Monday, December 1, 2014

A thing called people

How organisational theory fails society and business

I have witnessed again how organisational theory can sometimes overwhelm our humanity and even destroy value.

Paul is an experienced farm-hand who has helped in establishing new citrus plantations in this neighbourhood. He is one of the hardest working, loyal and dedicated workers I know, but has been laid off because, he has been told, he does not fit in with “the project’s business profile.”

Paul is by no means unique or even unusual. It’s a story that is replicated in its hundreds of thousands throughout the world daily and disturbingly so in an environment of high unemployment such as South Africa. It is the result of a key tenet of conventional economics upon which organisational theory is based that insists on expressing everything as a quantifiable resource, something to be positioned in boxes in an overall construct that can be manipulated and steered. These “boxes” include resources such as air, water, minerals, land, labour and capital amongst others. Organisational theory itself has added another called “the market”.

The theory then takes it one leap further to the understanding that resources have to be exploited in the creation of wealth and prosperity. To breathe life into these boxes an overall system is needed, giving birth to the grand theories of capitalism, communism, socialism, fascism, nationalism and many offspring. From there we have developed immovable ideologies, fanatical stances and open conflict in paying homage to a giant matrix that works as long as we all dance to its tune of abstracts and aggregates. The root cause of the dissension around systems is simply about who should be exploiting what for whom. In the process we create conflicting collectives and an inexorable centralisation of power.

If all of our calculations, research, science and technology have not yet produced one absolute, universal and permanent “ism” that, like gravity, defies contradiction, then there clearly is no such system. French economist, Thomas Piketty, is just one of a number of authorities that have criticised Capitalism in the 21-st century. This detraction could easily be applied by another expert to socialism or any other ism.

All of this can be consigned to theory. But once we have based intransigent approaches and institutions on these theories and have become addicted to them, our trust and security is shaken to the core when they do not deliver in practice, in turn creating a sense of hopelessness.

The case of Paul is just one example of the dehumanising and debilitating effect of concepts such as the “human resource”. It is easy to measure the cost of this resource. It is far more difficult to calculate its benefit and full potential, indeed impossible if this potential is cramped into carefully constructed organogram boxes. Equally dehumanising are terms such as “human capital”, “people asset” and “labour costs”. The only resource cost elements of human effort are skills, experience and qualifications. Its real value is far more dependent on the immeasurable such as willingness, dedication, loyalty and creativity.

There are many examples of where human ingenuity has flown in the face of conventional organisational theory. The view that something cannot be done because it has not been done before is the silliest of all postulates. Indeed for the most part innovation and creative entrepreneurship are arguably the result of challenging the conventional, of an ability to look beyond the obvious, of out-of-the-box thinking and often even beyond potential self-gain. That is, after all, what risk is about.

Labour is only one element of a need to go back to zero based thinking in all organisational theory. But it is by far the most important. We have seen examples of what can be done here and abroad such as in the Ohio employee buyouts in the US, and labour cooperatives such as Mondragon in Spain. We simply have to revolutionise the relationship between labour and capital, especially in South Africa.

There is no reason why we cannot develop our own unique approach; with value-adding pockets each with its own common purpose and shared destiny. (See a recent book on the subject here.) It brings to mind that inspiring thought by American author Margaret Mead: “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it's the only thing that ever has.”

I was further reminded of the labour imperative in recent reflections of the Great Depression of the early 1930’s. The most important definitive characteristic and frightening feature of that event was high unemployment – 25% in the US and up to 30% elsewhere. We have been living with unemployment levels above that for decades. Therefore, on that metric alone we have been in a depression for many years irrespective of what any other number has shown. For one in three employable especially young South Africans, their default position has been pessimism for a long time.

Yet we run like rabbits from the hounds of media hysteria, low economic growth, a weakening Rand, credit ratings, trade deficits, government deficits, civil unrest, and parliamentary disturbances. To a greater or lesser extent they are all symptoms of that one ailment. It is as if we have become immune to the cause, but not the symptoms. We appear to be immobilised by structured and protected collectivism, with each vested interest stubbornly protecting its turf as defined by clichéd theory and outdated ideology. We are so addicted to this construct that when this gets rattled as we have witnessed in recent times, instead of celebrating a clear fragmentation of power, especially in politics and labour, we plunge into doom.

In going back to basics we need not and should not lose sight of two fundamental pillars:

· the essence of economics is adding value to each other and

· the essence of our humanity is a deep desire to do so.

Few things are a greater threat to this spirit than imposing an “ism” upon it.

Tuesday, November 18, 2014

Is South Africa a junk bond nation?

Examining the power of Credit Rating Agencies and South Africa’s latest grading.

It certainly has been a week of gloom. But even for my pessimistic bent, the hysteria all seems to have been a bit over the top with a touch of professional expediency and media sensationalism, in turn unleashing the clichéd yapping of political fox terriers.

The spook of “fiscal cliff” is just one example. Most countries, including many of blue chip ratings, have plunged over that cliff some time ago. Their government debt to GDP ratios far exceed ours at less than half of GDP and the world average at above 100%. Apart from the Sudoku nature of these metrics, these countries have simply learned how to abseil down that cliff despite not knowing how much rope is left. That rope is the ability to pay with the assumption that the bigger and more powerful you are the longer the rope you have. There’s something quite immoral in that concept – one that applies equally to individuals in withholding credit from the needy, but supporting reckless ostentation of a few.

Adding to the dimming of the lights was Moody’s downgrading of South Africa’s credit rating triggering an unsanctionable hysteria of imminent junk-bond status. Not likely, according to this recent well considered argument with some highly informative charts by David Knee, Head of Fixed Income at Prudential. To this I would add a few perhaps more subjective and speculative considerations.

· Credit ratings are by their very nature comparative and with bourgeoning debt and continued lower economic growth in many countries there should be a logical resistance to downgrades in isolation of the overall global environment.

· As a country sovereign debt nears speculative or non-investment grading the implications of a downgrade become severe, arguably requiring a major economic shock or change in circumstances to warrant a plunge to junk bond status.

· Could this, one wonders, open such an agency to a liable suit, as we have already seen in the $5bn claim against Standard and Poor’s?

The rating agencies themselves have come under severe scrutiny since the collapse of 2008, shouldering much of the blame for those events and posing the question of who rates the raters and indeed even whether they have a right to exist. This is not a new debate and in defence the agencies can employ disclaimers, while their supporters argue that they are merely expressing an opinion under freedom of speech.

This is disingenuous. They are not merely a messenger. While it is true that their pronouncements are based on mostly known factors arguably not always fully and independently researched, they can and do have a severe impact on the lives of millions. In some cases they have regulatory weight behind them with statutory rating requirements for institutional investors such a pension funds. In America, regulations still make it virtually impossible to sell unrated bonds.

It is a moot point whether these agencies are comfortable with this power. But they have it. Whether they deserve it or should have it has become academic but under such circumstances they can expect their credibility to be constantly challenged, sometimes unfairly, but also with some justification.

For one thing they are puppet masters in the murky world of financial services and frenzied speculation that present an enormous cloud over the real global economy. As such there is a high inherent danger of them being incubators of insider trading that could make the Libor scandal look like shoplifting a Crunchie from Checkers. In fairness again, so far there has not been a hint of that.

Perversely, scrutiny and potential lawsuits could affect their judgement especially when it comes to sovereign risk ratings. It is far safer to be pessimistic than optimistic. Being in a speculative environment, this could have a subconscious negative effect on the ratings of less popular and riskier instruments, especially adjustments in response to changing conditions. This may be understating their objectivity, but that is simply the subjective nature of the beast.

Then there’s the tricky intermediary role between issuers and investors. CRA income is sourced mainly from issuers. Entities that issue investment instruments hire ratings agencies and can fire them if they do not like the ratings, presenting an inherent conflict of interest between the transacting parties.

At the very least it is an industry still very much in a state of change and constant reform. There have been ground breaking amendments to America’s Dodd-Frank Act enhancing SEC controls over agencies while most countries including Europe have been revamping domestic legislation covering the industry. The point is whether one can expect such legislation to eventually guarantee the same impartiality, accountability and liability applicable to independent auditing firms.

The greatest indictment of the industry is its restricted nature. There are really only three global players all with a mostly Western Anglo Saxon perspective. They control 95% of the global market, with Fitch having 15%, Moody’s 40% and S&P 40%. It is a very profitable business, and despite the serious knock to their reputation in 2008, the three agencies are thriving with the explosion of paper in the bond and securities markets.

As far as South Africa is concerned, unless there is a new unforeseen and major shock (of which hopefully the latest organised labour turmoil will not be one) we do not deserve and are not near junk bond status. We may even be able to tap alternative funding such as from the BRICS development bank. Of course, as we have seen with Eskom, ratings for other South African borrowers are a different matter. They will not only have to deal with additional pressure from a lower sovereign debt rating but face closer scrutiny of their individual prospects and management – perhaps not such a bad thing given the appalling state of many of our state owned enterprises.

Our collective institutions and their leaders representing government, business, and labour need a much louder wake up call. If this has to come from a downgrading of our sovereign debt, then so-be it.

