” definition of labour where the price is not guided purely by supply and demand for skills, experience and qualifications, but by negotiation, collective collusion, industrial action, extortion and “rights”.

This inevitably draws the workplace into a conflict between wages and profits – a divide that simply has to fall back onto counter-productive ideological paradigms. In the process, both sides ignore one simple truism – that their true value is not determined by what they own or even what they do, but by the contribution that that ownership or activity makes to others – to society as a whole, or more specifically their markets.

That is what being market driven is about. It is not the same as being profit driven – indeed the opposite. Being market driven means being driven by the needs and wants of others; being profit driven means being driven by your own needs and wants. The same goes for being wage driven.

There are many questionable assumptions that form an impenetrable barrier to industrial harmony in South Africa and I have regularly challenged them in much of my writing over the years. In avoiding repetition, I will return to only one I have touched on above and that deals with the need to find a common purpose in any collaborative economic activity.

Common purpose by its very nature can never be found in the rewards of participation, especially if the rewards of one can detract from that of another. It can only be found in contribution, the product or service that that economic activity is offering to society.

Therein lies the very essence of tangible wealth creation itself – the result of adding value to people’s lives. Any collective that constructs itself primarily on getting, on wealth distribution rather than on wealth creation, is doomed to simmering and eventual unbridled outbursts of conflict.

The importance of and dedication to that principle is the only palatable and valid base for information sharing and economic awareness in the workplace. But awareness implies much more than knowledge and information. It also implies empathy, understanding and commitment.

Monday, August 19, 2013

Variable pay in gold mining.

Are the risk-sharing proposals in current wage negotiations built on serious fault lines?

At last there is some significant movement towards flexible pay in one of South Africa’s biggest employers – the gold mining industry. As Geoff Candy reported on Mineweb this week, gold producers are looking at some form of pay at risk to counter Union demands for much more than the 5.5% pay hike employers have offered. This could add another 1% based on performance linked to factors such as the gold price, gold revenue, gold produced or cost savings.

It’s doubtful whether this will have a significant impact on reducing the gap between the employers’ offer and the up to 100% demanded by some Unions. In addition, even a superficial glance at the proposal reflects some serious flaws that could be detrimental in the long run to both labour and employers. One can only hope that these flaws do not scuttle the concept itself and delay the inevitability of some form of fortune sharing in the industry.

Fortune sharing in mining has been a desperate need for a long time. It’s a volatile industry, consuming large amounts of high risk capital that has to be ploughed into a depreciating asset, and which simply cannot sustain inflexibility and constantly rising costs.

The graphic below of Harmony Gold mine’s Contribution Account, which I have extrapolated from its latest Integrated Report is an alarming reminder of just how close to the cliff edge most mines have come. The 68% share of wealth to labour is simply over the top. When I consulted to some mines in the 90’s that share was about 50% even in marginal operations. For South Africa as a whole, labour share of GDP is less than 50%.

While some argue that mining is a labour intensive industry, it is far less so than your conventional labour intensive operations such as retail or financial services. It’s a capital hungry industry. The 23% which goes to “savings” or retained income does not have the normal effect of enhancing equity value. It is consumed in capital expenditure such as underground development, shafts, headgear and plant -- most of which have no resalable value. You cannot sell a big hole in the ground – unless someone wants a giant long drop somewhere in the Free State.

In the end, the share of wealth creation should be a fair reflection of the contribution each of the constituents have made in response to the needs of the market – which in gold and most other commodities is an unforgiving place that simply has no interest in your needs and wants, fights and squabbles. In other industries you may get away with imposing such adolescent pettiness on the market through profiteering, collusion, price fixing, bid-rigging and lack of competitiveness. There’s no place for that in mining.

Ultimately, and for any business, real tangible value is created through having served and supplied its customers. That is indeed the common purpose of all of its participants or direct stakeholders.

This is the first serious flaw in the gold producers’ proposals. You can never forge a common purpose through rewards, only through contribution. While that contribution is vague in an industry that is market led rather than customer driven, the production and supply of gold to a world that needs and wants it, is the only common purpose that all involved have. Common purpose based on rewards breaks down when the reward of one is reduced by the reward of another, where higher profits are achieved through reducing the wage bill whether through lay-offs or lower wages; or vice versa.

A well-constructed variable pay system, particularly its ultimate form of fortune sharing, should never be a knee jerk response to wage demands. Flexible pay is not about incentive, but about involvement and engagement, about common purpose and common fate.

Variable pay is about flexibility and viability of the enterprise itself. It should never be a threat to profitability and sustainability. The industry has had an example of this where, some years ago, one marginal mine constructed a bonus scheme based on cubic meters mined underground. Month after month, employees were called in to receive bonuses for their huge and exhausting efforts. At one time, they were all called in to be informed that most of them had to be retrenched. While tons milled had shot up, both the ore grade and gold price had slumped, putting the mine over the edge into bankruptcy.

