Economic cohesion

How going back to basics can achieve it.

One of the things that still works quite well in South Africa is the pursuit of individual enterprise.

That should not be too surprising. It is a feature of the indomitable spirit of human beings in achieving independence and securing basic comforts, and above all, it offers an opportunity for creating meaning in our lives. That pursuit dates back thousands of years giving practical expression to the two most powerful and basic driving forces in humanity – meaning and means.

Those primary forces have found expression in the cell of all economic activity, first from pure subsistence in making things of value for personal use, and then creating them for others, which ultimately led to commerce and industry as we know it today. No matter how sophisticated or complicated the commercial process has become, those ancient principles still apply. In the end, all economic activity revolves around a very simple principle – that of a person, or group of people creating something of value for others. In short – people serving people.

It is this principle that has served humanity well for hundreds of years and underpins a system that has been described as the greatest in the history of social co-operation. It also has within it the most powerful force of forging, at least at an economic level, cohesion between people of all persuasions. So the lofty “indaba’s” that South Africa repeatedly has between government, business, and labour to address unemployment and low economic growth, should not be focussed on what they can do to encourage it, but rather to stop doing that which discourages it.

The bond that exists in the value-adding, or wealth creating cell, is as natural, as cohesive and as strong as the bond between molecules that make up substances.

We can superimpose that template on any business activity, large and small. A street vendor, for example, actively sells her wares, and in that action is an employee (labour). She would have used her own money to buy stock, and therefore is the sole shareholder (capital). And she would use state or community resources, such as streets, pavements and whatever level of education she may have received. Apart from the state, which for the most part should be an existential given, the bond between labour and capital in this case is absolute, and virtually indistinguishable.

One could also present those “molecules” of the value-adding cell as active contributors, or active stakeholders. Again, the state by and large is, or ideally should be, an active contributor, albeit more indirectly than the other two. It is only when the cell becomes bigger and the individual molecules multiply to become groupings of self-conscious and self-gain interests, that tensions start to manifest. In turn it loses sight of the bond that holds them together – creating something useful for others.

Still, despite all the tensions, disruptions, jockeying for self-gain, customer neglect and occasional complete collapses of those cells, for the most part by far, they are still held together by that simple principle of people serving people. That principle remains the core upon which the entire economic construct rests. Without it, that construct would simply disintegrate.

The real danger for its survival does not come from within itself, but the creation of institutional abstracts such as “labour”, “capital” and “state”, and placing them in formidable opposing formations, presumptuously representing the contributors within the cell. The tensions that may exist in the cell itself give succour and largesse to a number of power mongers and are multiplied hundredfold in grandstand posturing: in parliament, in government, in the Nedlac’s and particularly in organised labour both amongst each other and against others. The favourite fall-guy and common enemy is “capital” – because of its formidable centralised power, its often exploitive behaviour, and an assumption of its supremacy and majesty in the cell.

Armed with, or perhaps warped by their pet economic theories or ideologies gleaned from text books, classrooms, or even the streets, their views, dictates and regulations are then re-imposed on the cell, multiplying tensions there many-fold. What is forgotten is that the value-adding cell is an ancient concept, predating the written word, theories and ideologies. It has survived wars, oppression, suppression, restrictions, constraints and any form of government or economic system.

All democratic systems need checks and balances. So too does the cell need rules of the game to ensure fair play and prevent exploitation and dangerous dominance, either by one of the stakeholders over the other, or of the cell towards its market. But what it needs most of all is a nurturing of a healthy and appreciative relationship between those stakeholders and the promotion of a shared purpose and common fate. That has to largely come from within the cell itself. All it needs is to redefine some of the conventional assumptions about how best that cell should operate.

There are few things more powerful in breaking down barriers between people than trade and transaction. We can easily forge a far greater degree of economic cohesion by re-examining how to nurture the already strong and natural bond between parties in the economic cell we call companies, businesses or indeed any enterprise. That will take us a giant leap forward in our greatest challenge of all: establishing social cohesion.

Then there is the overall economic environment that has caused a fraying of those bonds. They include the burgeoning of parasitic entities such as financial and speculative markets, the incursion by governments into private initiative, concentration of corporate capital, a contaminated exchange system and a warping of price discovery. In nearly every respect, the ideal of commercial democracy has been invaded. Economic democracy should not be confused with the populist concept of “economic freedom” which focuses on possession of wealth and assets. The former is about freedom of choice and access to opportunities for self-help and development.

