Meaning and means.

Distinguishing between the two benefits personal growth and trust in companies.

Ag shame, poor Charlie.

In an anonymous comment to one of my recent articles, he writes: “When one works for an organisation one wants to be paid and to hell with this service to others. The incentive is if one lives out whatever value the organisation wants to be known for you get paid (in cash),”. I emphasise its anonymity because it gives me some licence to be somewhat impolite and flippant in my response.

But the underlying issue is a serious one and has plagued economic man and organisational theorists for centuries. It’s a condition called “being a wage slave”, and while that term referred exclusively in the past to exploited migrant workers and the destitute, it can apply just as validly to anyone who is tied to the workplace only for pay. When applied to top executives the terms “golden handcuffs” or “retention bonuses” aptly describe the same condition. The latter may have a few more choices on parole than the former but the essence is the same. Only the chains and prison bars differ – one being hunger and desperation, the other mortgages and lifestyles.

Then, on the other end of the scale, I saw this Facebook posting by Western Cape community leader Nolan Adams: “I don't believe that our society really wants hand-outs, grants, easy-come-easy-go stuff, etc.! No, our society wants and needs opportunities. They want to take charge of their own lives and earn their own salaries and to be proud of whatever they manage to bring home - how big or small the stipend/salary may be!”

The beauty of the free market system is that it can accommodate both Charlie and Nolan – one focused on money and the other on meaning. In today’s world and the way most business organisations have been structured, I suspect that Charlie is by far the majority and Nolan the minority – although the latter includes quite a number of business icons who expressed the same intent and still made their fortunes as a result. We cannot prove Charlie nor Nolan right. I clearly favour Nolan and you may favour Charlie – it all depends on which wolf you want to feed. The real question is what makes the best driver of the human spirit and our economic collectiveness.

At the extreme end, one can find absolute, unconditional and exclusive dedication to a task that at a particular point in time disregards all other considerations, rewards or self-interest. I went through such an experience and described it in an article titled “A Decent Job”. Then there are those many recorded acts of heroism that involved extreme self-sacrifice including the ultimate sacrifice.

Somewhere between Charlie, Nolan and true heroes, there is an elusive truth that speaks to the very essence of being human. We try to package it neatly in a subject called “motivational theory” which in itself has achieved little in defining a one-size-fits-all driver for human endeavour. As organisational guru Peter Drucker once quipped: “We know nothing about motivation. All we can do is write books about it.”

Perhaps this is simply because in practice there is no such thing as a single definable motivational tool. People are motivated differently by different things, which means you would need some 7 billion different motivational criteria for all the people on earth. In each, these norms can change regularly depending on circumstances and changing priorities. On top of that we often confuse things like job satisfaction, self-worth, motivation, incentives and involvement. There may be links between them, but they certainly are not synonymous.

Of course, Charlie was being a tad mischievous. No-one works for pay only and the stipend at the end of the month is seldom, if ever the only thing that occupies us when we go to work or spend eight hours of the best part of the day in the workplace. Indeed many, if not most people get somewhat piqued when they see their pay slips, believing they deserve more; that the boss gets too much; that Pravin is being a bit greedy or that the government is squandering the tax contribution.

There are many other things, including the daily task routine, camaraderie at work, and the value of employment in creating a sense of self-worth. Obviously these cannot replace pay – that would simply be grossly transactionally incorrect and ignore universal principles that balance supply and demand, give and receive, generosity and gratitude and contribution and reward.

Charlie may have seen this light if he was the fall guy at one of my workshops where I ask those that profess to work exclusively for pay how they would respond if I offered them a job at fivefold more pay but where the job description was to do absolutely nothing all day, eight hours a day and five days a week. Most refused the hypothetical offer and only a handful said they would do it but for a brief period only.

The crucial point that people like Charlie miss and have blunted their consciousness of it, is the very significant distinction between meaning and means. Salaries and wages can never be anything else but means. If the work itself has no meaning, then nearly one third of one’s existence loses real meaning, indeed becomes demeaning.

We all have multiple self-identities, and one of the most important is our job or profession. It is a lot more than “earning a living”. One of the most frequent questions we ask of each other shortly after making an acquaintance is: “what do you do?” I have yet to hear the response: “I earn a living.” Not even Charlie would say that. And think of the difference in our inner response when the answer is either “I am a doctor”, or “I am an accountant.” The first gives one an immediate sense of greater value, of greater contribution and of making a greater difference to society. But if the accountant were to add: “I am an accountant for a hospital”, we would again get a sense of greater contribution.

