All posts by Gordon Pearson

Accounting profession, Audit profession, Company Law, Competition, Corporate Governance, Economics, Merger & Acquisition, Regulation

The Criminal Company

June 8, 2012 Gordon Pearson Leave a comment

The threat to the world’s liberty today comes from the monopolistic power of unregulated corporates. That is exercised mainly through banks such as Goldman Sachs and financial intermediaries and traders such as Glencore. A year ago the Financial Times ran a series of articles showing how Glencore fix commodity prices for their own profit and everyone else’s loss. The Russian wheat and corn harvest being threatened by drought, the FT reported how Glencore made speculative long term proprietary trades in wheat and corn. When wheat prices failed to rise sufficiently for a profit to be made over the period of Glencore’s trade, their man in Moscow ‘encouraged’ the Russians to ban wheat exports. That had the desired effect forcing prices up sufficiently to enable Glencore to close its earlier bets at a decent return. The obvious side effect of the price rise was that the struggling millions had to struggle that bit more. That’s the Glencore way of doing business. (See http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/)

Glencore is currently in the throes of taking over of its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata is already big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and is highly influential in thermal and coking coal. Using the Glencore business method, they will together be able to create and exploit prices of all these commodities and more. And with Viterra also acquired, they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival.
Continue reading The Criminal Company →

Agency theory, Company Law, Corporate Governance, Corporate Ownership, Economics, Free Market Capitalism, Management Practice, Management Theory, Regulation

A New and Legal Orthodox Wisdom

May 29, 2012 Gordon Pearson 1 Comment

Unilever’s Paul Polman must be a Chief Executive in a million. Or more. In his interview with Guardian Sustainable Business, Polman calls on business leaders, politicians and NGOs to recognise they cannot deal with the world’s environmental and social challenges by pursuit of Milton Friedman’s target of maximising shareholder wealth. Polman names a few other companies who are moving in that same direction, and suggests their numbers are growing. But it is a drop in the ocean.

“Why,” he asks, “would you invest in a company which is out of synch with the needs of society, that does not take its social compliance in its supply chain seriously, that does not think about the costs of externalities, or of its negative impacts on society?”

Sadly, the answer is simple and obvious: to make a quick buck. Friedman said that corporate officials had no other social responsibility than to make as much money as possible for shareholders, and that is what the business schools and university departments have been teaching ever since. So that is how the world now works. The world – business leaders, politicians, academics, and even the people in the street – have come to believe that it is the legal duty of those who run businesses to maximise the wealth of shareholders, and to hell with everything else. But it is simply not the case. We should not need heroic figures like Paul Polman to change the world. It should simply be a matter of compliance with the law.
Continue reading A New and Legal Orthodox Wisdom →

Bank Bonuses, Banking, Company Law, Corporate Governance, Corruption, Economics, Management Practice, Political Decision

Modifying the Capitalist System

April 26, 2012 Gordon Pearson Leave a comment

Goldman’s Lloyd Blankfein, Citibank’s Vikram Pandit and, of course, Barclay’s Bob Diamond, all have something in common. Even their normally acquiescent shareholders have been moved to express concern about their latest round of excess, greed and thuggery. But they are only the tip of the ice-berg. It has become custom and practice for top people to take spectacularly from the businesses they command. Whether their take, largely for unacceptable performance, is £5m or £67m makes little difference. It obviously bears no relation to their true worth: their talent, or their hard work.

These are the unacceptable faces of capitalism, the reasons why people have so little trust in the integrity of corporate business. They are why people are demanding ‘new models of capitalism’, ‘ethical capitalism’, ‘capitalism with a conscience’, etc. And why Ed Milliband makes the clear distinction between what he refers to as ‘good capitalism’ and ‘bad capitalism’.

But capitalism with a conscience won’t work. We may all start out with a conscience, but if the system tempts us with untold riches for doing not a lot, then most of us are likely to fall for it. Our intrinsic good intentions will be crowded out by extrinsic incentives or greed. The problem is making the system proof against that simple human frailty. Continue reading Modifying the Capitalist System →

Company Law, Competition, Corporate Governance, Economics, Management Practice, Moral Hazard, Political Decision

Free Markets Controlled by the Unaccountables

April 17, 2012 Gordon Pearson Leave a comment

How does a basic item of clothing, say a shirt, come into existence. Where does the cloth come from? And the colours or dyes, the buttons and thread, the machines that cut the fabric and the machines that stitch the bits together? And who dreamed up the designs and how did they get printed on the fabric? And what brought all these things together to produce the finished article? And how did it get distributed to people wanting such a shirt? The answer to all those questions is, of course, ‘the market’. No other form of economic organisation gets anywhere near that level of efficiency or provides a comparable degree of choice. All the tools of central planning and control of the former communist states, proved incapable of organising the production and distribution of shirts that people actually wanted to buy. That is the beauty and power of the market for something as simple as a shirt. For more complex products, and most products are, the competitive advantage of the market over any alternative, is far greater even than that.