But still, our magnificent cell will survive. Increasingly and ironically, this ancient expression of wealth creation is finding an unlikely friend in modern technology. The changing building blocks of the modern company, reflected in so-called “disruptors”, and “insurgents” are far closer to the pure and ancient value-adding model. The role of often largely parasitic intermediaries, including banking, is being challenged. Block chain technology is gaining trust and confidence, and crowd funding is chipping away at the very vestige of capital formation, stock exchanges and bond markets. Peer-to-peer transactions are ensuring greater purity in price discovery.

Put together, technology’s greatest achievement may yet be to restore economic democracy and with it a completely fresh, yet ancient understanding of the true dynamic of wealth creation. 

The metric malaise deepens.

What happens when increasingly, not all that counts is being counted.

The desire to measure all things is deeply ingrained in human beings. It is an essential mechanism for comparison, which supports our earliest cognitive development. In time, we learn to put specific yardsticks to these such as rulers, scales and thermometers.

The most important measurement of all, and one which drives most of us and completely dominates our lives is that which defines value. It is that measure that is vital to all of transaction, in turn supporting the social construct we call economics. Yet, for all of its paramount importance, it is the one measure that is severely flawed.

The first flaw lies in the dual nature of value. It has both an objective and subjective nature; a tangible and intangible; a quantitative and qualitative. And while we rely on the quantitative to guide and shape economic forces, policies, supply, demand, trade, measures and regulations; it is the qualitative, the immeasurable, that in the end trumps the measureable and is far more important to individual experiences. The quantitative measurement we call price, is merely a reflection of a transactional moment. The way that object or service behaves, is the ultimate determinant of value.

The second major flaw is in the quantitative measure of value itself – the price. Text book economists may argue that price is the balancing fulcrum between supply and demand, and therefore represents true value. But there is no market that is truly free or pure. The only virtue in the price argument is that for all of their flaws, market informed prices are still far better than regulated or fixed prices. That argument becomes increasingly difficult to defend when markets are contaminated by inappropriate behaviour and when speculative derivatives distort prices. Unrestricted markets certainly cannot claim to reflect true value accurately.

In addition, the unit of measure, money, or specifically the currency, is flawed. For one thing inflation ensures that measured values can change irrespective of supply and demand. Effectively it means that unlike a meter which is a unit of length of absolute constant accuracy, the unit in which we measure value is not constant. In addition, the relative value of one currency to another is even more volatile and can change dramatically on all kinds of whims, as we in South Africa well know. On top of that globally we have delinked money from intrinsic value such as gold or to tangible value in the production of goods and services. Money is now linked to debt creation, which has expanded unprecedentedly and threatens money’s future as a means of exchange and unit of measure.

We have nonchalantly learned to live with these shortcomings in our daily lives, routinely adjusting to these forces and mostly oblivious to the cracks they may be creating in our economic environment.  That may be well and good, but when these contaminants filter through and form the base of macro-measurements that have a profound influence and give direction to far reaching policies and decision making, then they surely must create a vicious circle that entrench and widen those cracks. We tolerate these things simply because we know nothing else, and despite all the advances in information gathering and processing, there is no serious move towards doing things differently.

The most important of the macro metrics are GDP and inflation. The first measures the value of goods and services produced in a country in a given year, and the second the movement of consumer prices. Apart from resting on the above flawed measure of value, they suffer from severe defects in the way they are compiled and often interpreted. That’s when the quantitative can also distort the qualitative, changing daily routines and important features of social life.

The inflation measure is always a bone of contention. (See previous article here.) As an extrapolation to an average, it has as much chance of fitting the price experience of the “average” person as winning the lotto. Yet it is routinely used to determine important decisions such as wages and interest rates. One aspect that is often missed is that it excludes important household costs such as income tax, which have a profound impact on the middle and upper income classes. Other taxes, such as VAT, customs duties and the fuel levy push up inflation but have nothing to do with supply and demand. Increasingly too, the practice of shrinkflation is distorting the picture.

GDP (yes, here we go again!) creates an even deeper anomaly. It has a bigger influence in determining decisions that affect our daily lives than any other macro measurement. Interpretations of underlying forces can differ widely with forecasts of economic growth this year varying from +1.2% to -0.9%. The GDP measurement stands on three very wobbly legs: the impurity of the unit of measure outlined earlier; the potential for various interpretations; and the third, probably the most important -- its constituents: what does it count and what does it leave out.

