Is private enterprise dying?

Governments’ claim on resources in some Western economies is at a post war high.

There are two main ways in which governments become involved in our lives – through laws which are intended to control behaviour, and through a claim on economic resources to facilitate development and redress imbalances in wealth distribution.

The two are linked, but not absolutely. A government could have only a few laws governing the behaviour of its citizens, but could be spending large amounts of taxpayers’ money on state activities. Conversely, it could have many laws controlling public activities, but spend very little on anything else. Champions of free enterprise and free markets have always argued that minimum laws and a small government share of economic resources are necessary for economic growth and prosperity.

That capitalism is in a crisis is no longer seriously questioned. The real question is whether free enterprise is also in a crisis and will be seriously challenged and assailed as an exclusive integral part of capitalism.

For the two are different. Capitalism is a system which may need free markets to flourish, but ultimately its real purpose is the pursuit and growth of capital. Free enterprise is a state allowing maximum freedom of choice for all of its citizens, and the only system required is the protection and nurturing of these freedoms. It can be found in mixed economies and socialist states as much as in capitalist states.

A basic tenet of capitalism suggests that capital is a scarce resource and that its owners in the protection, pursuit and growth of capital are the ultimate gods of wealth creation. This is debatable. Apart from capital reserve accumulation World-wide, capital paramountcy makes some dubious assumptions about motive, and ignores the fact that great efforts, meaningful contributions to society and entrepreneurial achievements have seldom been linked solely or even mainly to this pursuit. Ingenuity and effort attract capital. It is not the other way around.

Free enterprise on the other hand does not concern itself about motive but only with one fundamental truth: that all value is determined by the ultimate customer in free, fair and legitimate transaction. An individual’s or even a company’s real worth is not determined by a board, a boss, experience, certificate, or asset ownership but by an end customer who finds his or her efforts worth paying for – by the ability to make a contribution to others.

Free enterprise and free markets are inherently a benevolent state implying service to the other. The profit motive, shareholder value and maximisation of returns on capital are inherently self-serving.

Ultimately you can never blame an “ism”, but rather behaviour in that system. Clearly a “system” has the propensity to promote or encourage specific behaviours but unless it is completely tyrannical and repressive, individual values will play the dominant role. So, to avoid ideological posturing, let’s accept that behaviours --individual, corporate, and state – have created something of a mess in the “free world” and have become a threat to the freedoms that the system was supposed to have promoted.

The argument that one of the conditions for economic prosperity is small government, as reflected in its share of national wealth creation, or gross domestic product, is contradicted by the table below. (Ranked according to Life Satisfaction). In the United States, for example, the government share of GDP is at its highest since the 2^nd world war. The explanation that the state’s share increases as it acts contra-cyclically in times of recession does not account for a steady increase over the past 50 years. Most of the nations listed have shown similar government growth, with some at nearly half of GDP. To that one must add public (government) debt which in many cases exceeds the 60% to GDP prudent level for a developed nation.

To test the small government hypothesis, I included other economic welfare indicators. Denmark defies the assumption having a state involvement of about half of GDP, a marginal personal income tax of more than 50%, although a moderate company tax rate of 25%. Denmark’s public debt level is very modest. It ranks highest in the Gallup Life Satisfaction index; the Danes are amongst the wealthiest people in the world and income differences as measured by the Gini index are amongst of the lowest in the world. An important composite indicator covering incomes, education and health is the Human Development index. Here Denmark ranks 16^th with Norway 1^st.

A relatively high government share of GDP and high individual as well as company taxes have not affected the competitiveness of Denmark, Norway, Germany, the Netherlands, United Kingdom, Australia and the United States all of whom are ranked in the top twenty of the WEF competitiveness report. One, perhaps tentative conclusion one could reach from global experience is that countries need a high level of wealth creation and accumulation to afford higher government involvement.

Singapore may be the one confirmation of the small government argument. Its very low government share of GDP is based on very low company as well as personal tax. Its Achilles heel is high public debt.

But then, South Africa shows the opposite. Of the countries listed it has one of the lowest government to GDP ratios and a modest public debt level. Its real predicament is reflected in its relatively low per capita income; the low ranking of 123 in Human Development and of course the unsustainable conflict promoting income differences shown in the Gini index. The HDI ranking is perhaps the most telling – showing our real vulnerability because of poor education and health care.

South African tax rates come close to those of a developed nation, which reflect its ultimate dilemma of having too few taxpayers to sustain a higher government share of GDP. There are more people relying on social grants than there are people paying income tax to support them. To boot, life satisfaction in South Africa is one of the lowest in the world.

