A nation of dependents.

With MONEYWEB’S comprehensive coverage of and comment on Pravin Gordhan’s latest budget, I want to focus on the intriguing debate that is gaining momentum – a “welfare state” versus a “developmental state”. The 2011 budget has again placed unemployment and poverty as the key priorities of our time, and in the weeks to come experts, politicians, ideologists, vested interests and the media will feed off the policy meal that the latest budget has placed before us. No doubt the semantics on that menu will include “welfare and development”.

In essence they mean nothing more than “care and growth” – care referring to welfare and growth meaning developmental. This growth or development does not refer to economic or GDP growth. It means the development, empowerment and enablement of people. As our recent economic history has shown, they may be linked in theory but they are not the same. GDP growth is arguably fruitless if does not lead to individual growth.

The attributes of care and growth are present in all relationships of power: between leader and follower, supervisor and subordinate, supplier and customer, teacher and pupil, and parent and child. Parenting is our first exposure to power. It gives us a good insight into what power should do and the appropriate balance between care and growth, or between welfare and development.

A good mother knows exactly what behaviour is appropriate and when the relationship has to switch from care to growth. It is completely inappropriate, for example, for a mother to breast feed an 18 year old offspring. It is just as inappropriate for a mother to force feed solids to a newborn baby.

Good parents do not give in to the whims of childish desires. Discipline and elements of growth or development are always present. We know that parenting mostly goes wrong when there is a lack of appropriate emphasis on either care or growth at the appropriate time. This often happens when parents seek to be “popular” with their offspring and the child ends up being spoilt, with very high expectations and low aspirations: in other words, expecting everything to be done for them and aspiring to do little for themselves. They could take a leaf out of Bill Gates’ or Warren Buffet’s parenting book, in which they have said that their children will inherit very little or nothing from them because they do not want them to be members of the “lucky sperm club”.

In an earlier article, I discussed the critical social flaw of our time of high expectations and low aspirations. The key difference between my father’s generation and my children’s generation has been the switch from an independent, prudent and “self-help” society with low expectations, to an age of dependence, imprudence, immediate self-gratification and high expectations.

The greatest parenting perversion of all is where parents see their children as a means to an end: to be “used” for self gain. This includes crimes such as abuse and child trafficking. It also includes those who deliberately have children “as an investment in the future”, for some or other social grant from which the children themselves seldom benefit, or even sins such as using children as pawns in messy divorces or as emotional crutches. Then parenting loses its legitimacy.

The parenting model is a perfectly appropriate analogy for government. The classic definition of the role of government is to care for those who cannot care for themselves or who have no-one to care for them, and to create the conditions in which the greatest number of citizens have the opportunity to care for themselves. It is as solid a guideline as ever, but over time and probably in line with the shift from high aspirations to high expectations, as well as in response to Enronic behaviour, this ideal has become rather muddied. In the same way as parenting goes wrong when it seeks to be popular, unrealistic expectations in society are inflamed by the political popularity contest which in turn reduces the willingness of even those with means and ability to be fully self reliant. The ideal of minimal government may be gone for all time.

In the same way parents have to establish rules of behaviour for the care and growth of their offspring, so too do governments establish rules, regulations and laws. These have to be subjected to the care and growth test – do they enable and encourage people to be self reliant or to stay breast-fed adults? One set of laws that clearly falls into this category is the proposed labour laws, which many have argued remove choice and opportunities for self reliance.

But the worst perversion of government is the same as that of parenting – where the offspring are seen as a means to material self gain. In principle, there is little difference between people in government seeing their task simply as a means of self enrichment and parents who see their children as a means of self gain.

The budget is the practical expression of intentions. So I decided to examine the 2011 budget to see whether one could align it to a specific category of care or growth: developmental or welfare. Again, this is not GDP growth but individual empowerment. Of course these categories overlap quite a bit, but the publicly stated policy is to have a developmental state rather than a welfare state. I thought it would be a simple matter of calculating the percentage of government spending that can be classified as “care” and the part that could be classified as “growth”. It became an impossible task because the metrics simply don’t clearly define the expenditure and one would have to analyse the detail of each vote to determine not only its form, but also the intention behind it and, most important of all, the likely consequences.

So I gave up and decided to take a hang-glider’s view (which is a bit closer than a bird’s eye view) at the budget in the context of overall fiscal and general economic conditions.

We cannot claim to be a welfare state; although the budget continues to put much emphasis on social security and social grants. The fact is that we do not have adequate social security. There is no national health scheme (yet) and high quality free education for all is still decades away. But more people are relying on social grants than there are taxpayers supporting them. The implication is simply that we are spending like a welfare state without the means to support it, or even the full benefits accruing from it.