They may even deserve it, but for the most part the real victims, ordinary folks don’t!

Friday, November 14, 2014

Putting business on a guilt trip

Is the commendable label of “Homo empathicus” being abused for self-gain?

Having introduced a recent article with some history of my father, let me start this one with an anecdote about my mother. She was a formidable figure who had many weapons in her vast arsenal of persuasion and manipulation.

These were mostly simply what was conveniently at hand such as a tomato box or the flat end of a bread knife. Later I came to appreciate that what modern sissies would call abuse, was simply tough love and a reflection of both the times, and the maternal frustrations of raising four unruly siblings born soon after each other in very modest circumstances.

By far the most formidable of her WMD’s was nonviolent. It was a nuclear missile called guilt. As a devout Catholic she had a talent of pulling a guilt trip on her offspring simply with a look, raised eyebrow or feigned emotional pain. In this she outdid the prowess of ancient priests who defined the sin, the dire eternal consequences, the punishment, and the price of absolution; that conveniently could be paid to them. Or like modern day cult leaders and rogue charismatic pastors who preach the power of empathy, generosity, and charity -- all from behind the collection box.

"Homo empathicus" has been receiving some attention, including a call by our own Cooperative Governance and Traditional Affairs Minister Pravin Gordhan, supported by Cosatu (see article here) for business leaders to adopt this mantle, specifically against the background of large pay disparities. It has also become a growing feature of socio-economic discourse. Regular readers will know that I have always taken issue with exorbitant executive pay. At the same time, I have argued that apart from those builders and creators of business, who mostly have only a passing interest in wealth and profits as affirmation of their contribution, the market for executive “skills” and “talent” is thoroughly broken and remuneration criteria based on shareholder value is misplaced. Appealing to them for “charity” seems to confirm the validity of their pay, not challenge its flawed make-up.

But here's the rub. To see the term homo-empathicus as "soft" and "fluffy" or leftist and socialist is totally out-of-place. It's the same hypocrisy that I have challenged in capitalism claiming to be "market driven"... It is not... It is profit and self-gain driven which is the opposite of being market driven. An assumption that they are the same, or that the one automatically implies the other, is either disingenuous or simply naïve. Taking those motivators to extremes has been the root cause of our modern economic ills.

Homo empathicus is being expediently used in most cases to champion the plight of vested interests, in this case employees. They are clearly asking employers to adopt empathy for their (the implorer’s) self-gain. It is the ultimate insult to empathy itself -- in the same vein as using scripture to justify crimes, or insisting that someone else must act charitably towards yourself.

Business may soon find itself overwhelmed by this new rhetoric, and no doubt it will be the prelude to a plethora of "empathy" consultants to show them ways of faking it. On the other hand – and here is the real opportunity for business – they can seize the initiative and forge the genuine model which is the very foundation of service, common purpose and common fate. Empathy by its very nature is always externally focussed and in business it means everyone having empathy for the customer and society as a whole. All it requires from business is to do what should come naturally, having an external focus on the needs and wants of others in society and then serve those needs with the best product or service at the best price. Rewards in the form of wages, taxes and profits are there to sustain and grow that activity. They are not the purpose of that activity.

Inner empathy (for each other as partners in wealth creation) simply makes good business sense as long as it sticks to the fundamentals of sensible wealth distribution which means meeting the legitimate expectations of all of the stakeholders and encouraging continued contribution. But inner empathy is a means. External empathy is the purpose. Of course it is highly praiseworthy for business and the wealthy to be philanthropic and charitable to those in need. Many of them already are over and beyond the taxes they pay. It is simply inappropriate, if not obscene for the recipients of “charity” to manipulate, emotionally blackmail, or even extort their benefactors to be charitable.

Empathy is a human instinct and a state. Contribution is a behaviour that naturally follows this state. Contributory behaviour is the fundamental requirement for wealth creation, prosperity, job creation and national competitiveness. It is based on the self-evident axiom that when people by and large are giving more than they are taking, they create surpluses and prosperity. The converse creates deficits and poverty. The survival model of business, including profit and wage maximisation, has distorted this focus and has created many economic imbalances.

You cannot expect empathy from others when you yourself are not empathetic. It is a very moot point whether labour itself has been homo empathicus – especially to those who are the intended beneficiaries of their efforts: customers and society as a whole.

At the same time they have relinquished real power. Power based on threats, extortion and self-gain is seldom sustainable. Power based on empathy and contribution is far more so.

Friday, October 31, 2014

Beyond market jitters.

Are we still vulnerable to a global economic collapse?

My father was born a few years before the 1st world war; survived the global flu pandemic before his 10th birthday; lived through the great depression and fought in World War II. It was the depression that drove him and many of his peers to seek their fortunes elsewhere than Europe. They were of an age group poised to find meaning in life, carve their own paths and seek opportunities in a world that had little to offer after the collapse of the New York Stock exchange in late October 1929, and precipitating the longest, deepest and most extensive global depression in history.

As one interested in both history and economics, I would often encourage my father to share his thoughts and experiences of that time. They may have lacked some academic and scientific insights, but they gave me a much deeper understanding of human conduct so often ignored in our economic discourse but that was so profound in those events. It was during one of those exchanges that in my zeal to demonstrate my intellectual prowess, I explained to him that the depression was caused not by panic, but by a crude banking system unable to back the volumes of transactions and a fiscal policy that should have allowed greater deficit spending to counter an inevitable cooling off of the economy.

“Rubbish!” he said. “Everyone in an instant said: ‘Oh shit!’”.

That was it. A miner’s logic that brooked no further discussion; a belief in a single consciousness of man that in that case could trigger a collective response in unison with two words reflecting panic and dismay. Of course, there was some truth to that. Although there had been “market corrections” for some days from September 4th 1929, no one could predict the 40% fall over a few “black” days in late October. Just as surprising were four runs on banks within a year. Consumer confidence evaporated; spending fell leading to a sharp fall in business activity, bankruptcies, job losses and a fall in wages, all of which accelerated the vortex of a perfect storm.

I may not share my father’s assessment of economic booms and busts, but since that conversation, those two words come to mind each time we are confronted with market volatility. Can we really be confident that with all of the modern financial engineering tools at our disposal we can avoid a repeat of that cataclysmic event? Was the 2008 “great recession” not simply a warning light that faded behind the subsequent financial and stock market hype that in turn belied a much deeper malaise and an ailing real economy? Are the old economic postulates governing the relationship between consumption, production, money, debt and investment no longer relevant? Is everything so rationally secure that we cannot expect spontaneous irrational behaviour?

In short, with adjustment especially in the financial markets inevitable, the question is simply whether it will be a correction or a crash, a creep or a leap.

One thing is certain: the structure of the global economy is vastly different today and while this era has produced new disciplines of knowledge and experts, not one seems to have captured an absolute truth. Evidence of this can be found in contradictions in reputable responses: from pushing more money into the system to increasing interest rates; and from government austerity to increasing deficits and perhaps even writing off sovereign debts. Despite having armed ourselves with incredible technology to rationalise; to gather and process information and perform nano-second trades or responses across the globe, the whole system is underpinned more than ever by two profoundly irrational forces – greed and fear.

The side effects of a new Prozac for economic depression are still mostly unknown. The Atlas juggler has three spinning clubs in the air: a financial system; government intervention and the real, productive economy. Each has its own high level of complexity and intricacy, with the interaction between them being even more uncharted and complex. Even a highly condensed treatment of all the factors involved is way beyond the scope of an article such as this. Unfortunately the devil is in the detail so at best I can present an over-simplified analysis of some key issues and focus on the global perspective which impacts on South Africa.

The financial system is awash with debt – approaching $200 trillion or some 300% of total global GDP. This has been the result of a post-depression banking system that can multiply credit and advance it to the productive economy – in other words increase the money supply. Cheap credit should encourage both consumption and production and therefore economic growth, which in turn enables a repayment of debt.

But this has not happened. Consumers are insecure, debt weary (see Moneyweb article here), and generally income besieged; business is reluctant to invest in productive expansion and declining interest rates encourage widespread incestuous speculation in financial instruments including stock markets and derivatives which at an estimated $700 trillion is 10 times larger than global GDP.

Any talk, therefore, of increasing interest rates sends these “markets” into a tail spin, spilling over into stock markets and the real economy by further dampening consumer enthusiasm. Paradoxically interest rates are the primary weapon against price inflation.

Governments are the biggest “debtors” (about half of the total) and encourage low interest rates not only because of the impact on their own budgets but on the same theory that cheap money promotes economic growth. In addition, increasing government deficit spending should translate into higher economic growth and more jobs. So with few exceptions they continue to run deficits constantly shifting norms of prudence. But for the most part in the developed world this spending has gone into propping up financial institutions, and not on job creating government projects such as building infra-structure.

Yet, the most important constituent of all, the real productive economy remains as capricious, perhaps even as unfathomable as ever. It is here where we capture the very essence of our economic co-existence, adding value to each other in the provision of goods and services; where we explore and innovate, transact and exchange; where we freely express our moods, fears, hopes, aspirations and expectations.

