Chapter 5: Avoiding Armageddon!

Yep, it’s the last chapter! Phew, I hope you are still with me after Chapter 4…hello, is there anyone out there???

I said that I would end with “…and we all lived happily ever after” but there’s a few people who stand in the way of this.

Let’s get personal – Hot Potato time

hot-potatoSo everything I’ve written so far may resonate with you…and yet you will likely reply that nothing will change because those in control have no interest in doing so…and so I need to write a couple of personal messages:

  • to existing free-floating shareholders; and
  • to ‘large corporate’ CEOs;

I totally accept that there will be no real change unless both of these parties understand, need and want it.

A personal message to all you existing free-floating shareholders out there:

Okay, so cast your mind back to the opening of Chapter 1.

I held out Henry Ford as someone with something important to say…but I also noted that he had a huge amount of luck – he was on the right side of a technological disruption.

This is the time to inform (or remind) you that there are loads of technological (and related business model) disruptions happening right now:

  • In transportation: autonomous vehicles that will disrupt taxis, haulage, public transport…
  • In power: electrical generation (such as solar) and storage (such as batteries) that will disrupt the incumbent fossil fuel industry and its distribution networks…
  • In finance: I’m only just feeling around the crypto-currency stuff (I confess to being a bit of a laggard!)…but I can see that the effect will likely be huge;
  • In production: such that people can 3D print their own products to their own specifications as and when they want;
  • ….and all the financial service knock-on effects of the above:
    • On banking (e.g. less cars on the road = less car loans)
    • On insurance (e.g. drastically less accidents = no need for car insurance)
    • On currencies and share trading
  • …and probably loads more game changers that I don’t know about and/ or don’t understand (I haven’t even mentioned the rather trendy ‘internet of things’!);
  • …and yet more that none of us yet know about but could be around the corner.

Now, for a nimble start-up with a true purpose, the above is exciting. Indeed, they are the ones driving it.

But for a traditional, large, shareholder-owned incumbent, this is the stuff of nightmares!!!!

Such an organisation finds it almost impossible to change even though (and this is the interesting bit) it can and does see it coming – it’s as if its feet are stuck in cement blocks at the start of a 100 metre race. Worse, they waste loads of time and money flailing around trying to move (perhaps via ‘innovation’ programmes1)…but don’t really get anywhere.

In short: If you are a shareholder in such a company, you’d better wake up soon…’cos Henry Ford’s modern day equivalents are coming at ya! Your horse doesn’t stand a chance.

If you think “nah, none of the disruptions affect my investments in companies” then remember that many periphery industries were also devastated when the horse carked it.

“Hang on – aren’t many of these technological disruptions coming from large corporations?!”

steve-jobsYes, they are…but what form do these typically take? And did they start off from such a ‘large corporate’ state?

Well, they are usually led by a seriously driven founder (and likely lead investor), who toiled for years, because their personal purpose was clear from the start…and it wasn’t to make millions – this was the result from their success.

We can name:

  • Steve Jobs2 at Apple (and previously NeXT and Pixar)
  • Jeff Bezo at Amazon
  • Larry Page at Google
  • Elon Musk at Tesla, SpaceX, SolarCity (and previously Zip2 and PayPal)
  • and, of course, Richard Branson3 and his Virgin Group
  • …and there are no doubt loads more ‘seriously driven founders’ you could put forward.

(Please note that I’m not holding any of them out as great leaders – that’s a totally different matter.)

“Quick – grab a seriously driven founder!”

Every traditional ‘large corporate’ would just LOVE to employ a seriously driven founder…but it doesn’t work like that – they are doing their own thing…and perhaps sold their company to you!

You can’t fake being a seriously driven founder – you either are or you aren’t.

But wait, the large corporates that you invest in employ thousands of really capable people who, whilst they may not have the desire to ‘go it alone’, would be really happy to give of their all for a really great company that they co-own with you, through sharing in its success.

This is to match the right model to the system type.

At the moment, Management may be:

  • giving lectures on “you need to be innovative or else we’ll die”; and
  • putting huge effort into attempts to kick-start this (such as by setting up worker clubs)

…but change the paradigm and they may be hugely surprised4 at who starts talking to who…about what…who then informally club together to take it further…who enlist the help of others to do a little experiment…and uncover/ solve/ create something no-one else had…and, wow, that result could just be amazing!

To close this shareholder message: Your Dead money is useful, important and appreciated but, for your own good, it needs suitably diluting with Live money. This is in your interest – do you want your investments to be worthless or priceless?

And to all you Investment Fund Managers out there: You spend your days passing around shares in such ‘large corporates’. If the above is even slightly close to what is happening out there in your world, then I present you with the following analogy:

You are essentially playing Russian roulette, passing the gun around with your fellow fund managers until it goes off in the hands of whoever happens to be holding it.

How about swapping to play games with companies that have a lot better odds!

A personal message to CEOs out there:

fat-catIf the common man might label you as a ‘fat-cat CEO’ and you are responsible for a floating shareholder-owned company then I’d like to ‘speak to you’ about your situation:

  • You’ve done well for yourself; you’ve risen to the top. You are financially secure, in fact ‘set up for life’;
  • You probably spend much of your time telling your employees about the importance of purpose, and about matching their personal purpose with the stated purpose of your organisation;
  • So, what about your personal purpose?5 Are you here on earth ‘just for the money’?
  • Or would you like to be known (and remembered) for creating and sustaining a truly awesome organisation, for the good of society?

If it’s no longer ‘for the money’ (because, frankly, you’ve got that box ticked) then I’d ask that you ponder this post, perhaps share it with your board, and have a discussion about how you could change (I mean ‘improve’) the ownership structure of your company for the good of all…and that includes your current shareholders.

Personally, I love what Handelsbanken has done. But I recognise that there are many ways to ‘skin a cat’ (there’s that cat again!)

