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“Irresponsible behaviour in big business” – “Unacceptable face of capitalism” remastered?

A new wind is blowing down Downing Street. The leadership of the Conservative Party has skipped back a track, with a generation born in the 1960s whose ideas were shaped by the Thatcher era replaced by one born in the 1950s that emerged into political consciousness in the years of Heath, Wilson and Callaghan. The young Theresa Brazier – later to become Mrs May – was studying for her A levels when the first of these branded Tiny Rowland as “the unacceptable face of capitalism”.

Tiny Rowland was engaged in a battle with his own non-executives at Lonrho at the time, dismissing them as “Christmas Tree Decorations”. Theresa May is now sharing the popular outrage at the conduct of Sir Philip Green and Mike Ashley and calling for changes to address “irresponsible behaviour in big business”, in particular to protect the interests of employees and to challenge excessive executive pay. It is interesting to compare the targets of the two prime forty three years apart: Heath was criticising the chief executive of a company whose non-executive directors were standing up to him, whereas Theresa May’s challenge is to behaviour exemplified by a former chief executive who owned, or rather whose wife principally, owned the company, and a second chief executive who is a majority shareholder but who appears to have the chairman and board in his pocket.

Mrs May’s pronouncements, aided by such high profile cases as BhS and Sports Direct, help to change the climate. But is this sustainable, and are the solutions being canvassed the right ones? Philip Augar, writing in the FT on 22nd August, noted

In her last major speech before entering Number 10 as prime minister, Theresa May eerily echoed remarks made by the former Labour premier Tony Blair 20 years earlier: “Transient shareholders are not the only people with an interest when firms are sold or closed,” she said. “Workers have a stake, local communities have a stake, and often the whole country has a stake.”

Mr Blair, in a speech delivered in Singapore shortly before he took power, asserted that it was “time to assess how we shift the emphasis in our corporate ethos . . . towards a vision of the company as a community or partnership in which each employee has a stake”.

Augar went on to point out that “what had promised to be a defining philosophy for New Labour was scarcely heard of once he was in office”. Admittedly, section 172 of the 2006 Companies Act did shift the ground by requiring directors to:

have regard (amongst other matters) to—

  • the likely consequences of any decision in the long term,
  • the interests of the company’s employees,
  • the need to foster the company’s business relationships with suppliers, customers and others,
  • the impact of the company’s operations on the community and the environment,
  • the desirability of the company maintaining a reputation for high standards of business conduct, and
  • the need to act fairly as between members of the company.

Nonetheless, Augar’s point about lack of delivery is well made, given precisely the types of issue that the new prime minister has declared that she wants to address.

Her ambition to reform corporate governance is admirable. But are they right solutions?  The FT reports today (25th July):

The prime minister’s allies say that a package of measures to improve corporate governance are being drawn up and will be published in the coming weeks.

Mrs May this month promised to broaden the pool of non-executive directors, so that they were no longer drawn from “the same narrow, social and professional circles as the executive team”.

“If I’m prime minister, we’re going to change that system and we’re going to have not just consumers represented on company boards but employees as well,” she said.

The idea is opposed by some corporate leaders, who fear that “worker directors” would end up being selected by trade unions. Mrs May’s team say they would act as a deterrent to the “appalling” working practices adopted by Sports Direct, which were heavily criticised by MPs this month.

Mrs May’s reforms are also expected to include a requirement for more transparency on pay, including making shareholder votes on corporate pay not just advisory but binding. “Pay multiple” data would also be published to show the gap between a chief executive’s pay and those of workers.

The new prime minister has also talked about toughening competition law to protect consumers and a further crackdown on corporate tax avoidance and evasion. “It is not anti-business to suggest that big business needs to change,” Mrs May said at the launch of her leadership bid.

There is some very good stuff here, including ideas about widening the pool of non-executive directors, but a lot more thought is required about how this should be done, and what would be the most effective way of ensuring that what is done addresses the problems identified. For example, appointing a token employee director may be a less effective way of addressing the need to represent employee’s interests than having an effective workforce or HR director on the board whose job it to take into account the need to meet the needs and desires of all the workforce, and couple this with greater protection of employee rights, not least around working conditions and pensions.

“Shareholder value ……. the biggest idea in business” – Really?

The Economist has published a useful analysis of the place of “Shareholder Value” in contemporary thinking about business and the firm (Shareholder Value: the enduring power of the biggest idea in business*, The Economist, 2 April 2016).

The article describes the evolution of the idea that the purpose of the firm is to maximise shareholder value, its primacy first in the Anglo Saxon world, but its pervasiveness today globally wherever commerce is practised. It also cites the objections to capitalism of a society that sees corrupt and failing businesses and widening social inequality.

