THE GOOD GUYS.

There are great spirits in business whose behaviour and integrity have been beyond reproach. I did them no justice by falling into the conventional trap of generalisation, collective “trashing” and acknowledging institutions as personae...the same trap the distinguished Alan Greenspan confessed to have fallen into, albeit from a different perspective and with much greater consequences.

In the very article that I questioned the concept of labour as an institution, collective, or resource, I did the same to “capital”, including global and shareholder capital. These concepts have to be evaluated on the same criteria as labour, as “individuals: each with their own cultural background, fears and insecurities, hopes and aspirations, intentions and motives.” In earlier writings, I cautioned against laudable concepts such as “free markets” and “free enterprise” being “systemised” and tainted with a judgemental and ideological brush and with paint that has long passed its “sell-by” date.

I should not have added my few drops to that vile mix. Perhaps, like many, I was seduced by the clamour of perceptions that has eroded public trust in business to record lows in the past few years. So allow me to pay tribute to those who I interacted with and who shaped my views over decades in journalism and consulting. Around many of the most successful ones there was always an air of integrity; they displayed a degree of honesty and an appreciation of higher human values. The importance of this observation only became clear to me years later in doing research for Value through Values. The examples you may seek are fully covered there.

My real epiphany was triggered by Raymond Ackerman, and the way he stood up to the ideologically orchestrated labour unrest in the 80’s at the risk of everything he had worked for over two decades. Before then, having been thoroughly schooled in the merits of the profit motive and profit maximisation, I could not imagine any successful business being driven by anything else. For many years I regarded Ackerman as a brilliant marketer with a knack of generating controversy and publicity – a view that I dare say was shared by other reporters.

But right from the start, Ackerman tore into everything that smacked of disadvantage to the consumer. In this he upset a finely balanced commercial structure involving producers and government, with consumers caught in the middle. Most retailers were comfortable with that high profit margin dispensation. Indeed, the belief at that time was that the most profitable and least risky business to be in was retailing. Consistency in his values-driven approach was evident to all who had anything to do with Raymond Ackerman.

As the years went by and Ackerman’s business grew by leaps and bounds, he turned out to be exactly the kind of entrepreneur that had always confused me: prosperous yet values-driven, possessing a high degree of integrity, and breaking Friedman’s profit maximisation mould.

There are profound lessons in the Ackerman story. He has concluded himself that Pick ‘n Pay would never have survived if at any time, profit was his major concern; if he did not have an external focus; if he had not been driven consistently by the interests of the consumer. His biography is overwhelmingly convincing testimony to this.

Another lesson is that he stood outside the South African “system” of that time which was inward looking, onerous, oppressive, legally constrained and non-competitive. He was neither a product of it, nor party to it. On the contrary, his behaviour changed the system. He reformed the face of commerce more than any other individual, politician, political party, and business interest or business leader. Of course, Ackerman will still have many critics and sceptics. From being one of them in the early days, I am today unashamedly a fan of Raymond Ackerman. It’s not an easy position for a jaundiced ex-hack.

We all have an Ackerman inside of us. All we have to do is to try once, just once, to put another’s interest ahead of our own when we would not normally do so…until it becomes a habit. Observe then how circumstances, systems, structures and dependency on others not only become irrelevant, but how we possess the power to change them. One caveat: “You cannot help men permanently by doing for them what they should be doing for themselves.” – Abraham Lincoln.

It was the impression that such people made on my thinking that led me in the 80’s – before the ethics issue became the hot topic it is today - to champion in my own small way the cause for values-driven business behaviour and to question that most sacred of sacred cows, the accounting system. This is clearly a subject for future treatment and debate. So too will I need to come back to the definition of values. For the time being suffice it to say that they are prescriptions for our behaviour towards others and imply that the interests of the other override the interests of the self.

Raymond Ackerman is by far not the only one. There are many, many more who have understood their businesses as Kellogg did, as being primarily about meaning and adding value to people’s lives. Again, I cite Collins and Porras’s “Built to Last” and “Good to Great” as the definitive studies showing the relatively minor role of the profit motive for great companies.