What the table confirms is that on its own the government share of national wealth creation, whether in tax or expenditure, does not present any real threat to free enterprise. There are far more telling things, such as the nature of government and the nature of its spending; whether it is incorruptible, efficient, effective and appropriate. Without these, the “2^nd phase” in South Africa is doomed and a “mixed” economy will be a recipe for economic ruin. Greater state involvement requires “organisational renewal” in government itself and not only in the ruling party.

The real threat to free enterprise lies in the second aspect of government involvement in people’s lives – rules and laws that control individual activities and choices. The Legatum Prosperity index ranks South Africa 55^th on personal freedoms. Norway is ranked 1^st with Denmark 2^nd and Australia 3^rd. We also receive a disturbingly low ranking of 65 in the “social capital” measurement which is based on social networks and the cohesion that a society experiences when people trust one another. As desirable as they may appear, coercive interventions invariably have unintended consequences at least some of which could explain South Africa’s arguably crippled economic state.

Not only is there no clear link between state spending and a threat to private enterprise, in some cases it could promote freedom. As economist Cees Bruggemans has pointed out, none is more powerful than education and training.

Without knowledge we cannot be free.

 

Country	Life Sat rank	Tax % GDP	Exp. % GDP	Debt % GDP	Ind. Inc. $ p.a.	HDI Rank	Inc. Dif. (Gini.)
Denmark	1	49.0	51.8	46.43	59,928	16	25
Netherlands	15	39.8	45.9	66.23	50,355	3	31
Norway	19	42.1	40.2	49.61	97,255	1	26
United States	23	26.9	38.9	102.94	48,387	4	41
Australia	26	30.8	34.3	22.86	65,477	2	35
Germany	35	40.6	43.7	81.51	43,742	9	28
United Kingdom	41	38.9	47.3	82.50	38,592	28	36
Singapore	53	14.2	17.0	100.79	49,271	26	42
Brazil	81	34.4	41.0	66.18	12,789	85	54
China	82	18.0	20.8	25.84	5,414	101	42
Russia	167	34.1	34.1	9.60	12,993	66	42
India	180	18.6	27.2	68.05	1,389	134	37
South Africa	190	25.7	27.4	38.77	8,066	123	67
Sources: Heritage Foundation and Wall Street Journal. IMF. World Bank.

Feeding the evil wolf.

Have shareholder interests and customer interests parted company?

It’s a story worth repeating: the one where the wise old man tells his young protégé that all humans have two wolves doing battle inside of them – one good and one evil. When asked which one will win, he replies: “The one you feed the most.”

What outcomes can we expect from our economic co-existence when our diet consists mainly of immediate self-interest and self-serving junk food? When it is based on assumptions about motives that are inherently malevolent; and when we have structured that system to appeal to the worst in us and not the best. We assume for example, that most “normal” human beings are driven by their greed and avarice or their fear and insecurity.

“Do this for me,” we say, “and I will pay your more.” And if that does not work, we flip the coin and say: “If you don’t do this for me, I will fire you or cut your bonus.” Do we honestly believe that we will get the best out of people by appealing to the worst in them? Why the indignation and outrage when they lie, cheat or deceive sometimes on a grand scale like fiddling with Libor? Then we take hypocrisy to a totally ludicrous level by condemning as criminal those who have pushed that envelope a bit too far – well perhaps far too far if one reads blogger Robert Scheer’s description of it as “the crime of the century”. Still, it is only when these acts make headlines that we parade principled pixies such as values, morals, and ethics onto a sanctimonious stage, forgetting that there is an underlying force created by our assumptions about humanity and economic drivers.

I was going to add my rather thin voice to the outcry, because few love those pirouetting pixies more than I do. But in the wake of the Barclays debacle, which saw some high-fiveing traders being accused of rigging one of the most important base rates in the world -- the London Interbank Offered rate or Libor -- the coverage was somewhat overwhelming. So I decided to see whether it would reflect a growing consensus that business simply has to encourage a return to some “old world” values of honesty and integrity.

And so it did. But as usual, the remedies were proposed within two approaches – either change the structure, or change the behaviour.

Outspoken economist Nouriel Roubini has suggested that many of the structural issues that caused the financial crisis have not yet been addressed. "The incentives of the banks are still to cheat and do things that are either illegal or immoral," he argues, suggesting a breaking up of “these financial supermarkets” which within one house contain a massive conflict of interest between commercial banking, investment banking, asset management, brokerage, insurance underwriting and derivatives.

