Thursday, March 27, 2014

Ownership and empowerment.

The fallacy of seeing the two as synonymous.

In the days when our pet dogs were allowed to run free, there was that comic scene where a fox terrier is chasing a bus and someone asks what the little rascal would do with the vehicle once it had caught it.

It’s an appropriate analogy in response to President Zuma’s latest push for broader black ownership after the election and for those populists who seem to think that owning the means of production is a panacea to eliminating poverty and wealth disparities. It reflects a dismal ignorance of history and is an extremely reckless political ploy. So far, efforts to change the ethnic base of private ownership have done little to eliminate wealth disparities – indeed they have made them worse.

Conversely, those that scoff at the red berets and their antics may just be misjudging the level of envy and resentment that already exists and the extent to which these emotions are fuelled further by rhetoric. There is already a dangerous emotional overload in the current elections.

But then, one has to concede that the soil for such ferment has been fertilised no end by misconceptions on both “sides”. This goes much deeper and is more powerful than the reality of the politically loaded slogans of “unemployment, poverty and inequality”.

The power of ownership is firmly cemented as an absolute in all mainstay political theory. Ownership, it is automatically assumed, gives one ultimate control. The question then is simply who should own. At one extreme political ideologists argue that it should all be in the hands of private sector, and on the other that it should all be in the hands of the state. It’s only when one gives a human face to these institutional concepts that severe practical flaws in the theory become evident: who is the private sector and who is the state? Of course, the belief that ownership gives one ultimate control is a myth. It not only comes with demanding responsibilities, but also with social constraints, rules and regulations. And as private companies soon discover, ultimate control lies in the hands of their users or customers and not shareholders.

But the most important question of all is why do they own? There can only be two answers: for self-gain or for service to others: for survival or empathy.

I have already argued extensively for greater recognition of the inherent and implied service motive or the empathy base in the private sector. We have done this sector no favours by putting virtually exclusive emphasis on the profit motive as some kind of golden calf. At the same time, I have always defended profit as an essential tool in enhancing efficient use of resources particularly capital, and ensuring competition, and freedom of choice. Profit maximisation is a different thing altogether, and often leads to market failures that give an excuse for state intervention.

Even market orientated economies recognise the need for state intervention “when markets fail`”. This is clearly open to wide interpretation and will forever be a subject of debate and opportunistic agitation including political power play. State involvement through direct or part ownership is generally justified when government alone has the necessary resources to provide essential services. Add BEE into the mix and you have a toxic contaminant.

State owned enterprises exist throughout the world, including highly developed Western economies, and some are just as productive and efficient as their privately owned counterparts. They are mainly to be found in infra-structural sectors such as transport, communications, energy, and health care.

South Africa’s biggest and most influential SOEs are in energy (Eskom), Telecommunications (Telkom), Broadcasting (SABC), and transport (Transnet; SAA, and Sanral.)

After the wave of privatisations worldwide from the 70’s, continuing today in many previously communist regimes, these enterprises also largely adopted “commercial” practices, giving due recognition to the need to generate earnings and not rely on taxpayer funding. This is the perfect example of the vital role of profit, not as an end in itself (which would be unacceptable given their largely protected monopoly status) but to ensure maximum efficiencies and productivity.

On the surface, then, SOEs should perform as well and as efficiently as their privately owned counterparts: servicing their markets through the best use of resources. Yet they don’t, particularly in South Africa. It may be a sweeping generalisation, but few would disagree that they are among the worst performing businesses in the country. It was ironic that a mere few weeks ago, we faced forced power outages. My pet peeve at present is with Telkom, whose large promise, and exasperating, dysfunctional call centre has left me involuntarily twitching my ears.

So much has been written about their failures that it would be superfluous to go over them again. Of course, everyone has a view on the cause. Perhaps in part it is their “commercialisation” which has made them adopt many of the bad behaviours of their survival peers in the private sector, including outrageous levels of executive pay and marginalisation of labour. But paradoxically it has not prevented many of them from being on the edge of insolvency.

