Back in 1989, J K Galbraith addressed newly graduated women students of Smith College, Massachusetts. He was advocating the pursuit of simple truth and warning of the dangers posed by ‘institutional truths’. They were not truths at all, but overarching lies which had to be bought into if an individual was to survive and prosper in a particular setting.
Neoclassical economics was perhaps one of the most elaborate systems of institutional truths yet invented. Generations of dedicated economists have bought into it and then added further intricate detail of depth and breadth of institutional truth to the ideology.
The neoclassical foundation was built on simplistic assumptions of homo economicus, profit maximising business and a complete disregard for observed reality as well as for any wider context such as social and ecological systems. It also excluded any consideration of values and for the long term impacts of economic decisions. The maths simply was unable to accommodate such fundamental factors.
The generation of neoliberals associated particularly with Chicago University and in particular, Milton Friedman, added final touches to the ideology which was grasped by the Reagan and Thatcher administrations and has maintained its stranglehold on Anglo-America ever since. Those final touches include commitment to minimised flat rate taxation, minimised state involvement in the economy, minimised market regulation and the conversion of profit maximising business – which at least allowed potentially beneficial allocations of maximised profit – to shareholder value maximising which denominated everything, not just profits, as the property of shareholders.
The many institutional truths, that is lies, on which those various tenets of neoliberal economics are based have been well covered elsewhere on this website. Minimised market regulation doesn’t lead to competitive markets benefitting customers, but to markets regulated by financialised monopolists for their own benefit. Minimised government for the people by the people, doesn’t lead to freedom for the people, but to government by organised money for organised money. Minimised flat rate taxation doesn’t reduce the tax burden on the mass of people but on the rich monopolists who lead the self-perpetuating organised money establishment.
Continue reading The Lessons of Carillion and Grenfell
Taxpayers are going to have to pay for another big care home operator, throttled by tax avoiding financial predators. According to its chief financial officer, Four Seasons, which runs 450 care homes and 50 specialist care units, ‘is reviewing its finances with all options considered’. One option would be to close down, leaving the taxpayer to pick up responsibility for its 20,000 residents and patients.
Four Seasons is carrying debts of £500million on which it is paying interest of around £50million. It’s not immediately obvious how they got into so much debt nor why they should be paying interest at 10% pa when the official bank rate is 0.5%.
£500million of debt is a popular care home sum. When private equity Blackstone acquired Southern Cross, then leading UK care home operator, it sold the freehold of the care homes, pocketed £500million proceeds, lumbered the care home business with the costs of leasing back their homes, floated the business on the London Stock Exchange and beat a rapid retreat. It took around 5 years before the rental payments bankrupted Southern Cross. Meanwhile Blackstone were able to repeat the predatory exercise with the £500million.
The tax avoiding financial predator that acquired Four Seasons was private equity Terra Firma Capital Partners, owned by Guernsey based Guy Hands. The acquisition was completed a few months after the collapse of Southern Cross had demonstrated how profitable such deals could be.
Continue reading Screwing care homes still makes the easiest money
British manufacturing, science and R&D, is again subject to attack with Pfizer’s proposed takeover of AstraZeneca. The deal is reported as threatening 30,000 British jobs and a substantial part the UK economy’s manufacturing added value, as well as severely damaging British leadership in drug research and production. All this, with the dogmatic encouragement of the British government. David Cameron simply affirms the government’s neutrality over the deal, but expresses satisfaction with Pfizer’s promise not to act against British interests for the first five years after acquisition – a time scale beyond which he appears to have little interest. George Osborne’s pleasure with the deal is clear in that it demonstrates yet again the extent of his business ‘friendliness’. Only Vince Cable demurs, suggesting weakly that we’ll need to look at the detail.
At this point in time it is unclear who will defend British interests against such damaging takeover. The thirteen directors of AstraZeneca are the first line of defence. They are collectively responsible for the success of the company and will no doubt all have contractual agreements requiring them to act in the best interests of the company at all times and to declare any possible conflict of interest. However, their rejection of Pfizer’s improved GBP63bn bid was simply on the grounds that it substantially undervalued the business. That price hardly reflects the tax avoiding potential of the newly created combine, never mind AstraZeneca’s pipeline of experimental drugs and cancer treatments which is reported to be substantially superior to Pfizer’s, and the potential for stripping out and realising AstraZeneca’s assets, a talent which Pfizer has previously demonstrated.
Continue reading Who will defend the British interest?