Which, to a large extent is business’s own fault. Having beaten the drum of “here to make a profit” for so long, we have come to accept this demeaning description, forgetting that the real value of a business is not what it yields for shareholders, but the difference that it makes to our lives. That difference is contained in the axiom that our true value lies in our capacity to make a contribution to others. Linking work to this principle of service to others confirms that value.

We all value everything and everybody in our lives by the way they behave and not by what they possess. This is the underpinning motive behind everything we do because that is the way others value us. As doyen psychologist Viktor Frankl has told us, the search for meaning is at the root of all human endeavour. We can find it in many more things by simply questioning what difference they make to our lives – indeed it is more often the result of reflection, awareness, discovery and changing perceptions than of changing a circumstance.

To lose it in the workplace which is grounded in that principle is sad beyond description.

That is the tragedy of Charlie.he stipend/salary may be!

he stipend/salary may be!

Marikana as a microcosm.

How the tragedy reflects many serious socio-economic issues of our time.

It could have become one of the longest reports ever written. If the Commission of Enquiry into the Marikana massacre goes beyond its terms of reference and covers all of the nuances and underlying factors that went into the making of a tragedy on that outcrop at Lonmin’s platinum mine near Rustenburg, it will become a voluminous litany of socio-economic dysfunction.

One already has a taste of this not only from the widespread headline coverage that has saturated local and international media, but from the very disparate sources of comment and analysis – religious, political, legal, social and business. They all bear valid testimony to the very wide ranging issues involved. Well, not all. Emotion can sometimes produce some strange perspectives – like questioning platinum’s “noble metal” status in exploiting labour to “adorn elitist ring fingers” and for catalytic converters in “luxury yupmobiles”.

It is a hopeless and futile task to try and cover all of the key issues in a column like this and to avoid repetition. So it is not without some hesitancy that I become one of those bees whose swarm has been disturbed by the gunfire and who buzz in an already overflowing space of comment. But somehow I can’t help seeing in those excessively repeated video scenes, a severe indictment of a global economic state that is clearly in crisis and of voices that were not heard by the powers that were supposed to have served them.

In one of his first interviews after his ground-breaking Labour reforms, Nic Wiehahn told me: “If you have one worker who can bring your operations to a standstill, you had better talk to him.” He saw collective bargaining as an essential counter to industrial chaos and uncontrolled mobs of frustrated workers sabotaging their workplaces. He also saw union rights for all as at least one form of enfranchising the politically disenfranchised at the time and something of a safety valve for frustrated political expression. That automatically created a disproportionate bond between worker and political aspirations, the results of which are still evident today.

Power has an intrinsic anomaly – the more you centralise it, the more powerful and corruptible it becomes and the more it loses touch with its support base. What you are often left with is an elitist and aloof leadership and fragmented support consisting of many “minorities of one or a few.” In labour, that not only encourages competitive unions, which in itself is not a bad thing, but more frighteningly can lead to marginalised groups that become unruly mobs. While Marikana has been blamed mostly on union rivalry, the rivalry itself had to find some root in a disgruntled group. If this spreads to other workplaces, we could be in for a further and severe deterioration of industrial relations.

There clearly is also a gulf between leaders and supporters in centralised political power in South Africa. The three tier government structure is overwhelmingly dominated by the dictates of national parties. Recruiting support for their power bases both in government and labour produces a highly dangerous toxic mix of unrealistic expectations that fuel explosive situations of which there have been many since 1994.

Although formed and manifest differently, greater centralisation of economic power has created a similar alienation. Increasingly large corporate institutions, holding companies and big business have contributed to a growing public perception of a dehumanised business environment driven virtually exclusively for profit and viewing all involved, including customers, as resources to be exploited in squeezing out each drop to enhance shareholder value. It certainly has exacerbated income disparities and in the public eye at least, given these institutions undue influence over government and impact on their daily lives.