Another structural solution came from British opposition leader Ed Miliband who suggested that the country's big five banks should be forced to sell hundreds of branches to create at least two new major competitors by 2015.

On the behaviour side, we have the Financial Times analysing the shift of Barclays from “sober” Quaker values some three hundred years ago, to a culture of aggressive trading today. Local banking expert Kokkie Kooyman attributes part of the blame to lack of oversight by the British Financial Services Authority, but more on the Barclays board for badly planned incentives and failing to “select a CEO to whom they can entrust the running of the company in the best interest of shareholders.”

International Monetary Fund Chief Christine Lagarde and Bank of England governor Mervyn King see the problem as the focus on profits rather than customer needs.

And there’s the problem right there – highlighted in bold italics. Which focus is more likely to ensure appropriate behaviour –shareholder interests or customer interests? For as long as I can remember, and in everything I learned and read in economics over many years, there has been the assumption that they are synonymous. It was perhaps an academic point until about the late 1970’s when there was a pronounced shift to shareholder expectations, introducing the so-called “shareholder value era”.

The concept of expectation based share-value driven business is relatively new and coincided with the advent of a host of new trading features, conditions and mechanisms that arguably gave it great impetus to a point of frenzy. They included financial deregulation, split-second electronic trading, speculation, derivatives, and new executive incentive structures. The shareholder value postulate has undoubtedly shifted business behaviour. It may be too early to reach scientifically researched conclusions about its effects but so far these seem to be negative.

What it has done is to switch our reasoning around cause and effect. For centuries there was a simple logic that the entrepreneurial spirit, creativity, innovation, passion, and a desire to make a difference attracted investment capital. Today this has been flipped to argue that the deployment of capital creates entrepreneurial behaviour and all those other essential attributes for wealth creation and prosperity. Cold war rhetoric and its lingering ferment ensured that this view became the holiest of grails and the most sacred of cows.

An important premise of shareholder-value supremacy speaks to a very deep and fundamental assumption about humanity – that immediate material self-interest, acquisitiveness and greed are basic to being human. We’re on very dangerous ground when economists, accountants, traders and brokers make policy-affecting assumptions about psychology. We have had a psychologist win a Nobel Prize in economics. I simply cannot imagine a traditional economist winning a similar prize in psychology, unless he or she has fallen off a horse somewhere near Damascus.

To argue that greed is a basic instinct “and part of human nature” is simply wrong! The basic instinct referred to is that of survival, which evolved into gathering, storing and hoarding. Greed is a perversion, an inexcusable, abominable and contemptible excess of that instinct. To even remotely link it to being human is demeaning to our species and not unlike linking rape or paedophilia to the basic instinct of procreation. Besides, we have a countering basic instinct of care and concern for others grounded on an empathetic mirror neuron. This instinct has time and again overpowered the instinct of survival.

On top of all of that we are rational creatures that should through our leadership, social structures, parenting, and education be nurtured to a point way beyond such baseness. Because these institutions may fail us from time to time, it still does not give us an excuse for misconduct and outrageous behaviour.

We must rescue economics and our transactional lives from this demeaning and gross expression. Instead of extrapolating the basic instinct of survival to acquisitiveness and greed, we should extrapolate the instinct of care to contribution and service.

This, and not shareholder value, should drive the economic machine. This is the economic wolf that should be fed.

Is trusting each other an out-dated concept?

Why events such as the social cohesion summit will not succeed.

There’s something seriously wrong with me. The unwavering belief that there is mostly goodwill in the majority of human beings must be a reflection of an unhinged mind – or so I gather from some of the comments on my articles and conversations with friends and acquaintances. Global surveys that show consistent erosion in trust in institutions such as government and business is further evidence of my deluded state.

It’s not that I have not experienced more than a normal share of cheating, deceit, betrayal, loss and even criminal actions. I have. I’ve experience murder close to home; muggings, been defrauded by someone very close, betrayals and dishonest dealings. I’ve been told that I also have an above normal level of insecurity. Yet I hold on to the belief that most people are fundamentally good and benevolent.

It’s based on the simple logic that if 7-billion or so people on the planet were overwhelmingly driven by unbridled greed and their own immediate self-interest, were out to exploit and gaff each other at every opportunity and were prevented only by law from doing so, we would simply terminate ourselves in a kind of “species-suicide.” The “social contract” defined by the 17^th century British philosopher Thomas Hobbes would be torn up and we would indeed have a “war of all against all”.