Virtually all of the proposed “triggers” in the current producers’ proposals can have the same effect. The exception is profit sharing itself, but this carries the danger of rewarding some at the expense of others which breaks a fundamental rule of common fate.

The only common fate metric that exists in any business is cash value added or wealth creation itself. It captures all eventualities and is, after all, the pie that feeds all. Sensible sharing has to be based on two fundamental principles: it has to meet the legitimate expectations of all of the stakeholders and it has to ensure continued contribution. But before you can even get there, the way that pie is currently divided has to reflect some balance. From Harmony’s figures, it would seem the industry is very far from that.

But it can be done. If the employers’ are prepared to let go of their silly, over prudent cap of a 1% increase on current wages to variable pay, they may even convince the Unions to peg current wages and sacrifice say half of their gains from an increase in wealth to restoring the balance. When this balance is restored, or at least comes close to being restored, there is no need for a cap. Indeed given an improved outlook for gold mining from a firmer gold price, cheap rand, containing outside costs, and lifting production through fewer work stoppages one could easily envisage average value-added for the industry lifting by between 10% and 20%. In the current state, retrenchments have to be seen as part of restoring balance but for those left, it would in principle imply at least a 10% increase in pay, albeit at risk. I say in principle because from there one can construct the actual split in a variety of ways to accommodate merit bonuses, safety performance, and specific cost savings.

Then there are many other, perhaps even more serious flaws in the proposal, which I dealt with in a recent article, but will repeat here:

There are four absolute pre-requisites for any form of flexible pay:

· It must be simple and understandable,

· It must have a clear line of sight where employees can see the effect of actions or events on wealth creation and their pay,

· It has to be accompanied by regular and understandable information sharing.

· Pay-outs or feedback must be regular – at least quarterly if not monthly.

Conventional profit sharing schemes can seldom meet these requirements – share option schemes even less so.

While the current proposals are a very far cry from the ideal, they at least represent the beginning of a shift to a more sustainable dispensation.

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Tuesday, August 13, 2013

Revisiting indicators.

Counting what counts, as seen by the initiator of financial indicators in broadcasting in South Africa.

The recent Moneyweb article on “What the indicators are not telling us” sent me on a nostalgic trip to my days in broadcasting.

At that time, until about late 70’s, public broadcasting was a very minor player in economic news. The only dedicated business news broadcasts were 5-minute bulletins at 9.10 pm on the two non-commercial channels. They were to become the springboard for a separate economics news desk feeding news bulletins and talk shows on multiple outlets on Radio and Television and producing two Television shows, of which “Diagonal Street” was one.

I use the term “initiator” perhaps too modestly on the one hand and too conceitedly on the other. Regarding the former, it was more of a pioneering effort in a stubbornly resisting environment, and the latter: the quick growth of the economics department was largely due to a very dedicated team of professionals with whom I had the privilege to work in those formative years.

The indicators were first introduced in short news bulletins, where air time was jealously protected. In convincing the controllers of the validity of regular economic slots, we could not rely solely on examples elsewhere, and intense lobbying and discussions with leaders from various sectors, bankers, economists, brokers, the Treasury and the Reserve Bank clearly isolated the most important to a broad South African audience and how they in turn should interpret them in their daily decision making.

This is not purely a reflection on my past, but rather examining an important issue raised by the Moneyweb article which questioned their relevance today; what should be included and why. At the same time it may help you in applying the information in your own decisions. Our research and given the constraints of air time and target audience led to a number of pre-requisites and disciplines which arguably are still applicable today.

· They have to be brief and concise;

· they should be restricted to a few only and

· they have to be relevant to the country as a whole and not only to a specific sector or interest group.

Instead of the classic distinctions between leading, lagging and coincident indicators, it is more useful to think of them broadly as those that influence economic trends, and those that merely confirm or reflect those trends. It is perhaps a misnomer to call the daily and weekly prices and indices “indicators” because they clearly have to be maintained for a while to influence economic direction. It is also far more important to know what causes movements than to try and extrapolate their future impact. If you know and understand that then you have more than a casual grip on your economic circumstance.

Most economists will rely on monthly or quarterly figures to determine trends, and I’ll deal with those separately in a future article.

Our hunger for immediate information that influences future trends makes an absolute case for daily indicators. Context, reliable commentary, and authoritative interpretations should help even the less aware in assessing their trends and impact. An important rationale for daily indicators in the public media is to enhance a sense of awareness around their importance, and hopefully create a desire for further understanding. At the same time they should offer the informed a quick and concise alert system of developing events.

So what should we include and why?

