Wednesday, February 22, 2017

Believe it or not

What happens when information becomes increasingly less credible?

Fed; filtered; fake; false and alternative facts are words increasingly being heard in relation to news and other information sources. Even the recognised bastions of credibility and authority are no longer immune.

I have spent most of my life involved in and close to news. I cannot remember a time when information conveyed by popular and niche media has been received with such scepticism. This could be healthy if people were encouraged to do some cross checking, but that seldom happens and most prefer to either accept or reject depending on their own drawing bias. For a split second, however, even false information is believed and when it is proved false, the effects linger. In the end, divergent views are cemented and even polarised, creating greater disharmony when it should be doing the opposite.

There are many reasons for this, including the explosion of information technology and information overload. The results are predictable: purveyors lean towards immediacy, populism, headline hysteria and a bit of truth stretching; while audiences or readers orientate towards information that confirms or does not challenge their beliefs. A free flow of credible information is the thread that holds the social tapestry together and the ultimate nutrient for a functioning democracy. Today it is more likely to tear it apart. When knowledge is no longer a guarantee of enlightenment and insight, distrust becomes entrenched not only of sources, but of institutions and each other.

In a recent article (see here), I touched on the implosion of trust in the establishment globally. One of the biggest declines was trust in the media. Of the 28 countries measured in the latest Edelman Trust barometer, the media was distrusted in 82% of them and is at an all-time low in 17. (See graphic here.) 

At a 39% trust score, South Africa falls into the category where most distrust the media. Yet trust in the media is still significantly higher than in countries such as Sweden, France, the U.K., Japan and Australia.

A similar pattern emerges with general trust in the institutional categories of government, business, media and NGO’s. (See graphic here). There has been a sharp decline in trust generally in what Edelman describes as a “World of Distrust”, and its global trust index shows that less than half of the population trust the establishment they live in.  Trust in the United States was just over half, but that was before the election of Donald Trump as President. Trust in South Africa was measured at 42%, the same as Australia, and better than countries such as Germany, France, U.K., South Korea and Japan.

But at only 15%, South Africa still has the lowest trust in Government of all of the polled countries. (See graphic here.) At 76%, China heads the pack of most trusted governments, followed by the U.A.E., India and Indonesia.

If N.G.O’s are often seen to be doing what governments should be doing, then by and large they are better at it. (See Graphic here). At 53% globally, they head the list of most trusted institutions. Of course, that is still a rather low score and has declined over the past year; indicative of the paltry state of trust in the establishment world-wide.  South African NGO’s fared better than the global average at a 58% trust score.

Business too is generally trusted more than government and the media. (See graphic here.) Although Edelman says it is on the brink of distrust, it still has a trust score of more than half. Of course, if you turn that around and say “nearly half distrust business” to do the right thing, it becomes another frightening indictment of business behaviour, most of which, I would argue again, relates to how business sees its purpose in society.

Trust in South African business has declined by 4% in the past year to 56%. In part, at least, that may be attributable to the ongoing anti-business rhetoric that has become politically popular. But its trust score is still better than the global average and there’s a huge gap between that score and the 15% trust in government. What the populist politicians don’t seem to recognise is that tearing down trust in business is not going to enhance trust in them, and indeed will merely add fuel to disillusionment and ultimate dissent.

After that statistical refrain, let me add that in the last few years the validity of opinion polls has been severely challenged. They are useful only to the extent that they can show trends and comparisons, gaining weight with the sample size, regularity and longevity. But even comparisons, such as the country references in this poll, could be suspect because different communities could have different standards by which they judge trustworthiness.

What was more useful in this poll was the question put to the respondents on what business can do to regain trust. It clearly has an opportunity to influence a country’s destiny and secure its future role by enhancing that trust by: (Ranked in order. See graphic here.)

1.     Treating employees well.
2.     Offering high quality products or service.
3.     Listening to customers.
4.     Paying fair share of taxes.
5.     And following ethical business practices.

Judging by responses to my previous article on the shareholder-value driven model, there are some who believe that the best way is business as usual and that the benefits of this model must simply be promoted more convincingly. Only the na├»ve can truly believe that a model so singularly focussed on self-enrichment of one stakeholder often at the expense of others can engender trust. Ultimately society will dictate in the only way it knows how – “radical” economic transformation through more laws, restrictions and prescriptions. And that by an institution that is even less trustworthy.

For business it’s more than about being nice. It’s about survival.

Tuesday, February 7, 2017

A monstrous model exposed.

The lie that tarnished the best social system humanity has ever created.