Mining has brought significant economic benefits to this country. Indeed overall, labour and government as a group have been bigger monetary beneficiaries than shareholders as a group. But no-where is business more dehumanised than in mining. In most other businesses at least, there is some sense of meaning beyond profit and pay – that of service to customers. Mining is not market driven, but market led or pulled. There is no sense of customers and service. No-one who has not worked underground for more than a brief spell, will fully understand the psyche of an underground worker. It is like going into battle, sometimes for up to 10-hours on rotating shifts, often crawling through narrow spaces to reach a dangerous claustrophobic area at the face, where the rock drillers have to struggle with heavy vibrating machines for hours on end.

It’s an environment that breeds tough, macho men for whom working close to death or injury daily intensifies frustrations and fortifies them for violent confrontations elsewhere and who, apart from a desperately needed pay cheque, hold it together underground through a palpable sense of soldierly camaraderie. In these conditions, you simply cannot explain huge pay disparities and a stipend (even at more than R8000 pm gross) that in most cases has to feed a much extended family – a burden that keeps on growing with rising unemployment. It’s a highly emotional context that will always overwhelm any rational academic argument based on supply and demand for skills and qualifications. Living conditions are often not much better, despite efforts by the industry generally to improve them. All of this has been born out of an unfortunate colonial history of real wage slavery, migrant labour, compounds, hostels, and frequent deaths and injuries underground. Remnants of those conditions still remain.

What’s highly incongruous is why any group of strikers find it necessary or are allowed to be armed to the teeth with lethal weapons. There was a time when faction fighting was a regular occurrence, and weapons were fashioned from any suitable object that could be found – spears shaped from heavy tempered-steel rock drills, spikes, choppers, axes, pangas, knobkerries, shanks and knives.

Many of these were brandished on that now infamous koppie at Marikana. If I had a machine gun and they came storming at me from the hill, I doubt whether I could have resisted the urge to open fire.

But then I am not a policeman trained – or at least who should be trained – to handle these things.

Misery has its merits.

Will societies emerge from economic hardships happier and stronger?

“Only when the tide goes out do you discover who's been swimming naked” is a memorable and still classic quote from billionaire investor, Warren Buffett. Its wisdom is rooted in a long held insight that like the seasons of nature, economic cycles are a healthy and necessary thing.

Not unexpectedly, the cyclical nature of economics is again receiving some attention in the current global slump. Early 20^th century Russian Economist, Nikolai Kondratieff defined “super-cycles” as being 50 to 60 year waves broadly based on periods of innovation and implementation. Cycles have received much attention in authoritative research and economic theory, with one of the best known being Joseph Schumpeter who dissected Kondratieff’s wave into four main cycles.

Downturns not only reveal who has been swimming naked, or which businesses are flaky and unsound, but those that do survive are affirmed as being viable and most likely sustainable. Even those who did not make it will have learned valuable lessons to apply in a next attempt or venture. This applies as much to individuals, societies and countries as it does to business. Will Greece or Spain ultimately emerge stronger from their current woes? Will Europe likewise be stronger and more cohesive? Or even if the Eurozone falls apart, will it be to the ultimate benefit of those departing and those remaining?

One cannot help wondering whether the current global economic slowdown, with its extended stop-start nature, and business confidence here in South Africa falling to a 12 year low are not reflections of a much deeper adjustment process that will change many conventional insights about economics itself.

It’s been a long while since I last adorned my ill-fitting guru gown and then despatched it in pieces to the bin reserved for car cleaning rags. But one does not have to be a futurist or highly paid scenario planner to sense intuitively that there are major economic shifts happening beneath our feet. It may eventually manifest itself in a completely new economic model which, as the Wall Street Journal reported some time back, has been the subject of some serious study involving a number of different disciplines. Even some countries, like Malaysia’s growth focussed approach and Bhutan’s Life Satisfaction focus, are reflecting a desire to experiment with different ideas that could contribute to a melting pot delivering a model that breaks from traditional ideological paradigms.

But the toying with ambitious new models is not the only reflection of the shift. It is more clearly discernible in tangible events that undoubtedly will leave the world a different place in the next few decades, albeit mostly structural. An obvious one is the rapid growth in government involvement in economies which up to know have been defined primarily as being Capitalist or Free Market. In many, including the United States, government’s share of Gross Domestic product has reached a post war high.