In the absence of a large measure of mutual goodwill we would have to have many more “watchers” in uniform, and then more watchers to watch the watchers and so on. We would certainly need to have many more laws, which will create more criminals in turn requiring many more prisons until those inside outnumber the free – although arguably the free would be shackled by their own fears and insecurities.

At the same time, it can be argued that distrust has a strongly nurturing environment, surrounded as we are by crime, corruption, government and business misconduct, and social and economic insecurities. These are the things that make news headlines. In the process we miss the point that they make news headlines because they are still the exceptions, albeit more frequent, and that the vast majority of our day to day interactions and transactions are based on a very good measure of trust and mutual benefit. They do not make headlines because they are normal and indeed mundane.

Trust captures the ability to assume the benevolent intent of another. It is not necessarily an absolute or unconditional state. There are an infinite number of degrees between absolute trust and absolute distrust. The critical issue is that it should never be withheld automatically, and that at its most neutral point, there at least has to be a large measure of willingness to trust, an openness to accept the good intent of the other. Intuition, experience and wisdom deepened by life experiences enable discretion but they too can become dysfunctional if they imply automatic distrust. That is a state of paranoia and even a possible neurological disorder called dementia. It is a state of immense individual disquiet and suffering.

Trust can only be earned by having the interest of the other at heart. That implies a demonstration of that intent. It cannot be earned by approaching the other with a clear intent of getting something out of them; of approaching them with demands and your own needs and wants. Not only does that erode trust, but it is a strong motive to distrust.

That is largely what happened at the recent South African Social Cohesion Conference. Apart from the fact that it mostly paraded a litany of known problems obstructing cohesion, a number of the key role players seemed to see the summit as a platform for repeating hackneyed demands. Unsurprisingly, chief amongst those was the Trade Union leader Zwelinzima Vavi, whose refrain “no social cohesion without economic equality” was a cohesion killer at the outset. No-one disagrees with the argument that we have an intolerable level of income inequality but having used that argument in many a wage negotiation, organised labour has made it a demand for higher pay rather than for addressing other key issues such as lack of South African labour flexibility and competitiveness, and empowering the workforce with skills, opportunities and most important of all a desire to make a contribution..

Putting demands to the other is a sure killer of trust, and the summit, at least in my researching of the unenthusiastic media coverage, reflected an absence of willingness to make sacrifices and a contribution in the interest of engendering trust and social cohesion. It was set up to fail. But then the timing is not right for such a lofty ideal. We simply have to get the basics right, do what we know has to be done, and government effectively and incorruptibly do what it has been mandated and given taxpayers’ money to do, before such an ideal can become remotely practical.

The second reason for my deluded state of trusting the general goodwill of mankind is that the immediate self-interest driver in business and economics is an aberration, a perversion of the natural existential state of transaction. Despite the on-going Barclays Bank debacle, revealing a very self-serving global financial sector, if not business generally, we tend to forget that overall most transactions, of which small and medium businesses make up a good number, reflect a different and more trusting picture.

My trust in business is rooted in a more fundamental and longer term reality. Again beating an old drum of mine, the natural relationship between supply and demand is that supply exists to serve demand. Transaction has a benevolent base and economics works at its best when it gives due recognition to this, when companies see their primary role as being of service to customers. “Going back to the basics” as IMF Chief Christine Lagarde told the financial sector. The rest, wages and profits are outcomes aimed at ensuring sustainability and continued service.

This message has been lost in the past few decades. Until it returns (and I have faith that it will) the granting of trust will be reluctant at best, and restricted to misguided souls like me.

Executive incentives are “deeply flawed”.

A new authoritative study questions whether incentives are achieving what they set out to do.

It is one thing to pay too much for something. It is another if what you have paid for does not work. It is becoming increasingly clear that both of these conditions may be applicable to executive incentives, still one of the most contentious socio-economic issues of our time.

The global corporate consultancy, PWC in collaboration with the London school of economics has just released the findings of a study examining the issue against the background of what it describes as “an emerging consensus, at least in Western economies, that there is something deeply flawed about the current model of executive pay”.

It argues: “Executive pay has risen dramatically over a period when, in hindsight, the Western economic model has not been at its most successful.”  This may be too broad an assumption to conclude what PWC has concluded, but it backs up many similar research findings, one by author and Columnist Roger Martin who has determined that: “Total returns on the S&P 500 for the period from the end of the Great Depression (1933) to the end of 1976, the beginning of the shareholder-value era, were 7.5% (compound annual). From 1977 to the end of 2010, they were 6.5% -- suggesting that shareholders have little to celebrate, despite having been made the clear priority.”