In our desire to control the uncontrollable we have created a massive imbalance between the juggler’s three clubs. By their very nature the financial and government constituents are largely parasitic, adding very little value or creating little tangible wealth in their own right and feeding off the host of the real economy. But they are needed in creating the conditions in which others: entrepreneurs; the creators and builders of business, value based investors and workers can get on with the value-adding process and create prosperity and abundance. The current malaise is simply repeating history’s lesson that the force of the real productive economy is powerful, inexorable and with a mind of its own that sometimes simply wants to blow off steam.

Restoring equilibrium could take years, maybe decades. Yet, a collapse of the size of 1930 is unlikely. That was particularly severe because the pendulum swung from inordinate euphoria to widespread doom and in an economic car with no brakes. In addition, while we may still lack the expertise in appropriately using all the levers, switches and buttons of the fiscal and monetary machines, we are getting to understand them better.

Can we abseil down the cliff or will we run out of rope? Hopefully the bottom is not too far, but what is self-evident is that greed and fear are totally inappropriate in such a pursuit. We need patience, prudence and fortitude – attributes that sustained my father’s generation in an age of deprivation.

Monday, October 20, 2014

The great contamination.

Have we polluted wealth creation to a point of self-destruction?

Adding value to each other is not only the essence of our humanity, it is the basic cell of our economic life. It has been the core of our coexistence from the Stone Age; the foundation of barter, exchange, trade and money.

It accounts for our supremacy as a species. It is powerful and robust, shaping systems or destroying them. It accounts for prosperity, is measurable, drives innovation, transformation and progress, and is the ideal template for self-empowering conduct. But it is not indestructible. If it dies, we die as a species. It has to be nurtured, protected, strengthened, and not contaminated.

Adding value needs an environment of maximum freedom of choice, many suppliers, competition, consumer awareness, free moving prices, stable money, and adherence to the natural laws of supply, demand and price. A very large part of all economic study, research, and theories revolve around these issues and I am sure you have your own view on the extent to which these rules have been broken both globally and nationally. Despite the fanatical stances many often adopt, there clearly are no absolutes and no universal formula that can be applied in all circumstances.

That may be a subject for a separate article, but for now let’s focus on the contamination of the wealth creation cell itself; where value gets added to accumulate into national prosperity and abundance. This is perhaps more important and far more in our direct control both as companies and individuals.

A dual economy

Can one have wealth without adding value? Yes, through debt. You can live like a king and amass a fortune on borrowed money if you have no concern about repaying it and leaving the problem to your children and their children’s children. That’s difficult for an individual, but less so for a company and certainly easy for a government or country in a flawed banking system. So we have created two economies: one based on production, the other on debt; one tangible and the other financial; one real the other virtual. Not only have they been drifting apart but the latter has begun to engulf the former with the main effect being greater global inequality (see latest Global wealth report here) and financial instability. (See IMF GFS report here.)

Perverting purpose

Existentially tangible wealth is always created by serving another. It has no concern about motive or purpose: it simply has to serve and be served. I have dealt with this subject frequently and remain convinced on two points. The first is that we have inappropriately attributed great individual and company achievements to profit maximisation. In all my years of exposure to the subject I have found very little evidence supporting that – indeed overwhelmingly the opposite. More evidence of this can be found in the philosophy of the latest business superhero, Elon Musk.

The second is that a service motive does not and need not detract from sound business practices. It is not “charitable” and “non-profit”. It has to stick to the rules of legitimate transaction to be sustainable.

There are a number of business behavioural models or hybrids of these models in wealth creation: profit driven; wage driven; both profit and wage driven; state driven and service or market driven. Being service driven is not synonymous with any of the other models. That speaks to sincerity of purpose and ultimately trust. You may not care, but you certainly have to behave as if you do. Being service driven focuses on contribution and wealth creation itself. The other focus on reward and distribution.

The accounting deception

I’m often amazed at how many “informed” people still believe that mathematically profit equals wealth creation, and that other constituents such as labour and state are a cost to profit and therefore a drag on wealth creation itself. That’s pure accounting nonsense! Value-added = wealth creation involving three contributors: labour (wages and salaries); capital (profits) and state (taxes).

This deception has entrenched capital supremacy and the “profit motive” as being the real and only driver of wealth creation.

Divisive abstracts

In my wood carver example, I made the point that wealth creation and its growth make no distinction between labour and capital. In that simplified example, they are indeed one. Of course the bigger the business gets the more roles have to be defined. This ultimately leads to the creation of abstracts such as labour and capital, falsely attributing to them a generic behaviour and inevitably creating a jockeying for supremacy.

That detracts from a common purpose of service and an obsession with wealth distribution rather than wealth creation. It becomes particularly destructive when you have wage and profit driven conduct like in South Africa.

The labour market myth

The standard view that labour is a cost and a drag to wealth creation enforces a commodity expression of labour and the concept of a labour market. Few people actually understand it because it implies buying and selling bags of kilojoules. For the most part, it is a myth! Yes, there is a market for skills, qualifications, and experience backed by a track record. These may guide a basic minimum and differentiated pay, but the most important part, and the real value of labour’s efforts are priceless. They are willingness, enthusiasm, reliability and those human attributes that will always set us apart from bags of kilojoules. In the end, an unwilling engineer has not much more value than an unwilling janitor. Even less so from a cost/benefit point of view.

The value of that part of human endeavour – as I say by far the most important – is best determined by a proven end result, the real contribution to value added. There is no stronger case for variable pay. It’s made even more imperative because the so-called market price for labour, restricted as it is to those less important features is itself severely flawed both by remuneration criteria and factors that have nothing to do with supply and demand.

Capital supremacy

It’s one thing to create an abstract. It’s another to deify it. That’s economic paganism. Again, it’s a subject I have dealt with extensively such as in this Moneyweb article here.

Creating an abstract assumes some generic behaviour. We know that’s false. Shareholder and investor involvement can differ vastly in size, term, motive and conduct. Despite that, one could argue that “capital” is more suited to a passive commodity definition than labour.

We have somehow accepted that the highest price customers are ultimately charged for a company’s use of capital – i.e. profit – is desirable because amongst other things it is by nature a permanently scarce resource, whose deployment creates jobs and wealth. The scarcity of capital is also a myth in part based on a theoretical distinction between money (debt) and capital (equity). Debt capital is the cheapest it’s been for many years, and there’s certainly no shortage of equity capital given demand for equity on stock markets, high levels of corporate reserves, a relatively low level of new venture IPO’s and rights issues, and share buy-backs.

Few investments are being made in new ventures, plant, production and jobs, not because of a scarcity of capital, but because of a lack of demand. That destroys the theory that jobs are created because of capital deployment. One first needs relatively debt free demand, then a desire to serve that demand, and then the deployment of both labour and capital in that service.

There are many points in this article that justifiably can be challenged. The question in the title, however, remains relevant. Are we not so overwhelmingly obsessed with wealth distribution (specifically wages and profits) that we have ignored wealth creation itself, the most important and meaningful of all?

Sustainable wealth is not created by debt, investment, and speculation. Nor is it created by the pursuit of either wages or profits. It is always the result of adding value to other people’s lives. Wages, profits and taxes are a consequence, not a cause.

We have known that since the Stone Age.

Tuesday, October 14, 2014

The magnificent metric

The simplest measurement in business is also the most important and powerful.

It’s been said (by Einstein I believe) that if you can't explain it to a six year old, you don't understand it yourself. That may say something about the comprehension of the child or the teacher, but the most important and powerful measurement in business will not suffer from a lack of either. It can be explained by a six year old to a six year old.

Here’s how it works: a young boy buys a top for R10 and plays with it in a school yard. A friend comes to him and after enquiring where he got it and how much he paid for it buys it from him for R12. The boy has created wealth of R2.

That’s it! Clear, pure, and profound.

It could have other accounting terms in this simplified example, but it also captures the most important one of all -- value-added, or adding value. It means wealth created and is calculated simply by subtracting what you paid others from the income you received from your sales. You may ask what value the top seller added. Measurably he clearly did, because he now has R12 instead of the original R10. But he did so in practical terms as well. He saved the buyer a trip to the shop, perhaps even showed him how to spin the top.

Increasing value added, or wealth created is just as simple. Let’s illustrate this in another more commercial situation.

clip_image002If this wood sculptor increased sales by 10%, his outside costs would increase by 10% and wealth also by 10%. If he gets an improved price of say 10%, outside costs stay the same and wealth created increases by 20%. If he reduces outside costs by 10% his wealth also increases by 10%. If he can achieve all three at once he could increase wealth by up to 40%!

Simple! Of course what goes into achieving this may not be, but in essence there are only three things you can do to increase wealth creation – sell more; get a better price; and manage outside costs.

The process of wealth creation and the method of increasing it are very simple concepts and have been with us since we first learned to barter or trade. This can and should be taught in very early childhood, because ultimately all economic activity is dependent upon it, including the sometimes ridiculously complex abstracts that we have created in our economic world and the basis of equally convoluted “investments” which some rather misguidedly believe are the real instruments of wealth creation.

