The chicken run

Does Minister Davies know something many small poultry producers don’t?

Not more than 20 meters from my idyllic rented farm house nestled between the slopes of the Langeberg Mountains and the Breede River is a forlorn abandoned chicken run.

It’s a nostalgic shrine to fruitless attempts at self-sufficiency -- that deep and irrational urge that tugs at one’s conscience in troubled times – when politicking can stymy one of the world’s biggest national budgets; when a debt laden populace loses faith in its means of exchange; when poo is thrown in protest and when violent political springs are sprung.

That chicken run played no small measure in my decision to become an urban refugee. I had comforting visions of roosters heralding the dawn and copious feasts of eggs and drumsticks harvested from scores of fowls running freely in the considerable expanse around the renovated “opstal”. The potential abundance could be shared with friends and neighbours in exchange for cabbages and corn, offsetting potential protein overload.

What followed was a long and sorry struggle. First we discovered that our locally acquired motley clutch refused to seek refuge in the badly fenced run, let alone the decades old zinc chicken house. Attempts to get them to lay eggs in nests fashioned from plastic crates were fruitless. They chose rather to hide their passion fruit under thorn bushes and stinging nettles in the surrounding hectares and sleep in trees to show us that contrary to popular belief they can be quite accomplished fliers. Catching them for the table was beyond any geriatric capability.

Then came the day that one of our pet Jack-Russells proudly dragged in a headless carcase, followed soon by another, and then another. Disbelieving that nature could be so wasteful, we concluded that it was our two spoilt Jackies who had lost the art of hunting for food, emulating humans in killing for sport. Our decision to let them go was supported by their over-zealous appreciation of freedom to disappear for days and form packs with other dogs in terrorising everything that moved in the area.

We had little time to mourn their departure, before we found another carcase in the same headless, blood-drained state – and then more until our clutch of fifty or so was reduced by half. The Draculas were none other than fat otters from the Breede River, already overfed on guinea fowl. So like humans, our fowls were imprisoned in the name of freedom. Free range became semi-free behind a fenced 500 square meters of fertile bug and foliage carrying land. The house itself was cleaned and renovated but retained its original reed and bamboo fixtures which clearly had served its previous inhabitants well.

Then they all got sick. We thought they were overwhelmed by the loss of their freedom and were going through the four stages of grief. But then one died and soon all were gone apart from the wily old rooster. It took a local to inform us that they died of anaemia caused by blood sucking lice. The tiny creatures were dormant for years in fixtures we preserved in a misguided salute to bygone days.

At the grave of our dear departed feathered friends, we resolved to “do things properly”. The fence was replaced with costly professionally installed 1.8-m high heavy gauge jackal wire and the “hok” stripped, refitted, debugged and repainted with bitumen that’s the nemesis of any creepy crawly.

Without costly machinery, slaughtering would be a hurdle, so I studied various means of killing, de-feathering, and dressing to prepare them not only for the pot, but perhaps sell to the local mom-and-pop stores. The best, clean and bloodless method, Google informed me, was to stick a steel knitting needle in the beak and shove it into the miniscule brain. But one clearly mellows with age, to the point where one is repulsed by the killing even of sworn enemies such as spiders and snakes. The decision on slaughtering was postponed – indefinitely it turned out.

Our run was restocked with a mixture of 3 month old layers and broilers purchased and transported from Malmesbury and each costing as much as a dressed fowl in the supermarket.

Then we again found a headless carcase, and the carnage resumed. Those fences may have kept out otters, but not local musk cats and mongooses that burrowed under the fence and found other forms of entry. The run was fortified with below surface chicken wire.

And then came the hawks. They would swoop in and claw at our precious poultry before realising that not even their splendid wings could lift their prey, leaving a dead bird behind. We planted a long pole in the centre and suspended nylon cord from it to the fence, attaching blank cd’s at various intervals to blind their superlative vision. It did not deter their entry, only their exit, leaving us with a terrible conundrum of dead fowls and trapped predators. We covered the larger gaps with fish net and the hawks gave up. So did the otters: mongooses, musk-cats, ferret cats, meerkats, stray dogs, and the occasional wine-fortified human.

What finally killed the venture was economic. Having denuded their semi-free range of all goggas, creepy crawlies, and foliage, our expensive clutch had to be fed from locally bought crushed mealies, the price of which doubled to R60 for 10kg in less than a year. The ROI simply did not warrant the venture, including its rustic value of outside moving wall-paper and a nostalgic crowing at dawn.