The omission of qualitative values was lamented decades ago by American Senator Bobby Kennedy in his famous conclusion that it “measures everything, except that which is worthwhile.” It’s a lament that has been carried forward for decades, the latest from Nobel Laureate, Michael Spence.  But even selection of the tangible, or measurable, is sometimes arbitrary to say the least: like Nigeria’s huge leap in GDP after a reshuffling of the GDP constituents and Egypt overtaking South Africa in size based on an exchange rate. Or the U.K.’s including proceeds from sex and drugs to boost its GDP and overtake France in economic size.

And now a new dimension has been added to the debate. What happens when something of value keeps that value but loses its price? In effect, it moves from the quantitative to the qualitative. When something does not have a price, it can no longer be measured. And if it was included in the metrics before, it simply falls away, losing its impact on both GDP and CPI, amongst others. One could argue that it partly moves from product to advertising and is simply recovered differently. But will it have the same impact?

It is an intriguing question raised by independent economist, Cees Bruggemans, in a recent edition of Economic Insights.   Sir Charles Bean, Professor at the London School of Economics, went further in a recent WEF publication to suggest a rethink of how we measure economic activity. Bean points out that in a number of areas, technology has disrupted pricing, processes, and even the way companies operate. These include music, entertainment, communication, internet services, information gathering, banking, travel agents and insurance agents.

The relevance and reliability of some of our key measurements is increasingly becoming a more critical issue. I’m waiting for the day when Pravin Gordhan has one of his media briefings and emphasises the importance of increasing GDP, and when some junior maverick reporter questions the relevance and reliability of the measurement itself. His answer is predictable: “What else is there?”

That, indeed is the challenge. 

Perspectives on the Panama papers

Reflecting poorly on prescriptions for governance and transparency.

So another clump of mud has been flung at the reputation of free enterprise. This time in the form of tax dodging as revealed in the Panama Papers, reflecting only a small part of a problem that globally could be costing governments more than $3 trillion – a nearly impossible figure to confirm because of the nature of the beast.

It comes at a time when business is being blamed for many global ills, including stark wealth inequalities. This may not be surprising as one of capitalism’s tenets is that private initiative is much more productive than government, encouraging tax dodging as something of a billionaire and corporate sport. The fall out of this event will no doubt continue for months, if not years, to come. Not the least of which will be a further tightening and expansion of prescriptions around governance and transparency. South Africa’s King Reports on corporate governance are among them.

There is something in all these reports that is a reminder of the tale of the King’s new clothes. It is more than a play on the name. The revelation by an innocent question from a child that the King or emperor was naked, reminds one of the question an inexperienced reporter put to another king of sorts: Jeff Skilling, former CEO of the notorious Enron energy trading firm.

His defensive response to the question where Enron’s income was coming from, that he was not an accountant and could not know all about the company, triggered one the biggest collapses of a financial bubble the world had ever seen. In turn there was a feverish rush to enforce all kinds of prescriptions and regulations and a rekindling of animated debate around corporate ethics and social conscience. Mervyn King’s efforts in producing such prescriptions were globally leading edge in this regard. 

This is not a detraction from the value of these efforts, the latest of which is King IV now in the making and due for release in November. Transparency and accountability are fundamental pillars of social order, and no less so when it comes to business which affects all of our lives. Protocols that guide those in authority on ways of achieving them are of indispensable value.

When it comes to prescriptions, regulations and indeed trying to force enterprise to adopt business strategies that focus heavily on them, one could argue that they become highly counter-productive. It is this assumption that justifiably sparks the kind of response one saw to this Moneyweb article on King IV: “just another concrete block shackled to business to hinder it to go forward and do what it is best at viz. business.” 

The simple truth is that there is little, if any evidence that all of these efforts have resulted in a significant reduction in business malpractices. Indeed, in just one – that of executive pay – there is an argument that not only has disclosure not tempered executive remuneration, but has exacerbated it by creating envy among the more modestly paid executives as well as pressure for rank and file wage increases.

An article published by the WEF cites recent scandals just in the last year – Volkswagen, Toshiba, Valeant, Mitsubishi and FIFA – as evidence that corporate governance globally is still simply not taken seriously enough. South Africa has had its fair share of these since all of the hype began decades ago, and now we have the tax evasion scandals revealed in the Panama papers. The real fall-out of these papers for South Africa is yet to come and will seriously challenge the selective and unilateral enforcement of reputational risk.