I hear what you say but…

If you ‘get’ what’s written in this post but don’t want to change your world, then at least know that employees of floating shareholder-owned organisations distinguish that it is really about the profit…and many (most?) of them see the constant blowing of your ‘purpose trumpet’ as convenient propaganda i.e. not the rallying cry that you might imagine. Sad, but true.

A ‘half arsed’ attempt:

Now, it’s possible that you’ve taken this all in, can see some industry or societal ‘movement’ towards profit sharing, and feel pressure building to be seen to be doing something.

So to a warning: Don’t play profit sharing ‘dress up’ (i.e. pretending that you are doing it but then hiding behind complex scheme rules and playing accounting games). Your people will see right through it and you will be the same as, and likely worse off than, before (minus the costs of your failed propaganda exercise).

Only do it if you actually WANT to share the success of the organisation with the people who make it possible…and this will only be because you’ve truly understood the situation, the opportunity, and the immense and sustainable potential.

A thought to finish:

henry-ford-quote

…so, don’t think about the profit! Focus on the service…but change something with regards to your ownership structure so that you (and everyone else) can!

…and with that:

  • We all lived happily ever after (that’s nice 🙂 ); or
  • Armagedon!!! (bugger)

If you’ve got to the end…yes, this is it! – nice one, top banana, brilliant. Thanks for staying with me!

I don’t pretend that I’ve solved ANYTHING…but I’ve definitely ‘got a lot off my chest’ 🙂 . I also hope that I’ve helped you in some way. Perhaps not yet…but with what might come.

Normal ‘single issue’ blog posts will resume from next week….and now to go and lie down.

Footnotes:

1. On efforts to ‘get your people innovative’: You should know that incentives and innovation don’t go well together! Alfie Kohn writes eloquently to explain why research repeatedly shows that “Rewards discourage risk taking”:

“the risks we want people to take – being willing to explore new possibilities… – are minimised by the presence of rewards. An extrinsic orientation, for example, makes people less likely to challenge themselves. Instead, they are apt to choose the easiest possible tasks to do, since this maximises the chance of getting the reward and getting it quickly.”

And, just in case you think incentives and profit sharing are the same thing, here’s an earlier post that explains why they are polar opposites.

2. Steve Jobs:

“I was worth over a million dollars when I was 23. And over ten million dollars when I was 24, and over a hundred million dollars when I was 25. And you know, it wasn’t that important, because I never did it for the money. I think money is a wonderful thing, because it enables you to do things. It enables you to invest in ideas that don’t have a short-term payback. At that time in my life, it was not the most important thing. The most important thing was the company, the people, the products we were making. And what we were going to enable people to do with these products. So I didn’t think about the money a great deal. I never sold any stock [shares]. I just believed that the company would do very well over the long term.”

3. Richard Branson:

“My interest in life comes from setting myself huge, apparently unachievable challenges and trying to rise above them … from the perspective of wanting to live life to the full, I felt that I had to attempt it.”

4. Doing something about it: I find it really interesting that the talk around me in my workplace is all about the disruptions out there (i.e. people know about, and are interested in them)…but there’s little real passion to do something about it (i.e. actions rather than merely talking about it) because we’re all placed in our hierarchy with our cascaded objectives and incentive/merit mechanisms.

Take those crypto-currencies. I’m sure that there’s something really important within…but I’m not leaping about to DO SOMETHING. I’ve got ‘concrete feet’ just like many (most? all?) those around me.

Is this me being lazy? Is this me being some sort of organisational traitor? No, these are the behaviours that the current system creates.

5. Your personal purpose: Looking at Maslow’s hierarchy of needs (see nice piccie below), I’d ask you to reflect that you (as a highly paid executive) are in the wonderful position to choose whether you move up the scale – to esteem and, ultimately, self-actualisation.

More Money won’t get you there!

maslows-hierarchy-of-needs

Money is necessary for the bottom two levels of the scale (also referred to by Frederick Herzberg as ‘hygiene factors’), and might assist with the middle (though can you really buy friends?)…but, once these levels are in place, money has little (if anything) to do with the top.

Conversely, continuing to adopt a (potentially subconscious) position, and take actions, towards more ‘money’ will prevent you getting there…which can lead to unhappiness and (at the end) a sense of huge disappointment through wasted opportunities.

Reflect on how many seriously driven founders, not knowing what to do with their wealth and often becoming very unhappy, turn to philanthropy.

You can create an amazing organisation (and gain colossal satisfaction) by creating the necessary environment for all the people who work there…and this will require you to be courageous and think totally differently.

 

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Chapter 4: What possible ‘defences’ exist against the harm of ‘Money Power’?

So I’ve:

  • set out Ford’s explanation of Dead vs. Live money (Chapter 1);
  • ‘shot at’ organisations that claim they get this –as in “see, here’s my purpose!” (Chapter 2);
  • explained why shareholders are probably the last people you’d want as guardians for an organisation’s successful longevity; and
  • put forward a logic as to why executives behave as they do (including the recent Mylan example to consider) (Chapter 3).

light-bulb…and at this point you may reasonably ask “so what can be done about this situation?”

Thankfully not everywhere is the same…and we can look around for ideas.

Ha-Joon Chang writes that “most rich countries outside the Anglo-American world have tried to reduce the influence of free-floating shareholders and maintain (or even create) a group of long-term stakeholders (including some shareholders) through various formal or informal means.”

These include:

  • government ownership (either direct or indirect) of a sizeable share to act as stable shareholders (examples in France, Germany, Korea);
  • differential voting rights for different classes of shares e.g. for founders and their families to retain significant control (Sweden);
  • formal representation by the workers on the company supervisory board (Germany);
  • minimising influence of floating shareholders through cross-shareholdings amongst friendly companies (Japan)

“Being heavily influenced, if not totally controlled, by longer-term stakeholders, companies in these countries do not as easily sack workers, squeeze suppliers, neglect investment and use profits for dividends and share buybacks…all this means that in the long run they may be more viable…

Running companies in the interests of floating shareholders is not only inequitable but also inefficient, not just for the national economy but also for the company itself.”

