Category Archives: Shareholder Value

The focus on maximising shareholder wealth at the expense of the company and its other stakeholders

The Glencores, Xstratas and Blairs

Almost 18 months ago Glencore first featured on this blog – Glencore and others are screwing the world – a posting which highlighted the predatory nature of financial monsters like Glencore. The Financial Times had reported Glencore’s ability and willingness to fix commodity prices for their own profit and everyone else’s loss and how they were expected to increase their monopolistic stranglehold in key markets. Glencore was in the news at that time because of its imminent initial public offering of shares to the London Stock Exchange which was expected to value the company at between £60 billion and £73 billion and facilitate its further expansion through mergers and acquisitions. The FT also reported how the world’s largest commodity trader had paid “almost no corporate taxes on its trading business for years in spite of bumper profits.”

The FT’s report described how Glencore had exercised their monopolistic power to raise prices in the Russian wheat market for a quick profit, at the expense of those millions already struggling on the breadline. That was revealing of the sort of business Glencore is, and the sort of business practices it was prepared to embrace in order to make its money.
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The Defunct Professor Friedman?

‘Practical men who believe themselves to be quite exempt from any intellectual influences are usually the slaves of some defunct economist’. Practical men, say, like Bob Diamond. You can’t get much more practical than a man of limited intellect who takes from his place of work £17m a year, less a bit for having led a banking operation now officially recognized for its lack of ‘skill, care and diligence’, not to mention its criminal fixing of international money markets. Bob, himself, admitted his favourite economist is none other than Milton Friedman of the Austro-Chicago school of laissez faire, free marketeers.

Friedman’s influence still dominates government, finance and business, not just billionaire bankers. When he first came to the fore it was as a monetarist. The way to a small government and light touch regulation was to grant maximum freedom within a tightly controlled framework: the quantity of money in circulation. According to Friedman ‘too much money chasing too few goods’ would inevitably cause inflation. With Thatcher and Reagan, that simple aphorism replaced the Keynesian economics that had ruled since the second world war. But it didn’t work. There were too many unknowns about the quantity of money and the velocity of its circulation, and that rendered monetarist policy ineffective. Friedman himself expressed his disappointment at the ineffectiveness of monetarist policy.
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God Complex ‘Drivers’ to Extinction

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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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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What Really Matters Now

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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Budgeting for Naked Greed

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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Hatred, Contempt and Fury

A typically indecisive Will Hutton article in The Observer (29.1.12) was headed ‘Hester’s pay discredits bonus culture’. Did Will Hutton think, despite the works of Bob Diamond, Fred the Shred and the rest, that the bonus culture still had credit up to the time when Stephen Hester was awarded his relatively modest bonus of around £1m. Of course, Will labours under the considerable disability of being a neoclassical economist. Which unfortunate affliction led him, in the article, to assert that ‘It is true that well designed and proportional incentives work’. He offers no evidence. It is simply a bone deep belief, no doubt held in his mind since school days doing A level economics.

Much is understood about human motivation, intrinsic and extrinsic, which won’t be repeated here. But economists only deal in money and it is well understood how money incentives crowd out intrinsic motivation. In the case of the bonus culture, incentives are specifically aimed at doing just that, so that executives are converted into shareholders, thus aligning themselves with shareholder interests. That is the sole purpose of the bonus bribe: to destroy higher level, longer term motivations for the short term benefit of shareholders.
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