When one thinks of all of the time, effort and costs spent on ensuring ethical standards, sustainability, accountability and governance, one simply has to question their efficacy. These go much further than the King reports and include sustainability reporting, the high cost consultant driven placebo efforts at establishing Triple Bottom Lines and Balanced scorecards, and interventions on constructing organisational ethical standards and remits. For the most part by far, these efforts are mostly adopted very reluctantly as “have-to-haves” rather than “want-to-haves”.

The gathering of as much information as possible about all aspects of a big organisation is always useful. But compliance with prescriptions or some organisational intervention flavor of the month often leads to information overload. Teams of managers can spend hours filling in forms or data processing for “dashboards”. I have seen meeting room walls “brown-papered” from ceiling to floor until one senior executive wailed: “For heaven’s sake, we are not trying to invade Spain!” Much of this information perishes on its way to the board, where it seldom, if ever, informs company strategy.

In my decades of exposure to business and organisational theory, I cannot recall any case where these efforts have tangibly or even directly contributed to company growth or better overall performance. If there are such cases, they certainly have not made enough impact to encourage their adoption as a sound strategic framework for any business model.  The reasons are simple and two-fold. They do not reflect the real driving force of the business – maximum returns in the shortest time; and for the greatest part, they try to marry quantitative with qualitative metrics in a world dominated by measureable financial outcomes. They then create intolerable contradictions.

Which brings attention back to Skilling’s response, or lack thereof, to a question about Enron’s source of income. If a company or its CEO cannot passionately and clearly demonstrate the tangible value the enterprise adds to people’s lives, its right to exist is highly questionable. When an enterprise sees contribution as its sole purpose, and does it in such a way that reward expectations are met and further contribution encouraged, then it certainly will not need a plethora of prescriptions, rules, and interventions to entrench that behaviour. I have repeatedly argued that value-added, or wealth creation, scientifically reflects that. It is the only accounting measurement to do so. It is doubtful whether a company that is dedicated to adding value to people’s lives and demonstrates that in its behaviour in the market place, will also not reflect that spirit in its relationship with all other interests, including the community at large.

Good companies say they have a contributory purpose; better companies live by and demonstrate it. The best companies coherently measure it. In the main, those that don’t, will be caught out by customers, competition and normal laws. Most enterprises are indeed driven by these forces. It just becomes difficult to see when they constantly have to defend a self-gain money focused ideology.

A passion to make a difference in one’s market unleashes true willingness, without which no amount of prescriptions can prevent bad behaviour. That is particularly so when it is shared by all involved as a common vision.

Do you trust your bank?

Enough for them to be the guardian of ethics?

Forged in the embers of the 30-years religious war, one of the greatest humanists of all time, and credited with being the father of Capitalism, Adam Smith, wrote: “Virtue is more to be feared than vice, because its excesses are not subject to the regulation of conscience.”

The aphorism may be appropriate in questioning the interpretation of reputational risk by those financial institutions who within weeks of each other, cut ties with the listed Gupta owned Oakbay resources. So far, no contractual breaches have been demonstrated, despite Oakbay’s challenge for these suppliers to reveal them. Which would explain this picture in my mind of one of the suits in those boardrooms nudging, winking and saying: “Hey, let’s stand next to the bishop on this one!”

This not is to question the intention of the law, but the need rather for a thorough scrutiny of how these prescriptions, apparently applied for the first time on such a scale, can or should be interpreted. Most actions have multiple intentions, and ulterior motives are seldom fully revealed in the absence of full, transparent and expert judicial scrutiny.

Reputation and image.

Reputational risk is a legal requirement as outlined in this dissertation. It is open to subjective interpretation and should only be invoked when the “integrity of the individual bank and perhaps harm to the entire banking system” is threatened. That’s a huge leap and if Oakbay has potential for being that, one could argue that is vital to all who have dealings with them, and perhaps even the community at large. It may outweigh client confidentiality.

This points to brand image being perhaps at least one factor. Then it takes on a completely different flavour. The pedlars of image, very often independent of truth and sincerity, make up a huge industry in the form of branding, advertising, public relations, and lobbyists. A jaundiced journalist such as myself, and I suspect even the average Joe Soap, has long since seen through these cosmetics.

Collective punishment and collateral damage.

As another reflection of the inappropriate systemic regal status of shareholders and owners, a targeting of them is seen as paramount over the interests of other stakeholders. This is no different from the atrocities of collective punishment and collateral damage.