(Of course, I should reflect that there are lots of other ownership models ‘out there’, such as State Owned Enterprises, Mutuals and Co-operatives…and I have read many a good-news story about what can be achieved with the latter.

If you already have one of these ownership models, please stay as you are! What follows is aimed squarely at the Dead Money corporations).

Exploring the employee option:

proft-sharing-quoteI’m a big fan of the ‘employees as long-term owners’ method.

Now, many a ‘large corporate’ would respond that their people can buy shares in their company and, further, that they encourage this by administering some form of ‘employee share buying scheme’.

So how’s this different to share ownership through profit sharing (as in the Oktogonen Foundation)?

Well, if we consider a typical ‘employee share buying scheme’:

  • You are asking employees to put up their own money as risk, rather than rewarding them for their ‘blood, sweat and tears’;
  • Only a limited number of employees will buy shares (for a variety of reasons – the most obvious being their level of affluence and their attitude to risk);
  • The minority that do buy a small ‘side salad’ of shares have simply been added to the vast pool of floating shareholders…worried about short-term profits and dividends.

In contrast:

The power in ‘share ownership through profit sharing’ is that EVERYBODY in the organisation becomes an owner, and thereby connected with the same aim.

The power in setting up a foundation specifically for this purpose is that the employees as a GROUP obtain a significant voice, creating representation on the board.

The power in defining a long-term method of payment (say, at pensionable age) is that employees (past and present) care deeply about the LONG TERM success of the organisation…which will produce a genuine focus on the CUSTOMER (and society).

Now these words might cause the following reaction from existing shareholders and executives: “Whoa…I don’t like the sound of ‘worker power’ – this is Trade Unionism by the back door…and look at where that always ends up!”

Here’s why it is the exact opposite:

The birth, and historic basis, of the Trade Union movement was to protect the workers from the power of the owners. In response to Trade Union power, the owners would regularly claim that the employees were ‘biting the hand that feeds them’…and thus a hugely adversarial battle became the norm1 (usually with the customer, and consequently the organisation, suffering in the cross fire).

But, rather than employee ownership through profit sharing stoking the ‘worker – owner’ flames, it actually dissolves the problem! Everyone is pointing in the same direction.

Even better, a foundational base is set to enable the business to become so much more efficient and effective because all those commanding and controlling ‘management instruments of torture’ can be torn down – that would be incentives and Performance Management2 for a start!

….just think how easy it would become to engage with the workers – or should we call them ‘long term guardians’ now?

“Just close your eyes and imagine…”

imagineI have often found myself in company presentations with management eulogising about the next ‘cost cutting’ initiative. A usual candidate is the travel and expenses budget (and the associated rules to be complied with)…and they always use the same logic:

“Imagine it as your own money!”

Ponder upon this for a minute: management ‘get’ that it isn’t our money, and that this will alter how we think about it…but they want us to play a game of ‘pretend’. Hmmm – they’re missing something there.

But what if THEY (management) altered their thinking such that it IS the employees’ money. They can dispense with those silly games, and potentially all those wasteful cost cutting initiatives. Imagine that!

“But it’s not their money!!”

Now, there may be a backlash of comments from shareholders with a view that the company would be giving away their money.

Some thoughts on this:

  • The organisation doesn’t need to raise capital to do this! It just needs to STOP the offering, and paying, of contingent rewards. There’s plenty of money right there;
  • For those shareholders that don’t realise this…there is loads of cost spent in administering the performance management/ incentives lark…and a great deal of harm caused that is unmeasurable! This is no longer required;
  • But, fundamentally, a long term ownership interest (Live Money) will change the way that employees think…for the good of the customer and therefore the organisation…and, as a result, to the benefit of those that invest.

A start to the journey

silver-bullet‘Necessary but not sufficient’: I’d like to be clear that, whilst profit sharing could be game changing, it’s not a silver bullet….but it is a hugely sound foundation from which the right type of business can be successfully built and sustained.

It can act as a catalyst for all those things that you’ve been saying, but not been able to do. Why? Well, because it fundamentally changes the employee – company relationship.

It brings Live Money onto the scene and, if done well, brings Service Power back to the fore.

(Note: I’ve written this whole serialised post because – after many years of pondering – I came to the conclusion that you can understand and passionately want to change your ‘culture’ BUT you won’t (meaningfully or sustainable) achieve this if you don’t address your ownership structure…and this relates to Money Power).

To close: A comment on the current ‘side show’

The current ‘large corporates’ hymn is all about diversity….and that this will ensure the future of an organisation – all those different people, with all those different perspectives and ideas! What’s not to like?!

Now, I’m all for diversity. I believe in respect, equality and fairness for all.

However, you can be as diverse as you like, but if you don’t change the system (of management and ownership) then you’ll simply get more of the same.

To repeat my regular John Seddon quote (I have it ringing in my head most days!):

“People’s behaviour is a product of their system. It is only by changing [the system] that we can expect a change in behaviour.”

Or, to a Deming pearl of wisdom: “A bad system will beat a good person every time”

Stop trying to change people and, instead, perform a paradigm3 shift so that they change for themselves.

I should add that the diversity thing will be so much easier to achieve when all employees want to collaborate together (profit sharing) rather than competing with each other for ratings, rankings and contingent rewards. i.e. If you really want diversity, and what it can offer, then change the system first.


Okay, so I’ve argued that employee ownership through long-term profit sharing is a bloody good way to go…but there’s a few people that I really need to convince first. That would be a) the existing shareholders and b) the CEO. And that is the subject of my next, and final, chapter 🙂

Update: Link forwards to Chapter 5

Footnotes:

1. Owners vs. Unions: As usual, Henry had something useful to say on the matter:

“Business does not exist to earn money for the capitalist or for the wage-earner. The narrow capitalist and the narrow trades unionist have exactly the same view of business – they differ only on who is to have the loot.” (Ford)

2. On the merit system (i.e the rating and rewarding of people’s performance): Here’s a nice Deming exchange in a Q & A part of one of his famous lectures:

Question from the audience: “What do you propose to replace the merit system with?”

