Kowtowing to Chihuahuas

It is most likely a character defect, but I must confess that I am one of those people who get attacked by that little green monster when I follow David Carte’s series on executive incomes. So with some effort, let me suppress personal pique and apply whatever journalist objectivity I can muster.

It is a much bigger issue than many think. It deserves serious national debate and far more scrutiny than a fob off as emotional rhetoric about envy. Although this too cannot be ignored in a society like South Africa faced with rampant expectations, huge welfare disparities and popular discontent. Rubbing people’s noses in ostentation is one thing; having a dubious source of that ostentation is another highly dangerous dimension.

Even the more enlightened will have difficulty in defending some of the mind boggling rewards that a few individuals can accrue in their positions in companies. Something must be very wrong. The unquestionable benefit of a values-driven free market is that it creates balance. Speculation is supposed to smooth the transition. When we have lived for nearly 40 years with growing imbalances, particularly in individual incomes then we have to face up to the fact that these markets are broken. I have argued before that this is so with both the upper end of the skills market, and the lower end.

Executive share options are the most contentious of all. The criteria for their allocation make little distinction between creators, builders and professional managers of companies. Remuneration committees are, according to Warren Buffett, packed with Chihuahuas and not Dobermans. A hypothetical sketch may help illustrate this.

Joe is passionate about developing a new innovative widget and spends many months in his garage perfecting it. He starts selling and soon recruits a few equally dedicated people to help. Years of development and sales, home mortgages and personal risk pay off and they go to the stock market to raise capital. A large proportion of the shares issued are allocated on merit between the founders. A few more years of rapid exponential growth and further rights issues give the founders mind boggling wealth. It culminates in their losing control to outside shareholders, some of whom may understand the widget and its potential. Many others are intent only on share value. Some are investors; many are simply traders or speculators. It is their demands that drive the selection of professional managers or executives, and to ensure common focus on creating maximum share value, they offer large share options to the incumbents.

The important distinction between the founders, internal builders of tangible value and the professional managers of share value is lost. The former two are arguably far more deserving than the latter. They are very special people and rarely “interchangeable” between transport, banking, law, mining and retail. You don’t “buy” these people. The belief that you can replicate a Joe or his dedicated followers through massive financial incentives is seldom true.

The point is simply that good executives should not kowtow to shareholder whims – like Richard Branson and many others have shown when they get fed up and de-list. Shareholders on the other hand would do well to follow the unsolicited and “un-incentivised” lead of good executives – like they did with Apple and Steve Jobs in 1997.

Recognition after the fact and cementing the relationship either through bonuses or share ownership is an entirely different matter. There is a huge difference between recognition and incentive. The former is not an expectation. The latter is, and creates behaviour that has ranged from outright fraud to inappropriate actions for the long term sustainability of a company. No number of King based regulations and sustainability reports can counter that. Share option benefits spread over 3 or even five years are still a long way off the Buffett norm of “forever”.

We are told that shareholders should think like owners, and executives should think like shareholders. This is blatant irony! At the very least it shows a severely broken link between the motives of owners, shareholders and executives.

I’m grateful to Moneyweb reader Joan, who brought to my attention an insightful book “Fixing the Game” published earlier this month and authored by Roger Martin. He draws a distinction between the “real” economy and “expectations” economy. It is similar to my distinction between “tangible wealth creation” and “speculative froth” which I spoke of in my article: “The Cappuccino economy”.

Martin argues that the shareholder-value theory and stock-based options In the U.S. focus executive attention on the “expectations” market because that is where the money is. Ultimately, he concludes, stock-based options force managers to focus on what they can control – managing the share price over the short term.

Stock exchanges world wide are driven largely by speculation. Speculation is obviously based on expectations of exponentially increasing returns and growth. This is rarely sustainable and to gain advantage of their share-option structures executives have to either keep expectations alive, cash in their options or leave before they implode.

Martin also contends that stock-based compensation has failed in maximising shareholder value. Total compound annual returns on the S&P 500 from 1933 to 1976 were 7.5%. From the beginning of the share-value era in 1977 to the end of 2010, they were 6.5%.