And this is the model I spoke of last week. Not some grand new manifesto, structure or system, to which the word model does not apply in any case, but a multi-facetted model of behaviour – a way of doing things based on the wisdom of ages, a model that can be applied to any level of economic activity and even our own individual lives. Some of the blocks have been put in place. The first was to question the validity of any economic system that relies on material and immediate self interest as its driver. The understanding that we are all born selfish is palpably wrong as I tried to show in my first article. The second was to question the appropriateness of classical quantitative economics in shaping policies, systems and structures. South African Analyst, Shawn Hagedorn has eloquently argued this case in a Moneyweb article. This underscores the importance of the re-emergence of behavioural economics and the need to have its principles more widely taught, if not made a preferred qualification for the employment of business and other leaders. It certainly has to inform fiscal and monetary policies to a larger extent.

Another block is the need to break away from collective personae, glib assumptions of “factors of production” that get extrapolated to meaningless tapestries and lose touch with the human threads that go into their making. At my iconoclastic best I would submit that Milton Friedman may have known everything about economics, but he knew very little about people apart from some understanding of their base attributes…and then promoting a system appealing to the worst in the human spirit.

The most important one for business is the need to make a clean break from the marriage to the profit motive and the concept of profit maximisation. To this end I want to propose something seemingly outrageous: that we legitimise and de-stigmatise “profiteering”. The standard dictionary definition of “making excessive profits, especially in times of short supply” is meaningless. Price is supposed to move up to encourage supply and who is to say what is “excessive”? Laws against activities such as racketeering, price collusion, corruption and monopolisation are adequate enough to constrain coercive practices. Apart from the current stigma, there is little, if any difference between profit maximisation and profiteering. We must allow the profit focussed to live side by side with the service focussed. The only stipulation should be that they are transparent and honest about their purpose. A profit driven company can with pride take on the mantle of “profiteer” and thereby, according to some, attract a flood of investors wanting to make a quick buck. For some, like mining companies where a customer focus is a minor consideration, profiteering could arguably be a laudable goal. The others, the market and values driven companies will have to make do with the “old fogies” such as Warren Buffet who view their “best holdings as forever.”

We should all be concerned that we are being led inexorably towards authoritarianism unless there are behavioural adjustments to counter the proliferation of negative perceptions. We are perhaps fortunate that while only about half of the respondents to the latest Edelman Trust Barometer trust business to do the right thing, even fewer trust governments to do the right thing.

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XENOPHOBIA AND LABOUR.

It’s been unusually cold in this part of the Overberg this winter. Some confused peach trees have been flaunting their pink blossoms since April and there have been some sightings of swallows. But it has been a false promise of an early spring and has done little more than give some climate change advocates a few rounds of blank ammunition.

The freezing cold has also done little to discourage some folk from hugging gravel on the quiet roads leading to the farms where they make up a sizeable proportion of the workforce. They can be seen regularly on week-ends from Friday afternoons to Monday mornings having consumed from five litre plastic bottles a good quantity of “moss” -which is little more than fermented inferior grape juice. The reasons for this apparent state of social dysfunction are many and varied. The reality is that they are mostly trapped in an ongoing state of alcohol abuse extending far beyond addiction itself. (Is this part of Zwelinzima Vavi’s “Irish Coffee Economy”?) Social grants often have the opposite effect here, with absenteeism increasing over pay out days, and the grants clearly not being spent on the care of children. Without a thorough understanding of their social legacy and their hopes and fears we simply cannot judge them - as easy as it may be to do so, or as difficult as it may be not to do so.

This is a diverse agricultural region: including wheat, youngberries, vegetables, dairy, canola, grapes, deciduous and citrus fruits. Ask any farmer what his biggest labour problem is, and he or she will tell you it is unreliability - most of it caused by alcohol abuse. Reliability is the one critical attribute farmers here need. A difference of one day in harvesting can affect the quality of a crop. Already there has been a substantial fall in youngberry cultivation at least partly due to labour problems.