Organised labour has already raised concerns about the 7000 employees that could be affected.  One can assume that for the most part they are hard-working folk with families to support, and have become little more than cannon fodder in these events. Relatively speaking, they will probably lose more than the accused owners. Even if the threat to employment turns out to be little more than company spin, the angst these people must have gone through is still a high price for them to pay. It is broader still. Apart from investors in Oakdale shares, there are customers, readers, viewers, and others who in one form or another could be affected.

Double standards and hypocrisy.

Given the industry’s claim to protect client confidentiality, the fanfare that accompanied the actions is a bit strange. It would be quite revealing to discover which individuals who may pose a greater or equal reputational risk, bank with whom and are audited by whom. Just as interesting would be to know which companies or groups with known legal transgressions, including collusion and anti-competitive behaviour still have preferred client status at these institutions.

But more importantly: who’s watching the watcher? In my original article for Moneyweb, I wrote: “The South African financial services industry is highly rated internationally.”

That may be so. But in a comment to another article, veteran investigative journalist Barry Sergeant asked: “Could you perhaps explain why a good number of South African entities are appearing, very heavily, in the Panama Papers? This is not something that you or anyone else in the South African mainstream media would dare touch. One domestic bank, for example, has its name on more than 24,000 documents in the Panama Papers.”

Sergeant is one of 160 investigative journalists globally who have been tasked with analysing these papers.

Financial services as custodians of ethics.

When you put on the clothes of the Cardinal, you better ensure that they fit. Globally, the sector, including some auditing firms, have perpetrated the biggest financial swindles in history. (See report here.)  The South African industry is certainly not without blemish. Yet they wield enormous power at all levels in society and at the stroke of a pen can make or break an individual or company’s financial status. They are the custodians of our money, our debt, and our financial welfare. Heaven forbid that they become custodians of ethics.

The sector’s global misconduct has invited a barrage of new rules and regulations. But one could also argue that the difficulty in precisely determining what constitutes reputational risk can just as easily be used to enhance the power of these institutions, instead of curtailing them.  The law around reputational risk creates a serious anomaly. Its unilateral enforcement can be highly prejudicial to the “accused”, who have possible redress only after the fact and then through a difficult process via the ombudsman or courts. These in turn will have to consider subjective evidence of risk compiled by the institutions themselves. This procedure is flawed. The unilateral withdrawal of an essential service that can harm a number of innocent parties has to be subjected to an independent hearing similar to a court procedure. Despite its sensitivity, it has to be transparent.  

Just over a year ago, the treasury published a document detailing the shortcomings in customer care in the financial sector. If we have banked long enough, most of us mere mortals would have experienced the inconvenience and embarrassment of an arbitrary and bureaucratic action that even in redress is patronising and unapologetic. This has become more so with diminishing personal contact and electronic intermediaries.

Financial institutions have a serious trust issue. If through the latest action they hope to demonstrate integrity and trustworthiness over and above meeting legal requirements, it may still backfire badly on them. It could easily be interpreted as an abuse of legal prescriptions, especially when quite a number of clients see them as aloof and autocratic. For it creates an impression of an absence of other greater values: such as empathy and customer care.

Then there’s the unthinkable: the possibility of political scheming behind the scenes to settle some scores. If financial institutions with their inordinate power over our destiny become involved in and can be manipulated by these dark forces, then we are in very serious trouble. 

I for one, am left with a sense of disquiet.

Shaking off the 80’s

Repeating and perpetuating proven bad habits.

Warren Buffet’s famous idiom: “Only when the tide goes out do you discover who's been swimming naked,” can be expanded to give some new meaning in these tough times. The naked swimmers will mostly retreat with the tide to continue hiding their nakedness. Or they could scramble for some covering attire, or, like turtles, withdraw into their shells. More often than not, however, even those who are not naked follow the tide into deeper waters.

That is a fitting analogy for the behaviour of many, if not most companies in troubled times. They follow the irresistible temptation to opt for containment rather than growth and in the process revert to those techniques that played no small role in the receding tide. A recent line in the Economist speaks of the backfiring of the shareholder-value revolution of the 1980’s, pointing not only to the source of this constricting behaviour, but its continued presence and the folly of a strong resurgence.

To be clear, shareholder-value criteria on their own are relatively benign. It is when a strong dose of short-termism, another product of the 80’s, is added to it that one creates a highly toxic cocktail. It was a good decade for the champions of capital supremacy and exclusivity. It was unquestionably seen to be synonymous with freedom during the cold war, ending in victory with the collapse of the Berlin wall. There was a scramble for a plethora of old and new measurements and techniques that would support and enhance shareholder-value criteria, including EVA, ROAM, ROE, ROTA, RONA and many others.