So when Trade Minister Davies asks “If we can’t produce chickens in South Africa then what can we produce?” I am deeply mortified and have to hang my head in shame. My attempts were clearly unsustainably amateur. Perhaps I should try again after giving him a call. Perhaps too, he can pass on that something he clearly knows that many small, cottage producers might not, adding advice on combatting infectious diseases such as bird flu; quick, clean, inexpensive and precision slaughtering and dressing; avoiding health risks and coping with rising feed costs.

But one part of his question I can answer -- what we can produce.

Those things that we are good at; that we can competitively excel at. Those things where we can create more productive jobs; that will earn us the income to afford cheaper imported poultry that is the primary source of protein for the vast majority of South Africans and that do not burden beleaguered consumers with tariffs that only fill government coffers and protect domestic inefficiencies.

If we cannot compete in a race, we should not run in it but rather enter those where we can, and not handicap runners in the former. Of course it is not that simple in the dog-eats-dog world of international trade, rife with tit-for-tat protectionism. But the underlying principle is sound. We have to learn that we should always act in the interests first of the customer not the producer; the buyer, not the seller.

The world has had enough of commercial xenophobia and protecting the interests of a relatively small group at the expense of the consumer.

Phiyega’s real problem.

Not appreciating the difference between management and leadership.

Just how much egg can one face take? If that metaphor is applied to Police Commissioner Riah Phiyega, then her head must surely resemble an omelette. Her litany of personal faux pas since taking office needs no repeating here and her positive spin of “crime is under control” on the latest crime statistics is just another reflection of an imprudent reliance on her management team to guide her on public pronouncements in her attempts to confirm her status as South Africa’s top cop. Others described those figures as “the worst in ten years”.

The statistics themselves have always been highly controversial and suspect, and have again led to Disraeli’s famous assessment of “statistics and lies” featuring in a number of headlines. They have scant credibility globally and in South Africa far more so because of a lack of expertise and effectiveness in reporting, gathering and interpretation. Yet they could have been the ideal platform for the Commissioner to demonstrate true leadership.

I can think of no other position in South Africa that is in greater need of decisive and inspiring leadership than chief of the police force. Perhaps that need even outranks the presidency itself. One is tempted to overlook Phiyega’s stumbling attempts at her job because she really has had a baptism of fire. But that disguises a more fundamental issue – was her appointment the right one in the first place? She and no doubt those who appointed her, defend the appointment on her track record as a “top manager” in the corporate sector. She herself has professed that there is no difference in managing an organisation like SAPS and a big bank.

This inevitably reminds us of the failed two year experiment in recruiting a top manager from the private sector to “shake up” the police services in the late 1990’s. That was none other than the “boykie from Britz” Meyer Khan, who had a stunning record as South African Breweries chief. Repeating that experiment with someone of a different colour and gender is something of a mystery.

We see it too often in many organisations, including companies and large corporations – a failure to distinguish between management and leadership. There certainly is a huge difference. Broadly speaking, one manages things but one leads people. But those criteria are not always clear cut. One can, for example, manage things around people that motivate and inspire them, creating an image of inspiring leadership. In addition, one can learn certain skills that are required in leadership that can support a profile of being a good leader.

Indeed, the “art” of leadership is the subject of countless books, treatises, colleges, universities, and is an important component of organisational theory. Leadership Consultancies abound everywhere, and “leadership interventions” are the order of the day in many organisations.

Biographies of great leaders both in the public and private sector from Genghis Khan (no relation to Meyer) to Winston Churchill and from Henry Ford to Steve Jobs are all eagerly devoured by aspiring young executives. All are looking for that magic and seemingly elusive quality that will propel them to the top.

One would think that if leadership could be taught or nurtured, the numbers of skilled and qualified leaders that are churned out by educational and training institutions would ensure an adequate supply of competent leaders in all of our institutions – apart from the political arena that has a completely different dynamic susceptible to all kinds of contaminants that blur the important difference between being a good politician and being a good statesman or woman.

Yet the most common lament in virtually all spheres of society is the dearth of leadership. In my consulting days, I was intimately involved in the subject through the work of my brother, Etsko Schuitema, who developed our care and growth model after extensive research in the mining industry. In essence it was not very different from the Servant leadership model developed by Robert Greenleaf in the early 1970’s and which became a popular framework world-wide. In addition, I was an avid reader of leader biographies.