With the emphasis on job creation, the specific R150bn measures detailed in the 2011 budget, and against the background of Ebrahim Patel’s NGP we seem to be trying to establish a developmental state. But here there is a critical element missing, and Gordhan alluded to it in his closing remarks. We don’t seem to realise that “growth” requires toughness. We have to be informed, robust, competitive, prudent and dedicated. Unlike care, growth comes with some pain, with determination and a great degree of willingness to help ourselves. While we have to have measures to avoid exploitation, we cannot be pampered in self development. We have to have very low expectations. We have to be focused more on our responsibilities than our rights. We cannot want a job badly enough and then insist that it must meet our own definition of “decency”. We cannot expect inexorable pay increases (whether benchmarked by inflation or not) without having increased our productivity and the tangible value that we have added.

We may be witnessing a conundrum where “care” objectives are in conflict with “growth” objectives.

Perhaps a quote attributed to Abraham Lincoln says it best: “You cannot help men permanently by doing for them what they should be doing for themselves.”

Any good parent knows this.

Business turns purple.

It was a bit of Americanism in the 80’s to refer to the two cold-warring economic systems as blue for capitalism and red for communism. It was probably a play on the American political party colours but it was exported as popular rhetoric at a time of aggressive strategic rivalry between the two super powers. It was also the time when I had my most intense exposure to the business environment. The domestic and global ideological propaganda got to us all, tainting our objective assessment of the “greed is good” era.

This fundamentalism was tempered somewhat by perestroika and the collapse of the Berlin wall. Attention started to swing to blemishes within victorious capitalism culminating in near outrage at its behaviour in what can be described as the “Enronic” era at the turn of the century. Clearly, most of us have moved on from the rigid prejudices of the past.

Not all mind. To judge from some of the comments on various articles on MONEYWEB, many are still stuck in the 80’s. On the advice of my MONEYWEB mentors, I have tried to ignore these comments, but old fashioned courtesy has prevented me from progressing much further than using pseudonyms and personal attacks as the filter. One that missed this process was a response to what I termed the “schizophrenic” behaviour of business bad boys. This commentator rationalised and defended their acts as a necessary evil for survival in South Africa to counter the debilitating effects of AA and BEE. Apart from the fact that he/she missed the inclusion of global players in my examples of miscreants, the defence of contemptible behaviour is puzzling to say the least, especially when innocent folk are the ultimate victims. But I am sure he/she is not alone in a secure cocoon of outdated slogans. It’s a tough thing to be open-minded and admit to being wrong. Ask Alan Greenspan.

No point in asking Milton Friedman, though, even if he were alive. At the height of the Enronic period and before his death in 2006, he vehemently opposed the need for business to be involved in any form of “social investment”, proclaiming that the sole purpose of business was to maximise profits. It seems as if his legacy is still very much alive. So it would not be surprising that most would respond with an emphatic: “No!” if asked “whether business should be prepared to compromise shareholder value to align its interest with society”. The same response is likely to a question whether governments should intervene to ensure responsible business behaviour.

Or would they? Some? – Yes. Many? – Perhaps. But most? - No!

In fact, most informed adults in 23 countries surveyed for the 2011 Edelman Trust Barometer have stated the opposite (above graphic). The blue bar reflects responses to whether shareholders should be prepared to compromise shareholder value in society’s interest; and the overlaid purple bar their responses to the need for government intervention. The U.S. is always interesting because of the position it holds as the advocate of capitalism. Here 85% support business social alignment and 61% government intervention. The disparity in responses from Germans to the two questions is interesting and confirms disenchantment with European bail-outs.

The volatility of trust itself means that one must take care not to rely on one snapshot in history. But if I compare the informed views of the 80’s to those that have been expressed over a number of recent years, then there is no doubt that the red and blue of the past have become distinctly purple – both ideologically and in practice, and irrespective of a number of even highly respected commentators being dragged kicking and screaming into this new reality. Slogans and labels are simply no longer useful. Indeed they are counterproductive.

A new business model is evolving, both by voluntary response to social demands and by a legislative framework. It has always been good business to be responsive to society’s needs. It has never been a good thing to have to ensure this behaviour through laws. Sadly there is mostly no alternative.

The Edelman researchers define this new model as having moved from being focused solely on profit to having profit with purpose, engaging all stakeholders and being open and transparent.

The respondents (above graphic) have again ranked customer focus as the most important element in corporate reputation. Financial returns were ranked the lowest. It seems that even having a widely admired leader will not swing it for a company, although arguably such a leader would ensure that the most important other elements would be in place.