Broadly, the purpose and destiny of a business simply became a matter of financial technique, manipulating and pulling levers that are tangible and measurable. We see this spirit reflected in this praise singing of ROAM (return on assets managed) which proclaims that “the only legitimate purpose of managers is to maximise the value of the firm for shareholders”. I recently saw some advice to small business owners to focus less on income generation and more on profit. Individually and in themselves they are all valid as supporting indicators of company health, but many simply become an end in themselves. In that they can threaten the long term growth of the enterprise and are arguably counter-productive even in longer term shareholder-value terms.

An excellent example of this phenomenon is the behaviour of Tim Cook, successor to the late Steve Jobs at the helm of Apple which, until recently was the largest company in the world by market capitalisation. The approach of Jobs to the company was legendary – product innovation and market growth. Now hitting some troubled waters, Tim Cook has opted for share buybacks, lifting earnings per share and share value. He has spent $110 billion on share buybacks, $43 billion on dividends and debt has skyrocketed to $63 billion. Another IT giant, Amazon has adopted a similar approach and has boosted its share-buyback programme. Perhaps both companies have not fully understood that investors were attracted to their innovative and market growth strategies to begin with. Both shares have shown bigger falls than the broader market.

Of course, as the previous mining giant Anglo American has discovered, debt has its own pitfalls. It may be cheap at a given time, but can quickly reverse with central bank intervention, fickle bond markets and credit ratings. Debt is not as forgiving as equity, and its cost not as malleable. It becomes particularly questionable when used in a non-productive manner such as paying out dividends or executives cashing in share options; and not for investment in productive assets, growth, and innovation.

Shareholder value arguments in general and share buybacks in particular, speak to a much deeper issue that has supported an ideological argument: the premise that capital is a scare commodity that has to be revered and wooed by all means possible, including exclusively seeking maximum and quick yield on its deployment. That argument crumbles somewhat with easy and cheap credit and muddies the theoretical distinction between capital and debt. It also distorts some of the efficacy of the typical measurements mentioned above and that are often obsessively and exclusively followed.

The whole approach has been questioned for some while, particularly in the last decade or so. Early responses to the destructive effects of short-termism that invariably accompanies the shareholder value approach, especially if it is linked to executive rewards, saw the creation of broader metrics aimed at sustainability. They included the Triple Bottom line and the Balanced Scorecard.

For some inexplicable reason, the value-added statement, initially established to share information with broader stakeholders including labour, was never recognised as a far more powerful, growth orientated strategic template. (Even more so if the statement is adjusted to reflect what I have called a Contribution statement). Yet a focus on maximum wealth creation, or value-added automatically drives an organisation to greater growth orientated behaviour. All of the other measures, including profit and the others mentioned earlier, fit under optimum wealth distribution.

They are valid in their own right, but using them as the primary drivers is arguing that wealth creation is driven by distribution, which is putting the cart before the horse. You clearly have to create wealth before you can share it. There seems to be a blatant hypocrisy in arguing for maximisation of one component of distribution, profit; against maximising (or even for minimising) another, wages. As singular and obsessive focuses, both are wrong when longer term wealth creation itself suffers.

If applied vigorously, the wealth creation template does not imply letting go of prudence and cost containment. Anything but. In just one of its three dimensions, that of transforming one situation into another of greater value, it interrogates the productive use of every activity, every resource used and every asset employed. 

Business behaviour is broadly reflected in three ways: profit driven, wage driven and service or market driven. They are not mutually exclusive and should be mutually supporting. But there are times when an enterprise might have to put emphasis on one above the other. Containment invariably puts behaviour in the first mode often creating destructive tensions.

Letting go at any time of the third, being service or market driven, is perilous to say the least. 

Our triple deficits

The most important is not about metrics but about behaviour.

This may be a case of shooting the messenger, and heaven knows South Africa certainly needs as many messengers of caution as it can get. But I am not easily drawn into the public hysteria that is sparked by the activities of the three main credit agencies, nor the “shaking in our boots effect” of Moody’s latest reconnaissance. This despite their negative impact on the domestic economy. These have been well covered and will not be repeated here.