Wealth creation does require a specific self-evident environment to flourish:

· Maximum freedom of choice

· Maximum number of suppliers and competition

· Maximum awareness and information

· Free moving prices

· A stable means of exchange (money) and

· Being informed by the natural economic laws of supply, demand and price.

Its simplicity may also detract from its importance and supremacy. It is the cell of our economic existence, upon which all other cells are built either directly or indirectly. In our wood-carver example, the people he bought the materials from added value in their own right by producing them, and the person who bought his carving would have earned income in similar pursuits.

Someone in that chain may have borrowed money, which ultimately will have to be paid or redeemed by income earned from tangible wealth creation. This shows how debt is (or should be) realistically linked to current and future tangible wealth creation.

If we add the wealth created by all of the people involved in the exponentially increasing chain of value-adding cells in a country in one year, we arrive at the bulk of Gross Domestic product which as we know, is one of the most important national measurements that affects a host of critical economic outcomes, assessments, policies, government finances, interest rates, employment and board decisions. You simply cannot separate this from the microscopic cell such as the wood carver.

The value-added measurement is a much neglected, but vital acid test for companies, especially if tracked over time. Consistently greater value-added, or regular increases in wealth creation say far more about a company’s overall sustainable health than some of the other metrics do, including profit. Most of those metrics are in any case extrapolations of value-added. Unpacking the constituents of those three lines for example, would have prevented the large Enron fraud at the turn of the century.

Taking our wood carver example again, he is both the owner and doer in the process; both employer and employee or to use the preposterous and highly counter-productive ideologically loaded abstracts we have in economic theory: “labour” and “capital”. Wealth creation stands apart from but not immune to our questionable separation of these contributors. In terms of wealth creation, they are one and the same, a partnership if you will, whose rewards are ultimately determined by wealth creation itself, or the value they have added to other’s lives, not what they can exploit from each other or flawed “markets” that give them a presumptuous inherent claim to a reward.

To summarise: there’s a very simple formula to prosperity and the economic circle of life: value-added = wealth creation = contribution = reward. In turn this encourages demand, which leads to value-added and closes the circle.

If we examine both the environment which wealth creation needs to flourish, and the cell of wealth creation activities, we cannot help but be astounded by how we have contaminated it, indeed made many cells carcinogenic through theories, abstracts and ideology. I will deal with these in a future article.

The wealth creation measurement is only one of three dimensions of adding value. An important dimension is that of transformation. By its very nature value-added means transforming one situation into another which in most cases is better and represents progress. The full dimension can seldom be captured in one event and at one time, and also has to be assessed by factors other than natural economic laws. Preventing environmental destruction is just one example.

The third dimension of adding value is the most important of all. It is about behaviour. It is about an attitude. It’s an attitude that should be taught and instilled at the earliest age; through simple things like helping a sibling, or picking up some litter.

It’s an attitude that rests on our empathic nature; should be ever present; ever willing to make a difference and exploring transforming one situation into something better. It is an attitude that is there when one wakes up in the morning with the question: “what difference can I make to someone’s life today?”

Economic prosperity and success rests firmly on three personal qualities:

· willingness to contribute,

· a passion for an activity and its transactional relevance

· and the ability to look beyond assured immediate self-gain.

These are the winning attributes of an individual, of a company and of a nation.

Tuesday, September 30, 2014

Women in business leadership.

Are they the better choice for CEO’s in modern companies?

It may be a subject best addressed by someone other than of my generation and gender. And if so, perhaps it should have been written in August, which was women’s month and a time when debate on the subject was more topical.

I’ll leave those questions as rhetorical, save to say that even the question in the sub-headline smacks of gender discrimination and perhaps explains my procrastination and sensitivity to the subject.

A large number of our generation could have touched the hands of those born at a time when women were not allowed to vote. In my youth there was a fine dividing line between chauvinism and chivalry; between patronage and patronizing; between protectiveness and being patriarchal and being the provider or controller. Even today, those distinctions are vague and confusing.

At that time there were no women underground, in defence force combat and in the police force. It was rare to be attended by a women doctor or dentist. I remember as a cadet reporter in the Johannesburg news office of the SABC, witnessing the appointment of the first women reporters in broadcasting in South Africa. The paradigm that by their very nature, men were providers and women carers was firmly rooted in the functions open to the sexes in society. It was reflected starkly in many institutions including religion, politics and economics. When it came to business, there was little question that boys made the better bosses.

So it may have surprised many that this old born chauvinist at an open event some years ago posed the very question in the sub-headline. I may have been speaking to the gallery because it was at my book launch organised by a women’s organisation. But by then, I had developed a strong conviction that the aggressive, predatory and macho-male patriarchal business model based on survival behaviour was causing marginalisation in society. Business, I argued even then, was far more suited to an empathy model because of its dependence on serving markets, customers, and the goodwill of society as a whole.

Apart from the list of women entrepreneurs who had made their mark globally, there was evidence of a growing preference for women in executive positions, a trend that seems to have increased as shown by this Moneyweb Article by Reuters which argues that “companies can't afford not to have women on their boards”.

In retrospect my argument was perhaps half-baked if not flawed. It was a simple extrapolation of the predominant view that men are providers and women are carers that led to an assumption that the predominant basic instinct in men is survival and in women empathy. Therefore if business should be based on empathetic behaviour, it is more suitably led by women.

The first challenge is to the stereotyping itself: are women more empathetic than men? Well, latest research tends to support this. Neurological experiments have shown (see article here) that women’s brains are indeed wired differently from men and their mirror neuron response is greater than their male counterparts.

Mirror neurons and the more recently discovered anterior insular cortex are features of our species that account for empathy far greater than that found in other creatures on earth.

The second challenge to the hypothesis is perhaps more serious: whether having a greater empathy instinct in women and a greater survival instinct in men will determine their predominant behaviour, and also whether this will be the most apropriate behaviour in all circumstances.

This clearly is not so. Our basic instincts, whether survival or empathy always have to be tempered by rational thought. Without this, empathy will be little more than an impulsive, emotional, perhaps hysterical response that could be counterproductive and even self-destructive – for example a heavily clothed person jumping into deep water to save someone drowning; or giving an addict a fix because you feel his suffering. An impulsive survival response, whether flight or fight, could be equally inappropriate – such as shooting through a bathroom door at an unknown or imagined assailant on the other side.

It is then self-evident that either gender can adopt the most appropriate response -- empathy or survival – in a given situation simply by rational thinking. This in turn means that we will adapt, even counter instinctively, to what the situation requires. If the predominant business behavioural model is survival, one could speculate that business would naturally lean towards the appointment of men in executive positions, whereas women would tend to suppress their empathy instincts and emulate survival behaviour to reach those positions.

So the question is not whether women are better suited to lead business, but whether business is best suited to have them lead. When the model changes, and it surely has to and will, then women could very well become better candidates for business leadership.

Thursday, September 25, 2014

Labour lawlessness.

The case for holding Union leaders accountable for violence and intimidation.

If someone who has a grudge against you says “If you don’t do as I say, I’ll find you in the shebeens. I’ll come to your home,” it is blatant intimidation and tantamount to extortion. Yet this is what Zwelinzima Vavi, the reinstated General Secretary of the country’s largest Labour umbrella organisation (Cosatu) did in support of actors fired from the SABC soapie, Generations, after a pay dispute. According to this report in Channel24 he went on: “"Don't cross the picket line. Don't make yourself scab labour. Don't add salt to the wound," adding that the names of those auditioning for the series would be made public.

It always amazes me that in collective coercion little thought is given to the rights of the individual who may want to work for whatever reason but whose rights are simply trampled on for what is perceived to be “the greater good”. The slogan “an injury to one is an injury to all” then rings hollow.

I’m not sure what motivated Vavi to make such threats publicly and in a live broadcast of an open media conference. Perhaps he needed to flex his muscles and beat his chest after the embarrassing events that led to his suspension. Perhaps too, Cosatu wants to whip up a frenzy amongst their red shirts, in response to the more radical presence of AMCU’s green shirts – all reminiscent of the behaviour of the brown shirts, or Hitler’s storm-troopers.

We know that there is a fine dividing line between striking, marching, picketing and intimidation. Just as fine is the line dividing that from violence, disruption and property destruction. One tiny step further and you have bodily harm and death. A few leaps further and you have a Marikana. We are a violent society and for too long we have tolerated violence when it is perpetrated by angry collectives such as protesting communities or striking workers. Not only is it difficult to identify the perpetrators within the pack, but seldom are they then held fully accountable.

Just as questionable is the involvement of those who hide behind the collective flag, those in leadership positions who are quick to condemn overt acts of destruction and violence, but conveniently ignore the atmosphere they themselves create through incitement and rabble rousing. This alone should mean that they cannot escape some accountability for the routinely tragic, destructive and disruptive outcome of most industrial action in this country.

Labour has many valid and long standing grievances. Not only is this broadly acknowledged and understood, but it is also shared to a greater or lesser extent by a large section of the working population. What has not helped the labour cause at all is the contextualising of these grievances into outdated ideological conflict and cold war rhetoric. That cause is tarnished further by a callous disregard for two highly significant victims of their actions – consumers and the unemployed. What is at issue is not labour’s cause, but its actions.