Learning leadership skills and emulating leadership behaviours such as those expounded by Stephen Covey are important. But there is something in the makeup of the outstanding leader that is elusive and often not transferable in time, place, circumstance and sector. The best any institution or business can do is to be on a constant lookout for those qualities and give them the opportunity to lead without encumbrances – something most institutions are simply not equipped to do or prepared to risk. Mostly those that have these qualities cannot be bought – a feature that seriously questions our executive pay models and recruitment processes.

On reflection these past few years, when I am asked what makes a good leader, a perhaps highly inappropriate if not flippant image that comes to mind is from that 1965 movie “King Rat”, in which a nondescript prisoner of war gains power, respect and the adulation of his fellow inmates above that of senior officers through his black market enterprises, including disguising rats as other forms of protein. After the prisoners were liberated, he returns to obscurity.

The question is can and when will Riah Phiyega pull a rat out of a hat.

Monthly and Quarterly indicators.

Some important measurements to look out for.

Remember the theory of reflexivity in economics? It was one of George Soros’s pet subjects which the controversial hedge fund guru developed to explain his approach to trading.

This may be an oversimplification, but essentially it implies that trading is largely based on individual biases that ultimately form self-fulfilling prophecies. This has an inherent danger of disregarding economic fundamentals, or put even more simply, having a herd of traders shape the economic destiny of a country within an environment of short-termism and nano-second electronically generated trading.

Trading today is constructed on a number of “triggers”, such as daily, monthly and quarterly indicators and statistics, agency ratings, routine events such as interest rate announcements, statements by authorities or experts, deviations from expectations, tips, rumours, bad lunches, and “gut feelings”.

On top of that, these triggers themselves are not immune to massaging, insider trading, fraudulent manipulation as we saw with the LIBOR scandal, and simple downright mistakes, absence of context and misinterpretations, highlighted recently by economist Mike Schussler in his significant spat with Stats SA.

And that madness is what controls your economic destiny.

Or does it? It all comes down to that basic interplay that I dealt with in a recent article, between the measurable and immeasurable; the way we calculate and the way we behave; the way we think and the way we feel. And within that interplay, a very large measure is within our own control – the key attributes of which are awareness and resolve, or perhaps knowledge and patience. Those, over a longer term are far more powerful in shaping one’s destiny than following a manic-depressive herd. They also provide a deeper level of serenity and an ability of keeping cool while others flay about in frenetic frenzy.

Of course, very different rules apply if your approach is short-term trading or longer term investing. The dangers of the former are legend, yet many are drawn into that casino by large and quick returns that are promised in irritating pop-ups on various internet sites. Inevitably, most fail. A number of people I know carry significant scars from such gambles.

While a solid argument can be made for the view that behaviour drives our economic destiny, structures, systems, policies and measurements, it is clear that the latter also strongly influences the former, creating a circular relationship between cause and effect. So investment, as opposed to short term speculation has to be informed by these measurements. But they also have to be useful in guiding many aspects of economic life, such as when to extend or reduce debt; buying or selling a home; changing jobs and many more.

We are overwhelmed by hundreds of such indicators, each with their own relevance in time and place; all interrelated and yet at times conflicting and reflecting mixed signals. Too often essential context is missed in the reporting, not only in critical detail such as whether the metrics have been smoothed or seasonally adjusted to eliminate aberrations, but the strength of their influence and validity of comparisons.

If you are a glutton for statistics you can have a feast on the Bulletin of Statistics published quarterly by Stats SA. However, some other very important indicators are sourced by other government bodies such as the Reserve Bank and SARS.

Like the daily indicators I dealt with previously, I believe that if you become familiar with just a few of the essential monthly and quarterly statistics and indicators, you will have the critical tools to put all of the others into context and have the essential ingredients for sound investment and other economic life decisions.

GROSS DOMESTIC PRODUCT (GDP). Everyone is obsessed with this measurement. It reflects the total value of goods and services produced in a year and is released quarterly by Stats SA. “Economic growth” means simply changes in this number compared with the previous year. I personally believe it has some severe flaws, over and above the interpretation traps that Mike Schussler alluded to, but that will be an article on its own. Flawed or not it triggers a number of important assessments and decisions in board rooms, international rating agencies, foreign and domestic investors, government, the Treasury and the Reserve Bank. In turn these influence a very wide spectrum of our economic lives such as jobs, interest rates and taxes. Many of the routine monthly and quarterly statistics are components of GDP so GDP is a good composite reflector of economic performance as a whole.