Customer focus and being service driven has rightly been voted the most important of all. I have always argued that service is the true purpose of business and that profit is a vital means to that end. By its very nature, a service driven organisation will be responsive to society generally with the odd exceptions such as tobacco.

Other interesting features of trust in companies are:

- CEO’s have moved up considerably as credible communicators of company affairs. But they still rank 4^th below (1) Academics and experts, (2) a technical expert from the company and (3) financial or industry analyst.

- Most people seem to use an on line search engine as the first source of company information and the most popular second source is an on line news source such as MONEYWEB. Print ranks third, followed by broadcasters, the company website, friends and family and the social media last.

While I share the scepticism many have about the reliability of opinion surveys, Edelman have been in the game a long time and at the very least have been able to form authoritative views on trends. There’s no doubt that business has evolved from an aloof “get on with business” actor in the social scene to one that is becoming more involved in and sensitive to society’s needs.

Some are simply reluctant law abiders. Others are adept at spin and see trust as a means to an end. But I believe many (perhaps even the majority) really do care, are passionate about what they do and want to be good corporate citizens.

But it really makes no difference whether they want to or not, whether it is sound economics or not and whether it fits into our Smithian or Marxist paradigms or not. Society itself will dictate the rules and preferably in such a way so as not to kill the golden goose. Conversely in can be argued that business will destroy itself by not being socially sensitive.

Business is an inanimate and inorganic entity. People bring it to life. Business cannot stand apart from a wider social conscience and the values that drive that society. It is hypocritical to expect business to follow a moral compass that we are not prepared to follow ourselves. There’s the rub.

When Trust Goes.

No society can tolerate a lack of trust for too long. This is one of many lessons unfolding in the unrest in the Middle East, North Africa and Europe. It’s not about the vote. The right to vote is no guarantee of trust – only the chance for those in power to earn that trust.

Trust will be eroded to the point where citizens take to the streets when governments are not tangibly responsive to people’s needs, fail in the delivery of services, cannot enable a milieu where aspirations can be pursued, and are unable to contain envy and resentment that follow wide inequalities. Sound familiar? These shortcomings can happen in democratic societies as easily as anywhere else.

Of course, in many cases governments don’t have the resources or ability to meet civil expectations and all the stone throwing could be in vain. The real question is the extent to which they contributed to creating those expectations in their pursuit of popular support.

More than anything else, trust is the real fabric that holds a society together. That fabric spreads through virtually every facet of our lives to strengthen the tapestry of social co-existence. It has to exist between individual people, between groups, between individuals and institutions, electorate and government, business and customers, teachers and pupils and wherever we interact socially and in transaction. The stronger that fabric, the less chance there will be of the tapestry unravelling. Yet we play with it as if it is robust: rumour mongering, making false promises, relying on caveat emptor and legal recourse rather than our word and a sense of honour and the occasional act of kindness.

Trust is mostly very fragile. It is fickle, volatile and erratic. It is one of those human traits that confirm how complex and unpredictable we are as a species. Ultimately we give or withhold trust on our perception of whether the other has our interest at heart. That can mean many things at many different times. It makes the measuring of trust on a national or global level virtually impossible, let alone achieving a sensible interpretation of the data. This is a failing of all “opinion surveys”, especially those dealing with emotive issues like trust. Yet, given its importance to our lives, it can only be hoped that in time and with greater sophistication and comprehensiveness we can produce surveys that will come closer to reality.

In the meantime and with something of a health warning, one cannot ignore the annual research findings of Edelman, the most quoted in the world in this field. My real beef with Edelman is the exclusion of Africa. The survey is done in 23 leading countries and with a sample of more than 5000 “informed” adults. Its latest Global Trust Barometer says some quite revealing things against the background of civil unrest.

It is fair to conclude that given the informed nature of the respondents, the responses themselves will tend to be more rational and tempered. This implies that because it is an emotive issue, the level of distrust among the less informed masses will be even more intense.

 

Edelman concludes from the above graphic that trust in business has “stabilised”. I interpret the findings as showing a further decline, especially in the developed economies. In fact in most of the mainstream economies apart from Germany and France where it is still neutral to negative, the number of people who trust business to do the right thing has fallen. In both the United States and Britain it has declined to below half. It is more than a little ironic that in the bastion of capitalism, the United States, fewer than half of the informed public trust business to do the right thing and in China, the former bastion of communism and only a recent entrant into the free enterprise fold, more than 60% trust business.

