Category Archives: Corporate Ownership

Different forms of ownership, public limited company, co-operatiuves and various forms of co-ownership.

Bad Theory and Management Renewal

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-ownership Financing Growth

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.

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The Neoclassical S-Curve

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.

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A Further Word on Cadbury

The takeover of British confectioner Cadbury, with its long and honourable history in British industry, from its Quaker origins to its death throes earlier this year, has been featured as the main topic of two posts on this site, and mentioned in passing on five others. It is a compulsive story which celebrates the satisfaction of greed, the naïve stupidity of ideologically driven government, the destruction of Britain’s real economy and its real jobs, and the fatalistic acceptance of all this by the population at large.

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The Root Flaw in Economic Thinking

The idea of economic man, sometimes given a Latin nomenclature to increase its gravitas, is the real cause of economics’ more recent failures. Forty years ago it was referred to as a nineteenth century idea, as though the study of economics had moved on since that primitive Victorian era. But with Friedman’s shareholder primacy in the ascendancy with its supporting “theories” of agency, transaction costs and the market in corporate management, economic man resurged and is still dominant today, and wreaking its massive destruction.

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Unpicking Shareholder Primacy

The idea that companies, if not all economic activity, exists to maximise the wealth of shareholders or owners, dominates the world of corporate governance and much else. Bankers and traders believe it. Industrial managers have been led to accept it. Universities and business schools preach it. It is part of the free market ideology, often identified by its origins, as the Anglo-Saxon or Anglo-American approach. And its many adherents claim it is the only system that really works. Shareholder value is, for them, the acid test, all that matters. All this is despite clear evidence to the contrary from Germany, Japan, China, India and many other jurisdictions.

Much of the literature on corporate governance argues that these other approaches are in fact converging on the Anglo-American model and even assesses the level of their maturity in terms of how closely they comply with the Anglo-American line. It’s all nonsense.

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Cut or Spend? Fad or Strategy?

Before the British coalition government’s proposed cuts were announced they were greeted by 39 top business people writing to the Daily Telegraph confirming that they would create the necessary jobs so as to make the public sector cuts work. That way tax rises might be avoided and long-term cuts in public sector activity achieved. For them, any reduction in tax and spend would be a Good Thing. Well, business people would say that, wouldn’t they! But were they expressing a seriously thought through strategy, or merely expressing the currently dominant free market fad?

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