It describes the challenges faced by Shareholder Value. The first that is it

“is a licence for bad conduct, including skimping on investment, exorbitant pay, high leverage, silly takeovers, accounting shenanigans and a craze for share buy-backs, which are running at $600 billion a year in America”

but the Economist then argues that these are essentially perversions of Shareholder Value:

“These things happen, but none has much to do with shareholder value. A premise of “Valuation” is that there is no free lunch. A firm’s worth is based on its long-term operating performance, not financial engineering. It cannot boost its value much by manipulating its capital structure. Optical changes to accounting profits don’t matter; cashflow does (a lesson WorldCom and Enron ignored). Leverage boosts headline rates of return but, reciprocally, raises risks (as Lehman found). Buy-backs do not create value, just transfer it between shareholders. Takeovers make sense only if the value of synergies exceeds the premium paid (as Valeant discovered). Pay packages that reward boosts to earnings-per-share and short-term share-price pops are silly.

“Outbreaks of madness in markets tend to happen because people are breaking the rules of shareholder value, not enacting them. This is true of the internet bubble of 1999-2000, the leveraged buy-out boom of 2004-08 and the banking crash. That such fiascos occur is a failure of governance and human nature, not of an idea.”

The second is the challenge of the stakeholder model:

“that firms should be run for all stakeholders, not just shareholders. In a trite sense the goals of equity-holders and others are aligned. A firm that sufficiently annoys customers, counterparties and staff cannot stay in business.”

The Economist then goes on to describe the difficulty finding an objective to replace shareholder value, including risk of potentially unintended consequences of placing too much emphasis on specific stakeholder, for example by protecting employment to the point that a company goes under. It then concludes that “For these reasons shareholder value—properly defined—will remain the governing principle of firms” but with the qualification that “shareholder value is not the governing principle of societies. Firms operate within rules set by others.”

The Escondido Framework turns a lot of this thinking on its head. Maximising shareholder valuation is not an absolute objective: rather the management of a company need to deliver sufficient shareholder returns, including the prospect of returns, to secure the capital the company requires and to satisfy shareholder that they would not be better off using such influence as they have in the financial instruments they hold to replace them with other managers. This is fundamentally no different to the task they face setting terms of employment to secure the necessary workforce, and designing products and services and setting prices to attract and retain customers. The Escondido Framework also argues that other, non-financially mediated markets have also to be considered, to keep regulators on-side and to maintain a favourable climate among the public at large who may ultimately influence the behaviour of governments or even do such perverse things as consequence of their alienation as to cast votes to leave a continental economic union that underpins the welfare of the economy.

One of the underlying conclusions of the Escondido Framework is that shareholder value is not the governing principle of firms. This is a descriptive not a normative statement. Firms are managed to keep shareholders of management’s backs. Inefficiencies in capital markets and corporate governance result in perverse and/or satisficing behaviours by managers in relation to shareholders, as evidenced by the lack of control of executive salaries and value destroying M&A activity. Firms that are successful in the long term in terms of market presence, satisfying customers and being places that employees report as attractive places to work, whose standing and reputation with the public helps reduce pressure for adverse regulation from government, happen also to be those who are successful in providing returns to shareholders over the long haul that attract long term investors who, like Warren Buffet, manage to generate superior returns. The deal works this way round, not the other way!

*The authors regrettably seem unaware that Jack Welch once described Shareholder Value as “the dumbest idea in the world” – see blog post 10th April 2010

John Kay: Shareholders think they own the company — they are wrong

At the risk of breaching copyright, John Kay’s column in today’s Financial Times needs  reproducing in its entirety!

So whose is the business? No one’s, just like the river Thames

Stock exchange: Who owns shares in a company? A name is recorded on a share register and someone else makes a decision to buy or sell

Shareholders own the corporation, and the duty of the directors to maximise shareholder value follows from that. I have lost count of the number of times I have been told “that is the law”.

But it is not the law. Certainly not in America, as Lynn Stout, a professor at Cornell University Law School, has pointed out.

Shareholders in England have more rights — but even there, the obligation of a company director is to promote the success of the company for the benefit of the members. The company comes first, the benefit to the members follows from its success.

And English shareholders are definitely not owners. The Court of Appeal declared in 1948 that “shareholders are not, in the eyes of the law, part owners of the company”. In 2003, the House of Lords reaffirmed that ruling, in un­equivocal terms.

Ownership is not a simple concept. The classic account of its meaning was given 50 years ago by another legal scholar, Tony Honoré.

Ownership, like friendship, has many characteristics and if a relationship has enough of them we can describe it as ownership.

If I own an object I can use it, or not use it, sell it, rent it, give it to others, throw it away and appeal to the police if a thief misappropriates it. And I must accept responsibility for its misuse and admit the right of my creditors to take a lien on it.

But shares give their holders no right of possession and no right of use. If shareholders go to the company premises, they will more likely than not be turned away.