The champions of greater government control and intervention may rub their hands in glee at these findings. But governments are still trusted even less than business to do what is right.

Apart from Brazil, China and marginally Japan, less than half of the informed public in the countries surveyed, trust governments to do the right thing. Germany has shown a sharp decline in trust in government, despite a strong improvement in trust in business. This is attributed to public distrust of European bail-outs. Trust in government in the United States has dropped to 40%, which is on par with Russia.

The results for China and Brazil are quite astounding…to the extent that the accuracy of the Chinese finding has been questioned in China itself. It may be partly explained by the focus on “informed” respondents who may have lost some touch with grassroots sentiment. But it could also be explained by both countries having fairly recently “freed” their economies. The restrictive practices of the past and the very low expectations held by the average person are still fresh in memory. So there is a honeymoon giddiness and flirting with, as Paul Merton’s BBC programme on China put it: “capitalism on steroids.”

On sectors, the Edelman Barometer shows trust in American Banks down a startling 46% to 25%, while trust in British banks slumped 30% to only 16%. On the other end of the scale, 90% of Chinese and 87% of Indians trust their banks to do the right thing.

 

But before we in the media start pointing our fingers at any sector, the above graphic shows an appalling distrust of the media in the developed world. Indeed, banks are trusted more!

Despite the inescapable shortcomings of the survey, there are some absolutes that can be argued. The inter-country comparisons show that trust is not inseparably linked to grand notions such as living standards, human rights, labour rights and the right to vote. Average incomes in Brazil and China (where trust is the highest) are way below that of the U.S, where trust is much lower. China also has no political freedom and an appalling human rights record.

Trust is far more strongly influenced by unrealistic expectations, an absence of hope and the squashing of aspirations. Give people some hope for the future with a healthy dose of self help aspirations and trust is restored. With it too comes a good measure of personal serenity. These things are more easily found within ourselves than sourced from others. They are seldom found in throwing stones in the streets.

Integrated Babbling.

For a while now the business reporting environment has been moving from nudge to shove and from suggestion to prescription. It illustrates again how behaviour creates systems, structures and policies. In turn, these policies often have unintended adverse consequences because of an inability to accurately predict human responses.

Integrated company reporting is the latest manifestation of this syndrome which is part of the wider social disenchantment with business behaviour since the “Enronic” scourge at the turn of the century, and the hype around governance, transparency and sustainability that followed it. It is ironic that a full 8 years after Enron, and despite all the governance ballyhoo, poor judgement on the part of financial institutions led to the biggest financial meltdown since the great depression. This has given more pencils to the architects of regulation.

A discussion document on proposals to enforce integrated reporting, as envisaged in King III was launched last week. It is intended to consolidate the growing number of separate accountability documents into the company annual report and reconcile interaction between them. This covers the traditional annual reporting information and others such as the sustainability report, remuneration report, risk disclosures and the ethics statement.

I share David Carte’s scepticism. Few will deny the need for a radical shift in business behaviour, but before one rushes into new rules and onerous prescriptions, one should be fully aware not only of the unintended consequences but the efficacy of the measures themselves. As David suggests, too often the designers have a vested interest in the product and the new requirements hold the threat of red tape overload. Indeed it is valid to ask whether King is not overdressed.

Of course, prescriptions can never guarantee compliance as we saw with Cynthia Caroll’s appointment to the Anglo Platinum chair. At best the Integrated Report will encourage companies to “think on these things” and perhaps promote a kind of “fake it until you make it” milieu. But it has severe shortcomings as a pro-active tool for convincing stakeholders and the broader society of a company’s goodwill. Ultimately that will be determined by customer service and public behaviour more than statements in a report.

For one thing, the value of the annual report itself is often overstated. It is not a popular read even in its target market. The media seldom use them as a source of news but occasionally for background information. Most of the information is historic and if the company has something really important to say, it would not hold this for an annual report. This is particularly so if the information can affect the share price. The time and number of people involved in using the information before publication creates too many opportunities for insider trading.

So far there’s also been limited media and broader interest in the other instruments such as sustainability reports.

The primary interest in company annual reports is from the investment community. Even here, the efficacy of the annual report is often questioned. Interest is still largely focussed on the numbers that give a historic perspective. An American study showed that most of the respondents did not find the directors’ report and analysis sections very useful. The chairman’s statement too was found to be useful only if it contained tangible information about future prospects, which is a requirement under the Integrated Report. In turn, the reliability of this information will clearly depend on the general stability of trading conditions.

