Category Archives: Economics

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’.
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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.
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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.
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Economics, Free Market Capitalism, Political Decision, Public Sector, Real economy

Public Services and Predatory Shareholders

March 3, 2012 Gordon Pearson Leave a comment

The trouble with the provision of public services such as health, education and the police by private for-profit companies is pretty obvious. Successive governments from Thatcher on, have pursued this flawed policy which derives from a hopelessly simplistic ideology. Private providers, who are subject to the discipline of the market, are held to be more efficient than public providers. The late lamented Milton Friedman claimed they were twice as efficient. Therefore, the argument goes, services would be most efficiently provided by private firms operating in competitive markets so that, for example, NHS patients have choice, and providers who are not good enough to get chosen, will fail. That’s how markets work.

So far so good, despite the famous lack of supporting empirical evidence, and the difficulties, where real markets don’t exist, of creating pseudo-markets without the costly bureaucracy of targeting, monitoring and supervising pseudo-competitive performance. But another thread of that same ideology, most famously enunciated by the same late lamented Friedman, is that those who run for-profit businesses have no social responsibility other than to make as much money as possible for shareholders.
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Competition, Corporate Governance, Economics, Merger & Acquisition, Political Decision, Real economy, Regulation

Blind faith is destroying British industry

February 25, 2012 Gordon Pearson Leave a comment

Peter Mandelson, writing in the New Statesman (‘Mind the gap’,20.2.2012), expresses the problem for the UK left in one plaintive sentence: “We still have to have faith in the basic model of an open and competitive market.” Well, no we don’t! Misplaced faith in such broad generalisations is what got us into this mess and is still keeping us there. Mandelson sounds very like Transport Secretary Philip Hammond proclaiming his fervent belief in “free trade and open markets” when he announced the award of the £1.4billion Thameslink contract to Siemens, rather than to Derby’s Bombardier, UK’s last rail producer. Blind commitment to such generalised dogma has led us into all sorts of destruction from which it will be difficult to escape. German and French politicians aren’t so naïve. Nor, when push comes to shove, are the Americans – ask General Motors!

The combination of ‘open’ and ‘competitive’ is itself problematic. ‘Open’ suggests a minimum of control and regulation, but for a market to remain ‘competitive’ requires specific control and regulation. This is because the natural unregulated outcome of competitive markets is for the most successful competitor to become dominant. The natural outcome of competition is monopoly. Competitive markets used to be protected by the Office of Fair Trading (OFT) and the Competition Commission, acting to prevent the establishment of dominant market positions. For example, a merger or acquisition which would result in a market share of 20% or more warranted their consideration. The current legislation specifically allows the creation of dominant market positions. The only restrictions apply to the abuse of a dominant position, or the operation of a price fixing cartel.
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Economic History, Economics, Globalisation, Management History, Management Practice, Management Theory, Regulation

Anglo-American Post-Industrial Waste

February 18, 2012 Gordon Pearson Leave a comment

The idea of the life cycle is widely applicable, from products and industries to something as simple as a lighted candle, or even something as complex as a whole economy. It depicts four distinct stages: start up, growth, maturity and decline. The early stages are slow with typically many false starts, but once a particular approach is established, growth takes off. For example, the factory system in 18th century England. During this growth phase innovation dominates, with new technologies applied to produce genuinely new products with more features and better performance. In due course, generally accepted standards of performance emerge as growth slows into maturity. During this critical transition to maturity there will be a radical reassessment of growth projections and fierce competition will force the weakest to withdraw.

During the ensuing, relatively stable mature phase, the emphasis of innovation tends to move from product to process, where innovations are largely aimed at reducing costs and improving efficiency. That phase comes to an end when either a completely new technology takes over or some other structural change eliminates the existing; maybe something like globalisation. Again the reduction in future expectations will cause intensified competition and force out marginal units.
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Bank Bonuses, Banking, Economics, Political Decision, Regulation

Why Bankers’ Bonuses Matter

February 12, 2012 Gordon Pearson Leave a comment

It is barely four months since Bob Diamond’s BBC lecture about how banks might restore public trust, which he acknowledged was then sadly lacking. He avoided discussion of excessive bonuses for doing not very much, and also the casino banking which got us into this trouble and for which he was responsible at Barclays. His lecture hardly revealed a man of super intellect, rather one who happened “to have been in the right place at the right time” (see http://www.gordonpearson.co.uk/06/talent-for-being-in-the-right-place-at-the-right-time/). Now, here we are again with bonuses being declared, but with Bob still being coyly reticent about his own take.

According to Peter Drucker, when bosses over indulge themselves at the corporate trough, they lose the respect of people within their organisation. Yet, while paying himself around £5.4m the previous year, Bob lectured that “if you can’t work well with your colleagues, with trust and integrity, you can’t be on the team.” Bob adopts the long discredited ‘rewarding success’ and ‘departure of talent’ defences of banker’s bonuses. He clearly doesn’t recognise Drucker’s ‘hatred, contempt and fury’ among his people at Barclays. Presumably that’s because he doesn’t see much of them, or because those he does see have their trotters in the same trough.
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Fighting for Fairness by Remaking the Real Economy