Deming: “Replace it? What, you want something to destroy people better than that does?!

Replacement means another method to do the same thing. [Do] you know of anything more effective in the destruction of people?

Question rephrased: “But is there any way to change the merit system?”

Deming: “Change it? Abolish it! Look at what it’s done to us.”

3. Paradigm: I usually hate using the ‘p’ word – it seems so ‘management consultancy’ to me…but in this case it is spot on!

4. So…what if you don’t (yet) want Live Money: If you don’t want to do the profit sharing thing (even though you’ll be seriously missing out) then STILL GET RID OF THE INCENTIVES!

Chapter 3: Can executives change the ‘shareholder value’ machine?

So Chapter 1 explained Henry Ford’s philosophy, only for Chapter 2 to give modern ‘large corporations’ (including their executives and short-term shareholders) a bit of a slap around. You might reasonably ask whether executives can actually do anything about this, for the good of the organisation. That’s the subject of this chapter:

shareholder-value-machineSo let’s say that you are an executive of a shareholder-owned corporation. Who are you legally answerable to, and therefore in whose interests must you act?

This is the subject of another superb book, ‘The Corporation’ (2005) written by Joel Bakan. Here’s what he has to say about this:

“Corporations are created by law and imbued with purpose by law. Law dictates what their directors and managers can do, what they cannot do and what they must do. And, at least in…industrialised countries, as created by law…it compels executives to prioritise the interests of their companies and shareholders above all others and forbids them from being socially responsible – at least genuinely so.”

Bakan cites company law as establishing the principle that directors have a legal duty to put shareholders interests above all others1.

Now the last line of the Bakan quote might seem strange because ‘don’t all those companies provide us with corporate social and environmental responsibility statements?’ (i.e. on their websites and in a prominent position within their annual reports)

Bakan goes on to explain the apparent conflict:

“There is, however, one instance when corporate social responsibility can be tolerated – when it is insincere. The executive who treats social and environmental values as means to maximise shareholder wealth – not as an ends in themselves – commits no wrong.”

Now, this is pretty disturbing stuff! You might come back at me and say “but other laws and regulations will stop ‘em!” Mmm, it would be nice if that were so:

“For a company, compliance with law, like everything else, is a matter of [weighing up the] costs and benefits.”

Simply having laws and regulations isn’t going to protect the public. If the costs of meeting the ‘rules’ becomes exorbitant, the company will consider the legal and reputational costs of breaking (or ‘manipulating’) them as against the benefits to be derived….a small oil spill here, a dodgy tax deal there, with a sprinkling of marketing propaganda to cover up or divert attentions elsewhere.

[Quick side note: I recently watched the 1st Trump: Clinton debate and ‘the Donald’ referred to such logic as ‘smart business’…and why America needs him. Nice…not!]

Further, Bakan defines the concept of corporate externalisation:

“The corporation…is deliberately programmed, indeed legally compelled, to externalise costs without regard for the harm it may cause to people, communities and the natural environment. Every cost it can unload onto someone else is a benefit to itself, a direct route to profit.”

This illuminates the gulf between Dead Money power and the public good.

plastic-birdTake the really simple example of packaging for food and other consumables. Sure, the supermarket pays for the costs of the plastic…but they happily externalise the cost of dealing with this packaging once the item has been bought. “What do you mean it got into the sea and is killing stuff? Not our problem anymore!”

Are the big supermarkets bothered about this? Not really…but they become so if, and only when, we make it in their interests to be bothered…and you can be sure that, if they then make any improvements, their Public Relations (PR) machine will crow long and hard about how they are ‘making our world a better place’.

This is looking for good news out of what you are being forced to do, rather than doing the right things in the first place.

And beware of that supposed ‘good news’. The wonderful stuff (that they say) they are now doing, might not be so wonderful. I’ve just watched another episode of ‘Hugh’s war on waste’ and am appalled at big coffee’s2 attitude to coffee cups – they are perfectly comfortable with us all thinking that they are recyclable when they know that they aren’t. Nothing to see here – move along!

Now, I think that you and I know that we could dig up literally hundreds, if not thousands, of case studies over the years showing the harm caused to organisations and society by Dead Money…but let’s keep it real simple and just look at one that’s been in the media recently3:

Example: Mylan and the Epipen

epipenLet’s have a look at the drug company Mylan and their 2007 purchase of Epipen (an auto-injector of adrenaline, to counter an anaphylaxis reaction). The product had been around for many years and was making modest revenues of US$200m.

So here’s what Mylan came up with:

  • let’s strongly market it to concerned parents (so they feel morally compelled to buy more pens – for home, for school, for camp….);
  • let’s get laws passed that increase demand;
  • let’s get labelling rules changed that allow it to be marketed more widely;
  • let’s work hard on hindering competitors from bringing their substitute products to market
  • …let’s do whatever to push and protect this product.

And so, between 2008 – 2015: Mylan increased prices 400% (to US$600 for a twin-pack), sales rose to US$1 billion and the product margin went from 9% to 55%.

(Note: those price increases are the exact opposite of Ford’s success4)

But what of the customer (the public)? Well, as is often the case, the really needy people are the ones that suffer. Many parents of allergic children can no longer afford the best product (or the rising health insurance premiums). They have no choice but to take alternative actions, like:

  • carrying expired Epipens and hoping the drug still works; or
  • reverting to the old fashioned method of regular syringes, by paying a doctor to fill them with the drug…costing about $20… and hoping that it is administered correctly when the time comes.

Even officials in many states are training their medical technicians to use the old ‘regular syringes’ method so as to save hundreds of thousands of $ from their budgets.

…and, finally the dam burst: the story got out, with mainstream and social media waging war on Mylan’s CEO, Heather Bresch.

So, did Bresch do anything wrong? Who says? The shareholders had been ecstatic with her actions…at least until ‘we’ found out.

