Standing next to the bishop.

The maxim cautioning advertisers against “standing next to the bishop” means simply that they must be wary of the attention they draw to themselves and their motives.

That saying came to mind over the recent furore sparked by asset manager Futuregrowth’s announcement that it would stop “lending” money to a number of South African state owned enterprises. That in turn set off a number of responses including market jitters with the rand losing 1½% on the day and most likely playing some part in Moody’s decision to review the ratings of five parastatals.

Futuregrowth, in the form of Chief Investment officer Andrew Canter, took the stand next to the bishop, not so much by the decision, but by its widely publicised announcement. While some hailed it as brave and even “revolutionary”, I had a very small overripe tomato that I flung as a question on social media regarding a lender unilaterally announcing to the world that it would no longer accommodate a specific borrower. Imagine if your bank blacklisted you publicly after considering a loan application.

Canter has subsequently conceded that there could “have been a fairer process” and that “the story had some remarkable unintended consequences”. Is being fully aware of these things not why one invests in these institutions? That aside, Canter’s integrity is not in question, and he was responding to a situation that was common knowledge.

The problem with hurling a tomato at the one next to the bishop is that you could hit the bishop. As I discovered when my missile was blown off course by a “fiduciary wind” and the argument that these high profile borrowers were being subjected to reckless political meddling. In the words of Pravin Gordhan, the move was a “useful lesson that we should not think the world is not watching us”.  But that should add more concern, because like cluster bombs, the fallout has been much wider and has added further stresses to all levels of the South African population.

With no innuendo intended and as a general hypothesis of the incredible weight of responsibility placed on financial institutions generally, one has to reflect on a conundrum they face.

If an institution can foresee that a certain public announcement could have a marked effect on financial markets, does it not have a duty to protect its own book against such a fallout? Perhaps even exploit that situation for its own or related clients? If it does not do so, and their clients are negatively affected, would they have acted in their best interests? The danger that presents itself under the umbrella of “fiduciary responsibility” is increased exposure to insider trading – albeit unwitting and perhaps even with good intent.

Of course, it would be outrageously illegal if an entire event is staged specifically for that end. This is covered by legislation, but the problem with insider trading is that its trail can so easily be lost from source, via brothers, lovers, uncles to one eventual beneficiary.

It is sometimes very easy to stand next to the bishop in a charged atmosphere. The American banks arguably did that in 1985 when they pulled the plug on South Africa. What was not so well known was that despite trade sanctions, these same banks, backing a commodities upsurge in the preceding years, were seducing the country into issuing more IOU’s. Financial sanctions coincided with American institutions unwinding commodity investments as the boom began to falter. (See chart here.)

Let me emphasise that the South African financial services industry is highly respected, well regulated and acknowledged by august institutions as one of the best in the world. This reputation has to be protected and defended at all costs. Positioning itself as an economic moral compass will ultimately make that task more difficult. No sooner had Futuregrowth gone public, than all kinds of misguided missiles were flying all over the place – from Mining Minister Zwane’s call for an inquiry into Bank behaviour towards Oakbay, to some naive interpretations of the role of the Reserve Bank.  

At least some of their baskets are filled with the toxic fruit of the Global financial industry. It is common cause that reckless behaviour played a large role in the 2008 meltdown – a state that led the then Fed Chairman Alan Greenspan to lament that he was wrong in trusting the industry to act in the interest of its long term survival. It has been rife with scandals, corruption and price manipulation for decades and is constantly being subjected to further controls.

On an individual and product or service level, financial services add little tangible and measureable value, yet their sheer size and spread contributes about 20% to global GDP (See Moneyweb article here.) It has become by far the biggest driver of the world’s economic destiny, with individuals in control using other people’s money to shape that course; being paid large sums to do so, yet risking very little of their own personal wealth.

The industry is widely fragmented and hugely diverse, but as a whole and virtually by default, it has become a “5^th estate” perhaps the most powerful outranking others vaguely defined as government, the private sector, general consumers and of course the media as the 4^th.  As a balancing force in a healthy democracy, any additional watchdog with teeth should be welcomed – especially in a country with deep-seated patronage, nepotism and corruption that even institutional bull-terriers and judicial Dobermans have difficulty in controlling. Ultimately, it’s about who is watching the watcher -- the 4^th estate?

Standing next to the Bishop to the point of overwhelming his presence demands a full appreciation of the gravity of that position and an ability to put narrow interests aside for a greater good – especially those with market influence.

Can they do that? 

What would Leonardo do?

Distractions from contributing to the great age of innovation.