Executive share options hold a much greater threat to the economy than envy and some dubious executive behaviour. Martin warns that these theories underpin the regulatory fixes in the wake of bubbles and crashes and because they are based on the wrong premise, they will be ineffectual.

Coinciding with my argument for a return to tangible value creation rather than reliance on speculative froth, Martin says: “The difference in outcomes between a real-market focused world and an expectations-market dominated world is stark and critically important for the economy. When the real market is dominant, customers are the focus and the central task of companies is to find ever better ways of serving them.”

Clearly, executive share options are adding substantially to the froth and the speculative tail wagging the wealth creating dog!

Despite ever increasing regulation, share markets remain the arena for the biggest crimes in history. A superficial scanning of only some of Barry Sergeant’s articles will show how, even in this country, billions can be siphoned off into the pockets of a handful, sometimes with only a small dilution of share value. I’m not for one minute suggesting that this reflects the behaviour of most executives who have share options – far from it. But it certainly reflects the temptation and opportunities that are created for behaviour ranging from fraud to even the most modest inappropriateness. At an individual level the returns can be huge!

In this country too, we have compounded the issue with dubious B.E.E. deals creating instant individual, Porsche driving, sushi-eating-off-naked-bellies billionaires who certainly don’t have the same credentials as Joe the creator, or his fellow builders. Some even lack the basic skills of the professional managers. Unless, of course, we assume that being previously disadvantaged is a qualifying accreditation. It helps too, if the incumbent has political sway and some useful crony connections. A further handy attribute is an ability to turn one’s back on the surrounding squalor that one previously crusaded against, or ignore the plight of unpaid mineworkers.

This article is probably going to mean little more than tilting a lance – no a toothpick at a windmill. I accept that there are billions of rand in vested interests. These are often linked overtly, covertly and perhaps even corruptly through all institutions in our society, including government. But I firmly believe we underestimate the full ramifications at our peril, not only for investors, but for the country as a whole.

Yes, there is pique. But this should not detract from the fact that we have a real problem. If there is behaviour that can cause the throwing out of the free market baby with the greed contaminated bath water, then this is it.

We can start with the smallest of steps by replacing the Chihuahuas with Dobermans on the remuneration committees and their consultants.

The Worker Capitalist delusion.

What is this economic mutant called a “worker capitalist”? On the surface it seems to be an attempt to merge the employee and shareholder interests and create a new hybrid of fired up, loyal and committed actors on the company stage. In one swoop, it seems to say, the “inherent conflict” between capital and labour can be countered if not eliminated.

The idea has found favour with no less an influential capital investor than Elias Masilela, the new head of the Public Investment Corporation (PIC). As the chief of an entity controlling close to R1trn in assets, one is bound to sit up and listen. American Lawyer and Economist Louis Kelso is credited with designing the concept in the late 1950’s and being the architect of instruments such as the ESOP (Employee Share Ownership Plan) and CSOP (Consumer Share Ownership Plan). But it has only been since the mid seventies that wooing labour into the shareholder camp has gained momentum and has given rise to a whole array of schemes with some of the most complex, costly and imaginative forms of accounting targeted at the whole spectrum of employees from executives to the general workforce.

Reluctant to tilt my lance at the formidable windmills of economists, financial journalists, accountants, and remuneration consultants, I decided to delve a bit deeper. In the end, I must admit defeat. There are as many champions as detractors. The accounting conventions are still not fully understood, polished or even universally supported. Returning to simple logic, I ended with a similar conclusion to that of Warren Buffett who a few years ago ruled that they were based on “fuzzy maths”. Of course, he was talking about executive remuneration, although the principles are the same as when applied to a group of employees as a collective.

The principles may be the same, but the nature and behaviour both intended and unintended are quite different for the two groups. It has become common cause among remuneration experts that as an incentive, share options and share ownership appear to work better at the more senior level of employment than at the general workforce level. Both are questionable. Those for general staff are of suspect value and those for executives perhaps even an evil. This article focuses on the schemes for general staff and I will come back to executive schemes later, which may be the more controversial and challenging topic.

I also do not discount the value of such programmes in facilitating leveraged “empowerment” actions and management, employee, or customer buyouts. This was the intention of Kelso’s original design. Most ESOPs today do not have that as their purpose.