Incentives don’t work. Individual pay increases, which can barely be afforded by the smaller family owned farms are met with resistance and resentment and are viewed as a form of elitism. Of course, this situation does not apply to the total workforce, but it is enough to cause severe disruption at critical times. Like any farming area migrant labour is a feature of production and is often managed through labour brokers. Many have settled in nearby areas, becoming casual workers rather than migrants. This group includes foreign workers, mostly from Zimbabwe and they have begun to infiltrate the more permanent employment ranks in towns and bigger settlements. The seeds of xenophobia have been planted and there are fears that another De Doorns or Khayalitsha is on this area’s doorstep.

This picture is just one tiny thread of a vast tapestry called the labour market. There are many, many more. The tapestry itself has become indistinguishable from the threads, extrapolated to a blandness that has lost touch with the reality of each thread. It has become the fixation of dozens of theories, systems and policies and is glibly flung into academic discussion like some vuvuzela blast intended to still a referee’s whistle.

Markets on a global, national and domestic level can broadly be divided into capital; trade in goods and services, and labour. They interact and influence each other very powerfully. It is self evident that if there is a disproportionate degree of freedom between the three, it will cause severe imbalances. It is obvious too, that the best outcome can be achieved if the three act in harmony and for a common purpose.

Of the three groups, capital has been given the freest reign, reflecting the view of market fundamentalists that capital is the magic wand that will correct all imbalances. It is now common cause that capital, particularly global capital, has behaved badly leading to new international constraints. George Soros has described it as behaving “like a wrecking ball.” Shareholder capital, domestic and global, is also under constant surveillance and increasing legislation. It has often blamed “executives” for this behaviour. I find this a bit disingenuous. It’s like saying: “Yes! Stop these thieves. We asked them to steal for us, now they are stealing from us!” Despite executives being increasingly classed as a new self focussed group, shareholders certainly cannot dismiss as irrelevant their pressure for quick and short-term profit gains, incentives promoting this, shorter reporting periods and the appointments of executives likely to achieve it. But still, of the three groups, capital is the freest.

The growing frustrations with the DOHA talks are a reflection of severe impediments in global trade in goods and services. One of the threads of this particularly tapestry that I have witnessed is in the export of citrus fruit to Europe. The manager of the farm where I live is subjected annually to two audits, one from the E.U. and the other from TESCO, the U.K. customer. The audits, which the producers pay for, are a bureaucratic nightmare to say the least, and cover the finest detail, from how many grammes of chemicals were used, to how much workers are being paid. Interviews with employees, both permanent and casual are included in these audits. Not only do many producers here feel that the audits are a form of trade discrimination, but it means that only big commercial farms have the capacity to export. This is over and above the more onerous constraints, such as protectionism, trade barriers and exclusive trading agreements.

Even if we were to concede its validity as a “market”, then the labour market is arguably the most dysfunctional of all. Let me emphasise again that I fully subscribe to the concept of free markets, but have argued all along that without appropriate behaviour, markets can never be free. It is their perfection that reflects behavioural imperfections which then lead to their constraint. In labour, market theory falls apart. It is subjected to all kinds of machinations, regulations, controls and interventions. Despite the evil of migrant labour, immigration controls ensure that labour is simply not a real factor in balancing supply and demand on a global level. Domestically, one simply cannot argue that market principles are truly reflected in differentiated pay – from the lowest paid to the highest. In most countries, labour legislation and collective bargaining put severe constraints on labour flexibility particularly at the lower paid levels– perhaps justifiably so! Executive pay, on the other hand, has reached pop star levels, even if they sing badly.

It reminds me of a statement by TV news doyen, the late Walter Cronkite. When he was appointed the first news person to anchor an American TV news show, his pay jumped several-fold. He was asked whether he did not think that he was overpaid and he responded: “Compared with a pop-star, no; compared with a teacher, yes, vastly so!” This is just one of many examples of social values reflected in some bizarre market outcomes.