Additional information has seen company annual reports evolve from the provision of some statutory and mostly statistical information to multi-page glossy publications with narratives, photographs and graphs. Recent research reported in the Investment Analysts journal confirmed that this has opened the door for substantial editorialising. “Managers use accounting narratives in a self-serving manner, rather than reporting performance objectively”, the writer said. King III tries to address this by insisting on independent verification which is much easier said than done.

There are many other issues that question the effectiveness of the annual report such as accessibility and more importantly trustworthiness. History is full of examples where even audited information simply did not reveal the full truth. Company information sources, including executive statements have always ranked low in trust amongst information sources, according to the Edelman Trust Barometer. Indeed, this barometer shows that less than half of the respondents in the United States and Britain trust business to do the right thing. As long as people distrust business, they will not trust what they say. Trust has declined in these two countries despite some years of recognising the importance of a stakeholder rather than an exclusively shareholder approach.

Then there is the unsolved problem inherent in the Integrated Report of reconciling the quantitative with the qualitative, the numbers with the narrative. This problem dogged the Triple Bottom line, and simply remains unresolved. There is a huge difference between integrated reporting and integrated accounting.

Above all, the most important drawback is one of intent.

The concept of sustainability is not new. In the 1980’s it was standard management school teaching that the strategic intent of any company should be “short term profitability for longer term wealth creation.”

A vastly more competitive environment for capital, investor appetite for quicker returns, uncertain times, shorter horizons and executives with even shorter term personal goals, have created a conflict between profit maximisation and sustainability - as the schizophrenic behaviour such as the B.P. oil spill, Toyota’s quality problems, Pioneer Foods’ bread price collusion and the construction bid-rigging has shown.

Will the Integrated Report make a difference?

Irrational Humanity.

It may be a product of overindulgence in my favourite pastime of reflection, but I sense these days that people seem to respond less to situations in a manner one would expect. In doing some reading for last week’s article, the thought struck me that perhaps human beings are not as rational as we think. I hesitate to use the term “irrational” because this implies a degree of mental instability, but at times it seems to border on that.

I have been struggling for some time to employ part time help from a large pool of unemployed in the area. After months of experimentation with better than average pay and amenable working conditions I have still not found the formula to counter a widely followed custom here where people work for a few weeks, perhaps even a month or so, and then take an extended, unannounced holiday.

The example is perhaps trivial and anecdotal, but it serves to illustrate the millions upon millions of transactional relationships that make up the global economy where, at the core, lies our understanding of each other and our definition of human nature. The conundrum is whether the behaviour itself is irrational or whether the expectation of a different behaviour is irrational. It should not be a surprise that very often our expectations of the other based on our understanding of human nature differs from the outcome. At the time of writing there were nearly 7-billion definitions of human nature.

The real question is how predictable are human beings? This is not an academic question. It has been the most important component of economics and social structures since the earliest days and strongly informed the writings of amongst many others, Adam Smith who is credited with being the father of Capitalism. Despite his intuitive genius and humanist motive, Smith arguably knew far less about human nature than we do today. More importantly, John Muth’s development in the 1960’s of the theory of rational expectations created the most important driver in economic modelling, which in turn shapes policies, systems, structures and measurements which affect our daily lives. Take away rational expectations and policy loses its grip while systems lose their efficacy.

Yet, it has become increasingly clear that we have only scratched on the surface in our understanding of human beings and of humanity itself. When we get it wrong, it can have some disastrous consequences. The case of Alan Greenspan deserves repeating. There are many, including a recent Federal commission report that put the blame for the 2008 financial meltdown squarely on his shoulders as Chairman of the American Federal Reserve. Time Magazine ranked him third amongst 25 people most to blame for the crisis. Most agree in retrospect that he kept interest rates too low and failed to regulate derivatives and excesses in the financial markets. This is all old hat by now, but the lasting legacy of that time and perhaps of Greenspan himself is the danger of preconceived beliefs about human responses. By his own admission, the flaw in Greenspan’s thinking was that “financial institutions didn't protect shareholders and investments as well as I expected”.

And perhaps more importantly: ``we cannot expect perfection in any area where forecasting is required. We have to do our best but not expect infallibility or omniscience.''

One can understand Greenspan’s frustration. It was natural to assume that given freedom to act in the interests of their investors financial institutions would follow the Buffett philosophy on long term sustainability. It is also too simplistic to blame it all on unbridled greed – some would argue that a measure of greed is an essential component of a Capitalist economy. As a product of the age of deprivation, Greenspan shares with many of that era a belief in prudence, modesty and a moral compass.