Not all lies are based on deceit and malevolence. Sometimes they are based on seemingly valid assumptions but then become a lie when they are fanatically promoted as a universal truth despite clear evidence to the contrary.

There is no better example than the 40 year persistent defence of and slavish adherence to the shareholder-value driven business model; once described by American business leader, Jack Welch as “the dumbest idea in the world.” The model proposes simply that the sole purpose of business is to maximise shareholder value. It found its intellectual and ideological roots in the teachings of American Nobel laureate in economics, Milton Friedman, and is still widely followed, especially by large quoted companies.

But it has had its critics from its earliest days. The latest has been published by the bullhorn of capitalism, Forbes Magazine, in an article by author and columnist, Steve Denning, titled: Resisting the Lure of Short-Termism: Kill 'The World's Dumbest Idea'. It is one of the most comprehensive indictments of the model I have come across and I urge you to read it at this link.  He is not the first. Some years ago Business Insider did a similar analysis, which I captured in a Moneyweb article “Profits of Doom.” Regular readers of this column will be aware that it has been a theme of many of my columns from the beginning.

Apart from Jack Welch, there have been many other critics and Denning mentions a few in his column. In addition, within a decade or so, we saw prescriptions and processes being developed to address the side effects of putting companies on profit steroids, especially short termism. These included the Triple Bottom line, Balanced Scorecard and accounting protocols trying to force business to broaden its view and adopt ethical standards, good governance and sustainable procedures and controls. In South Africa, we have had the King reports. While they obviously have their merits and no doubt have dampened many excesses, they do not, and nor are they expected to change the primary strategic direction of the company. In the end they do little more than treat the side effects of addiction and perhaps dampen excesses.

With the exception of King IV. While the previous King reports address business models, King IV defines a different business world – one where the overall task of business is creating value for all. Again, this is not really new. It was the predominant view before the 80’s. One should also add that not all companies have followed the steroid addicted model, and for most smaller to medium enterprises, it does not make business sense. To some extent this addresses a possible counter argument: that despite its blemishes, the model has promoted many advancements and prosperity. To this I would respond that this is not because of the model, but rather in spite of it.

Adapting to this new business world is a lot easier than one may think, and certainly does not need a huge turnaround intervention. In recently completing the Contribution Accounting Methodology (see here), which is based on decades of exposure to economics, organisational theory and my own consulting work, I was struck by how much of such a transformation is simply doing what comes naturally; is easily understood by all stakeholders, and still makes sustainable business sense. It can be captured in 4 brush strokes, the fine details of which are fully documented in the methodology material.

There should be absolutely no ambivalence that the purpose of a company is to serve its customers. This is rooted in existential logic and the natural laws of transaction. Again, this is not a huge leap and has been endorsed through the ages by great entrepreneurs, companies and organisational theorists. It strikes me that detraction from this truth is because we make no distinction between shareholder interests and company purpose. They are not synonymous. Individual stakeholders may have different motives for being involved in a company, including, but not limited to, maximum profit. But the purpose of the business itself remains creating value for customers. Obviously reconciling individual motives with that purpose has many advantages, including entrenching authenticity.

Nothing is more counter-productive than trying to propose a hierarchy of stakeholder importance. It is divisive and creates conflicting interests. Being loyal to its purpose, a company would clearly see relationships with customers as by far the most important. Stakeholder cohesion and inclusivity are established through a common purpose of service that translates into wealth creation; and a common fate which impacts on distribution such as profits and pay.

For the most part this redefinition would merely imply changing direction. If it is customer driven, it focuses on contribution to its market; if it is profit driven, it focuses on reward. Switching focus from reward to contribution has a fundamental impact throughout the organisation, including improved and more sustainable rewards. Strategy should rest on the three pillars of maximum wealth creation and the 2 of optimum wealth distribution. (See graphic here.)

The “value” in “creating value for all”, is captured in one very simple metric called value-added. It is the outcome of creating value for customers, and is the source of all rewards. It is the centre of an operational Contribution Account which portrays stakeholder inclusivity and a simple presentation of wealth creation and distribution, and from which one can extrapolate all the standard accounts. It embraces the measurements needed for 3BL, BS, and the King prescriptions.

The direct and indirect harm done by obsession with the shareholder value approach has been substantial. Denning gives a superb account of this in his article. For me the biggest harm has simply been the assumption that this monstrous model is an unassailable reflection of free enterprise itself. Criticism of it leads to all kinds of leftist labels. That lie has gone a long way to tarnish the true spirit of free enterprise and its standing in popular perceptions.

It is an aberration and has proved to be the world’s dumbest idea.