Mixed economies are with us, whether ideologically correct or not. And there’s little likelihood that government involvement will be rolled back when the global economy returns to growth. In future, assessing the health of economies will have to be based to a much larger extent on the behaviour of the government. Measurements such as GDP will increasingly lose their efficacy as assessors realise the importance of other criteria such government debt, productivity, accountability and effectiveness.

Another slow but inexorable development has been the growth of international government. The impact of international rules covering key areas such as labour, trade, environmental protection and financial controls are being felt on an ever increasing scale. Environmental considerations themselves will inevitably in time reflect important structural shifts in a number of areas, particularly in industry and manufacturing.

Companies are feeling the winds of change too. They may appear to be responding very reluctantly and slowly as evidenced by repeated misconduct based on greed, short-term profit maximisation and obsession with shareholder value, but public disapproval has been mounting and has become more tangible in protests, media attention, and rules and regulations covering business conduct, governance, transparency and sustainability.

Financial systems are already being overhauled and have been since they were primarily blamed for the crash in 2007. New rules governing banking and regulation of financial markets are being written regularly, and will continue until misconduct such as the recent Barclays Bank LIBOR fiddling is finally a thing of the past.

The fact that financial manipulation of that magnitude could still occur five years after the players in those sectors were identified as the main perpetrators of the financial calamity reflects a much deeper underlying malaise – an inability to confront the strong likelihood that the entire global financial and monetary system needs a major overhaul. Thus far, governments and regulators have bent over backwards to preserve the vestiges of a system that let it down in the first place. In the process they have shifted mountains of debt to individual taxpayers, moving the burden to ordinary workers and citizens and not flushing out the speculative froth that made a select few inordinately rich in the three or so decades to the mid-2000.

All that this means is that the real much needed transformation -- that of individual behaviour -- will be very slow and most likely incapable of coping with the regularly postponed but inevitable day of reckoning. The very things that slumps, downturns, depression and deprivation were supposed to have taught us will be absent.

There’s only so much an individual can do to cope materially. It has to go much further than having an emergency fund, savings or life insurance. That day will require people who are independent and self-reliant. They will need to be innovative, prepared to take risks, aspirational and expecting little in the full realisation that they are not in control of anything but themselves and their own responses. Prudence, patience and flexibility will be key attributes to survival.

I’m left wondering how we as South Africans will cope.

Using taxes for Employee share schemes.

Questioning the wisdom of giving tax breaks on Employee Share Options.

Sometimes politics can generate some curious suggestions. Despite its likely overall merits, the Democratic Alliance’s master plan to increase employment includes a proposal “to introduce tax breaks to help ordinary South Africans get shares in the companies they work for.” It is a bit like dishing up a wholesome plate of pasta with a spoonful of peanut butter on top of the serving.

Employee share options really do sound like a great-to-have – employees owning a stake in the company and working their tails off to ensure top dividends. But unless the ESOP is designed for employee control of or a significant say in the company, the merits of conventional programs have still not been clearly demonstrated globally. As I wrote in an article last year: they have “as many champions as detractors. The accounting conventions are still not fully understood, polished or even universally supported.” As a concept in organisational theory it certainly deserves on-going scrutiny. But to take it to a point where we should consider sacrificing part of our tax income in its wider promotion is putting the cart very far in front of the horse. In the United States, there have been some serious efforts to roll back tax breaks for ESOPs

One of the puzzling contradictions in the DA proposal is that it is clearly going to be of benefit mainly to employees (or more likely employers) of listed companies. It is then proposed to have “an employee bonus scheme for unlisted firms that replicate existing share incentive regimes for listed entities”. It suggests that “bonuses would be partially tax-free, in a ratio that is linked to growth in an appropriate share index over the five-year period”. Apart from a rather nebulous measure, it still means that the tax break will in practice only apply to larger companies, putting smaller and medium enterprises at an employee recruitment disadvantage.

Employee Share Option Schemes have been around for some time. But it has only been since the mid-seventies that wooing labour into the shareholder camp has gained momentum and has given rise to a whole array of schemes with some of the most complex, costly and imaginative forms of accounting targeted at the whole spectrum of employees from executives to the general workforce.