Has Bresch taken some steps to address the mess? Hell yes!…but only to defuse, protect and then, no doubt rebuild. Nothing has fundamentally changed. She might be ‘shamed’ into resigning (not looking likely)…but I hazard a guess that if this occurred:

  • her salary cheque (and share options) will likely comfort her;
  • there will be many job offers from other companies wanting to benefit from her ‘corporate acumen’; and
  • Mylan will look for, and easily find, a replacement CEO in her image.

So, where’s that much vaunted ‘purpose’ in all this? If you want to have a read about Mylan, their Mission and their Values then have a look here. The following words from Mylan’s website give me a lump in my throat, and tears in my eyes:

Doing what’s right is sacred to us. We behave responsibly, even when nobody’s looking.”

It reminds me of a rather nice Jon Stewart quote:

“If you don’t stick to your values when they’re being tested, they’re not values; they’re hobbies.”

If you were wondering about the insincerity part of Bakan’s quote above then I hope the Epipen example assists. Mylan’s demonstrable purpose is money, not its customers (the public).

It’s worth noting that Mylan’s short-termism has laid itself bare to disruption by those who (are seen to) champion the customer. I expect competing products to do well from this media saga, and new products to emerge.

We shall see how this affects Mylan…but they have clearly lost a great deal of trust from the public.

As an important side note: How many of Mylan’s employees do you think now love working for them vs. how many are embarrassed to say so? And what effect might this have?

The unholy alliance:

unholy-allianceThere is of course a further (and huge) problem implied within the above: Those short-term thinking shareholders have formed an unholy alliance with those they employ as their agents – the directors and executives. By which I am referring to share option incentives.

This isn’t new stuff – and I often reflect that not much in human history is!

Here’s what Henry Ford had to say about the stock [share] market nearly 100 years ago:

“The most common error of confusing money and business comes about through the operation of the stock market. And especially through regarding the prices on the exchange as the ‘barometer of business’. People are led to conclude that business is good if there is lively gambling upwards in stocks, and bad if the gamblers happen to be forcing stock prices down.

The stock market as such has nothing to do with business. It has nothing to do with the quality of the article…nothing to do with the output…it does not even increase or decrease the amount of capital used in the business. It is just a little show on the side.”

…and, to the highly problematic part:

“The state of the stock market may make a deal of difference to the officers and directors of a company if they are dabbling in the stocks and trying to make money out of the securities of the company instead of out of its service.

It’s interesting that Henry saw this point clearly so long ago. I wonder what he’d say to the size and nature of the modern share option incentive packages! This has become a modern ‘large corporate’ virus5, attacking at the heart of the (supposed) customer purpose.

To close:

So, we have:

  • A problem of dead money usurping purpose;
  • An ownership model that favours short-termism over doing the right things for the long term success of the business; and to cap it all…
  • Directors and Executives ‘bought’ by those short-term shareholders to keep it this way.

Many an executive could throw their hands up in the air and cry “I know…but what can I do?!”

In Chapter 4, I’ll put forward some alternative thinking – for ways to alter the ownership model and thus change the foundation for the good of all (including the shareholders).

Update: Link forwards to Chapter 4

Footnotes:

1. Shareholders as King: If you want to really delve into: the detail on the ‘shareholder primacy’ issue; recent attempts to move to an ‘enlightened shareholder value’ concept; and the conclusion that little has really changed then here’s an in-depth paper that does that.

2. ‘Big Coffee’: Hugh investigated the (misleading) words and (contradictory) actions of Starbucks, Costa Coffee and Cafe Nero in the UK.

3. Wells Fargo: I had already written Mylan as the case study when I saw the Wells Fargo fraud come out in the media…I could have added this case, but I expect that you’ve got the point – lots and lots of big corporations focused on dead money power, not service power for the public.

If you don’t know about, but would like to read up on the Wells Fargo case, then here’s a link.

4. Price: Henry Ford constantly sought ways to reduce his costs and pass these savings onto his customers (the public) by reducing the price of his cars. The price of a Model T ford dropped from $850 when it was introduced, to $260. (Source for price info.)

5. That ‘Unholy Alliance’: Just in case you were wondering (and this note is mainly for the benefit of shareholders), studies have examined the link between the introduction of executive incentive (i.e. share) packages and shareholder value – and it hasn’t exactly worked out well for the shareholders! A book to read here would be ‘Fixing the game’ by Roger Martin.

A recent study of 1,500 large corporations by Raghavendru Rau (Finance Professor at Judge Business School) found that:

“shares in firms that paid their CEOs in the top 10% of incentive pay [i.e. with high executive ‘incentive’ packages] typically saw their share price decline – and they fared considerably worse than the shares of companies in the bottom 10% [ i.e. with no or little executive incentive packages]”

Chapter 2: “That’s what WE do!”

Okay, so to recap, in Chapter 1 I took you back 100 years to consider the visionary Henry Ford and his foundational philosophies. I know he wasn’t a saint, I know he didn’t ‘solve the worlds problems’ and I know that he was lucky to be the right side of a technological disruption…but there’s bucket loads to learn from him.

what-peple-say-and-doThe ending of Chapter 1 was about Money power and, in particular, the idea of Dead Money provided by professional financiers – people focused on profit.

Now, I can almost hear any and every ‘large corporate’ executive, after reading Ford’s words, shouting back that “yes, yes, YES” – they understand ALL of this…they don’t run the business solely for profit…and this is why they have a rather wonderful Purpose Statement!1

To those ‘large corporate’ executives that would protest that they are ‘at one’ with Henry, I would reply with Stafford Beer’s acronym POSIWID, which stands for ‘The Purpose Of the System Is What It Does’.

To better explain this point I will borrow from my earlier post on this point:

“There’s a BIG difference in what we might like the purpose of our (organisational) system to be and what it actually is!

You can say that the purpose of the system is [XYZ] until you are blue in the face but, if this isn’t what it actually delivers, then by point of fact it ISN’T its (current) purpose.”