COMPOSITE BUSINESS CYCLE INDICATORS. (BCI). This is a surprising omission from general coverage of economic indicators. Published monthly by the Reserve Bank, they come in three self-explanatory separate parts: leading, coincident and lagging. The strength of the leading BCI (which can be found on this page of the SARB website) is that it is a 12 to 15 month predictor of future trends. In addition, its 12 components capture not only the most important monthly indicators that receive far greater individual coverage, but also some of the mood measurements such as business confidence.

PRICE TRENDS. We’ve all heard about the Consumer Price Index (CPI) which is published monthly by Stats SA. I’ve yet to meet anyone who believes that their cost of living has increased in the past year by only the 6.4% measured in August. That’s the trouble with averages – no-one is average! But its veracity is vehemently defended by Stats SA and that aside it has a key influence on our economic life such as on wages and salaries, jobs, interest rates, and taxes.

An earlier indicator of price movements is the Producer Price Index (PPI) which is also published monthly by Stats SA. The PPI tracks the rate of change in the prices charged by producers of goods.

The major factors that drive prices in an economy are: labour (wages and salaries) capital (interest rates and profit expectations); government (taxes and municipal rates); electricity (Eskom tariffs); fuel and other imports (the Rand exchange rate).

FOREIGN TRADE. To the chagrin of many a politician, we are an “open” economy, which means that a significant source of our economic welfare comes from trade with others. The key indicator that has to be included in a basket of monitoring measurements is the current account of the balance of payments (BOP) published by the Reserve Bank. This comes in two components, of which the most significant is the Trade Balance published monthly by SARS. It reflects the difference between the value of our exports to and imports from other countries in physical goods. The other component of the current account is the exchange of services such as insurance, dividends and interest paid and received, but trading in physical goods is the overwhelming number in the current account. An important part of the balance of payments is the capital account, drawn down by trade deficits and topped up by surpluses as well as reflecting foreign investment flows.

Foreign trade impacts directly on many economic factors such as jobs, prices and the exchange rate. A sustained deficit ultimately puts pressure on the flow of capital which in turn puts pressure on interest rates.

PURCHASING MANAGER’S INDEX. (PMI). This indicator has become a keen favourite for many economists since it was launched in 1999. Also known as the Kagiso PMI, it is viewed as perhaps the best early signs of economic trends, and is based on a monthly survey amongst purchasing managers in manufacturing. While manufacturing itself forms only about 15% of GDP, the sector is the most sensitive to underlying forces in the economy. So of all the other sectoral measurements, surveys and indices, the PMI arguably trumps them in relevance.

Of course there are many more measurements that could be included in your own economic telescope. In keeping with the intent of restricting a dedicated following to just a few of the most significant, I would stick to the above five. Get to know and understand them, and follow them regularly and you will have a better grasp of economic events around you.

At least you will have more confidence in not following the whims of the hysterical.

Businessman or conman?

Is the only difference the absence of ethics?

I thought I had heard it all, until this comment confronted me on the TV programme Carte Blanche recently.

“The traits to be a really successful business person are in fact almost identical to what you need to be a really successful conman. There’s just one issue … you have to remove ethics.” Cynthia Schoeman: MD: Ethics Monitor.

No matter how many hypotheses and how much context Ms Schoeman puts to that statement, it is a very sad reflection of the general state of trust in business.

There is a mushrooming industry that is finding lucrative incomes in advising companies on how they should behave, prescribing “codes of ethics”; monitoring committees; training programmes; and highly lucrative “bosberade”.

On the other hand, we should not be surprised. The near fanatical defence of the exclusive profit motive in business in the last four or so decades, bringing with it short-term profit maximisation; obsessive focus on shareholder-value; indefensible executive rewards and at times disgraceful behaviour that severely tainted business reputation since the turn of the century, has left many with a similar view…a view that has gone way beyond Bill Kellogg’s description of the profit motive as “dreary and demeaning”, to comparisons with the attributes of a conman.

All one needs, it seems, is a clearly defined code of ethics, prescribed and shaped by an expensive outsider – rules of the game that eventually have to be enforced through a big brother government. More rules. More regulations. More Mervyn Kings.

Ethics are what you wear. Values are what you are. I can prescribe a suitable dress code. I cannot prescribe your desire to be clothed. I can prescribe what utensils you must use at table. I cannot prescribe what and how much you must eat. These definitions may differ from those of the conventional behavioural scientist, but it clarifies a very important distinction between how you behave and why you behave. It speaks to the important issue of intent, and to remotely suggest that the intent of the conman is the same as the intent of the businessman, entrepreneur or company, is quite astounding.