Despite their growing popularity in employee reward systems, particularly executive rewards, they have had inconsistent outcomes at best and apart from some anecdotal research I have not been able to find credible scientific global evidence to prove any real discernible difference in staff motivation, loyalty and productivity, between those that have and do not have them. While it has been argued that they tend to work better at a more senior level in an organisation, a PWC study has concluded that they are deeply flawed even at that level. Recent history is also increasingly questioning the behaviour of many executives in exploiting short term performance at the expense of longer term company health to gain maximum benefit from their options. Do we really want to add general staff into that collusion?

What is already clear from both the number of collapses of these schemes and the overwhelming number of participants who cash in their shares at the first opportunity, is that the schemes themselves seldom enjoy much loyalty. Of course, most employees will express willingness to be part of such a scheme, especially if they have heard about Kumba employees getting up to nearly R600 000 in share option pay-outs. But even here, given the opportunity to reinvest, less than 20 of the more than 6200 did so. Loyalty to an ESOP will be severely tested, and probably fail, if it hints in any way at flexibility in regular pay.

Minority holding ESOPs may eventually prove their value, but at this point their rationale is suspect. Their growth is rooted in the agency theory which seeks to align the interests of managers with the interests of owners. This became popular organisational thinking in the past 3 decades or so with the emphasis on shareholder value. Unfortunately, there has also been a coincidence of customer neglect over this period, leading to the question whether the pursuit of shareholder value itself is not to blame for a growing gap between shareholder and customer interests.

If the primary purpose of ESOPs is to encourage employee involvement in their companies and pave the way for flexible pay structures, then there are far easier and more effective ways of achieving this than through complex share ownership schemes. It is difficult at the best of times in any collective to align a common interest around rewards. It is especially so in companies where we simply cannot get away from the inherent conflict between profits and pay in the way our accounting formats are structured. And it is even more difficult in a confrontational labour environment such as in South Africa, despite its BEE benefits.

A common, unifying purpose is still best achieved through a focus on what everyone is there to contribute – service to others. Not only is this the only way of ensuring improved rewards for all, but it is the foundation of competitiveness, which in turn creates jobs and attracts capital. Once common purpose is forged, it becomes a lot easier to introduce common fate instruments such as profit-, gain- or fortune sharing. Only then will an ESOP make sense.

Giving credit where credit is due, the DA plan comprehensively and imaginatively tackles the problem of income disparities at one of its key sources – that of executive pay. Page 54 of its document says: “measures to reduce inequality will also have to tackle high-powered corporate insiders who extract salaries that are often out of proportion to the shareholder value they create by abusing remuneration committees that are not independent and shareholders who are not sufficiently informed.”

But as far as employee share ownership is concerned, and if I were asked to sacrifice some of my tax Rands, I would much rather do it on ensuring that employees are willing, contented and productive workers before being shareholders.

So far, there has been no substantiated link between the two.

Dehumanising business.

Why society is increasingly at odds with its business institutions.

Picture this: The Absa stadium in Durban packed to capacity with more than 50 000 people. Outside, 50 000 more are waiting to get in. Listen to the crowd chirping and you discover that they were all Absa clients who, for some or other reason, had left the bank in the past year or so. Then imagine that after waiting under the glare of Absa stadium billboards for some bank executives to address them, the executives do not pitch.

No, these executives are not following up the more than 5000 comments on hellopeter.com, which have an overwhelming number of “frownies” next to them. They are on their way to explain to shareholders why headline earnings are down 6%. But they do hold a placating card in the form of an increased dividend indirectly funded in a small part by covert retrenchments over the past year or two but mainly made affordable by capital levels above those of the other banks.

Of course, the above bit of fiction has been constructed somewhat out of context – one being that the stadium crowd still represents only a small percentage of the bank’s total client base. Branding experts maintain, however, that clients who have a bad experience will tell 12 others about it. A good experience is shared with only 3. With social media you could probably multiply those numbers many times.

But the dripping irony of my little story was based on some of the real bullets of

· clients lost,

· earnings down,

· dividends up,

· staff retrenched and

· uncomfortably high capital levels.

I find it difficult to connect these dots, but one is certainly left with a taste of an unbalanced mix between shareholder, employee and client focus. It was starkly underscored by the media coverage of Absa results which literally deluged us with shareholder information and I found only one, in Die Burger this week that covered client migration. In bygone days this would have been crucial shareholder information. In response the bank has launched “Values Bundles” in an attempt to woo back those phantoms in the Absa stadium. And even here, Finance Director David Hodnett found it necessary to caution shareholders that this “could further dent non-interest income” but with benefits in the longer term. It reflects the partly self-created quandary facing many executives today – investor pressure for quicker delivery. It’s a modern disease called short-termism.