Interest Rates.

A serious omission in the daily broadcasts today (and surprisingly elsewhere) is the debt markets. Foreign capital movements are our Achilles heel and these will be reflected in the daily movements on both the short term money markets and long term capital markets where debt is actively traded and new paper auctioned. We included both in our original bouquet: the money markets through the B.A. rate, and the capital market through RSA long term bonds. I cannot explain why these have disappeared, but any observer of these rates will have an early detection of the capital flows and trends.

Current movement in all the rates can be found on this page maintained by the Reserve Bank. SABOR on the money markets and the 10 year and longer daily average bond yields are probably the more telling. Despite all of the instruments at its disposal, the Reserve Bank cannot maintain a repo rate that does not reflect the pressures from these markets.

Exchange Rates.

An absolute must! At least we seem to be past the hackneyed and misguided “good for growth” argument for a cheap currency. Most people today have a good understanding of the implications of movements in exchange rates, and when they make news, we have enough professional and amateur commentators to trot out yesterday’s prepared scripts. All I would add is a repetition of what I wrote some time ago “a consistently strong currency reflects economic health and a weak currency the opposite”. But it could be argued that focus on the Dollar, British Pound and the Euro is a bit skewed. Most viewers will not see much beyond the dollar and perhaps a case should be made for the Reserve Bank’s nominal effective exchange rate.

Gold price.

Keep it! If it is assessed purely on gold mining’s contribution to GDP then it has lost considerable weight compared with when it was first included. But the gold price reflects more than export earnings, mining income and mine employment. It is still, albeit informally, an alternative currency to many which explains its place in international business slots.

Also, mining has a far greater multiplier effect on other industries than most other sectors. The viability of mines has a concentrated impact on specific communities, which may be a good reason for also keeping the platinum price as an indicator, where its export income now exceeds that of gold. But I have my doubts. And if we are focussed on export earnings then adding a R/kg price may be more useful for both gold and platinum.

JSE.

Our original argument for its inclusion was based on the logic that share price movements were a reflection of both local and foreign sentiment. This is clearly no longer absolute, given a record breaking All Share index recently, at a time when for the most part the mood was gloomy. The explanation for this is the lack of attractiveness of other investments, continued growth in profits despite lower income growth, and executive rewards linked to share values. But equities still have a dominant impact on public investments such as pension funds, endowment policies and unit trusts, which are more broadly held today than 20 years ago. For a compact bouquet of daily indicators, however, I doubt whether I would want to argue for more than the ALSI.

Oil price.

A significant number of people are often surprised when petrol price adjustments are announced. This casts some doubt on the usefulness of this indicator. The confusion of course, is caused by the Rand conversion. It’s an important price to the economy, but perhaps it could be made more meaningful if it was reflected in Rand terms.

That would be my top five for a daily fare. In time past, I would have championed more, but with the plethora of economic news in various media today, a case can be made for clearing the clutter and focussing only on a handful for routine reflection and your own personal attention. Of course no indicator is insignificant but instead of routinely cluttering these crucial five, it would be better to have fuller treatment, contextualisation and explanation of their movements. An understanding of these indicators, what influences them, and how they impact on the economy, will go a very long way to enhancing economic literacy. I’m left wondering how many of our top leaders in parliament, labour and perhaps even elsewhere have even this very basic awareness.

Of course, you may have more suggestions, and sharing them with us in your comments will enrich this article.

The marvel of an economy is that it is a living, breathing organism where each cell impacts on others and the body as a whole. But what we too often ignore is that at its heart and soul are people; their hopes, fears, aspirations and expectations and the way they behave.

Now, if only we could find a daily indicator that would reflect that!

Monday, July 29, 2013

Bosses with moneybags.

Muting “freedom fighters” at the heart of their “struggle”.

There was a popular caricature in years gone by of the “fat-cat capitalist” boss leaving work with his briefcase stuffed with money that had been gathered from the efforts of exploited workers.

Thys, the mine manager at one of the first sites I consulted at, and I used to have precious moments of levity at his casual safari-suit dress code and absence of a brief case to counter that caricature. Indeed, my presence there was part of that effort, more specifically to set up some form of comprehensible sharing of information that would disabuse the belligerent mobs of their misguided musings.

In all of my work at the time and at many different sites, I could never convince clients of the need to be transparent about pay differences. Even the most belligerent workforces never argued for “equal pay” – only, and then not too convincingly for “equal pay for equal work”. What was even more tragic was that the pay difference cover up was exacerbating misconceptions. Employee suspicions were far worse than the reality. Full and credible disclosure, I argued, would in fact ameliorate the murmurings.