This is where the most dangerous assault on free enterprise and free markets comes from – not the financial shenanigans that left the global economy in crisis, although they were arguably sourced by similar motives – but from a general assumption that the primary intent of any business activity is to maximise self-gain; and that the only difference between that activity and a “con” is in the clothes that are worn.

This is much more than a “dreary and demeaning” description of any business. It is an affront to many an entrepreneurial giant that has made a tangible difference to our lives. I have met many over the past number of decades. I have studied as many others. While they have amassed huge fortune, I am fully persuaded that that is not what drove them.

What drove them and what ensured their success was passion and love for what they could do – a desire to make a difference, and thereby fulfil a fundamental principle that unleashed their true value – their capacity to make a contribution to others. They saw profit as a means to an end, not an end in itself. Indeed, many, after achieving great personal wealth, simply gave most of it away.

They should not be confused with over-paid professional predatory managers who mostly ride on the backs of their founding entrepreneurs under the false guise of being able to replicate their achievements and have largely contributed to the trust problem.

Of course success breeds envy and attracts suspicion. The envious and suspicious assume that they are privy to the real motives behind those acts; that those who profess to be driven by something else than maximum self-gain are simply lying. The fact remains that not only did they promise to do; they actually did!

This is the essence of business. It is the fundamental principle behind supply – that it has to meet the needs and wants of others before it can even remotely think of self-gain. That it owes its very existence to being of service to others. The fulfilment of that condition is ultimately not interested in motive. At the same time it is obvious that aligning motive with that condition, where rewards are not seen as an end in themselves but as an indispensable affirmation of contribution, then that success is not only more likely to be assured, but also sustained and expanded.

It is that intent that will shape behaviour, not an imposition of a code. The “why” always shapes the “how”. Attention always follows intention.

Those focussed only on what they can get restrict their capacity to add value because of their limited knowledge, fears and insecurities. They restrict their ability to identify clearly the needs of others, thereby often missing opportunities. The opposite is true for those constantly exploring the needs and wants of others and caring enough to make a difference.

It is indeed unfortunate that the benevolent underpinning of the relationship between supply and demand has been redefined, both in understanding and often in practice; that the sole purpose of economic collaboration is seen as maximum gain for one constituent, often at the expense of others; that behaviour in the last few decades has led to severe imbalances and disparities, and that the motives of business and conmen have become synonymous.

That will surely invite the wrath of society and ominously so through government.

Strikes and ignorance.

Blaming labour disruption on lack of economic awareness amongst workers.

Of all of the volumes of comment and statements regarding the disturbing industrial action of the past few weeks, one that comes close to the heart of the matter was from well-known labour authority, Andrew Levy. He told the eNCA TV news channel that the wide gap between the parties in negotiations could be attributed to the “appalling” lack of economic awareness among workers.

Many will be tempted to deride Levy’s response as stating the obvious. This poses the question whether if it is so self-evident, why was it not addressed many years ago? Why, as Levy rightfully points out, has information in the workplace been hi-jacked by an ideologically driven Union movement to subject recipients to what he called “propaganda”?

And there’s the first problem. Our entire national economic debate is still firmly held in the stranglehold of severely out-dated cold-war ideological rhetoric on both sides; much of it based on highly questionable assumptions that inform the debate from the lowest levels of economic awareness in frenzied mobs to the highest in hallowed halls of academia.

Far from settling the ideological divide once and for all, the collapse of the Berlin Wall led to some critical re-examination of the key tenets of capitalism itself, which gained momentum after the financial crash some five years ago. The “crisis of capitalism” is now a familiar topic in many authoritative discussions and news media headlines and the merits of a tainted system are not so easy to sell any more.

The other question which is posed by Levy’s postulate is what has company leadership been doing to address this shortcoming? The appalling lack of economic awareness in the workplace was a key factor that prompted me to leave a well-established broadcasting career and establish a “developmental” employee communications consultancy more than 20 years ago. At that time I not only had to sell the critical need for information sharing, but faced great resistance to openness and transparency. Since then we have had the King recommendations, sustainability reporting, integrated reports, vastly advanced communication techniques, and internet media that negate many of the excuses of cost and distribution difficulties of that time.

Despite the consultancy’s success as a business venture, it clearly failed to make much difference in solving the awareness problem itself. That ran into prejudicial issues such as employee rights to information versus shareholder rights. Many a time we had to couch critical information, (even in harmless formats such as the Value-added statement or Contribution account) into averages and indices because of their “privileged nature.” Today still, these critical formats are relegated to complex and brief coverage in the occasional sustainability or integrated reports.

