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.