It seems somewhat incongruous that the triad of S&P, Moody’s and Fitch can have such sway over sovereign economic destiny. These agencies have arguably not fully shaken off some of the mud flung their way after some inflated ratings that supported investments in dubious instruments, leading to S&P specifically facing a $5bn lawsuit a few years ago. It is a rather restricted club whose services are paid for by the debt issuers. (Although, of course one could argue this would tip the balance in favour of the issuer in the event of massaged ratings.) Admittedly too, the behaviour of rating agencies has been tempered more recently by regulation, the threat of law-suits and more agencies entering the field. Whether additional competition will blemish ratings to favour paymasters, remains to be seen.

However, this is not a repeat of a Moneyweb article of about a year ago when I wrote: “It is a moot point whether these agencies are comfortable with their power. But they have it. Whether they deserve it or should have it has become academic but under such circumstances they can expect their credibility to be constantly challenged, sometimes unfairly, but also with some justification.” 

That power is sourced not by their findings, or even their impact on investment decisions, but the inordinate effect on the domestic mood in turn fuelled by at times hysterical knee jerk responses. It is rare to see a sober overview of credit ratings as this one by Moneyweb’s Hanna Ziady. For the most part, credit ratings are greeted with much, often ill-informed, fanfare. Even the language can be emotive and sometimes dramatic. The word “junk bond” alone, instead of the term “sub-investment grade”, “evokes thoughts of investment scams”, according to Investopedia. But then it goes a step further. Sloppy journalism invariably uses phrases such as “South Africa will be downgraded to junk”. And from the mouths of politicians, one can even hear terms such as “we are now a junk country”; consigning the entire nation to junk. Some have even gone as far as to warn of a “failed state”, showing little understanding of what failed states such as Libya or Yemen really look like.

Credit ratings also become a political football with expedient politicians and other vested interest using them in an often highly dramatized fashion. We saw much of that prior to the last budget, leading to the firm conviction that Finance Minister Gordhan’s primary, if not exclusive budget task was to avoid a negative response from a bunch of suits across the Atlantic. That pressure no doubt also came from within the ruling party itself to sway the less economically informed of the executive, including the President himself, of the need for fiscal discipline.

So it was not surprising to hear the first question asked by reporters soliciting comment on the budget and Gordhan’s recent spin effort abroad: “Did he do enough to avoid junk status?” All of which led to something of a conundrum captured in Moody’s response that there should be more emphasis on economic growth. That’s a bit of a contradiction to fiscal austerity, albeit not totally unachievable, perhaps even quiet feasible with more effective spending and less waste.

The need for being an attractive and favoured destination for capital can never be understated, and credit rating agencies have to be wooed as a significant factor in achieving that. For a significant part they, and most economic analysts, look at the “twin deficits”: that of the budget, which is simply the difference between Government revenue and expenditure accumulating in our sovereign debt; and the balance of payments which is the difference between what we spend and earn with other countries and of which trade in goods and services, or the balance of trade, is the most significant. The latest figures reflecting all of these can be found here, and I will not clutter this column with statistics.

Because the most important deficit of all cannot be captured in hard numbers. It is the trust deficit, or the credibility gap. As Gordhan himself put it “the economy and South African society needs to win back credibility”. This credibility is the outcome of our behaviour as a nation, and has the most profound impact of all on the numbers, not only in terms of their actual state but also how they are assessed by others.

Numbers are always the outcome of behaviour. Our sovereign debt is a good example. At about 46% of GDP, it has solicited much concern. But it pales into insignificance to Japan’s 230%, which has an A+ stable rating. One reason is that Japan’s debt is mostly funded domestically, but then South Africa only has a 10% foreign component to its central government debt. The real difference is Japan’s credibility, or simply put, the faith people have in the country to meet its commitments. One could also argue that Japan therefore still has a trust surplus.

It is in that trust gap where South Africa has its biggest problem. We are a long way from defaulting on any of our debt commitments. What concerns most, including no doubt the credit rating agencies, is the behaviour of leadership and political and social stability. We rank as one of the lowest countries in the world in trust in government, which must spill over to global perceptions.

There are so many negative experiences on a daily basis that the accumulative effect on sentiment and perceptions both here and abroad must be devastating. They emanate from behaviour at many levels, including individual, institutional and other collectives, and from racial tensions, violent student protests, labour disputes, civil unrest, the current Gupta debacle and corruption and governance. All blindly follow their own narrow agendas with little regard, or even only remote knowledge of their effect on how we are rated as a nation.

Of course it is demeaning to kowtow to strangers. But we should not be doing things to please them. We should be doing them because they are the right things to do.