Business Report’s Ann Crotty has written consistently and critically about the subject over many years and has earned an authority equal to that of a practitioner in the field. In a recent column she highlighted an interesting point extracted from the PWC study regarding demands for disclosure “in the innocent belief that these executives would be shamed into being reasonable in their demands.” The effect has been the opposite!

“Despite a huge amount of guff, passing itself off as insightful and expensive analysis, the key factor influencing pay was that playground whine: ‘He’s got more than me, that’s not fair.’ In the corporate world this puerile attitude is dressed up and presented in a sophisticated form, as ‘market forces’, which apparently cannot be challenged.”

The “market forces” theory can also be effectively debunked from other perspectives. I have questioned the benchmarking of executive pay in several previous articles which in summary have argued:

· The term “executive” is far too broad, and includes entrepreneurs (builders and creators) who are distinctly different from the risk-averse professional managers demanding similar rewards. The agency theory (getting executives to think like owners) does not work.

· The supply pool of executives is artificially constrained by an insistence on “track record” which often takes decades to build up and very often means very little in a different industrial context.

· Supply is further constrained by poor leadership, mentorship, succession-planning and management development.

· Global “peer-group benchmarking” has no tangible scientific validity that warrants general automatic remuneration levels on a global standard. It is indeed contested in the PWC findings which highlight stark differences in executive expectations and behaviour in different countries.

· Executive pay is based on the wrong measurement criteria and performance outcomes.

Regular readers of the Human Touch can be forgiven for starting to believe that I am a bit obsessed with this subject. But even old stories can have fresh angles and when it deals with an issue that extends beyond business to social discontent, then each new development deserves attention. What makes this latest study very different is that it not only examines the efficacy of executive incentives from a shareholder perspective, but, as far as I know for the first time, from the perspectives of the executives themselves -- about 1100 from 43 countries.

The key findings are:

· Executives are risk averse: Most people chose fixed pay over a bonus of a higher value. Only 28% chose the higher risk option.

· Complexity and ambiguity destroy value. The majority of the respondents prefer a clearer pay package over a more ambiguous one of the same or potentially higher value.

· The longer you have to wait the less it is worth. Deferred pay is valued at significantly below its economic or accounting value and is typically discounted by up to 50%. This puts a high cost on long term incentives (LTI’s) which typically have a three year horizon.

· It’s all relative – fairness is fundamental. Most executives would choose to be paid less in absolute terms, but more than their peers.

· People don’t just work for money. Participants would accept nearly a third less pay in exchange for their ideal job.

· The key motivation of a long-term incentive plan is recognition. Fewer than half of executives think that their LTI is an effective incentive. But most still value an opportunity to take part in something similar.

The report emphasises that one simply cannot apply a one-size-fits-all approach to executive incentives. They have to take cultural and geographic features into account, but in particular be based more on understanding individual behaviour than classic economic cause and effect theory.

Executive pay levels have been subjected to many critical analyses, media attacks, shareholder disquiet and socio-political agitation. Few can contest the premise that it is an intolerable assault on the concept of socio-economic fair play. Those directly involved appear to be doing little more than burying their heads in the sand in the hope that it will go away.

It won’t.

All this attitude is doing is to provide a very effective arrow in the quiver of those agitating for misguided and enforced egalitarianism.

From containment to growth.

Is there more to South African company cash hoarding than policy uncertainties?

South African companies are sitting on a hoard of cash. They claim this is because of uncertainties around Government policy decisions implied in President Jacob Zuma’s call for a “dramatic shift” to spread wealth and the so-called “second transition” – the new ANC catchphrase to placate the masses regarding lack of economic progress.

This could be so, especially for mining companies. But the general link to these latest developments is tenuous at best. So far, the stock- and foreign exchange markets have been relatively undisturbed by the rhetoric while the policy documents themselves do not quite live up to Zuma’s “drastic change”. In addition they still have a long way to go before becoming official policy.

Mainly due to economic recession, company reserves have been building up for some time in many developed nations, as they wait for the next government aid or stimulation package to give them easier markets through higher consumer demand. In the United States alone this hoard is estimated at $1.25trn. In South Africa at last count, it was R530bn – half of the Government’s annual budget.