I may be a poor “Googler” but as far as general staff are concerned, nowhere have I found definitive, conclusive and comprehensive evidence that ESOPs do what they are supposed to do – create a more committed and involved group of employees. The evidence is sketchy, anecdotal and largely sourced by vested interests. The point really is that from a simple cost benefit point of view, there is more evidence to show that ESOPs do not prove their value against the elaborate provisions needed to put them in place such as the formation of trusts, individual accounts within the trusts and the accounting dimensions of “expense” or liability against equity.

If ESOPs are created as an employee incentive, they will clearly fail and there is little evidence to contradict this. Certainly in South Africa they cannot claim to have tempered wage demands or labour unrest. The value of most ESOPs to the participants depends ultimately on the share price and for quoted companies this can be very far removed from operational performance, especially labour productivity, The value of each employee account is mostly only a fraction of what they earn in normal wages and compromising the latter for an improvement in the former would not make sense to anyone. Also, the full value for the employee is mostly only realised on retirement or departure, becoming little more than a supplement to their pension or provident provisions. These seldom motivate people in their day to day work.

But ESOPs fail as an incentive in one of the key requirements – line of sight, or visible and tangible evidence of performance improving an outcome. They are far too remote at an individual level. This means they can never serve as an instrument for gain sharing or flexible pay. A far more tangible, direct line of sight trigger is value-added or wealth created which in turn forges a common focus on service and creates empathy for common fate. These are ideal conditions for fortune sharing and pay flexibility.

The champions of ESOPs defend more vehemently the role of such programmes as a tool for involvement. Of course, this is firmly rooted in classic capitalism’s obsession with ownership. It’s an important feature in economic philosophy and even psychology. We steadfastly adhere to the belief that owning something is more important than doing something, that we only do things to own things and that ownership and not action or behaviour is what gives us our real worth. From this perspective, ESOPs are an insult to the nobility of work.

ESOPs assume that ownership ensures involvement. Even if this were true, ownership is not a blanket, indivisible entity. The more ownership is shared the more it is diluted. Owning one cell in one body of a crowd of shareholders becomes meaningless especially if these shares have no voting rights in the company. Then rather have the German system of appointing a labour representative to the board. At least you can claim to have listened without necessarily having heard.

Incentives seldom guarantee genuine involvement, whereas genuine involvement mostly creates incentive. Genuine involvement comes from behavioural things such as service, customer care, sound leadership, shared values, ethics, trust, transparency, developmental communications and nurturing aspirations.

Of course it is not a bad thing to create an understanding of and empathy with shareholding. But it pales into insignificance in terms of understanding the real value of work and real labour issues that should still be addressed in most companies.

Trying to mix shareholding and labour to create a “worker capitalist” is like trying to mix oil and vinegar. It only works when they are shaken up to serve on a salad – when they serve a purpose greater than themselves as individual components. In companies the salad has to be customers. You cannot change the molecular structure of each to achieve this. Left to focus on their own needs, they return to their separateness.

Of course “worker capitalists” do exist. I know many. They include the likes of Raymond Ackerman, Johan Rupert, Bill Gates, Steve Jobs, Koos Bekker, Brian Joffe, Adrian Gore and many others. They are the creators and builders of business.

But they were not created by a construct of ESOPs or narrow financial incentives. They created themselves out of a passion for making a difference.

Faces without noses.

Here we go again! There’s a rumbling on the labour front in the not so metaphoric “silly season” of public service wage negotiations.

The latest salvo is the suspended municipal workers strike which intended to involve some 220 thousand members and threatened to cripple the already poor service delivery. Quite puzzlingly, South African Municipal Workers spokesperson, Tahir Sema claims that their real motive is to improve service delivery! Included in this demand is a call for the sacking of Co-operative Governance and Traditional Affairs Minister Sicelo Shiceka.