Regular readers of The Human Touch will be aware that I have been an avid champion of labour as statistically the biggest contributor to the creation of wealth. Of course, that is labour in the broader sense and not restricted to the emotive term of “the working class”. Most people are “workers”, or doers who find more meaning in being that than in being owners or “employers”. Many are both.

Those categorisations, including that of “capital” serve only to institutionalise individuals into abstracts; enhancing divisions and conflict and indeed denigrating the vital role that labour plays in the creation of wealth. It’s an environment that not only encourages the formation of combative collectives, but the emergence of megalomaniacs jockeying for power to lead them, whatever side they represent. What routinely escapes them all is that you can never enhance your value and indispensability to an activity by withholding your contribution from it.

I have spent some fifteen years closely engaged with workers at all levels and in many different companies in enhancing their understanding of the economic environment and the companies they work for. The key stumbling block in achieving a sense of common purpose and common fate is the commodity expression of labour, particularly at lower levels. This expression inevitably leads to the routinely destructive haggling about benefits and rewards, and a complete alienation of labour’s contributory role to the common purpose of serving customers upon which wealth creation to the benefit of all so self-evidently rests.

Perversely, that common purpose is mostly fully understood, endorsed, sometimes even championed at an individual worker or manager level. But when they become absorbed into a collective called a Union or “employer”, or worse still the abstracts of “labour” and “capital” that enthusiasm morphs into becoming a belligerent battle between claimants of wealth distribution. It’s a familiar battleground that both sides seem to prefer, and that fuels ambitions for power.

There is little need in this article to repeat the many economic analyses that have shown indisputably that labour unrest and disruptive industrial action are severely harming our economic well-being. It has again been highlighted in the recent Global Competitiveness report (see Moneyweb report here.)

Far from behaving like proud contributors to wealth creation, Labour has become South Africa’s economic Achilles heel. And there’s a highly poisoned arrow of self-destruction heading straight for it.

Tuesday, September 9, 2014

Convenient collectives

Hiding behind a collective flag to avoid personal accountability.

Much has been written in law and organisational theory about responsibility, accountability, and liability. While I am not an expert in the subject both in practice and theory, I cannot help concluding that for the most part we still have not got it quite right. It is the failure of the theory to insist that when someone or something is responsible for an action or event they also have to be held accountable and liable for that event or act. To the extent that when ordinary folk are confronted with at times dire consequences of the actions of others or groups of others, they are left with a deep sense of injustice.

So when Deputy President Cyril Ramaphosa told the Marikana commission that there was a collective responsibility for the tragic event 2 years ago, it left one with an immediate sense that in the end no single person or even a number of individuals would, or could be held accountable. The Commission is still some distance away from compiling its final report, and it is still to be seen whether it will identify specific individuals who can be held accountable. To then establish liability will be a near impossible task.

African Bank is another recent convenient collective that comes to mind. To be sure, former CEO Leon Kirkinis, shareholders and perhaps a number of employees have suffered or may still experience financial losses. But how does this compare with the dire position many of the borrowers find themselves in or will have to face in future? In most cases, when the interests of the collective collides with that of the individual, the latter is the loser both in terms of relative loss, and also in ability and capacity to engage the collective, establish full accountability and seek retribution or compensation.

All of this should imply a strengthening of the principle of caveat emptor, or “let the buyer beware”. But that principle becomes sterile as collective power becomes more centralised and commands far more influential, collusive, and persuasive resources to seduce the individual into a lop sided transaction. Even more invidious are transactions backed by cartels, price fixing and uncompetitive behaviour of which we have seen many such as the bread price collusion some years ago.

Such behaviour makes more rules, regulations and government involvement inevitable, leading to an individual clamouring for greater protection, bigger government and more policing. Which then raises the question: “who watches the watcher?” There cannot be a greater impediment to trust and social cohesion in South Africa than the appalling lack of government accountability. To many the protector has become the predator; the shepherd the wolf. The lack of accountability, which should be reinforced with appropriate liability at all levels of government, is the root cause of corruption and a major contributor to the pervasive civil unrest we have been experiencing for some decades.

When collectives behave badly or even merely seemingly inappropriately, other collectives are formed to engage them. The most significant and one of the oldest is in labour which dates back to the industrial revolution in the late 18th century.

Most modern societies have come to accept labour collectives in the form of Trade Unions as essential in balancing power between employers and employees. While in one sense one could argue that they represent little more than a cartel of workers, the three main constituents of capital, labour and government, have endorsed and entrenched their existence and rights as being beneficial to all.

But this should never imply escape from accountability and liability for their actions. This is one of the most critical economic issues our time. Not only have we become known as the strike nation of the world, but labour unrest has in too many cases led to violence, deaths, wanton destruction of property and severe disruption of the lives of ordinary citizens. So far, there has been no major case where we have seen the collective, let alone individuals, being held accountable or liable for this destruction. Refuge is simply sought under a collective flag, and accountability attributed to uninvited hooligans and gangsters.

Then we have the random, smaller or communal collectives of vested interests, who similarly seem able to escape accountability and liability for acts of destruction and disruption. The latest case in point is the taxi driver protests in Cape Town, where buses have been torched and one life lost. (See eNCA report here.)

Much of this is self-evident and has been for some time. But perhaps the real root of the problem lies at a much deeper level. We have to confront the question whether we as a nation and more so than many others, have become far too tolerant of the principles of self-gain and self-interest; of the view that the world owes us a living; and of acceptance of dependence on others.

The axiom that our true value lies in our capacity to make a contribution to others applies as much to a group as it does to an individual. Business fits perfectly in this paradigm. Even a young child wanting to trade marbles discovers very quickly that in a commercial sense supply cannot exist without demand. It’s a small leap from there to understand that supply exists because it serves demand, and from there to define service as its true purpose. Rewards that flow from it within the natural laws of legitimate transaction are an affirmation of that purpose. The motives of labour and capital are actually irrelevant to that existential reality, but they clearly become counter-productive and self-destructive when they deviate from it.

The purpose of government and all in it is even more clearly defined as being service. Involvement for material self-gain is patently an abomination that cannot be countenanced.

Apart from NGO’s and service organisations, these criteria are arguably less applicable to other collectives and groups of vested interests. They are mostly formed with the specific aim of serving their participants. But when this service implies a coercive and extortive claim on others a benign activity becomes malevolent and socially destructive. Another dimension these collectives often lose sight of and do not explore enough, is that empowerment is about enabling participants to make a contribution to others, to contribute to them and not claim from them.

Collectives are simply that – a group of individuals pooling resources and efforts for a common good. When that “good” is understood to be about making a contribution to the world around them, it is both empowering and enabling. The opposite is true when that purpose is simply for self-gain and self-enrichment in the exploitation of others.

In reality, there is no such thing as “collective responsibility”. It all starts at an individual and personal level with each accepting accountability for themselves and their actions.

The question is simply are they willing and are they able?

Wednesday, September 3, 2014

Defining the entrepreneur

Why dictating their role or purpose is presumptuous.

Imagine a stubble-bearded young consultant sitting opposite a Bill Gates, Steve Jobs, Anton Rupert or Henry Ford and trying to define a job description for him. Worse still, having the “suit” approach him with preconceived ideas about what the job description should look like and being armed with a clipboard with forms where boxes have to be ticked.

That scenario is not much less ludicrous than the assumption that the role or purpose of an entrepreneur is to maximise return for the shareholders. It is a bit like the staff of Moneyweb saying that the role of the sun is to provide them with light and heat. We have become used to what is often perceived as shareholder arrogance, basking in the concept of shareholder supremacy and the Holy Grail of shareholder value.

This view, and indeed the assumption that all shareholders are singularly focussed on maximum returns in the shortest time possible, ignores the fact that there is no single standard shareholder. Their involvement in companies and hence their behaviour and expectations can differ markedly between the single majority shareholder, shareholders directly involved in operations, institutional investors and many others. We also tend to forget that the shareholder value obsession, highly contaminated with short term thinking and speculative trading, has featured only in the past four decades or so and that great entrepreneurial achievements have flourished since long before then, often enough in highly socialist environments.

Good entrepreneurs will ensure good returns for investors. But that is not their job. Rather it is the job of a good investor and his advisors to identify and support good entrepreneurs in the pursuit of their visions and dreams. It was something that John Sculley, former CEO of Apple found out in the demotion/firing of Steve Jobs from Apple and the latter’s subsequent triumphant return. Sculley later confessed that he did not then understand the entrepreneurial mind-set, and wished he had. Forbes Magazine (see article here) quoted him as saying: “I didn’t appreciate, coming out of corporate America… what it meant to a founder, the creator of the Macintosh, to be asked to step down from the very division that he created to lead the very product that he believed was going to change the world.”

This is not to say that the entrepreneur, or what I have previously defined as the real creators and builders in business, do not have a duty to investors who have provided capital in good faith. The question is whether this ranks higher than the regard they have to have for customers, employees and society as a whole. It is completely unproductive to champion one over another, yet that is the very essence of the debate. So prioritise we do, and I have always championed customer supremacy. Those who say that the interests of all of the parties are synonymous do so mostly on outdated theory and are either out of touch with the economic reality of our times or are wilfully ignorant.