The media expressed shock and horror that Centrica should jack its prices up to its customers and pass £1.3bn of its surplus profits back to its shareholders. But why? That’s what Centrica’s directors think they are there for. And the media and most everyone else appears to share that misunderstanding that it’s the legal duty of company directors to maximise shareholder wealth. But it’s simply not true. It’s based on a lie. The capitalist system was much more soundly based than that, but is currently being destroyed by such dishonest, even criminal corruptions of the truth.
In real competitive markets, exploitation of customers, employees and the rest, for the sole benefit of shareholders, is constrained by competition. So everyone benefits. But where a market is carved up between a small number of monopolistic giants, exploitation is inevitable. Some markets are like that. Gas is one. So are most privatised markets because government attempts to create pseudo competitive conditions invariably fail, succeeding only in establishing an additional layer or two of bureaucracy to handle the unavoidable extra regulation.
Continue reading Centrica and the Existential Lie
Back in July last year, this site pondered what would replace the public company, formerly the most powerful institution in the economy (see http://www.gordonpearson.co.uk/11/what-will-replace-the-public-company/). Its numbers had halved over the past decade and the number of small and medium sized firms’ initial public offerings had declined by more than 80%. Shareholders’ funds appeared to be no longer of much worth to the public company, the flow of money having been reversed so that shareholders, and indeed the whole financial sector, were now taking rather than investing, Nevertheless, media interest in the FTSE100 and other stock market indices continues unabated, even though they only measure betting activity on such as M&A rather than real new investment. A posting last month offered a reasoned explanation of how democratic capitalism, which had delivered so much and promised so much more, appeared now to be approaching the buffers – http://www.gordonpearson.co.uk/20/democratic-capitalism/.
The still dominant Friedmanite version of capitalism is now being seen to self-destruct with its array of naïve beliefs and illegality. Company law (eg Companies Act 2006) charges company directors, Friedman’s ‘corporate officials’, with the legal duty of looking after the best interests of the company having regard to the long term and to the interests of all stakeholders. Friedman argued they had no other duty than to make as much money as possible for shareholders. Friedman clearly won hands down against the law, and that despite the fact that ‘corporate officials’ have legal contracts of service and employment with the company, not its shareholders, and those contracts invariably charge them with the duty of looking after the company’s best interests.
Continue reading Glencore, PwC and Horsemeat
An article in the current issue of Harvard Business Review notes that there has been a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’ [‘What good are shareholders?’, Fox & Lorsch]. The City of London achieved similar disinvestment. But that’s not what stock markets are supposed to be for. The money was supposed to flow the other way, from myriads of investors into new industrial, technological and business developments.
But public companies clearly no longer need to issue shares for sale on the stock market. Their funding is largely through retained profit and more and more of them are actually being taken private where disclosure and transparency requirements are less invasive. At the same time, the fast growing small and medium sized innovators on which a sustainable future depends, and which do need to acquire additional funds for future investment, don’t find stock markets a satisfactory means of raising the necessary. The fund managers and traders who control investment in stocks and shares want fast, low risk returns. But returns from SME innovators, even though they may be exciting and sustainable, are unacceptably long term.
Continue reading What good are Stock Markets?
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
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.
Continue reading Bad Theory and Management Renewal
As announced this week, the John Lewis partnership is raising £50m to finance further expansion by issuing a savings bond to its ‘partners’ and customers. If it succeeds it would make a lot of expensive City activity seem rather unnecessary, and its success is not seriously in doubt. The bond will return 4.5% gross plus 2% in John Lewis vouchers which puts it slightly ahead of the field in terms of returns. City “experts” seem worried that this sort of thing might catch on. They advise investors to proceed with caution because the issue is not covered by the Financial Services Compensation Scheme. So, if John Lewis were to go bust over the next five years, investors might lose their money.
Continue reading Co-ownership Financing Growth
The pattern of technological progress has been found to be surprisingly consistent. New technology has to clear various hurdles before attracting funds for its commercial development. A successful project that gets fully exploited grows fast, all the time getting detailed improvements and added features. Eventually, progress begins to slow, returns from further R&D diminish and the technology begins to stagnate, before being replaced by something totally new and different which starts the whole process off again. The graph of this progression is the S curve, starting at the tail of the S, going through a rapid growth and tailing off, before being replaced by a new S.
About 30 years ago, when Friedman’s fixation on maximising shareholder wealth was beginning to be widely adopted, S curves were a trendy form of strategic analysis. They had been applied to many industrial sectors, studying the introduction, development and replacement of technologies, all following discernible S curve progressions. However, the idea was not then applied to theoretical development.
Continue reading The Neoclassical S-Curve