The labour “market” tries to make a collective of what cannot be collected; generalise what cannot be generalised; define what defies definition. These are individuals: each with their own cultural background, fears and insecurities, hopes and aspirations, intentions and motives. To define each one, you would need more than seven billion entries in the dictionary.

The severe flaw in the labour “market” is its attempt to define labour as a commodity, or “resource”. It is expressed as a “cost” of production and in the Western profit maximisation model is automatically set up in conflict with other “resources” particularly capital. This gives sustenance and a powerful raison d’être to Trade Unionism, strikes and many other arguably wasteful activities. It places emphasis on pay as the key motivator and over decades of conditioning has changed work from meaning to money and has converted many individuals into what can be loosely called “wage slaves”, shackled to daily drudgery by the chains of mortgages and debt in an attempt to maintain comparative lifestyles and excesses in consumption and acquisition. In the process, for most the crucial links between task, passion, contribution, meaning and contentment are shattered.

It can be done differently. There is a model in which the spirit of free enterprise can flourish – a model that fits in with the search for alternatives; that focuses on contribution and adding value to people’s lives; that nurtures the human capacity to care; that forges a common purpose and common fate between all of the actors; that reduces if not eliminates conflict and that thrives on flexibility and sustainability. I hope to introduce you to it in future writings, but for the moment, its spirit is perhaps best captured in this little anecdote related by someone who had returned from a sabbatical to NASA in the United States. Watching a sweeper engaged in his task, he asked:

“What are you doing?”

“I’m helping to put a man into space”, was the reply.

 

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BEHAVIOUR AND HUMAN DESTINY

“My theory of the world was wrong. My framework was wrong”. Alan Greenspan, Chairman of the American Federal Reserve from 1987 to 2006, the second longest tenure in that capacity.

Greenspan’s confession was quoted by Nobel Prize winner for Economics, Daniel Kahneman at a conference on economic behaviour in Germany.

The 2010 World Economic Forum conference put much emphasis on values in business. It’s a pity I can no longer fit into an orange mini-skirt. I could have done some ambush marketing for my book Value through Values. Greenspan’s confession and the fact that some of the world’s top business leaders could spend hours on such a “mushy” subject are only a small reflection of a new wave of thinking best captured in the emergence or perhaps re-emergence of a discipline of knowledge called “Behavioural Economics”.

This discipline is enabling the more serious minded innovative socio-economic thinkers to take a helicopter view of the point we have arrived at in the history of exchange – a point that has been forged by some 200 years of behaviour from the industrial revolution and Adam Smith’s “Wealth of Nations”, through two world wars, the great depression, the great split in economic ideology bringing the world to the brink of self annihilation, to the era of technology and monetary manipulation of today. From their vantage point they can see the cracks, the severe imbalances that have emerged between:

• Population and the planet,
• Growth and resources,
• Behaviour and nature,
• Expectations and reality,
• Happiness and prosperity,
• Rich and poor, and
• Money and tangible added value (which has already led to a financial earthquake.)

I have travelled a quarter of this road. I remember well the fervour of the divide between Red and Blue in the 60’s and 70’s, blinding us so that we could not examine anything beyond our Western self righteousness. I recall too the victory of a crumbling Berlin Wall in the 80’s, whose chunks of falling concrete severed the chains of self constraint, and with the earlier seeds planted by Milton Friedman, gave momentum to unbridled greed, consumption and acquisition as the ingredients for sustainable prosperity beyond our wildest dreams. Occasional questions were asked, precipitating some aberrations such as the crash of ’87. But no-one took that too seriously for too long.

Earlier, in 1979, gold, not too happy with the window being shut in its face a few years before challenged the mighty Dollar suffering from rampant inflation unprecedented in peacetime. We all hovered around the Reuters screen at the International Monetary Fund meeting in Belgrade; awe struck at the occasional $80 dollar spike between fixings to hit a high of $850 an ounce a few months later.