But it all fell on deaf ears, even at one large retail site where we extrapolated an average differential of about 7 to 1 between the top-paid 10% per cent and bottom paid 10%. Of course that was before the introduction of other executive pay magician’s capes such as share options and convoluted bonus schemes. (Latest U.N. statistics puts that calculation for South Africa as a whole at 33 to 1). But at that time, I vehemently championed disclosure, pointing out that it was a differential that even the most radical unions could accept, against the background of a relatively mild prevailing South African Gini co-efficient of less than 5 compared with today’s 6.7.

What I could not achieve in those years was later done by the stroke of a Mervyn King pen. The King III governance requirements has forced executive pay disclosure at a time when the differential has been exponentially burgeoning, not only catapulting the issue into the heart of serious labour ferment, but adding to the frenzy by igniting comparisons and adolescent envy as a motive for increasing executive rewards.

What changed in a span of less than 20 years, that could turn modest, yet covert pay differentials into excessive, now embarrassingly overt gaps? -- certainly not sudden and massive changes in supply and demand for executives. That alone should confirm that the so-called executive market is thoroughly broken, and the price for executives is nothing short of fiction.

It has perhaps been forgotten that the explosion in executive pay has happened in less than 20 years, more specifically as an unintended consequence of American President Bill Clinton’s efforts to curb what was then already becoming obscene levels of executive remuneration. His executive pay tax proposals in the early 1990’s set off a wave of tax avoiding remuneration initiatives that compounded the gap many fold.

South Africa, with its 50-60 times pay differences in a highly emotionally charged environment, simply cannot escape the global soul-searching on executive pay. Switzerland for example is looking at enforcing a 9 times differential cap, on the back of a recent referendum for executive pay reforms.

One of the world’s thought leaders on executive pay, PwC has been challenging executive pay models for a number of years, concluding in its latest Executive Remuneration report that “there are few who would argue that executive pay models have produced better performance over the last decade”. The case against long term incentive plans, it says, may be based on:

  • Poor track record of aligning reward with shareholder returns;
  • Volatility of performance being rewarded rather than strong sustained performance;
  • Impossible to calibrate reliably;
  • Perceived as a lottery by participants; and has led to irrational discounting by executives, so valued at a fraction (in many cases only 25%) of their economic cost.

PwC believes that simplification and with it greater certainty will lead to a reduction in executive gross pay, simply by reducing the extent to which executives discount the real value of these incentives. It has proposed a new model to capture

  • Financial performance (but with a long-term view on underlying trends),
  • Customer,
  • People, and
  • Risk, compliance, and behaviour.

It says performance assessment criteria should be based on (1) Revenue; (2) EBITDA (earnings before interest, tax, depreciation, and amortisation); (3) Operating free cash flow and (4) Return on capital.

It is beyond the scope of this article to give all the details of the proposed model, let alone a critique of all of its elements. Encouraging as it is simply in challenging the current dysfunction in executive remuneration, my main concern is that it is still deeply rooted in profit maximisation and shareholder value criteria and will do little to effectively counter short-termism and a squeezing out of other social constituents, including labour. The model falls back heavily on elements of the Triple Bottom Line and the Balanced Scorecard, which have been around for decades with no effect on pay disparities or more balanced national economic growth globally.

Ultimately the real value of any business should not only be to one specific group such as the owners, but to all of its constituents, the most important of all being customers or the market that that business serves. Accommodating those constituents as merely co-incidental beneficiaries of the grand purpose of maximising profit is skewed, inappropriate and indeed has led to their neglect.

If, as Bill Kellogg once remarked, the real purpose of a business is to add value to people’s lives and profit is only one consequence (albeit a very important one) of that, then the real issue is to challenge the mother of all measurements, the income statement itself.

The only metric that appropriately captures the very essence of what companies should be about is wealth creation or value added. This is simply income less outside costs. I believe, however, that real wealth creation is more accurately represented as cash Value added, which means that interest, depreciation and amortization should be deducted from the commonly used value-added metric.

If used as the primary incentive criterion, it forges common purpose and common fate within an organisation and will be by far the most powerful tool in countering ever increasing pay disparities. It is the one measurement that will encourage executives to emulate entrepreneurial behaviour while reconciling shareholder and customer interests.

Of course, there are such powerful vested interests cemented in conventional accounting that one cannot expect any serious move towards something else, particularly from the accounting profession.

Indeed, giving credit where it is due, PwC’s challenge to current formulae is a laudable proposal in addressing pay disparities, one of the great distortions of our time. It is such a powerful weapon in the hands of malcontents such as our so-called economic freedom fighters that any hint at its invalidity has to be seriously explored.

PwC’s difficulty will be to reassure a sceptical audience that any tinkering with executive remuneration that implies a reduction in their gross pay, will lead to an exodus of much needed talent.

I used to be an avid poker player. Let’s call their bluff!