The attempt to glorify the strike as an act of concern for ratepayers and recipients of municipal services rings rather hollow when you unpack the Union’s solutions: one being a demand that President Zuma not sign into law the Municipal Amendment Bill which is intended to "depoliticise" municipalities and ensure they appoint skilled people. Another is to scrap provincial governments and divert their funds to local authorities. Even the most ardent supporters of decentralised power (of which I am one) would baulk at the idea. What would happen to the hundreds of thousands of provincial government employees? One shudders to think what incompetent local authorities would do with the extra manpower and extra funding. Even our best run municipalities are nowhere near the proficiency of a Swiss Canton. A third “grievance” is the old perennial of opposition to outsourcing of services. People intent on service should not be too concerned about where the service comes from, but rather how they can do better.

Adding to the rumblings of a bigger storm cloud is Finance Minister Pravin Gordhan’s warning this week that there was “no money to afford steep wage demands.” Few can forget the devastating 21 day civil service strike of last year. Images of patients dying in hospitals and empty seats at schools are still fresh in our minds. Initial empathy with underpaid teachers and nurses turned to anger as unruly vandalising crowds and scenes of violence were shown repeatedly on our television screens.

One of the silliest expressions in the English language is: “to cut off your nose to spite your face.” Who on earth would perform such a bizarre form of self-mutilation? But labour behaviour brings the metaphor to life. There are many civil servants and municipal workers out there who probably still have not made up what they lost in income during last year’s strikes. Certainly many a South African still conjures up those unfortunate images when they hear the word “nurse” or “teacher”.

We are proud of having an advanced labour-law framework. But it is a dispensation that many argue is far too utopian for a developing country like South Africa. Study after study shows that it is too inflexible to encourage employment. Felicity Duncan’s latest article and graph showing comparative unemployment rates is one confirmation of that.

Another is the World Economic Forum’s Global Competitiveness Index. In 2010/2011, of the 139 countries surveyed, South Africa ranked at 135 for hiring and firing practices, at 131 for flexibility of wage determination, and at 112 for pay and productivity.  There seems to be some hope that this penny has finally dropped.

Law is one thing. Behaviour is another. I believe the latter is far more important than the law itself. Without detracting from the important role business can play in ensuring a healthy level of trust at both individual and collective level, labour seems to be still locked in a destructive and outdated confrontational mode with its old enemy, “capital”, and is ready at any time to play the strike card.

The SAMWU action this past week is a good example. Even if we accept that negotiations have been underway for some time, the threat of a strike came out of the blue for many. Even non-sceptics saw the move as expedient ahead of the municipal elections. The subsequent “suspension after talks with the ANC” is equally expedient and disingenuous, leaving the threat hanging in the air and a lingering “we’ll show you who’s the boss”.

For good measure, SAMWU throws in its 18% increase demand. It then tries to legitimise this outrageous level by saying it is “only the opening bid and can be negotiated down”. “It should not be taken seriously”, said Tahir Sema. Then why say it at all? Apart from the obvious ploy of claiming kudos for being conciliatory when the settlement is at a more legitimate level, it creates expectations and heat in an already inflamed environment.

We know we live in a violent society, one that we keep on trying to rationalise in avoiding our own present day accountability. The source of most violence starts at a much more innocuous level, at minor confrontations leading to intransigent positioning, then to strikes and then to violence. Have we not come to accept this process too readily?

Lasting and legitimate power is never achieved through coercion. That is control, and control without legitimate power sows the seeds of its own destruction.

Legitimate power can only be earned by contributing to those around you. It is also where true empowerment comes from.

Will we have more faces without noses in the months ahead?

Stop rationalising crime!

I can’t speak on behalf of others, so I will. But in my defence, I simply can’t imagine that many South Africans of all colours are not sick and tired, if not downright angry, at the extent to which misbehaviour and crimes in our society are rationalised on the basis of the past. If there is one phrase that has become hackneyed and an excuse for everything from rape and murder to corruption and misguided policies it is “the legacy of the past.”

The most recent is Cosatu Chief Zwelinzima Vavi’s bit of inspired psychology: “Colonialism, apartheid and international mining houses created serial killers and rapists”. A day or so earlier President Jacob Zuma told the E-news channel that “apartheid created a culture of violence”.

The simple fact is that the more you rationalise and find extenuating circumstances for any act, the closer you get to condoning it. Few can doubt that at the very least, you encourage it as a mantle of expediency for those so bent. Blaming others is always the simplest way of defending one’s own shortcomings. It is also the most obvious and disingenuous.