Every time I hear the ‘purpose’ words and then see the conflicting profit actions, I have to go and have a lie down.

Ford’s words are profound2 and agreeably fit with what has subsequently been written/said by all those giants I referred to in my earlier post ‘Oxygen isn’t what life is about’.

Here’s the summary from this post:

  • “You can state a purpose….but you’ve got to actually live it to move towards it;
  • An organisation’s purpose should NOT be ‘profit’, even though this outcome is necessary for the system and those that finance it;
  • If you think it’s the other way around i.e. that you need to state a purpose so as to chase profit, then you are likely to fall a long way short of what you could achieve…and will put your long term survival at serious risk;
  • A focus on short term profits and results for the market will likely destroy unknown and unknowable value.

For those of you who think ‘what a load of hippy liberal rubbish, of course it’s all about the shareholder’, here’s a really nice quote to consider from Sam Walton (founder of Wal-Mart):

“There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”

…how would those shareholders feel if their investment became worthless?”

i.e. Purpose is above profit…and you can’t just say this – it has to be so.

We seem to have a problem with understanding the ‘purpose isn’t profit’ thing.

So, what’s the difficulty here? Why can’t we fix this? What might be the cause?

And so to Corporations

shareholder-demandsIf you’ve not read it then I heartily recommend a well written book by Ha-Joon Chang (Economics Professor at Cambridge) called ’23 Things they don’t tell you about Capitalism’3.

‘Thing 2’ is that “Companies should not be run in the interest of their owners”.

Now this will likely confuse most people, provoking responses like “…but isn’t this a building block of capitalism?”

And yes, in Ha-Joon Chang’s words, here’s what we are told:

  • “Shareholders own companies. Therefore, companies should be run in their interests. It is not simply a moral argument…;
  • Shareholders’ incomes vary according to the company’s performance, giving them the greatest incentive to ensure the company performs well…;
  • If the company goes bankrupt, the shareholders lose everything, whereas other ‘stakeholders’ get at least something. Thus, shareholders bear the risk that others involved do not.”

Okay, that looks pretty cut and dry in favour of the shareholders – so what is he on about?!

…but here’s what they don’t tell us:

  • “Shareholders,…as the most mobile of the ‘stakeholders’, often care the least about the long-term future of the company;
    • On mobility: whilst shareholders can sell their shares in the blink of an eye, the other stakeholders (customers, employees, suppliers and even the lending banks) have far higher barriers to untangling themselves
  • Consequently, shareholders, especially but not exclusively the smaller ones, prefer corporate strategies that:
    • maximise short-term profits, usually at the cost of long-term investments; and
    • maximise the dividends [and share buy backs] from those profits, which even further weakens the long-term prospects of the company by reducing the amount of retained profit that can be used for re-investment.

 Running the company for the shareholders often reduces its long-term growth potential.”

This could just as easily be Ford talking about ‘Dead money’!

short-termismHa-Joon Chang goes on to tear apart the 1980s principle of ‘shareholder value maximisation’ (I won’t reproduce his critique here…but it is well worth reading4).

He concludes that “[shareholders] ease of exit is exactly what makes [them] unreliable guardians of a company’s long-term future.”

Jack Welch (then CEO of General Electric) was the darling of the ‘shareholder value maximisation’ ideology…and it seemed to work really well for the large corporations…until it all inevitably came crashing down5.

Welch, many years later, reflected in an interview with a financial journalist that:

Shareholder value is the dumbest idea in the world…

…Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products.”

…and, whilst it’s good that I can use this quote here, I find it convenient (to put it mildly) that Welch utters these words after he has extracted his $$$ millions from the corporation he pillaged and the ‘Guru Management’ books he sold…and now earns yet more $ from the reflective books telling us it was such a dumb idea!

“So are you trying to argue that we shouldn’t have limited liability companies?!”

llc-pros-and-consNo, I’m not.

They have been rather useful to our societies in enabling large, risky and capital intensive ventures that, whilst important, wouldn’t have happened without risk sharing – e.g. large-scale industries such as the railways.

Prior to their existence, a business person had to risk everything (including the shirt on their back) in order to carry out business…and if they failed then it was off to debtors prison.

The idea of a limited liability company was invented back in sixteenth century Europe (known as a joint stock company back then)…but, due to constraints imposed upon them, they didn’t come into general usage until the mid nineteenth century.

So why might society have wanted those constraints? Well, they didn’t trust them! Even Adam Smith, often referred to as ‘the father of economics’, said the following:

“directors of [limited liability] companies…being the managers rather of other people’s money than of their own, it cannot well be expected that they would watch over it with the same anxious vigilance with which the partners in [their own business] frequently watch over their own.”

So, the idea of limited liability? – Yep, this is definitely of use to society.

But the idea of purely dead money in a business, or even of it being the master? – No, this is not healthy, for the business, for society or (for that matter) those free floating shareholders caught holding the dead money when the music for the ‘short-termism’ pass-the-parcel game stops.

The music stops when the business fundamentals bite…and they always do.

What about those businesses that buy businesses that buy businesses?!

fish-eating-fish-eating-fishDon’t they need barrow loads of private financier’s money?

…and so back to a lovely Henry Ford quote to close out this chapter:

“What seems to be a big business may be created overnight by buying up a large number of small businesses.

The result may be big business, or again, it may be just a museum of business, showing how many curious things may be bought with money.

 [True] Big business is not money power: it is service power.”

Many a big corporate has used dead money to pursue a strategy of mergers and acquisitions…and has often destroyed so much value in the process….and, after licking its wounds (and perhaps the convenient ‘retirement’ of those involved) has repeated the same mistakes, again and again.

A business becomes successful because of service power, not because it took actions that merely made it big.

The point is that ‘big is not beautiful’, service is beautiful…which will likely lead to a growing business. Cause and effect.


So…this chapter considered the likely protests from ‘large corporate’ executives that they are doing exactly as Henry implored…and why it’s really not as simple as that. In fact, if we look at the idea of ‘shareholder value maximisation’ then Henry’s definition of Dead Money appears to fit oh-so-well.