Without the profitability mandate being met, one would at least have expected their service mandate to be impressive. But it is the worst. Then one can only hold the owner, the government, accountable. If a state owned enterprise fails in profitability and above all in service, the motive behind and validity of government ownership becomes highly questionable.

Yet, the populists want more.

While nationalisation, particularly of mining, may be a dead subject to the elite, it is very much alive in populist politics. In order to underscore its stupidity even to those who want ownership, I extrapolated a contribution account, reflecting wealth creation and distribution for the industry as a whole.


As the graphic shows, nationalisation of mining will bring the state only the 8% from dividends (5). It cannot escape supply costs (1) and capital expenditure (2) which is the lifeblood of mine survival. It most likely will succumb to labour pressure which will increase the employee share, obscuring efficiencies and ultimately forcing taxpayers to sustain operations.

Nationalisation may nearly double the government’s revenue from mining but in return it has to manage the mine, run all the risks associated with mining, and use taxpayer’s money for development. The latter demands high risk private capital and not what would be tantamount to reckless use of taxpayers’ money

As they say: “Be careful what you wish for. You may just get it!”

Wednesday, March 12, 2014

A two faced business.

Facts and fallacies about the business sense of survival or empathy.

All economic debate is based on assumptions about humanity. Yet surprisingly, despite our scant knowledge of ourselves, we are prepared to assume fanatical stances on economic theory to the point of risking violent conflict.

It's self-evident that our economic construct cannot be too far removed from the essence of our humanity, our basic instincts, and that we will always strive to express ourselves in an optimally free environment. The latter implies freedom of transaction and markets and frankly I'm too old, cranky, impatient and perhaps even too arrogant to debate this point in the ideological kindergarten of red berets.

The two mutually supportive predominant instincts that define human behaviour are survival and empathy. The convergence of the two creates a vast number of permutations – as many as the variables in individual DNA’s and fluctuating constantly according to time and circumstance. These characterisations can also be applied to our understanding of companies, giving us broadly two definable approaches or models: a survival model and an empathy model. While their behaviours may show similar variations as those displayed by individuals, their purpose or intent is what defines them and will drive their predominant behaviour.

The survival model is the most commonly understood definition of business. It has a money focus, and is driven by self-gain, immediate self-interest, maximum profit and shareholder value. It mostly feigns empathy as a means of survival.

The empathy model has a people focus and a service motive. It is driven by customer and societal interests, and sees profits and wages as an essential means to service, rather than as an end in itself.

Common assumptions about both models need to be tested.

A survival motive accounts for success.

· Survival is based on fear and insecurity which promote greed and short term thinking. It’s inconceivable that one will get the best out of people by appealing to the worst in them.

· It contradicts an axiomatic truth that the true value of anything depends on the contribution it makes to others.

· It makes an arbitrary and highly questionable, if not false, assumption about the intent or motive of great entrepreneurs, sustainably successful companies, and individuals.

· Virtually all successful entrepreneurs have professed to have been driven by their passion and desire to make a difference to other people’s lives and not by profit.

· Long standing research by Collins and Porras of successful companies has shown that profit maximisation ranked fairly low if at all in their thinking.

Ensures prosperity for all in the profit driven deployment of capital.

· This is the most vehement defence of the survival model based on the quaint belief that wealth is created in its accumulation and deployment. Tangible wealth is and always has been the result of creating something of value for others. Capital accumulation and deployment is at best a result of that act.

· It is based on the fallacy that profit is equal to wealth creation or value added.

· It is extremely difficult to avoid short term thinking in a survival model which has led to serious economic ailments such as unsustainable wealth disparities, and marginalisation of other constituents particularly customers and labour. The “trickle-down” effect becomes severely impeded.

· Paramountcy of capital which is synonymous with “capitalism” leads to accounting for profit maximisation and shareholder value. It inevitably develops in its structural and operational processes, a conflict environment by seeing other constituents as exploitable resources and as costly commodities.

The survival model is synonymous with market orientation and free enterprise.