They have no more right than other customers to the services of the business they “own”. The company’s actions are not their responsibility, and corporate assets cannot be used to satisfy their debts.

Shareholders do not have the right to manage the company in which they hold an interest, and even their right to appoint the people who do is largely theoretical. They are entitled only to such part of the income as the directors declare as dividends, and have no right to the proceeds of the sale of corporate assets — except in the event of the liquidation of the entire company, in which case they will get what is left; not much, as a rule.

There is a stronger case for asserting that a company is “owned” by its directors than there is for its shareholders. There is little doubt that if you explained to a Martian what earthlings mean by ownership and asked who owned a corporation, the Martian would point to the C-suite.

So who does own a company? The answer is that no one does, any more than anyone owns the river Thames, the National Gallery, the streets of London, or the air we breathe. There are many different kinds of claims, contracts and obligations in modern economies, and only occasionally are these well described by the term ownership.

It makes little sense even to ask who owns shares in a company. One name is recorded on a share register; someone else makes a decision to buy or sell; someone else decides how the shares are to be voted; and someone else benefits from the returns from the company’s activities.

It is not only possible today, but usual, for all these rights to be exercised by different people. And that is even before taking account of the complications introduced by stock lending.

As Charles Handy has written, when we look at the modern corporation, “the myth of ownership gets in the way”. Clear thinking about business would be easier if we stopped using the word.

 

Are we seeing a shift in the understanding of ownership rights?

The FT’s Merryn Somerset Webb comments today on the sale by the City of Bristol to the Bristol Port Company of the freehold of the port at an apparently knock-down price, with the mayor appearing to justifying going ahead with the deal against the opposition of the city council who favoured a higher offer from a third party on the basis that the company were good tenants of 20 years standing.

Ms Somerset Webb declares that her interest in the story arises from its parallels with David Cameron’s support for housing association tenants being allowed to buy their homes at heavily discounted prices and the Scottish Land Reform Bill which is “jammed with right-to-buy clauses and power transfers to ‘communities’. “ She goes on to observe:

“Interesting, isn’t it? These examples of wealth transfer from right-to-buy all come from different directions and political positions but they all suggest the same thing: a convergence around the idea that owners shouldn’t have exclusive ownership rights.”

She continues by expanding her argument to rising real wages in countries around the world arising both from market pressures to changes in government policy. She notes that she wrote a column here a year and half ago where she:

“talked about just how much of a “boss’s world” ours has become over the last 20 years — the share of corporate output going to profits (and hence to shareholders) had soared and that to workers collapsed……. At the time I noted that these swings in the relationships between profit and labour — or tenant and landowner — take decades to play out, but I felt we were seeing the same signs of a shift as we saw back in the 1960s when the government was ‘irrevocably committed to doing something for the low paid’.”

The primary purpose of her article is actually to suggest that these shifts are good for the global economy because they are likely to transfer income to wealth to people who are more likely to spend it. However, one of the other points she has the effect of making is that the rights that go with ownership of the shares of a company and the rights that are accorded to workers in their employment contracts (which for some people a few centuries ago would have been capable of being bought and sold) and the income flows that go with them, are subject both to general exogenous effects and to the outcome of political action.

Ms Somerset Webb is writing this in her column for private investors and appears to be warning her readers about to recognise that their property rights are not immutable and sacred but are ultimately subject to the will of government, responding to public pressure:

“With tenants getting increasingly angry about our dysfunctional property market and governments and councils across the UK clearly all for right-to-buy, is it really safe to assume that landlords will keep the rights they currently think they have over their rental properties?”

Failing the marshmallow test

The BBC World Service is the insomniac’s salvation. If you are lucky, a background of talk radio helps you back to sleep. If you are luckier still, you stumble on a piece of quality programming that Auntie has chosen to share with the rest of the globe but not with its domestic listeners.

“In the Balance”, a business programme presented by Andy Walker at 03:30 GMT on Sunday 2nd November, included a first class discussion of short termism between Bridget Rosewell, Geoffrey Franklin and Richard Dodds, following an interview with John Kay that marked the second anniversary of the publication of his report for HM Government on short termism in equity markets.¹

The essential conclusion of the Kay report [reference needed] was that there is too much short termism in UK corporate life at the expense of addressing long term competitive advantage. The top management of quoted companies focus unduly on hitting 3 monthly targets, which are a poor measure of management competence, and have been rewarded accordingly. The 1990s featured attempts to align management incentives with the interests of shareholders, but the net result was that “many people who were quite incompetent made quite a lot of money”. Kay concludes that regulation is not the solution, but that a change in culture is required, but that it is hard to know how to do this, and harder still to measure progress.