The thing that makes the market so effective is competition: the existence of alternative suppliers of cloth, dyes, thread, machines and the rest. Without competition , the market would be no different from the central planning and control system. That failed not only because of its inherent inefficiency and proneness to bad decisions, but because the empowered bureaucracy was vulnerable to self-interested, even corrupt and illicit decision making. Monopolists are in exactly the same position: inefficient and vulnerable, and likely to take corrupt and predatory decisions to further their avowed aim of maximising shareholder wealth.
Continue reading Free Markets Controlled by the Unaccountables →

Co-operation, Corporate Governance, Economics, Management Practice, Management Theory, Political Decision, Shareholder Value

God Complex ‘Drivers’ to Extinction

April 10, 2012 Gordon Pearson Leave a comment

Keynes referred to them as the ‘madmen in authority’, referring to the policy makers and top financial and business executives, who rule our world. Maybe ‘madmen’ doesn’t quite capture their essential characteristics today. After all, mainstream economists would argue they are not mad, but wholly rational in their unwavering pursuit of self-interest without regard to any broader, more enlightened consideration. In a talk to TED’s global conference (TED – Technology Entertainment Design – bills itself as a nonprofit devoted to Ideas Worth Spreading), economist Tim Harford identified a ‘terrible affliction’, one that the ‘madmen’ might be suffering from. It was both ‘debilitating to individuals and corrosive to society’. He referred to as ‘the God complex’, the symptoms of which could be simply described as: ‘no matter how complicated a problem, you have an absolutely overwhelming belief that you are infallibly right in your solutions.’

The UK coalition government has more than its fair share of sufferers: Andrew Lansley at Health, Michael Gove at Education, and, of course, Prime Minister Cameron, self-confessed expert in how to manage hospital wards, deal with binge drinking, solve racism in football and make child adoption processes fairer and faster, to name but a few recent self-confessions. These are individuals convinced of their infallibility, despite the complexity of the issues they confront, and not prepared, unless forced, to consider the possibility they might be wrong and other solutions might be better.
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Corporate Governance, Corporate Ownership, Economics, Management Practice, Management Theory, Shareholder Value, Society, Stakeholder theory

Bad Theory and Management Renewal

April 4, 2012 Gordon Pearson Leave a comment

Management scholar, Sumantra Ghoshal, accused mainstream business schools and university departments of teaching ‘bad management theories’ that were ‘destroying good management practices’. His arguments were persuasive, both as to how bad the theories were and how effective they had been in destroying good management practice. The bad theory was that management had no other social responsibility than the legal duty to maximise shareholder wealth. The good practices this bad theory destroyed were related to concern for employees, customers, the local community, the environment and (therefore) the long term, all of which were exploited and impoverished, or at the very least neglected, on the altar of short term shareholder interests.

Ghoshal argued that destroying the bad theory would be an essential first step to renewing good management practice. If the bad theory remained intact, the greed enabling culture it supported would remain as the dominant set of beliefs. Under that circumstance, initiatives promoting sustainability, transparency, fairness and integrity, as characteristic of the role of business in society, would be doomed to fail. At the end of the day, no matter how worthy an action would be, if it meant reducing shareholder return, it would not be sustained. And if an action were to harm employees, customers, the community or environment, but would enrich shareholders, it would be justified. For this to be reversed, the bad theory must be totally overturned.
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Co-operation, Corporate Governance, Economics, Management Practice, Management Theory, Shareholder Value, Social values

What Really Matters Now

March 29, 2012 Gordon Pearson Leave a comment

Professor Gary Hamel’s new book is available: ‘What Matters Now: how to win in a world of relentless change, ferocious competition, and unstoppable innovation’. Hamel is a breathless optimist. He sees the world changing and he encourages and motivates managers to achieve near impossible ends. He believes in the potential greatness and goodness of industry and teaches bright young people how to raise their game so as to take us forward to the promised land. He is today’s Peter Drucker, with slightly less gravitas, but rather more academic shape and a whole lot more bounce. We need Gary Hamel. Big business under the Hamel code would be honest and trustworthy, exciting and innovatory, giving people real opportunity to develop to their full potential and encouraging them to participate in decision making at all levels. He puts five issues at the centre of whether a business will ‘thrive or dive’ in the years ahead: values, innovation, adaptability, passion and ideology. They’re all people based factors which together ratchet up corporate performance to winning. But there’s a problem with Hamel’s brave new world. It’s not going to work.