The problem is much deeper than greed: there has been an understandable and fundamental shift in human behaviour. The pace of life is so much faster today than it was in the days of my youth or even early adulthood. Despite greater prosperity, we have become more agitated and insecure. Horizons are shorter, so out the window go patience and prudence, making way for immediate self gratification and the quest for a “quick buck”. We don’t have to look much further than companies where reporting cycles and shareholder expectations have increasingly been focussed on short term profitability at the expense of long term sustainability. King III, sustainability reporting and the just announced “integrated reporting” are responses to that. They seem to have negligible effect so far.

It is also easier today to give effect to less rational consumption and acquisition. On line shopping, more seductive and broader advertising, quick and easy money transfers and easier credit, all create the conditions for greater impulse buying and quicker responses. I can remember a time when you needed a 25% deposit and a 36 month repayment period to buy a car. This automatically reduced an impulse buy, giving you time to move from a Porsche fantasy to a Volkswagen reality before committing yourself to a purchase.

The same goes for investments. The quick buck syndrome is the breeding ground for schemers and fraudsters, but even on a legitimate level it is easy to by-pass solid expert advice and to follow an irrational herd via on line trading and half baked, homespun networked views. One could argue that these are desirable features of a modern economy, but one could also argue that given the human behaviour it facilitates, it’s a bit like having well oiled wheels on a runaway truck.

The gap between expectations and reality is much wider than decades ago. Expectations may have been dampened somewhat by the meltdown but there are still symptoms of “irrational exuberance”. This makes them unpredictable and if you multiply them by the vast increase in the number of people, each with their own expectations and aspirations in a world where they can more easily express them, then you are dealing with a data base that no known model can capture for sensible and reliable assumptions.

Add to the mix, random events such as floods, earthquakes, strikes and social unrest, all of which have their own impact on the real economy as well as on human expectations, then current models are rendered more inaccurate and suspect.

The exciting thing is that this is being recognised and work is being done to develop a much more comprehensive and all encompassing model.

But in the meantime, the consistency we seek does not lie in computer models, measurements, structures and systems, but in a return to universal values that make us more trustworthy and reliable as human beings. They include honesty, fairness, care for each other, generosity and integrity.

Unfortunately, these are not things you can legislate for. You cannot force people to be generous – that’s taking not giving. You also cannot coerce compassion. That’s a contradiction in terms.

The Broken Link.

If the title sounds familiar, it is because I borrowed it from the pioneering and award winning documentary produced for Springbok Radio in the 70’s by broadcast doyen, the late Bryan Chilvers. The programme covered the generation rift that had developed in society at that time, demonstrating again the old cliché that “the more things change, the more they stay the same.”

One can’t help thinking, though, that this time there are many more broken links than one between generations, which is endlessly repetitive in any case. There is some inkling of this in an unassuming French “book” Indignez vous (Cry Out) whose 13 pages of text have smashed all publishing records in France, selling more than 600 000 copies in the first 3 months. It has been written by 93 year old French resistance hero and activist, Stephane Hessel who urges people to recapture the spirit of war time resistance against the Nazi’s to challenge what he claims is today’s market tyranny. Against the background of popular protests against austerity in much of Europe one can’t avoid seeing Hessel’s pamphlet as striking a chord of popular discontent in many parts of the world.

The broken links are many and profound.

The link is broken between population growth and what the planet can sustain. In turn this has broken other links such as that between consumption driven prosperity and sustainable resources; between growth and bio-diversity; and between human activity and the balance in nature.

The link is broken between prosperity and contentment. Despite an 8-fold increase in prosperity in the last 50 or so years, there has been little increase in human contentment as argued by Richard Easterlin. This may be because of our difficulty to determine what makes us happy as individuals, or even the definition and measurement of contentment itself. But economies clearly fail in an important respect if they do not enhance social contentment, whether perceived or not.

The link is broken between economic systems and equitable wealth distribution. As the latest World Economic Forum report has recognised, it is no longer an ideological or emotive issue when it starts to ferment social disquiet. Classical theorists will find it difficult to present rational arguments to an irrational mob, whether at the polls or in the streets. The truth is that there is no solid market argument for the huge income disparities. Failing to recognise that envy based on comparisons is the main source of human discontent is not much different from Marie-Antoinette’s famous “let them eat cake” remark.

The link is broken between expectations and reality. This deadly economic virus is still being nurtured. An example is the promise in the New Growth Path to create 5 million jobs in the next 10 years. However laudable the intent and perhaps even the plan itself, pegging a “big, hairy, audacious goal” to something so exposed to market uncertainties is needlessly flirting with social discontent. Another is the let down recent matriculants must feel when 9 out of 10 of them can’t find jobs within a year or more.