That period also saw the emergence of an economic phenomenon called “stagflation” – inflation accompanied by low economic growth and rising unemployment. But soon, the monetarist marshals were on the march under the command of Ronald Reagan and Margaret Thatcher to at least temporarily put an end to the madness, immortalizing them in Reaganomics and Thatcherism.

But for me, the most memorable was my first real taste of the meaning of behavioural economics. A retired Chairman of the American Federal Reserve, Arthur Burns, (whose job no-body really wanted until Paul Volcker entered the fray with his 2 meter frame) explained his role in the inflation debacle. Delivering a key note lecture he attributed inflation to a hangover of the great depression, the shattering of the American’s belief in self help and Roosevelt’s New Deal which in a swoop changed behaviour from being based on high aspirations to one of high expectations. That speech convinced me that no system can cope permanently with inappropriate behaviour. It makes me wonder whether we may still have to deal fully with the after effects of that time…high expectations and low aspirations: perhaps no longer a hangover, but more seriously, liver damage. You simply cannot cure a tumour with a band aid.

I too played the new computer games of the mid 80’s into the 90’s. During a training spell at the Oxford Centre for Management studies, (my prize for being the first winner of the Rosholt Fellowship), our group was split in two teams to punch keyboards in an exciting simulation of the British Economy called an Econometric model. I headed the one team whose composition I believed was clearly some form of punishment. It was a motley crew of a Bulgarian who could not speak a word of English, two Koreans who never slept, and two stern looking British Navy Admirals in uniform, who were as far removed from Economics as the width of the Pacific Ocean. The other team was headed by a formidable economist from Unilever, a British broadcaster who parachuted to the venue because he was late, and a number of aspirant CEO’s. I had no clue about what to do. The bleary eyed Koreans, who could have taken the ancient computers apart and reassemble them in the blink of an eye, were clearly reminiscing about their last haircuts. The Bulgarian kept staring at me as a caution not to mess up or I would face the ricin laced point of his umbrella. The two Admirals went AWOL.

And we won! Probably because a kind lecturer took pity on us and touched a few keys while the human monitor was not looking, or perhaps the threatening glare of Jani the Bulgarian got to her as well.

I witnessed then how measurements mesmerize. There was an unshakeable belief that by inserting the right numbers we could accurately forecast British GDP up to a year ahead. And if you can forecast something a year in advance, with the right numbers, charts and lines, you can with certainty buy or sell something in advance. You have created money today for something to come tomorrow. These futures and options had existed years before, but they took on a new exponential dynamic with an unshakeable belief in the infallibility of computer data processing and a “web” connecting the smallest to the biggest, the smart to the not so smart, the cunning to the naïve, and the villain to a victim. Enter the cappuccino economy.

From their helicopter vantage point, our “out of the box thinking” bunch may reflect on Einstein’s words: "Not everything that counts can be counted, and not everything that can be counted counts."

But new exciting measurements are on the brew - such as the Happiness index, and the Life Satisfaction Index. Some are already well established such as the Human Development Index, the Gini co-efficient and Ecological Footprint and have gained a good measure of popularity and authority. This is all flying in the disgruntled faces of hard core human calculators and “ism” fanatics. Their time is done. And hopefully, to their chagrin, we can all, the media included, have great fun exploring the import and interpretation of these new indicators. At its core, behavioural economics is bringing together the disciplines of psychology, sociology, anthropology, empirical economics, statistics, development economics and other “human” sciences.

Perhaps it’s been there all along. After all, Adam Smith was a moral philosopher and “humanist” before being classed as one of the world’s first economists.

 

In years to come, in reflecting on these times, Dickens’ famous line “it was the best of times and it was the worst of times” may become as relevant as they were in the industrial revolution.

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PROFIT IN PERSPECTIVE

“The purpose of a business is not to make a profit. What a dreary and demeaning description. The purpose of a business is to add value to people’s lives; the consequence of doing that well, is that you make a handsome profit.”