Outsourcing: friendly trend or foe?

The changing building blocks of the modern company and implications for labour.

There is a strong ironic link to university student protests and their cause against outsourcing of certain tasks on campus. Those very students who so vehemently protested against outsourcing are most likely going to enter an environment where they too may be “outsourced”, joining the so-called “precariat class”. In that world they can either see themselves as victims or masters.

The transition from sheltered and largely legally protected employment to an independent supplier is not easy. After leaving a fulfilling and secure career in broadcasting and then founding the company transformation consultancy Schuitema Associates with two others, I quickly discovered the fine dividing line between being self-employed and unemployed. This was even more onerous when one, in the early years at least, was the main source of income and sole financial risk taker for others.

But what really sustained us then, and what constantly fuelled determination and hope for the future, was that we knew we were doing something that could make a difference to others lives. It is that force, so often absent in the day-to-day life of the average worker, that really defines the difference between a job and work.

Ultimately there may be fewer jobs, but there will always be work. It is the ability to focus on the latter, rather than the former, that will be the hallmark of a successful productive life. Indeed, one could argue that it always has been. But it has become severely muted as employees, over time, have become conditioned into the belief that a successful career follows a simple path of rungs on a corporate ladder.

Inexorable forces are radically scrambling the parameters of organisational theory. Modern trends may not change the principles at stake, but will certainly change conventional company structures. And by the looks of it, they could spell a change of organised labour’s role as we know it, while the latter tries to cling to outdated theories that are rapidly becoming irrelevant. We can see evidence of this tension not only in public debate, but in megatrends of technology and mechanisation; declining labour participation rates; new company structures; inequality and the explosion of financial services.

A recent insight into how the modern company is reinventing itself was given in this article in the Economist. They use services such as Uber, AirBnb, and cloud computing as examples of where “across industries, disrupters are reinventing how the business works.”

The appeal of the “insurgents’ model”, the Economist says, is partly a result of the growing dissatisfaction with the public company. “After a century of utter dominance, the public company is showing signs of wear. One reason is that managers tend to put their own interests first. The shareholder-value revolution of the 1980s was supposed to solve this by incentivising managers to think like owners, but it backfired.”

The article argues further that in insurgent companies there is a much tighter link between ownership and responsibility, and founders, staff and backers exert control directly. “It is still early days but, if this innovation spreads, it could transform the way companies work.”

The insurgent model implies a flattening of hierarchical structures, a much slimmer and streamlined organisation, greater participation by employees, incentivising them with ownership stakes and performance related rewards. Keeping the organisation tight means buying in services as and when needed, in turn relying far more on outsourced services.

In short, these forces imply using traditional labour to a much greater extent as outside suppliers in the creation of wealth, rather than partners in it. That’s a rather oversimplified mental graphic based on the conventional understanding of wealth creation and completely ignores all the behavioural nuances that are forged in that model. But I’m using it to illustrate that in theory at least, a shift of labour from partner to supplier should not impede wealth creation itself which is ultimately measured in Gross Domestic product. What it does mean is that the combined value-added is more fragmented. There are many pros and cons to that, but most are the effect they have on behaviour which is a subject on its own.

Given the increasing shift away from large corporate and company structures as we know them, the increased use of outsourcing and with it the much maligned labour broker, seems inexorable. Insisting that companies cannot outsource when it makes business and sound supply chain management sense to do so will be highly counter-productive. It will clearly impede the “insurgent” model, new start-ups, and SME’s – all of which are the way of the future. Large companies and corporate structures encourage large and powerful labour organisations. They find far less sustenance in lean, streamlined operations where there is a high degree of employee operational involvement or even ownership.

The key strength of these new organisations is their very high level of flexibility. If organised labour facilitated the same degree of flexibility in conventional organisations, they will ensure their continued relevance in a rapidly changing world.

While still mostly subtle and gradual, outsourced activities, despite their multi-facetted nature, should be approached as a new sector, worthy of its own institutional constructs, legislative protection, umbrella organisations, and developmental support that can even explore its role in import replacement and establishing new training platforms. In particular, concerns about the treatment of labour in these services have to be addressed. Large companies using outsourced services can adopt a highly supportive and developmental role towards these suppliers.

Instead of seeing outsourcing as a threat, it could become a new and vibrant sector which is an incubator for entrepreneurship, SME’s and co-operative type ventures. It not only fits in with employment needs of our time, but with the creative and adventurous spirit of the new generation.