Leonardo Da Vinci was a truly remarkable human being. This 15^th century “Renaissance Man”, not only left an enduring legacy in his art, but inventions and observations that bear testimony to his incredibly diverse mind and insatiable curiosity. These covered anatomy, flying machines and weaponry, architecture and water and land machines. They were so ahead of his time that only years later, indeed sometimes centuries later, some were tested and found to have worked!

Da Vinci must rank as one of the greatest inventors of all time. Yet he certainly does not stand out as one of the great entrepreneurs in history. Which points to some subtle distinctions between invention or discovery; innovation itself, and entrepreneurship. Invention is the idea; innovation the functional application of the idea and entrepreneurship, the commercial deployment of both. These roles are often, although not necessarily, found in one person. But they are all crucial to invention finding full expression in the difference it makes to mankind.

So where are the Da Vinci’s in our midst? They are everywhere, albeit on a much smaller and less impressive scale. Daily, natural curiosity and intuition drives each of us to question whether there is not a better way. Often enough, that finds some expression in an invention – from cow-poo power to a CAT scan that made its mark on the global stage. But do we effectively bring those three legs of discovery, innovation and entrepreneurship together to establish fullest impact?

The statistic tends to show that we do not. There are many global measurements of innovation in different countries and despite some impressive individual achievements (see top ten inventions here), we do not rank very highly in most of them. The Bloomberg comprehensive index does not put us in the top 50, where countries such as Malaysia, Ukraine, Tunisia, Argentina and Kazakhstan have a place. The International Innovation index gives us a more favourable position of 34^th of the 110 countries measured. The authoritative Global Innovation Index, in its 450 page report for 2016 (see full report here), ranks South Africa 54^th of 128 countries.

The mixed findings between these and other highly ranked research efforts illustrate the multi-facetted and complex nature of innovation. The three mentioned do not agree on even the top ranking with Bloomberg and the I.I.I. placing South Korea first and the G.I.I. placing the country below the top ten. It has Switzerland first.

But rankings aside, there is universal recognition that innovation is arguably the most important catalyst in ensuring sustainable prosperity for a nation. Even a superficial analysis of country prosperity over an extended period unequivocally shows that.

Getting there presupposes that the national economic goal itself obsessively nurtures and promotes it, and creates an environment in which it can flourish. That rests on 2 key interrelated pillars or choices: between being market driven or production driven; and between focusing on wealth creation or wealth distribution. Any talk of “adding value”, “establishing a manufacturing sector” or “beneficiation of raw materials” is just that – lip service in a confused understanding of what these really mean.

Then it becomes useful to reflect upon countries that consistently rank in the top of the most innovative and in economic health measurements.

INNOVATION
Country/Economy	Rank
Switzerland	1
Sweden	2
U.K.	3
U.S.A.	4
Finland	5
Singapore	6
Ireland	7
Denmark	8
Netherlands	9
Germany	10
Source: GII 2016 REPORT.

Human Development Index. 2014
Country/Economy	Rank
Norway	1
Australia	2
Switzerland	3
Denmark	4
Netherlands	5
Germany	6
Ireland	7
U.S.A.	8
Canada	9
New Zealand	10
Source: countryeconomy.com

Correlation is not proof of cause, but when correlation is fairly consistent over time then it certainly provides a good indication of cause. An important deduction that can be made from the innovation table is not what those countries have but rather what they, for the most part, don’t have – and that is natural resources or commodities. It boils down to simple logic, the more material resources you have, the less you focus on the development of people. In the second table, where there are more resource rich countries, those that succeed are also those who pay attention to human development. But even then, only three with abundant resources make the top ten.

Which works against the first imperative of innovation – being market driven rather than production driven. It is often argued that commodity producing countries are by nature open market-driven economies because they are so dependent on commodity markets. There’s a huge difference between being market driven, and being dragged by the market. The first is being a master; the second a dependent slave. The first is having an external focus; the second being internally focused.

The long established key requisites for national prosperity are: having an external focus and developing people. Commodity based nations seldom do either. Which naturally drives them into the second iniquity: a focus shift from adding value to people’s lives and creating wealth, to distribution of wealth that comes from simply breaking rock and digging big holes. This may work in the good times, and distracts these nations from being market driven. But when commodity markets slump the wealth distribution focus leads to greater government encroachment and state dependence.

Economic theory tends to put homo economicus in a production context rather than a social context. This is more so in commodity producers and blunts an important understanding of adding value – that of being useful to others.  As a humanist, it most likely came naturally to Leonardo Da Vinci.

You only have to gaze at the Mona Lisa to appreciate that.