· Nothing is further from the truth. Market orientation means being driven by the needs and wants of others. The profit focus in the survival model means being driven by self-gain and your own needs. They are actually opposites in intent.

· “Capitalism” more appropriately defines a self-gain behavioural trait within free markets – a trait which has become self-destructive and a threat to freedom itself. The economic ailments it has caused have led to increasing rules, regulations, interventions and calls for bigger government.

· The above assumption relies on a misinterpretation of classical masters such as Adam Smith. While he did propose that freedom would lead to the pursuance of self-interest, he also believed that this self-interest would be mostly enlightened and driven by humankind’s instinctive empathy for each other – not predatory material self-gain.

Ensures competition and customer care.

· In the absence of a genuine intent to serve others, the survival model becomes hostile to competition, seeking either to destroy it or collude with it.

· This often leads to customer neglect.

· It also attracts further rules and regulations to govern its behaviour, which ultimately discourages new entrants, and favours big above small.

Ensures maximum productivity and efficient use of resources.

· This is partly true. But the standard macro measurement of productivity (output over input) is synonymous with profitability which again puts emphasis on the paramountcy of capital.

· Productivity is more easily achieved by reducing input rather than increasing output, encouraging containment rather than growth.

· This emphasis also prefers to grow output through mergers and takeovers, rather than through organic growth. In the process it also reduces relative input, reduces competition and marginalises other constituents.

The empathy model also conjures up many assumptions that have to be challenged.

The empathy model is leftist, socialist, Marxist and anti-free market.

  • Without a strong underpinning of empathy our world would fall apart and humanity would self-destruct.
  • As Adam Smith implied in “Theory of Moral Sentiments”, empathy is nurtured in freedom. Freedom in turn cannot flourish without empathy.
  • Empathy cannot be institutionalised in a system. Coerced empathy is an intolerable oxymoron and creates resentment and envy.

It goes against classic business principles.

  • There is no institution in society that relies more on empathy with others than business – albeit some more than others such as mining.
  • Empathy is not about charity, but about sustainable service.
  • The model relies on and has to be guided by the rules of free legitimate transaction of supply, demand and price.
  • It should embrace competition as enhancing choice in its market and in identifying more opportunities in the needs and wants of its customers.
  • A sincere empathy model is better equipped than its survival peers to adopt principles of common purpose and common fate.

It is revolutionary and untested.

  • The empathy model is followed by more companies than many believe. Empathetic behaviour has been the hallmark of great sustainable companies and entrepreneurship and is particularly prevalent in small and medium enterprises.
  • It is, however, difficult to recognise with the obsession and near exclusive focus on shareholders in accounting and in turn strategic and operational processes.
  • These processes become toxic and counter-intuitive when they start dictating purpose, and then behaviour, which in turn impede the forging of common purpose and common fate, as well as tarnishing the image of and trust in business.

We are witnessing a struggle to change the course of business behaviour, with a plethora of new demands and rules. The answer is a lot simpler and requires going back to the basics of the inherent benevolence of any business.

But freedom itself will be threatened without a serious review of the company scoreboard to reflect empathy, maximum wealth creation and sensible distribution, all of which are far more supportive of and subservient to free markets than the survival model.

Sensible distribution in particular is not arbitrary but has to meet the legitimate expectations of all of the stakeholders. The key pre-requisite is not only that distribution has to be informed by factors such as supply and demand for skills and qualifications, and be comparatively attractive to capital investment, but that these rewards in turn are linked to and influenced by wealth creation and empathetic behaviour.

Shareholder expectations have to be defined and legitimised to what is defensible. Benchmarking informed by the relative cost of and competition for capital is easily achieved and some benchmarks already exist. Shareholder expectations cannot be legitimised under the banner of unbridled maximisation. This is a wanton challenge to social trust and constantly perverts the instinctive empathetic behaviour of business.

Indeed, enlightened and serious long term investors should favour the empathy model. In time, it is conceivable that all companies will be assessed on the basic criteria of which model they live by.

The real difference between the two models however, is a philosophical one. The survival model is about being alive; the empathy model is about having a life.