This is all very interesting…but what if this is just how it has to be! Chapter 3 will consider whether executives can do anything about this, for the good of the organisation.

Update: Link forwards to Chapter 3

Footnotes:

1. I reflect that Simon Sinek’s excellent TED talk covering ‘Starting with Why’ has done extremely well in making its way around the world.

2. If you are a manager lecturing people as follows:

“We are here to make money and to [meet our purpose], in that order!…because if we don’t make money, we can’t [meet our purpose]”

…then PLEASE re-read and really think about what Ford (and the others) are saying.

Your ‘money comes first’ lecture is a classic case of ‘the tail wagging the dog’.

3. Anti-capitalism? Just in case you think Ha-Joon Chang, and perhaps I, a Communist, here’s a few lines from his concluding chapter:

“My criticism is of free-market capitalism, and not all kinds of capitalism….There are different ways to organise capitalism. Free-market capitalism is only one of them – and not a very good one at that…..so, capitalism, yes, but we need to end our love affair with unrestrained free-market capitalism, which has served humanity so poorly, and install a better-regulated variety.”

He goes on to set out eight principles to have in mind in redesigning our economic system.

4. Shareholder value maximisation: If you don’t want to buy Ha-Joon Chang’s book (it’s bloody good!) but do want to delve a little deeper in respect of “the dumbest idea in the world” then here’s a Forbes article that does similar.

5. General Electric: They became infamous during Welch’s tenure as masters of ‘legal earnings manipulation’ so that they always hit their earnings projections…and this was over a period of decades!

However, their underlying business didn’t look so hot when the pressure came on in the two crashes of the 2000s. Their share price (see graph below) tanked from $41 in Oct 2007 to $7 in March 2009.

ge-share-price-chart

 

Chapter 1: A long time ago in a land far, far away…

henry-ford…well, about 100 years ago in America…there was a visionary man who led society through a monumental technological disruption – his name was Henry Ford – and he and his organisation changed the world through his desire to ‘democratise the automobile’.

His success in putting the internal combustion engine on wheels devastated the ‘technology’ it replaced – the horse – and its many related industries (stables, horse feed and bedding, saddleries and tack shops, blacksmiths and farriers,….) although, on the plus side, it dissolved the huge problem of ever increasing amounts of horse manure pilling up on city streets!

We talk about modern technological disruptions, like the mobile phone or internet, happening quickly (in years) but we should reflect that profound technological shifts can occur pretty swiftly, whatever the age.

I imagine that once one ape invented the spear, then the rest changed ‘technology’ quicker than you can say “I wonder what those long pointy things are that I can see hurtling through the air towards us?”

The change from the horse to the car was pretty dramatic too:

horses-and-cars

Okay, so Henry Ford was on the right side of a technological disruption…but, whilst this was necessary, it was much more than luck that made the Ford Motor Co. such a success2.

So what were Henry’s core philosophies, and what ‘gems’ might we learn from him in this modern time of technological disruptions? These were his foundations:

  • ‘Service power’;
  • The ‘Wage motive’; and
  • ‘Money power’.

Service Power:

gandhi-quoteHenry was fanatically clear that a business is only there because of the people that buy its products and services. Without them it wouldn’t exist and, as such, the customer (the public, society) is the point. Full Stop!

“Since the public makes a business, the primary obligation of business is to the public.”

(He nicely clarified that “Those who work for and with the business are part of this public.”)

This is so much more than the trendy “customer centric” mantra, in which we are usually shown a lovely circle with the customer conveniently arranged in the middle BUT, and this is the problem, all the other ‘conventional thinking’ management orthodoxy is retained around the outside3.

And to make it absolutely concrete in your mind as to what Ford really meant, he explained as follows:

“The true course of business is to follow the fortunes and pursue the service of those who had faith in it from the beginning – the public.

  • If there is any saving in manufacturing cost, let it go to the public;
  • If there is any increase in profits, let it be shared with the public in lowered prices;
  • If there is any improvement [in the quality of the service] let it be made without question, for whatever the capital cost, it was first the public that supplied the capital.

That is the true course for good business to steer, and it is good business, for there is no better partnership a business can enter than a partnership of service with the people.

It is far safer, far more durable and more profitable than partnership with a money power.”

Everything Ford did was with the customer at heart i.e could he provide the public with a cheaper car and yet also make it better than the ones he made yesterday? If he could do this, he knew that customer demand would continue to rise and profitability would be the least of his worries. ‘Customer, customer, customer’ provides growth and profitability – THAT WAY AROUND.

To make it cheaper and better for the customer, Henry was obsessed with constantly studying, experimenting and improving the process – through fanatical cleanliness and maintenance, ever deeper removal of waste (transportation, movement, scrap…), re-use of anything and everything, in-sourcing wherever possible, constant technological breakthroughs, decentralisation to where the work should be…and so on4.

And Henry didn’t just think about his automobile customers, he thought about the whole system (society) because he realised that it was all really one and the same thing. This led him into all sorts of interesting ventures that supported, and enabled, the core purpose.

In short: THE foundational ‘thing’ that made the Ford Motor Co. such a huge success was that Henry truly believed that his master was the public.

The Wage Motive:

your-greed-is-hurting-the-economyAnd so we move from customers to employees (the worker).

The ‘wage motive’ was Henry’s phrase for his philosophy that “one’s own employees ought to be one’s own best customers.” If the workers truly prosper then they will love, buy and advocate for the products (e.g. cars) they make…which will create an ever-improving product, a superb reputation and expanding customer demand…which enables the workers to prosper – and off we go round the circle.

He goes on to write that “If an employer does not share prosperity with those who make him prosperous, then pretty soon there will be no prosperity to share.”

Now, Henry was no Saint – he was a man of his times – but he wanted to do the right thing. Significantly, he learned from his early worker experiences and saw that the best, and only logical approach, was for his system to work with, and for, the worker, not against them.