The Sculley/Jobs confrontation is an interesting case study of the difference between the entrepreneur and professional managers who today have become mostly the custodian of narrow shareholder interests. Given Jobs’ return to Apple and guiding it into becoming the world’s biggest company (more recently the second biggest by market capitalisation) it is easy to assume that Jobs won that confrontation outright.

But Forbes’ assessment is less harsh on Sculley, and concludes that without Jobs’ absence Apple would have been worse off. The pity was that the confrontation developed into something of a turf war with constant head butting that prevented some form of reconciling creative genius with a practical mindset.

Jobs’ treatment by the board, his return and the eventual ousting of Sculley himself, poses an interesting question of who shareholders should trust the most, the leader with entrepreneurial flair and societal and consumer market impact, or the professional executive singularly focused on increasing shareholder value. The view that the former can be replicated in the latter simply by dishing out a parcel of shares and offering remuneration equalling, if not sometimes exceeding the rewards of the former is patently misguided. For one thing, the remuneration criteria for executives are largely focused on shareholder value and maximum shareholder returns, and not on the criteria that excite most real entrepreneurs, creators and builders.

With entrepreneurial genius comes the courage, if not the right, to dictate to shareholders how the company should be run. As Liberty Founder Donald Gordon is reported to have once told a disgruntled shareholder: “I know better what to do with your money than you do! And if you disagree there are many in this audience who will be just too keen to buy your shares from you!”

Among all of the definitions of an entrepreneur, one will not find a remit to ensure maximum return on capital. A World Economic Forum report has defined entrepreneurship as “the pursuit of opportunities beyond the resources you currently control.” This fits in with my own understanding of an entrepreneur as being one who has the ability to look beyond immediate and guaranteed self-gain. That is what risk is about. Clearly that ability will be shackled by an absolute insistence on defined short term returns on capital.

Perhaps Time Magazine said it best some years ago: “The creating part of capitalism is the part that economic laws cannot explain. Like a code writer and his code, inspiration and dedication stand outside the system to which they are so crucial.”

In all of my experience with and reading about great business leaders, those entrepreneurs who not only made a huge difference to our lives, but also generated much wealth for themselves and those who invested in them, I have yet to come across one that professed to have been singularly and unambiguously driven by creating maximum shareholder value.

That happened in the pursuit of other far more exciting and meaningful things.

Monday, August 25, 2014

Sincerely yours: African Bank

How sincerity of purpose could have prevented the demise of a bank.

African Bank had a laudable purpose. It was supposed to have empowered and enabled millions of people excluded from basic financial services in South Africa, especially those having no access to credit.

As the old folks used to tell us, debt can be either empowering or debilitating, a slave or a master. If you use it productively to enhance your capacity to add value to people’s lives, it will become one of the most liberating and self-enabling things you could have done. If you use it purely for consumption and immediate self-gratification it will crush you, enslave you, and rob you of your serenity.

To that the old folks added a simple rule: the repayment term of the debt should never exceed the life or usefulness of the product you bought with it. Like health warnings on tobacco, any peddler of debt should clearly display this advice. It should be included in big bold letters on all contracts and agreements. Indeed, it should be a condition for the granting of a loan.

So old folks will shudder in their graves, wheelchairs and frail care beds, when they see what debt has become today; the crushing levels it has reached among individuals. It has become the basis of money; the playground of traders; the generator of enormous wealth for a handful; the black pudding of carnivorous banks and the manipulative tool of politicians and governments who simply rewrite the criteria of prudence to postpone the day of reckoning to some future generation. In this environment, it becomes extreme hypocrisy and outrageous self-righteousness, when it is said of the clients (or victims?) of reckless lenders, that “they should have known better”; or “you cannot save people from themselves.”

You could, you should, and you would: if you were sincere in your purpose.

African bank had such a purpose. When it was first launched in the 70’s, its founder, Sam Motsuenyane saw it as a vehicle to support fledging and highly disadvantaged black business. Then, at the turn of the century, it took huge leaps into the “unsecured” lending market, and still today its vision professes “to improve quality of life through affordable, convenient and responsible credit.”

Its spin goes on: “African Bank understands you as an individual, believe (sic) in you and empowers you to create more with your life. African Bank enables you to achieve your goals and improve your standard of living”.

If the investors in Abil, those much admired abstracts of asset managers, investment funds, financial institutions, pension custodians and other “safe-houses” of our money, simply took their eyes off their shareholder value spreadsheets they would have got it. The real story was never in the spread-sheets, the metrics, the bonds, the mergers and the acquisitions. It was in the human events that were unfolding long before the others took place. It was in behaviour, not measurements.

It was not Abil’s business model that failed but its behavioural model.

Without the latter, the former is nothing but an empty shell of meaninglessness. But then, the assessors of financial value, from credit rating agencies to portfolio peddlers have long since dehumanised business into abstracts and calculations, into pretty graphs and Power-point pictures.

I have hypothesised previously that one can identify two kinds of business behavioural models: empathy and survival. Applying strictly the criteria of each to African Bank leads to an interesting conclusion: either would likely have prevented the bank’s demise.

In the survival model, one which is driven by profit maximisation and shareholder value, those involved would have quickly realised that their revenue streams were becoming increasingly insecure, their lending increasingly “reckless”, their funding unstable, and ultimately the simple and common assessment of future returns on investment highly risky. They would no doubt have curtailed those practices.

The smart boys missed it with their I-pads, spreadsheets and designer suits (do they still wear them these days?) because of the fundamental flaw in the survival model -- a rampant virus of maximising returns in the shortest time possible – or short-termism that is always flirting with unbridled greed. That virus is strongly incubated and replicated by parasitic institutions with their own capital supremacy, demanding maximum returns from their hosts, seeing that as the sole purpose of the business and indeed seldom knowing what the true purpose of the business is.

The empathy model, one which is based on service to customers, adding value to people’s lives, maximum wealth creation and optimum wealth distribution which meets the legitimate expectations of all of its contributors, would likely have stopped the rot much earlier on. It would have identified that it is not meeting its purpose by reckless lending and by having clients fall deeper into a debt trap. It would have adopted as part of its approach to clients those sound principles of lending that the old folks spoke of.

The empathy model too, has its flaws. The first is a misunderstanding of empathy itself (which I dealt with in this article). It is not emotional, soft and cheesy. It does not encourage mediocrity and self-destructive behaviour. At the very least it has to adhere to fundamental laws of transaction. All legitimate transactions should be mutually empowering. If not that, then at least neutral and not harmful. And even when society allows the latter, that harm should be obvious and fully understood by both seller and buyer.

The other flaw in the empathy model is that it is so easily feigned by the survival model, with its battery of spin doctors, media dominance, public relations, branding specialists and advertising. But it says a great deal for the empathy model that all companies try to emulate or fake it. Interestingly too, prudent and authentic empathy companies seldom fail. It is the modern predatory survival model that most often hits the wall.

What finally distinguishes the two is sincerity. Ask African Bank.

Monday, August 18, 2014

Nepotism’s playground.

Is overt cronyism seriously eroding trust in our leadership?

A bizarre bit of irony has been playing itself out at the Marikana Commission of Inquiry into the tragic events 2 years ago. It came in the form of a much anticipated confrontation between Deputy President Cyril Ramaphosa and the miners’ legal representative, Advocate Dali Mpofu, who, if he had his way, would have the deputy President charged with murder for the role he played in the event as Lonmin non-executive director.

Again Marikana, and the soul searching now taking place through the Commission, has demonstrated the serious fault-lines in South Africa’s socio-economic structure. It goes some way to explain the large overrun of the Commission’s deadline and when the report is finally released, it will no doubt be voluminous in trying to cover all of these fault-lines.

Quite a number will be hidden in verbiage and seemingly nebulous banter that Commissions of this kind encourage in the absence of normal court discipline. One that sprung at me, and that understandably has received scant attention from the media in focusing on much bigger issues, was the curious private interchange that transpired between the two seemingly arch foes of Ramaphosa and Dali. To many it was simply a side issue, perhaps even trivial.

In a rather convoluted defence of his belief that his multiple roles at the time did not constitute conflicts of interest, Ramaphosa related how Dali had approached him outside of the hearing, and the question of Dali’s professional status was raised. Now I cannot profess to understand jurisprudent elitism, apart from that it sounds like a blatant oxymoron. But apparently for Dali to be adorned with silk he needs the endorsement of number 1 himself. Ramaphosa offered to nudge-nudge, wink-wink on his behalf, because, as he put it, such a status would not only be in the interests of Dali, but the legal profession, the country, the world and perhaps even the universe. (My additions.)

Dali himself was livid, at least partly by the disclosure of what he thought to be a private conversation between old pals, but more so because he believed that Ramaphosa was lying about what had actually transpired. Of course, it also detracted from his accusation that Ramaphosa exercised extreme nepotism in defending Lonmin’s interests. While the essence of that conversation now rests firmly in the domain of he-said-he-said, it no doubt took place, and shows that perhaps Dali as the champion of the downtrodden is not beyond a bit of elitism himself. At the very least, our Minister of Higher Education, Blade Nzimande might want to take note of what elitism is about. It is not about raising the bar for a matric pass, but about self-aggrandisement and the constant search for the good opinion of others, which Maslow tells us, is the ultimate reflection of immaturity.