Just as bizarre is encouraging the populist rhetoric of an “ongoing revolution” and the need for continued radicalism. Even the lesser enlightened would argue that democracy with its supporting institutions such as the constitution, courts, freedom of association and expression, and instruments of accountability makes such behaviour redundant. Indeed radicalism and revolution have seldom been friends of democracy, but rather its antithesis. Soon the victors become the vanquished.

I have never quite understood the debate in psychology around “nature or nurture”. Both seem to be little more than a cop out for personal accountability.

One of those who were the most disadvantaged by the previous regime was Nelson Mandela. When he came out of his 27 years in prison he could have, according to the nurture theory, preached violence and retribution. He did not. Instead he became an icon for reconciliation and a statesman of international stature.

When Viktor Frankl came out of years of incarceration in a Nazi concentration camp, he may have been forgiven if he had murdered the first Aryan German he saw. He did not. Instead he wrote “Man’s Search for Meaning”, one of the most profound and inspiring works in psychology ever written and one still widely read today by those in search of a higher human self. If Mandela and Frankl teach us nothing else, it is that you need never revert to the worst in you because of debilitating circumstances such as deprivation, poverty or anger.

If deprivation triggers depravation then those reared in wars and depression would surely be mostly depraved. Certainly most of the holocaust survivors would be suspect.

There are literally thousands of people who contradict the nurture argument. They may not have reached the pinnacles of success and iconic stature of Mandela and Frankl, but they have survived. They have struggled and grown to become loved, admired and respected by those who know them – often not in spite of severe deprivation but because of it!

Most of us know such people. They are not saints. They are not even exceptions. They are simple ordinary folk who listen to a deeper voice, respond to the good in themselves and follow a caring compass that exists instinctively in all of us. They are less controlled by and more in control of their circumstance. I often used to argue to my work groups that you are just as, if not more likely to find acts of compassion and generosity in the streets of the Diepsloot squatter camp than you will in the Sandton suburbs.

Nature or nurture?

My own background questions both. I have related snippets of my upbringing before and for some interesting reading I suggest accessing my brother, Berend’s blog here. We were six siblings. Four were born during the war years in a shack not much better than the average squatter camp home. From what most would have described as severely dysfunctional circumstances, came the suicide of the eldest brother in his late teens, and a mother and an elder sister constantly seeking refuge in institutions for nervous breakdowns. But those circumstances also spawned a brother who founded the Anti-apartheid movement in Holland, another who became an award winning journalist and broadcaster as well as founding a successful management consultancy, a third who became a leadership consultant and a sister who was one of the first in South Africa to adopt abandoned babies across the colour line and is running a well established home for children. Three have authored published books. None turned to common crime.

Neither genes nor circumstance can explain the disparity in accomplishments or varied careers. There are many families in South Africa with similar experiences from a variety of backgrounds.

There are also many “strugglers” of the past who share some of the concerns about leadership behaviour in South Africa. They include Archbishop Desmond Tutu and former Trade Union leader Jay Naidoo. There are many more. Perhaps these words by activist Berend Schuitema says it best: “I feel an alienation rising up in me that has more to do with nostalgia for a lost country I knew, a dashed frustration about what I thought it would become.”

The words echo in the resting places of fallen heroes both sung and unsung, and resonate in the hearts of thousands of a generation of South African adults. They came from both sides of a structured apartness – villains once heroes, heroes once villains. They were brought together in lingering suspicion and tentative hope through a short and yet so long walk to freedom by a real and symbolic hero. Those steps inspired and united most of the citizens of a polecat country – from the warriors on both sides of the gulf to a vast middle that either voted or waited.

All shared a dream of what they thought the country could become.

A very important part of current leadership accountability is the unrealistic expectations that have been created and still form part of populist pronouncements.

In one of my first articles, I related the fable of a wise old American Indian who informed a young protégé that all humans have two fighting wolves inside of them: one good and the other evil.

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

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

The evil wolf has enough real grievances to feed on. Let’s not feed it scraps of psycho-babble!