Internal communications are largely geared to enhancing empathy with shareholder interests and the paramountcy of capital. Despite the unassailable logic that labour is a substantial, in many cases the biggest, contributor to the creation of wealth, companies seem simply unable to express it as anything else but a cost and a drag to profits.

Of course, the Union movement itself plays a significant role in ensuring that this expression is maintained by relying on a “commodity” definition of labour where the price is not guided purely by supply and demand for skills, experience and qualifications, but by negotiation, collective collusion, industrial action, extortion and “rights”.

This inevitably draws the workplace into a conflict between wages and profits – a divide that simply has to fall back onto counter-productive ideological paradigms. In the process, both sides ignore one simple truism – that their true value is not determined by what they own or even what they do, but by the contribution that that ownership or activity makes to others – to society as a whole, or more specifically their markets.

That is what being market driven is about. It is not the same as being profit driven – indeed the opposite. Being market driven means being driven by the needs and wants of others; being profit driven means being driven by your own needs and wants. The same goes for being wage driven.

There are many questionable assumptions that form an impenetrable barrier to industrial harmony in South Africa and I have regularly challenged them in much of my writing over the years. In avoiding repetition, I will return to only one I have touched on above and that deals with the need to find a common purpose in any collaborative economic activity.

Common purpose by its very nature can never be found in the rewards of participation, especially if the rewards of one can detract from that of another. It can only be found in contribution, the product or service that that economic activity is offering to society.

Therein lies the very essence of tangible wealth creation itself – the result of adding value to people’s lives. Any collective that constructs itself primarily on getting, on wealth distribution rather than on wealth creation, is doomed to simmering and eventual unbridled outbursts of conflict.

The importance of and dedication to that principle is the only palatable and valid base for information sharing and economic awareness in the workplace. But awareness implies much more than knowledge and information. It also implies empathy, understanding and commitment.

Variable pay in gold mining.

Are the risk-sharing proposals in current wage negotiations built on serious fault lines?

At last there is some significant movement towards flexible pay in one of South Africa’s biggest employers – the gold mining industry. As Geoff Candy reported on Mineweb this week, gold producers are looking at some form of pay at risk to counter Union demands for much more than the 5.5% pay hike employers have offered. This could add another 1% based on performance linked to factors such as the gold price, gold revenue, gold produced or cost savings.

It’s doubtful whether this will have a significant impact on reducing the gap between the employers’ offer and the up to 100% demanded by some Unions. In addition, even a superficial glance at the proposal reflects some serious flaws that could be detrimental in the long run to both labour and employers. One can only hope that these flaws do not scuttle the concept itself and delay the inevitability of some form of fortune sharing in the industry.

Fortune sharing in mining has been a desperate need for a long time. It’s a volatile industry, consuming large amounts of high risk capital that has to be ploughed into a depreciating asset, and which simply cannot sustain inflexibility and constantly rising costs.

The graphic below of Harmony Gold mine’s Contribution Account, which I have extrapolated from its latest Integrated Report is an alarming reminder of just how close to the cliff edge most mines have come. The 68% share of wealth to labour is simply over the top. When I consulted to some mines in the 90’s that share was about 50% even in marginal operations. For South Africa as a whole, labour share of GDP is less than 50%.

While some argue that mining is a labour intensive industry, it is far less so than your conventional labour intensive operations such as retail or financial services. It’s a capital hungry industry. The 23% which goes to “savings” or retained income does not have the normal effect of enhancing equity value. It is consumed in capital expenditure such as underground development, shafts, headgear and plant -- most of which have no resalable value. You cannot sell a big hole in the ground – unless someone wants a giant long drop somewhere in the Free State.

In the end, the share of wealth creation should be a fair reflection of the contribution each of the constituents have made in response to the needs of the market – which in gold and most other commodities is an unforgiving place that simply has no interest in your needs and wants, fights and squabbles. In other industries you may get away with imposing such adolescent pettiness on the market through profiteering, collusion, price fixing, bid-rigging and lack of competitiveness. There’s no place for that in mining.

Ultimately, and for any business, real tangible value is created through having served and supplied its customers. That is indeed the common purpose of all of its participants or direct stakeholders.

This is the first serious flaw in the gold producers’ proposals. You can never forge a common purpose through rewards, only through contribution. While that contribution is vague in an industry that is market led rather than customer driven, the production and supply of gold to a world that needs and wants it, is the only common purpose that all involved have. Common purpose based on rewards breaks down when the reward of one is reduced by the reward of another, where higher profits are achieved through reducing the wage bill whether through lay-offs or lower wages; or vice versa.