It may simply have been a camera “cutaway”, but immediately after Dali’s outburst, Ramaphosa was shown smiling mischievously. Perhaps smirking is a better word. But this spat was much more than good television.

In defending one stance on conflicts of interest that pervades much of our economic and political lives, Ramaphosa nonchalantly and unwittingly revealed another, perhaps much darker side – that of nepotism and cronyism. His indifference to this abomination reflects how deeply immune we have all become to its real menace. Worse still, how easily it is practiced in echelons of power.

We all experience it. We all most likely practice it. It is arguably the way of the world we live in, facilely paraded by a Deputy President in a public forum. As a journalist in an influential editorial position, I became painfully aware of how often coverage was influenced by the purveyor of the content rather than what or why. Yet, most in the media are arguably on the outskirts, caught in a maelstrom of nepotistic froth, rather than at the epicentre.

Therein lies filtered power, constantly pyramiding to represent raw vested interests that by themselves become incestuous relationships – a term that raised Ramaphosa’s extreme ire at the commission. We protest vehemently at blatant nepotism that has led to service neglect in government at all levels, and overt hypocrisy that ferments social discontent and unrest. But it is equally practiced in the private sector – from the appointment of supervisors to directors both executive and non-executive, and even CEO’s. It’s because, they argue, it is the way of the world, and it is in the shareholders’ interests to have someone close to or even at the top on the basis of who they know, rather than what they know.

At what price? When people are appointed or gain status on that basis rather than what they are capable of doing, we severely reduce our capabilities as a nation; our innovation; our efficiency; competitiveness; transactional fairness and ultimately our prosperity and national contentment. In the end, we simply don’t get the best people for the job.

It is not a subject that we can be flippant or mischievous about. The real price we pay is the destruction of trust.

Monday, August 11, 2014

Institutional investors: whose side are they on?

Unpacking behaviour behind South Africa’s broad ownership of capital.

Be cautious when playing devil’s advocate – you might just qualify for the job. From the pile of CV’s being sent to the hot place many will no doubt come from journalists because it is a role they often play. But their mischief is tempered by the reality that they can never tell you what to think, only what to think about.

It’s different for academics and thought leaders. They shape not only the agenda but also the content in their teachings at educational institutions and their influence on socio economic perceptions. So when they add a touch of devil’s advocacy to their pronouncements, they should expect their media colleagues to take the bait.

One that has invited such a response is a Moneyweb article by the highly rated and my personal favourite economic myth buster, Mike Schussler (see article here). His finding that South Africans have one of the broadest ownerships of the economy in the world via pension funds, unit trusts, ESOPs, Trade Union investments, and broad based community ownership schemes will most likely lift a leftist eyebrow here and there and highlight a few behavioural conundrums.

One which Schussler raises is labour dissent which arguably hurts their capital interests. Other incongruities and questions include:

· Why the anti-capitalist rhetoric that overwhelms our economic and political debate?

· To what extent do the financial institutions who rely so heavily on employee contributions act in the interests of workers, and not the shareholders of investees?

· Why has this availability of capital from ordinary folk not helped in creating jobs, especially considering the large corporate savings of some R600bn?

· Why does broad ownership of capital instruments not mitigate concern about personal savings?

It is easy to write labour behaviour off to ignorance and powerful prejudices inherited from cold war ideologies and past legacies. That is only a small part of the answer. An important other part is that in this case ownership clearly does not mean control. The reality is that people’s views are mostly shaped by their experiences and one cannot deny that this capital ownership, including Employee share option programmes (ESOPs) has done little to involve them in the running of companies. The unemployed are automatically excluded.

At best, these institutional investments may give some comfort of a nest egg in retirement tempering the grudge deductions from pay. But this comfort is often shattered by the Fidentia’s of this world, or the more recent Transnet affair: that’s if this nest egg was preserved at all in the rapid turnover of employment. In addition, as Moneyweb reports, many beneficiaries are unhappy with their pension pay-outs.

One must also bear in mind that more than half of the R2.7 trillion pension assets are held on behalf of an overpaid and bloated civil service whose interests won’t be harmed by their own industrial action. The taxpayer simply foots the bill.

In our desire to condense everything into neat academic boxes we construct concepts such as “labour, capital, and state”, all interacting with each other in a predictable fashion from which we extrapolate theories, ideologies and immovable standpoints. The most vehemently defended is the supremacy of capital, the pursuit, ownership and accumulation of which accounts for prosperity and Milton Friedman’s “justice for all.” All other constituents, including labour and consumers, are commodities to be used in this process. To argue differently, even defending the ultimate supremacy of the buying public, and the axiomatic logic that supply exists to serve demand, automatically consigns one to some leftist leper colony.

The problem with these absolute abstracts is that they simply do not capture the humanity inherent in them all: individual behaviour shaped by values, dreams, fears, hopes, aspirations and expectations. To be sure, these are nebulous factors and way beyond the formulae of economists’ spreadsheets.

What cannot be disputed is that a growing number of people today, independent of ideological convictions, believe that capital has behaved rather badly in the last few decades. (See Moneyweb article here.) It is perhaps more than co-incidence that this has coincided with a spectacular increase in institutional investments estimated to be well over half of all investments globally. This has prompted Harvard and Yale academics, Benjamin Heineman and Stephen Davis (see joint paper here) asking whether institutional investors are part of the problem or part of the solution. Do they adequately advance the goals of individuals who gave them their money? Do they contribute significantly to undesirable “short-termism” or myopic behaviour in investees? This concern has also been raised in this Moneyweb article.

In addition one could ask whether they have encouraged or tempered excessive executive remuneration. With the relatively small individual benefits spread over millions of people and delayed for years to come have they not aggravated income disparities? By favouring large investees, do they not skew access to capital to big established and bloated corporates at the expense of SME’s and new risky investments? Are they not aloof, insensitive and not understanding of entrepreneurial genius and flair as was evident with Steve Jobs, Richard Branson and others? Do they not negatively impact on research and development?

The jury is still out on most of these questions and a vast amount of research is being done into this relatively new major force in capital formation. It has become clear that there are no absolute truths here and answers can differ depending on the institution, who it represents and the duration and size of its involvement. But what they all share are two very important features:

· They seldom if ever have a controlling interest in their investments making it difficult to have full sway on executive behaviour and

· Perhaps more importantly and understandably, their primary task is to ensure maximum returns for their funds or portfolios often posing a conflict of interest between those from whom they obtained funds, and those who use them.

Of course labour, especially in South Africa has behaved badly too. Both labour and capital suffer from the same myopia: pursuing maximum self-gain to the point of conflict between each other. When both doers and owners are so hell bent on maximising their benefit the ultimate victims are customers and wealth creation itself.

It is obvious that for the most part, broad public and employee stake-holding via institutions or ESOP trusts has not and will not motivate them to behave differently towards companies. Even less will it encourage involvement which is by far more important than incentive. For that, one needs a far greater degree of common purpose and common fate between the primary stakeholders. Essential to that is labour taking or being given behavioural ownership of their tasks and their part of wealth creation.

Until then the near inaudible lyrics of institutional investment may sound fine, but for many the melody is false.

Tuesday, July 29, 2014

Owners and doers in farming

Why 50% employee ownership of farms will threaten food security.

When bright sunlight reflects off frost, ice and snow, we need no reminding that often light comes without heat. It’s a bit like wisdom which does not always accompany age. These thoughts make good metaphors for the land reform debate which has been raging in South Africa.

It is certainly generating much more heat than light, and over time has not led to greater wisdom and rational thinking. No-one can deny its importance and its complexity is compounded by the fact that it is highly emotive and sensitive both politically and economically, as we have just seen in parliament this week. A coherent approach on land reform simply needs far greater clarification even of some basic concepts.

One is that many, including policy makers, are failing to make a distinction between land restitution and land reform. The former is aimed at restoring ownership to those disposed of it by government decree since 1913.The latter is aimed at establishing some form of demographic representation in land ownership. It may suit radical parties to ignore this distinction, but this is needlessly tipping the issue into open conflict and threatening production.

Another is compensation for land repossessed. There are three: transfer of ownership on a willing buyer/seller basis; expropriation with compensation based on a prescribed value, or expropriation without compensation. The first has seemingly failed and the third is highly unlikely, perhaps even unthinkable without inviting some form of rural unrest. Richard Spoor, land reform activist and lawyer warns that the second, transfer on a prescribed value, could lead to even greater delays because of court challenges to these values.

A third and perhaps the real heart of the matter is that production and ownership are seen to be synonymous, often leading to a collapse of production with transfer of ownership. So when Gugile Nkwinti, Minister of Rural Development and Land reform flung the Strengthening the Relative Rights of People Working the Land proposals into the debate, he must have expected some vehement protests not only from current land owners but from agricultural experts and economists. The key suggestion is the transfer of 50% of land ownership to those currently working the land, or farm workers.