In the meantime, it seems, holding company Barclays has had its own eureka moment after its Libor woes. According to The Telegraph the bank has now confessed that it needed a culture change that would see it “affirming key values” with “reinforcing mechanisms” to ensure staff behaved appropriately. Alluding to management and pay, it added “visible leadership” and rewards would have to be aligned to these values.

This is not about Absa, or even Barclays. I’ve never quite understood how the gap between shareholder and customer interests has been allowed to develop to a point where trust in business has dropped so low. Or how is it possible that despite all our economic woes and growing unemployment in most of the West, corporate earnings in the United States for example can be at 60-year highs?

It came to me after an interchange with a well-informed Moneyweb reader which again confirmed how deeply capital has been entrenched as an untouchable golden calf. This has been accompanied by two strongly held assumptions: that capital is a very scarce and precious resource and that profit represents wealth creation.

The second assumption: that profit equals wealth creation is simply an accounting fallacy. Value-added (sales less outside costs) is wealth creation as a result of adding value to people’s lives. Profit is only one part of that. While some argue that wealth creation is the result of profit creation, I’ve consistently challenged that view on the basis of volumes of research and the stated intent of a very large body of the best known entrepreneurs. These are the people who should be writing business theory and not economists, academics, accountants and consultants.

If profit maximisation automatically increases wealth creation it is mathematically implausible to have a slackening in GDP accompanying general above inflation increases in company earnings. Then the latter is only possible through squeezing out the share of other stakeholders such as labour, or impairing longer term customer service. In turn it increases the gap and conflict between the 1% and 99%. We could argue that lower growth has been caused by increasing government involvement in economies, but the nature of this involvement has been to act contra-cyclically; to soften the decline and prevent it from falling further. The real caveat here is that governments have done so largely through increasing debt. Only tangible value-adding and not debt can create sustainable prosperity.

The first assumption, that capital is a scarce resource, is a theoretical hypothesis that has really taken hold of corporate business since the 70’s. Its legitimacy is defended on the basis that axiomatically assuming its scarcity is the best way of ensuring maximum productivity and competitiveness. Of course that is partly true, but the assumption of real scarcity is questionable and there are many other ways of ensuring maximum productivity than by creating a lean, mean profit producing machine, which Bill Kellogg once described as “dreary and demeaning”. As for competitiveness, there are many examples of customer neglect due to profit maximisation, ultimately eroding competitiveness and leading to self-destruction.

In this context capital is defined as money applied in productive capacity or shareholder funds, the returns on which have to be competitive with other uses of money. Any scarcity has to be reflected in supply, demand and price and we do not need complex P.E. calculations to prove that entrepreneurship, innovation and stable companies, especially the larger institutions, have little difficulty in attracting capital. Just two indicators already show this: the relatively high level of corporate savings and the flow of money to stock markets where on the JSE alone we have seen regular record highs in the All Share index these past few weeks.

The real harm that the capital scarcity assumption has done has been to encourage short-term profit maximisation, to shorten performance horizons and aggravate social divisions. In the process it has created a golden calf based on a theory, a rule or an institution which has literally dehumanised a crucial body of people in wealth creation – investors who enable great people and great ideas to serve mankind.

Of course this fits in with a dehumanised view of economics itself – where transaction is not seen as people serving people within the rules of legitimate transaction and to the mutual benefit of both, but as supply exploiting demand; where customers are not seen as people who have needs, wants, expectations and aspirations that can be served by others in business, but rather as an exploitable entity known as “the market” and where labour is not seen as a partner in this service and in creating wealth, but as a commodity, costly bags of kilojoules that eat away at scarce and precious capital.

Ultimately society, whether misguided or not, will dictate what it expects from its institutions, including business. Conventional assumptions around business are being challenged regularly through social pressure and protests, and new rules and regulations such as governance, transparency, and ethics requirements.

It is such a pity when one has to slap restrictions on something which could and should be a benevolent process. But that’s what happens when you pay homage to a golden calf.

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.