A well-constructed variable pay system, particularly its ultimate form of fortune sharing, should never be a knee jerk response to wage demands. Flexible pay is not about incentive, but about involvement and engagement, about common purpose and common fate.

Variable pay is about flexibility and viability of the enterprise itself. It should never be a threat to profitability and sustainability. The industry has had an example of this where, some years ago, one marginal mine constructed a bonus scheme based on cubic meters mined underground. Month after month, employees were called in to receive bonuses for their huge and exhausting efforts. At one time, they were all called in to be informed that most of them had to be retrenched. While tons milled had shot up, both the ore grade and gold price had slumped, putting the mine over the edge into bankruptcy.

Virtually all of the proposed “triggers” in the current producers’ proposals can have the same effect. The exception is profit sharing itself, but this carries the danger of rewarding some at the expense of others which breaks a fundamental rule of common fate.

The only common fate metric that exists in any business is cash value added or wealth creation itself. It captures all eventualities and is, after all, the pie that feeds all. Sensible sharing has to be based on two fundamental principles: it has to meet the legitimate expectations of all of the stakeholders and it has to ensure continued contribution. But before you can even get there, the way that pie is currently divided has to reflect some balance. From Harmony’s figures, it would seem the industry is very far from that.

But it can be done. If the employers’ are prepared to let go of their silly, over prudent cap of a 1% increase on current wages to variable pay, they may even convince the Unions to peg current wages and sacrifice say half of their gains from an increase in wealth to restoring the balance. When this balance is restored, or at least comes close to being restored, there is no need for a cap. Indeed given an improved outlook for gold mining from a firmer gold price, cheap rand, containing outside costs, and lifting production through fewer work stoppages one could easily envisage average value-added for the industry lifting by between 10% and 20%. In the current state, retrenchments have to be seen as part of restoring balance but for those left, it would in principle imply at least a 10% increase in pay, albeit at risk. I say in principle because from there one can construct the actual split in a variety of ways to accommodate merit bonuses, safety performance, and specific cost savings.

Then there are many other, perhaps even more serious flaws in the proposal, which I dealt with in a recent article, but will repeat here:

There are four absolute pre-requisites for any form of flexible pay:

· It must be simple and understandable,

· It must have a clear line of sight where employees can see the effect of actions or events on wealth creation and their pay,

· It has to be accompanied by regular and understandable information sharing.

· Pay-outs or feedback must be regular – at least quarterly if not monthly.

Conventional profit sharing schemes can seldom meet these requirements – share option schemes even less so.

While the current proposals are a very far cry from the ideal, they at least represent the beginning of a shift to a more sustainable dispensation.

Revisiting indicators.

Counting what counts, as seen by the initiator of financial indicators in broadcasting in South Africa.

The recent Moneyweb article on “What the indicators are not telling us” sent me on a nostalgic trip to my days in broadcasting.

At that time, until about late 70’s, public broadcasting was a very minor player in economic news. The only dedicated business news broadcasts were 5-minute bulletins at 9.10 pm on the two non-commercial channels. They were to become the springboard for a separate economics news desk feeding news bulletins and talk shows on multiple outlets on Radio and Television and producing two Television shows, of which “Diagonal Street” was one.

I use the term “initiator” perhaps too modestly on the one hand and too conceitedly on the other. Regarding the former, it was more of a pioneering effort in a stubbornly resisting environment, and the latter: the quick growth of the economics department was largely due to a very dedicated team of professionals with whom I had the privilege to work in those formative years.

The indicators were first introduced in short news bulletins, where air time was jealously protected. In convincing the controllers of the validity of regular economic slots, we could not rely solely on examples elsewhere, and intense lobbying and discussions with leaders from various sectors, bankers, economists, brokers, the Treasury and the Reserve Bank clearly isolated the most important to a broad South African audience and how they in turn should interpret them in their daily decision making.

This is not purely a reflection on my past, but rather examining an important issue raised by the Moneyweb article which questioned their relevance today; what should be included and why. At the same time it may help you in applying the information in your own decisions. Our research and given the constraints of air time and target audience led to a number of pre-requisites and disciplines which arguably are still applicable today.

· They have to be brief and concise;

· they should be restricted to a few only and

· they have to be relevant to the country as a whole and not only to a specific sector or interest group.