The protests in Europe are a reflection of unrealistic expectations. But it is more than the let down from the “good years” which in turn were based on another broken link: that between prosperity and tangible wealth creation or the froth generated in a cappuccino economy. It is clearly based on an expectation that governments can do something about it: like borrowing to roll over debt – which most of them have done. The expectation that there won’t be a future price to pay in greater austerity or inflation is unrealistic. It is also a tab that we may have to pick up sooner than we think.

This shows that the link between popular politics and sound economic policies is also broken. Some may argue that it has never existed and is impossible. We have seen time and again that the popular thing is not always the right thing. We have come to understand democracy as being about elections rather than about governance, transparency and accountability and the ability to make the right rather than the popular decision during tenure, even with a well informed electorate.

The link is broken between economic models and reality. I reflected with interest on the usual medley of annual economic reviews and forecasts this past month or so. They range from cautiously optimistic to a touch of euphoria about the year ahead, with one or two even declaring the end of the recession. Apart from an occasional reference to “Black Swans” most seem to have been written out of the context of the “scary world” that Felicity Duncan so aptly extrapolated from the WEF report.

This is understandable. According to the Wall Street Journal, economic models simply have not come to grips with that erratic, unpredictable, complex and most important component of all – human nature. It’s a component that simply cannot be reduced to a mathematical formula and it has made attempts to model the economic future inaccurate at best and futile at worst. Very few of us understand ourselves, let alone the nature of others. A growing realisation of this defect is bound to challenge our understanding of all economic theory. It will also challenge our stance on systems, measurements, policies and ideologies all of which are based on preconceived ideas of human responses. This need not imply rejecting proven best practices, but a more comprehensive understanding of our world and human responses will help us avoid unintended consequences: such as labour laws that destroy jobs, social grants that encourage layabouts, and interest rate cuts that fail to stimulate job creation.

Let us join the optimists who proclaim that with a bit of luck, the absence of major sovereign debt defaults, fewer floods, tsunamis, earthquakes and other displays of nature’s wrath, we will “muddle” though the next decade or so. But in the meantime, this is also a time to “let a thousand flowers bloom” as Robert Johnson of the Institute for New Economic Thinking put it. Such a process will be infinitely enhanced by extending economic modelling to seriously include other disciplines such as psychology, the social sciences, science itself, religion, and medicine - indeed all branches of knowledge. The existing firewalls between these disciplines have to be dismantled completely.

Such a vastly extended model will come closer to the truth: that economics is much more complex than what we have thought, perhaps not in basic principles, but certainly in the human dynamic that drives it. Yet it is simply unthinkable than human kind with its superior intellect, vast accumulation of knowledge and the information revolution, cannot find solutions.

It is not too outlandish to say that economics as we know it, is itself broken and we cannot rebuild new structures on broken foundations. Returning to old ideological paradigms and assumptions will not do. We should be pursuing new holy grails rather than protecting old holy cows.

The more things change, the more we have to change with them. Einstein’s definition of insanity is “doing the same thing again and again and expecting different results”.

But there is one constant: it is the one that made us the greatest species on the planet - the capacity for compassion.

THE BONUS BUBBLE.

It’s that time of the year again: bells, baubles and bonus bubbles. I’ve called the latter bubbles because they are not unlike those much feared fragile things that happen in stock and other investment markets: inflate to catch the attention of all and sundry and then … pop!.

For many, bonuses are a routine “13^th cheque” factored into “entitlements”. I employed a day worker for 2 days a few December’s ago to help clear some refuse. After paying him the agreed rate plus a bit extra, he became extremely agitated at not being paid double for a “krismis” bonus.

Then there are those bonuses based on “merit”, leaving some angry, most petulantly envious, and a handful a bit embarrassed by their good fortune. Very few, if any, see their bonuses as the outcome of a deliberate effort by themselves to improve performance during the year: it’s the luck of the draw based on a tedious annual assessment where things are said that should have been dealt with routinely and regularly during the year. Then there are those that follow good profit performances as a gesture of gratitude and sometimes on top of the “entitled” 13^th cheque or incentives.

Executive bonuses are in a class of their own and I dealt with them last week.

In writing the “Planet of the Apes” article a few weeks back and in a general review of the theme on incentives and fortune sharing, I recalled some strange quirks in the field of bonuses. One that caught my eye recently came from Australia.