Management practitioners today, at least the vast majority, believe in something quite different. They are taught to be, and have become, dedicated followers of the Friedman line: their bounden duty, they believe, is to maximise the wealth of shareholders, having no other social responsibility than that. To hell with everything else! Oblivious of the fact that maximising any one thing necessarily results in the neglect and impoverishment of everything else, they are taught that the relentless pursuit of shareholder value will end with the best result in the best of all possible worlds. But that, as Sir Mike Darrington of the Pro-Business Anti-Greed campaign would put it, is all ‘total bollocks’.
Continue reading What Really Matters Now →

Banking, Competition, Corporate Governance, Economics, Political Decision, Regulation

Who Rules the World?

March 26, 2012 Gordon Pearson Leave a comment

A news item on budget day, commanding all of two column inches on an inside page of some of the national press, was of far greater importance than anything Mr Osborne had to say. It reported the completion of Glencore’s acquisition of Viterra, Canada’s largest grain handling company. Glencore has ways of making money as reported previously on this site (see http://www.gordonpearson.co.uk/28/glencore-and-their-ilk-are-screwing-the-world/). Briefly, they bet on the future price of a commodity in a market they can fix. They then fix the price and take the profit. The example given in the previous posting was Glencore’s bet on future wheat and corn prices. Despite Russian harvests in 2010 being threatened by drought, prices didn’t rise sufficiently for Glencore to profit, till Yuri Ognev, the relevant Glencore executive, “suggested” to Moscow they might be well advised to ban wheat exports. Two days later exports were banned and prices rose by 15%, enough for Glencore’s profit. That’s how Glencore works. An unfortunate bi-product of Glencore’s price rise would be added numbers starving to death in the Horn of Africa and elsewhere.

Glencore, the world’s largest commodity trader, listed in London but successfully avoiding UK taxes, is currently taking over its associate company Xstrata, one of the world’s largest mining and metals companies. Xstrata’s London IPO ten years ago established it from day one in the FTSE100. Its boast is that over the past decade it has grown faster than Amazon, largely by acquisition. It is now big enough to fix supply, and therefore prices, of strategic minerals such as nickel, zinc, platinum, chrome and copper and being highly influential in thermal and coking coal. Glencore with Xstrata will be able to create and exploit prices of all these commodities and more. And with Viterra on board they’ll be even more powerful in the grain markets, adding starvation to the millions already struggling for survival. The already weak and poor will pay for Glencore’s profitable growth. But they won’t be alone: we all will pay.
Continue reading Who Rules the World? →

Competition, Corporate Governance, Economics, Political Decision, Shareholder Value

Budgeting for Naked Greed

March 20, 2012 Gordon Pearson Leave a comment

All sorts of hares are set loose in the run up to the budget: removal of the 50% income tax rate, ending of national pay settlements in the public sector, imposition of a mansion tax, a clamp down on stamp duty avoidance, and so on, not to mention the various stimulus–austerity alternatives. Debate centres around the clash of two different motivations: the desire to get the economy going again, and the desire for fairness and equity, or not. All this punctuated by outbreaks of naked greed by the likes of Bob Diamond. Sometimes those motivations are opposed and sometimes they coincide. Underlying this cacophony, there are simplistic party dogmas, clearly based on half understood or partly remembered ideas from undergraduate economics. Blind faith in ‘free and open markets’ is one such tenet which quite ignores reality: freedom from government interference inevitably results in monopolistic control and predation, a far worse limit on freedom than that imposed by democratically elected government. Check out the audit industry, or the Glencore-Xstrata merger, and have fear.

In amongst all this, Vince Cable, the nearest thing the coalition has to a non-dogmatic, avuncular influence on the economy, is trying to make sure the better off shoulder more of their share of the burden, while those at the bottom of the heap are given some respite, which would also, coincidentally, have some immediate stimulus effect. One Cable initiative is to curb the excesses of executive pay by making it subject to shareholder control. Executive greed is certainly out of control, and on the face of it, restraint by shareholders doesn’t sound unreasonable. But it wouldn’t have the effect Vince intends.
Continue reading Budgeting for Naked Greed →

Fighting for Fairness by Remaking the Real Economy