Instead of the classic distinctions between leading, lagging and coincident indicators, it is more useful to think of them broadly as those that influence economic trends, and those that merely confirm or reflect those trends. It is perhaps a misnomer to call the daily and weekly prices and indices “indicators” because they clearly have to be maintained for a while to influence economic direction. It is also far more important to know what causes movements than to try and extrapolate their future impact. If you know and understand that then you have more than a casual grip on your economic circumstance.

Most economists will rely on monthly or quarterly figures to determine trends, and I’ll deal with those separately in a future article.

Our hunger for immediate information that influences future trends makes an absolute case for daily indicators. Context, reliable commentary, and authoritative interpretations should help even the less aware in assessing their trends and impact. An important rationale for daily indicators in the public media is to enhance a sense of awareness around their importance, and hopefully create a desire for further understanding. At the same time they should offer the informed a quick and concise alert system of developing events.

So what should we include and why?

Interest Rates.

A serious omission in the daily broadcasts today (and surprisingly elsewhere) is the debt markets. Foreign capital movements are our Achilles heel and these will be reflected in the daily movements on both the short term money markets and long term capital markets where debt is actively traded and new paper auctioned. We included both in our original bouquet: the money markets through the B.A. rate, and the capital market through RSA long term bonds. I cannot explain why these have disappeared, but any observer of these rates will have an early detection of the capital flows and trends.

Current movement in all the rates can be found on this page maintained by the Reserve Bank. SABOR on the money markets and the 10 year and longer daily average bond yields are probably the more telling. Despite all of the instruments at its disposal, the Reserve Bank cannot maintain a repo rate that does not reflect the pressures from these markets.

Exchange Rates.

An absolute must! At least we seem to be past the hackneyed and misguided “good for growth” argument for a cheap currency. Most people today have a good understanding of the implications of movements in exchange rates, and when they make news, we have enough professional and amateur commentators to trot out yesterday’s prepared scripts. All I would add is a repetition of what I wrote some time ago “a consistently strong currency reflects economic health and a weak currency the opposite”. But it could be argued that focus on the Dollar, British Pound and the Euro is a bit skewed. Most viewers will not see much beyond the dollar and perhaps a case should be made for the Reserve Bank’s nominal effective exchange rate.

Gold price.

Keep it! If it is assessed purely on gold mining’s contribution to GDP then it has lost considerable weight compared with when it was first included. But the gold price reflects more than export earnings, mining income and mine employment. It is still, albeit informally, an alternative currency to many which explains its place in international business slots.

Also, mining has a far greater multiplier effect on other industries than most other sectors. The viability of mines has a concentrated impact on specific communities, which may be a good reason for also keeping the platinum price as an indicator, where its export income now exceeds that of gold. But I have my doubts. And if we are focussed on export earnings then adding a R/kg price may be more useful for both gold and platinum.

JSE.

Our original argument for its inclusion was based on the logic that share price movements were a reflection of both local and foreign sentiment. This is clearly no longer absolute, given a record breaking All Share index recently, at a time when for the most part the mood was gloomy. The explanation for this is the lack of attractiveness of other investments, continued growth in profits despite lower income growth, and executive rewards linked to share values. But equities still have a dominant impact on public investments such as pension funds, endowment policies and unit trusts, which are more broadly held today than 20 years ago. For a compact bouquet of daily indicators, however, I doubt whether I would want to argue for more than the ALSI.

Oil price.

A significant number of people are often surprised when petrol price adjustments are announced. This casts some doubt on the usefulness of this indicator. The confusion of course, is caused by the Rand conversion. It’s an important price to the economy, but perhaps it could be made more meaningful if it was reflected in Rand terms.

That would be my top five for a daily fare. In time past, I would have championed more, but with the plethora of economic news in various media today, a case can be made for clearing the clutter and focussing only on a handful for routine reflection and your own personal attention. Of course no indicator is insignificant but instead of routinely cluttering these crucial five, it would be better to have fuller treatment, contextualisation and explanation of their movements. An understanding of these indicators, what influences them, and how they impact on the economy, will go a very long way to enhancing economic literacy. I’m left wondering how many of our top leaders in parliament, labour and perhaps even elsewhere have even this very basic awareness.

Of course, you may have more suggestions, and sharing them with us in your comments will enrich this article.

The marvel of an economy is that it is a living, breathing organism where each cell impacts on others and the body as a whole. But what we too often ignore is that at its heart and soul are people; their hopes, fears, aspirations and expectations and the way they behave.

Now, if only we could find a daily indicator that would reflect that!