The owner of the Yabulu Nickel refinery, Clive Palmer was so enamoured with the company’s performance this year that he has given the 800+ staff some incredible goodies: the best performing 55 got a Mercedes Benz each, 700 a five-star Fiji holiday for two; and the worst performing 55 received week-ends at a 5 star luxury hotel. Incentives have worked well for Palmer, who was able to turn around the previously BHP Billiton owned refinery from a loss into success on a staff incentive drive.

Clearly there’s more to it though. Palmer has been able to get everyone enthused and involved with the saving and sustainability of the venture. The size of the rewards reflects a large measure of “fortune” sharing with the variable part of the total package higher than the norm. Its sustainability, of course, is going to depend on staff expectations and the extent to which these can be tempered by the involvement that made the payouts possible in the first place.

I saw something similar, although on a much smaller scale, while consulting to a gold mine on the West Rand some years ago. I arrived one morning to find the General Manager very animated. He had received an envelope with about R40 in cash. So did everyone else at the mine. The camaraderie that day was tangible and transcended all hierarchies. This mine had a simple bonus calculated quarterly on gross revenue, which was close to a value-added measurement. The results were shown on a huge “thermometer” at the entrance gates, and when it “spilled over” everyone knew a payout was due. This seldom exceeded R100. It was a unique “common effect” trigger which became part of my thinking on fortune sharing, and at the time I thought it was an ideal involvement tool.

A few months later, I arrived at the shaft to find the place in a mess. Rubbish was strewn everywhere. I was told that news had leaked that management were mooting staff cuts to reduce costs and that the surface cleaners were the first in the firing line. So in solidarity with their cleaning comrades the surface was trashed to preserve jobs. It makes one wonder whether municipal workers have the same thing in mind during strikes. It reminds me of that Bastiat satirical sketch in which the 19^th century French economist suggested that all workers should tie their right hands behind their backs because it would make work more difficult. This would create more work and in turn more wealth.

What the mine incident taught me was that involvement cannot be achieved by incentives alone, even if they are structured to affect everyone equally. The key to involvement is more about sharing understandable information than it is about sharing wealth.

At another mine some months earlier, incentives for underground workers were structured to promote production. The base was meters mined very much like my father’s high speed developing days. Month after month teams were called into “lo-offees” to receive their production bonuses. Until out of the blue, they were all called in and retrenched. Both the gold price and the ore grade had dropped and the bonuses being paid were simply unaffordable, leading to the closure of the shaft.

Fruit farmers here have a similar problem. They pay pickers according to volume, leading to an indiscriminate handling of the fruit that causes bruising which surfaces days later. So they have to employ overseers that cost them as much as the pickers themselves. A team of pickers often contains a group that, to avoid being embarrassed, put peer pressure on the star performers to curtail their efforts. Others again, having earned enough to fund a few days of “moss” consumption, simply slack to zero effort or disappear to re-surface at another farm.

I did some work at one of those curses of modern business – a call centre. The incumbents were paid according to number of calls handled with little regard to the content of the call. Needless to say it had a devastating impact on client service, and the system was changed. One financial service company I know of stopped paying their agents commissions on products but rather bonuses on clients recruited and maintained. There was also an interesting twist on executive bonuses. It was pooled and the group had to decide on each share.

The need for a thorough understanding of the workforce before structuring reward systems is a universal rule. Our class at the Oxford Centre for Management Studies was exposed to a case study in which an electronics component manufacturer in a small Scottish town paid the assemblers a bonus over a certain quota of components produced. It lifted production for a while but quickly returned to the standard. Apart from the same negative peer pressure, they also discovered that the employees, mostly young girls from the village, lived with their parents and had to hand over their full pay without benefitting from the bonus.

Then there’s Keith, a Johannesburg accountant who fled the Gauteng rate race to move to the Overberg. Pursuing his first love of gardening, he bought an ailing garden service and within months was not only able to overcome local prejudice against “inkommers”, but had the books substantially in the black. He provides excellent service through personal supervision and by ensuring that each of his team (of which Jan Rasta was one) shares his passion for the job. After each job, Keith runs through the financials with his workers and where every cent goes. He then includes a share of the weekly profits in their pay.

It is dangerous to relate all performance to a “work ethic”. I would challenge any Korean worker to perform better under the conditions that our mineworkers have to -- conditions of which I have first hand experience.

A willingness to give the best of oneself is nurtured by much more than pay or incentives. It has to include a measure of virtuosity, a common contributory purpose and a sense of common fate, involvement, information sharing and leadership styles based on care and individual development.

Our largely Anglo Saxon inspired bonus systems have arguably become dysfunctional and counter-productive. “You get what you pay for”, they say. Often it is not what you expect.

Wishing my readers a festive season filled with contentment. May your choices in the New Year be the correct ones.