Unusual cash reserves reflect a lack of corporate entrepreneurial flair, hung up as they are on shareholder value, short term profit maximisation, and executive self-interest which all work against an essential ingredient of entrepreneurship – being able to look beyond calculable risk and not being blinded by immediate returns. In addition, large cash reserves facilitate share buy-backs which line the pockets of executives through share options and enhance share values without much effort or taking any risks.

These perspectives and the size of the cash hoarding make business vulnerable to populist rhetoric. It’s only a matter of time before politicians cast their beady eyes on the hoard and explore ways of accessing it. Already there’s a suggestion to revive prescribed assets for financial institutions to use private savings for development.

And all because business is not doing what it should do best – explore opportunities and invest in growth.

It’s long been an insight in organisational theory that strategy is about maintaining short term profitability for longer term wealth creation. But for a number of years the second half of that vision – longer term wealth creation – was abandoned and companies, indeed individual behaviour and global economies generally became trapped in a vicious cycle of short-termism, impatience, quick-buck thinking and speculative wealth creation.

We all know the results. A frenzy of speculative froth created a bubble which burst in 2008, plunging the world into persistent recession and causing excessive levels of public debt. Most companies were caught up in the fervour. Competing for capital in a market which favoured quick returns, they were pushed into unsustainable levels of short term earnings growth and linking high levels of executive rewards to rapid increases in shareholder value. In turn this exacerbated unemployment and income disparities. Still today, executive returns are seldom linked to company performances beyond three years or so.

So how do we turn this around? I have argued before that it’s all in the measurement: counting what counts. And now I want to argue the case for wealth creation, or value added, as the focal point rather than profit or shareholder value.

Sustainability has become a key strategic issue, but many see it more in a social and environmental context than from a company’s longer term viability perspective. The two are clearly linked; as are the other key business concerns today of governance, transparency and accountability.

It was at a conference on sustainability that I became aware of the power of the value-added measurement to longer term growth. I was conducting a workshop for a group of senior and experienced accountants, and gave them an actual Contribution account (an adjusted value-added statement) to work with. The question was simple: what would the company in question have to do to increase wealth?

There were, of course many responses. But they all agreed on one crucial point: the exercise forced them to focus on growth rather than containment; to look outward rather than inward. If I had asked them what they would do to increase profit, they would automatically have paid more attention to costs and containment, particularly employment costs. As Business Leadership Chairman, Bobby Godsell, lamented recently, it’s a focus that side-lines labour.

The answer is again quite simple. The Contribution account breaks up into two components: creating wealth and sharing wealth – or more behaviourally and philosophically – contribution and reward; or giving and receiving. The income statement and profit emphasis focus on a specific component of wealth distribution, making all else fair game in its maximisation without necessarily increasing wealth creation.

The simplicity of wealth creation is also its strength: it’s the difference between the value of what you have sold and what you have used from outsiders. In accounting terms it is portrayed as sales, income or turnover, less outside supplies, including interest and depreciation. (The latter two are my adjustments because I believe it more accurately reflects real wealth creation).

The most important feature of the top three lines is that they do not include employees as an outside cost. As contributors to wealth creation, they are beneficiaries of wealth distribution. If the task is to increase value-added or wealth, you cannot have recourse to cutting staff. The illustration shows that an increase of 5% in sales and a reduction of 5% in outside costs lead to a 15% increase in wealth creation. Cascaded to distribution, it means that the three beneficiaries of wealth: capital, labour and state, should all receive 15% more.

Increasing wealth creation boils down to only three actions or a combination thereof: sell the most you can, get the best price you can, and cut outside costs. As my workshop accountants discovered, these are mainly the result of being outward looking, growth orientated and service driven. This by no means implies that they are easy to achieve. If they were, companies would clearly opt for wealth creation and growth before they go for rearranging wealth distribution to increase profit. In a tough economic climate and a focus on the quickest returns possible, it is clear that sharing the cake differently is a much easier option than to try and bake a bigger cake.

In the long run, containment is a self-defeating practice that unfortunately has become a matter of routine and automatic option for most big companies. The general decline in customer service is just one symptom of an inward looking focus. At the very least, increasing wealth creation and a regular serious exploring of the three actions mentioned should be the overriding element of any strategic agenda. Executive management should be held accountable much more for wealth creation than for shareholder value and rewards should be directly linked to the value-added measurement.

Wealth creation is the outcome of adding value to people’s lives. A much stronger focus on it will return business to its primary task – being of service to others. At the same time it ensures growth and sustainability.