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 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

 

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 🙂