Nkwinti subsequently informed the eNCA TV news channel that this was aimed primarily at farm land, and not production. Others have interpreted the draft proposals as meaning the opposite. This alone underscores continuing incoherence around the land issue. More fundamentally and dangerously, it reflects a flawed concept that permeates most of our socio economic life – that wealth per se is a function of assets, of capital and of owning rather than doing.

The vehement defence of capital supremacy, of a faceless golden calf whose pursuit, possession and accumulation represents prosperity in itself is a very powerful force that drives much of the behaviour we see today, including redistribution of capital assets through nationalisation, often misguided BEE actions, costly and faltering ESOPs and land transfers. A system that places inordinate emphasis on ownership and capital accumulation only has itself to blame when it unleashes such behaviour.

It’s a long held ancient, classical even biblical wisdom that it is not what we own that creates wealth but what we do with it. Assets can never be anything else but a means to an end; not an end in itself. Theorists and ideologues love to construct premises on “factors”: faceless, inanimate institutions that all interact in a predictable way. Eventually these premises lose touch with the simple and human behavioural logic that not only underpins the entire system, but threatens many of these carefully constructed premises.

The land reform debate and specifically redistributing 50% ownership can be distilled into a simple analogy. Imagine a farm worker picking an apple and reflecting on the fruit in the knowledge that he owns a small part of it, and the rewards that will come from its sale. Now think of another that does not necessarily own a part of the fruit, but owns part of the land from which that fruit was produced.

Which worker will be more motivated to ensure the success of the crop? Who will be more interested in where the fruit goes, is sold, and who the customers are. Who in the end will be more loyal to the production process? The answers are self-evident and reveal the flaw in the concept that simply transferring assets empowers the beneficiary. Ultimately our true value lies in our capacity to make a contribution to others and ownership of production is a far greater empowerment tool than ownership of land or assets.

Already on average labour accounts for more than half of the wealth created in farming and is not very different from the national average which is just under half, but still the larger share over capital and state. The fact that this seldom translates into recognised “ownership” of production is rooted in some stubborn assumptions about systems and ideologies, not the least of which is capital and shareholder supremacy, deeds and titles, ownership rights, and commoditised labour. Of course, labour itself succumbs very willingly to this expression because it is relieved of the responsibilities of production, mistakenly believing that it is immune to market risks and can dictate rewards through mob action.

Capital, on the other hand has benefitted from this model for decades, mostly victorious in the simple battle plan that “the market” is a resource to be exploited, and that everything but profit is a drag and a cost that has to be squeezed to an absolute minimum. It defends this position on the false premise that it alone takes risks, which entitles it to all surpluses (often vaguely defined) that are generated by the venture.

Ownership always has two contexts: physical and behavioural. It’s a distinction we too often miss in our obsession with ownership rights, but its importance becomes clear in the simple example that a murderer should not be allowed to own a gun. In similar vein, should the predatory shareholders of Aurora have been given ownership if it was clear to the sellers and governing authorities that all they were going to do with productive assets was to strip the mine and destroy production?

The behavioural dimension of ownership is more important than the physical and clearly the former has to be fully understood and embraced before physical ownership can be entrenched.

The simple condition that labour, in this case farm-workers, have to comply with to qualify for ownership of production, is to also assume the responsibilities that comes with that ownership. One clearly is that all rewards in the end are determined by the value of production itself, and they have to be linked to this value through a predetermined yet flexible share of wealth created.

Before one can even go that route, there is a huge task of education and training, and sharing information with the work force, both in agriculture and elsewhere. Only when labour fully understands its contribution and responsibilities towards customers and wealth creation itself, indeed establishing some common purpose with other stakeholders, can one seriously consider making labour co-owners of production, let alone assets.

There are many successful cases, both here and globally where labour has become more directly involved in ownership, either in the form of labour co-operatives, co-ownership trusts, mentorship programmes and worker ownership schemes. (See separate links for examples.) It is clear, however, that the success of these ventures has depended heavily on labour seeing itself as doers before owners.

At the very least some proof of behavioural ownership of production is an absolute pre-cursor to ownership of assets. To do otherwise is a reckless putting of the cart before the horse.

Tuesday, July 15, 2014

The lonely soldier.

Waving the flag for state owned enterprises in a hostile environment.

Five decades of exposure to companies through journalism, management consulting, and study in organisational theory exposes one to some weird consultant interventions and processes.

One of the more bizarre 'monthly flavours', the remnants of which I came across in one client, seemed to have structured its intervention on a war game. Senior managers were encouraged to read biographies of military figures; the battleground was the market; competition the enemy; workers the troops and management were various levels of ranks. To be fair, I experienced only a few remnants of this strange structural thinking, and more specifically in one highly placed executive, who cut a straight backed colonial figure, spoke with a clipped Oxford accent that barely masked his Yorkshire background and always referred to the work force as the “troops”. But it was not the first time that I had come across military jargon in companies.

So meet one of the modern day company troops. He is Daniel (not his real name). His rank is private. His speciality is telecommunications technician. His company (both in the analogous military and real business sense) is Telkom. Let’s imagine that Telkom is playing this war game, and views the market as its theatre, with customers as its conquests. To equip themselves for this game, its leaders have been studying the military exploits of Julius Caesar and Adolf Hitler.

The Romans had little if any competition in building their empire; perhaps because of their tactic to befriend their conquests and invite them to become citizens of mighty Rome. The Third Reich, on the other hand, had some very stiff competition. Yet Hitler saw his conquests as slaves, cannon fodder, some as vermin, and all as resources to feed his ego and the Reich’s coffers.

As an aside, Eskom is another of those SOEs -- or as we can now call them -- state owned empires. The ungrateful conquered subjects of any empire will always grumble, whether under benign Roman rule, or malevolent Reich subjugation.

So I was not surprised when, just after the recent power outages, and waiting to cross a robot-less Swellendam street, a fellow next to me loudly bellowed the most creative Overberg expletives I had ever heard -- and I’ve heard plenty since settling here! I’ve never fully understood why mothers become the targets for such tirades. His wrath was directed at a hapless Eskom “troopie” who was sitting in a marked company bakkie across the street.

My heart went out to him and my immediate thought was that if you want your troops to operate in a war zone, you shouldn’t place them in marked vehicles. This acrimony can sometimes literally become a battleground as Eskom discovered in violent protests in Soweto and elsewhere recently. There, the empire had 15 of their chariots torched.

But the indomitable Telkom Empire standard bearer, Daniel, would probably have held his ground. I met this courageous soldier after I became an unwilling subject of Telkom rule, and when I chose to live in an isolated area, with poor cell phone reception, no access to normal ADSL and a constantly failing landline. They discovered that the landline problems were caused by the increased height of peach trees in the grove where the overhead cable crossed. Not even the mighty Telkom can force a peach grower to cut down his source of income.

The problem was eventually solved when my empirical masters graciously installed a system called Wimax, which transmits data via a signal beamed from some tower, and linked a VOIP telephone to the system. So Daniel packed up his armour, took his standard and left.

Then, in early December last year, the whole thing crashed. With the empire having closed its barracks in Swellendam many months earlier, and lacking a landline and internet connection, we had to contact Telkom via a cell phone to the 10210 complaint line. Now, any subject who has tried this facility quickly discovers that its sole purpose is to discourage popular dissent and is as impenetrable as the ancient walls of Rome.

After spending some R300 on air time we had secured a precious reference number that somehow gave us an assurance that a centurion had the matter in hand. Then we received an SMS falsely claiming that the fault had been restored. In desperation we sought another provider, only to discover that it bought its data from the empire and relied on its infra-structure to transmit that to non-citizens.

We then discovered that the empire had an SMS facility and informed the office bearers there that indeed the system had never been restored. A few days later, Daniel arrived, his chariot groaning under the weight of steel ladders and from which he emerged carrying the weapons of his trade. So this lonely soldier set about clambering onto the roof; cutting off tree branches several meters from the ground; plugging and unplugging thingies into thingies, and spending hours trying to connect to the same 10210 line.

He left having achieved little, still singing the praises of the empire, but expressing huge frustration with his superior officers. He promised to return the next Monday.

He never did and we yet again received a message saying the fault had been restored. And so the whole process had to be repeated...and repeated! In the meantime we simply had to fall back on an erratic service from a local supplier. Daniel eventually returned, bringing with him two other legionaries, two extra chariots and a determination to solve the problem once and for all. They did, four months after the problem first occurred. When it happened again, we decided to finally escape the empire’s rule and settled for the erratic local offering. At least we now have an intermediary with the empire.

As so often is the case in subjugation, the conquered learn to love and respect those that have to apply empirical rule but get to hate the empire and Caesar, especially when it dawns on them that in the end, Caesar, his senate, and his commanders are interested in little else but the gathering of gold and silver.

It’s the sad tale of many organisations today, lonely soldiers desperately trying to find meaning in their day to day tasks and being of service to others, but in the end overwhelmed by contamination of short term self-gratification from the top.

And soon they become the same…rebelling against their masters for their own self gain, and also viewing subjugated citizens as little more than collateral.