He paid them high wages (far higher than they could receive elsewhere), provided regular employment (replacing the uncertainty of casual labour with steady work), reduced the standard working week to 8 hours for 5 days, insisted that Sunday was a day off for all, and provided them with excellent working and living conditions. Any worker that wanted more than manual repetitive work was given the chance to better themselves through training and increased responsibilities.

And finally, given that Turkeys don’t vote for Christmas, he was very clear that improvement was about bettering people and not about getting rid of people:

“Nobody with us ever thinks about improvement lessening the number of jobs, for we all know that exactly the contrary happens. We know that these improvements will lessen costs and therefore widen markets and make more jobs at higher wages.”

In fact, Henry got rid of (incentive driven) piece-work and created a profit sharing arrangement in the form of share ownership (more on this in Chapter 4)

Money Power:

And last, but nodead-moneyt least, to money. Over to Henry:

“There’s nothing to be said against the financier – the man who really understands the management of money and its place in life….but it is very different with the professional financier, who finances for the sake of financing and what he can get out of it in money, without a thought of the welfare of the people…

[Moneys] proper place [is] as one of the cogs in the wheel, not the wheel itself…

This is not to say that money and profits are not necessary in business. Business must be run at a profit, else it will die. But when anyone attempts to run a business solely for profit…then also the business must die, for it no longer has a reason for existence….

A business cannot serve both the public and the money power.

Money put into business as a lien on its assets is Dead money, its main purpose becomes the production of payments for the owners of that money. The service of the public [will] be secondary. If quality of goods jeopardizes these payments, then the quality is cut down. If full service cuts into the payments, then service is cut down. This kind of money does not serve business. It seeks to make business serve it.

Live money goes into the business to work and to share with the business. It is there to be used. It shares whatever losses there may be. It is asset to the last penny and never a liability.

Live money in a business is usually accompanied by the active labour of the man or men who put it there. Dead money is a sucker-plant….

Business that exists to feed profits to people who are not engaged, and never will be engaged in it, stands on a false basis.…Profits of business are due:

  • first, to the business itself as a serviceable instrument of humanity [i.e. to constantly improve the service to its customers], and then
  • to the people whose labour and contributions of energy make the business a going concern [i.e. its employees]…

The true course of business is to follow the fortunes and pursue the service of those who had faith in it from the beginning – the public…

The best defence any people can have against their control by mere money is a business system that is strong and healthy through rendering wholesome service to the community.


…and so I (and Henry) have set the scene as to what this ‘story’ is all about – customers, employees and money…and in particular, how do large floating (i.e. short-term thinking) shareholder owned organisations ‘fit’…and most importantly, (how) can their structure be altered to provide a foundation for a long term win/win/win for all?.

Update: Link backwards to Introduction and forwards to Chapter 2

Footnotes:

1. All of Henry Ford’s quotes above come from his 1926 book ‘Today and Tomorrow’.

2. Ford Success: Just in case you doubt this success (and accepting that money is a poor measure) Forbes estimates that, in today’s money, Henry Ford was worth around US$200 Billion….more than double anyone alive today.

3. Note to self: I’ve still got to write the post that slaughters the ‘Balanced Scorecard’ sacred cow! It’s been on my ‘to do’ list for far too long because other stuff keeps on popping up every day.

4. Toyota: If you’re a follower of Taiichi Ohno and, upon reading the above, think “Hang on, didn’t Toyota invent all that stuff?!”, here’s a rather nice quote to reflect upon:

“I met Taiichi Ohno on a Japanese study mission. When bombarded with questions from our group on what inspired his thinking, he just laughed and said he learned it all from Henry Ford’s book.” (Norman Bodek)

Introduction: “Your Money or your Life!”

What if there was aadam-ant big, hairy, gnarly beast of a thing…how would you go about tackling it?

Well, probably rather carefully!

How about thoughtfully, bit-by-bit….raising ideas, not solutions.

My posts normally focus on a particular point. Sure, they are all linked together in one glorious philosophical mess…but they (hopefully) stand on their own.

This time it’s different. I have (what I believe to be) an important story to tell and a message to create curiosity…but I’m conscious that you probably don’t want to read a book!

So, I aim to take you on a journey by breaking the ‘adventure’ down into interesting ‘Chapters’, and release a chapter per day until we are done.

There are 5 chapters:

  • starting with “A long time ago…”; and
  • ending with “…and we all lived happily ever after”.

Well, I doubt the Disney ending (I should probably add an alternative ‘Armageddon’ finale) but I definitely aim to reach a conclusion, that is of use to society.

“But what’s it going to be about?!”

If you read the end of my last post then I hinted that this story will hurtle towards ‘large corporates’ owned by floating (i.e. short-term thinking) shareholders.

Is this ‘story’ relevant to you? Probably!

  • you may work in such an organisation (or do so in the future);
  • you will likely have investments or pension funds that own shares in them (even if you don’t realise this or don’t think about this much);
  • we are nearly all customers of such organisations; and
  • we are all affected by them!

Now then, are we sitting comfortably? Good, then tomorrow I shall begin.

Update: Link forwards to Chapter 1

Footnotes:

1. “Your Money or Your Life!”: the title of the post refers to the folklore words uttered by a Highwayman as he holds up a stagecoach. He (or, if you are a Blackadder Series 3 fan, ‘She’) is asking you whether you’d prefer to hand over your money or lose your life.

  • If you hand over the money in the short term then you can go on to long term success; however
  • If you attempt to protect the money, then you die. Nice.

…and I hope those of you from the 1980s enjoy the Adam ‘the highwayman’ Ant pop. culture image.

2. A word of encouragement: If you are thinking “oh no, he’s writing a long one again!” then ooops, sorry. It’s just that this subject matter really needs to cover a few bases.

I am invoking the following quote in my defence:

“Make everything as simple as possible, but no simpler.” (attributed to Einstein)

I promise that I won’t make a habit out of it (it takes far too much out of me!) and normal service will resume just as soon as I’ve got over the effort of this one 🙂