Mr. William Kellogg could have said much more - like enabling people through jobs so that they too can make a contribution to people’s lives; creating state revenue and (if you really insist) getting involved in community projects. We don’t even have to go into the contribution to society of “snap, crackle and pop!” Because that was the purpose. That was what made the company great and lasting, perhaps one of the better known companies of all time, appreciated by people from the first time they took solids into their tiny mouths.

“Profits are like breathing: you breathe to live, but you do not live merely to breathe!”

And an even cheesier one: “Profits are the car; the owner/s and staff are co-drivers, the market is the journey; the destination is meaning.”

I have met many of the Kellogg type in my life – from the Corporate chiefs to the plumber and electrician and hope to introduce you to them and their thinking in future writings.

The role of profit is simply to recognise the contribution of one essential resource, that of capital. It is neither more, nor less important than recognising the role of labour, nor the role of the State. Profit is also an invaluable and vital technique of measuring efficiencies, but perhaps just as vital are measurements such as cash flow and market research.

I will always vehemently defend profits, but never the profit motive! To defend it as a co-motive with service is an intolerable contradiction. They often conflict, and when they do, service is the loser. An attempt to prioritise profit as a consequence is also silly. Many companies have experienced losses, some showing no profit for a few years, and they have not died. But try not paying your staff. You will die within months. Cheat the taxman…. (Let’s leave for the time being).

Offer nothing of value to your customers, and you have certainly lost the right to exist. Indeed, one could argue that the ability to make profits without creating underlying value has caused the froth liquidity that has come to bite us so severely.

In the same context, I will always vehemently defend free markets. Markets are perfect, so much so that they will reflect all of our imperfections. Don’t throw away the thermometer because you don’t like the temperature. Market orientation means responding to the market, in other words serving the needs and wants of others.

The profit motive, a cornerstone of Capitalism, is the opposite: unashamedly self serving at times to the point of adding no value to others. There can be no greater threat to free markets than this behaviour. Far from being synonymous with free markets, the profit motive is its biggest enemy leading us on an inexorable march towards authoritarianism.

The real power of business lies in its generosity of spirit. Generosity at its purest is totally unconditional, seeks no recognition or reward of any kind. My mother, a marvellous product of the age of deprivation told me: “You kill kindness when you tell everybody about it!” But generosity cannot survive without gratitude. Contribution and reward go hand in hand. Giving is impossible without receiving.

Business is not unconditional. It has to stick to the rules of legitimate transaction and has been given some wonderful tools to guide it. They are essential to its survival. They existed long before profits or prophets were heard of. Perhaps even present when that 200 000 thousand year old jawbone fossil referred to in the previous article, was still chewing on some morsel of meat. They are the fundamental, natural economic laws of demand, supply and price.

At its purest and simplest, demand is a reflection of needs and wants, supply a response to that, and price the balancing fulcrum between them. In that sense, and again at its purest and simplest, supply exists to serve demand. It is not the other way around.

These are the fundamental rules of transaction, of fair exchange. Their value, by evolution more than design, is to enable a magnificent state of interdependence and ultimately meaning for most of us. We break these rules at our peril.

“Economics is not that simple”, a book reviewer of  my first book “Econosense” once wrote. Neither is the human body. Although at its core it simply needs air, water, food and shelter. And from that we have developed incredibly complex rituals, structures, fashions and culinary delights sometimes to the point of self destruction. So too with the natural economic state: Demand is manipulated, created, and controlled by techniques including lies, deception, addiction, targeting children in advertising, debt enslavement, government controls and many others. Supply is tainted with slave labour, Trade Unionism, corner cutting, collusion, covert monopolies, trade pacts, protection and seeing a competitor as an enemy, rather than a compatriot offering choice and an additional source of market awareness. Price has been distorted by collusion, kick-backs, bribes, corruption, interest rate manipulations, credit, derivatives, and worst of all the abuse of money which is destroying the measuring stick of price itself.

A little anecdote to end:

A young American Indian is listening to a wise old medicine man telling him that all humans have within them, two combating wolves – good and evil.

“Which one will win?” asks the young man.

“The one you feed the most,” the old man responds.

Time to change our diet!