Kay expanded on the culture change required and the inherent difficulties. He referred to the “marshmallow test”, an experiment with 4 year old children. Most, when presented with a marshmallow and told that if they wait 5 minutes before eating it they will be given a second one, will eat it right away. (A celebrated study of children subjected to the marshmallow found that those who exhibited a lower personal discount rate and exercised sufficient self control to win the second marshmallow – or maybe just had the insight to understand the challenge facing them – prospered more in later life). Andy Walker asked John Kay whether he was saying that executives simply need to grow up, to which Kay responded “a lot of company directors would fail the marshmallow test.”

In the ensuing discussion among the panellists, Bridget Rosewell blamed her profession (economists) for promulgating the view that all the information about the future prospects of the company is captured in the share price, and consequently many board level remuneration packages have been structured around movements in the share price, and the panel as a whole seemed to conclude that we have spent years telling people to focus on the wrong thing. Further, Rosewell also observed that “All markets exist in institutional contexts and cultural contexts.”

Is John Kay right? Undoubtedly yes. But the supplementary questions are more interesting: why do so many fail the marshmallow test; and what can we do about it?

There are probably could be three underlying reasons for the behaviour Kay describes.

One is that, notwithstanding the experimental data that suggests that people who come out on top in later life are  those who as small  children passed the  marshmallow test, perhaps some of those who make it to the upper reaches of commercial organisations respond disproportionately to short term signals. (Or maybe, by the time that they have reached the upper reaches they are no longer capable or responding to anything other than short term signals?).  This is not something that I have observed myself, but there may be some revealing academic research lurking in the nether regions of a business school somewhere that addresses the personality types of chief executives and points to this failing.

A second explanation could be that human timeframes and organisational timeframes may be intrinsically misaligned. “In the long run, we are all dead.”  The career time horizon for a typical chief is only exceptionally longer than twenty years on first appointment.  Even then, the time horizon within the specific appointment is only exceptionally more than ten – and probably for very healthy reasons including personal boredom thresholds and the benefit from time to time for a fresh set of eyes on a problem.  Whether it is desirable is irrelevant, it is entirely reasonable for individuals to consider the rewards – both material and emotional – that will flow from what is deliverable and measurable within their own term of office. And although they may also be concerned for their own legacy in the role, they also have to reflect that they have little power to stop those who come after them frittering it away.

The final explanation relates to the institutional and cultural frameworks about which Kay and the “In the Balance” panellists agonised. The evidence here is compelling (although I would not go as far as Rosewell in condemning the argument that share prices capture all the information about a company – the point, for discussion in more depth elsewhere, is that the prices of traded financial instruments are corrupted because they also capture information about expectations about trader behaviour (in an economist’s version of Heisenberg’s Uncertainty Principle). Many management teams have been presented by academics, consultants, brokers, investment bankers, and journalists, arguably in error, that they must respond to and seek to affect short term share price performance, and the regulator environment has encouraged rather than discouraged this.  Given that the possibility that the first of these three explanations holds true for some executives, and the probability that the second of these three explanations holds true for most, it is all the more pernicious that the we have aligned cultural and institutional frameworks in this way. Instead, we need to bend over backwards to create a culture and institutional framework as a counterweight to the possibility that personal discount rates – driven by hardwired human appetites and instincts – are higher than those of companies and organisations in general, and society overall.

So, who’s eaten my marshmallow?

 

¹ The Kay Review of Equity Markets and Long Term Decision Making, July 2012

HBR Case Study: Do Business and Politics Mix?

The case study feature in the November 2014 issue of Harvard Business Review is titled “Do Business and Politics Mix?” At the most basic level, this is a daft question.  The fact that it has been worded like this illustrates some of the shortcomings in the way that business in general, and the nature of firm in particular, is discussed.  It is not a matter of whether they mix, business operates within a political environment. Indeed , many businesses engage with least two “markets interfaces”  that are essentially political in nature. The question should not be “do they mix”, but how does a firm position itself on each of the political market interfaces.

The case study describes a fictional US business called Natural Foods that has made donations to a “super PAC” (a peculiarly American artifice for getting round restrictions on the financing of candidates for political office) funding pro-business candidates, only to discover that one of the candidates backed by the super PAC takes an anti-gay stance.  The characters in the case study debate whether or not they should be trying to engage with the political establishment, by funding candidates in order to secure influence with the legislative and executive branches of government, and how they should present themselves to their public and to their immediate stakeholders, who are socially liberal.

The value of this case study is not the specific conundrum faced by the management of the fictional business or the advice provided the pundits assembled by HBR to comment on it. Rather, it is elegant illustration of the significance of political aspects of market interfaces illustrated in the case: the interface with the branches of government as regulators and enablers, and the political dimensions of the market interfaces with employees and customers, for whom the political positions with which the company is identified are considerations in their dealings with the company.

Three Sanctions: Cash, Influence and Force

“War is not merely an act of policy but a true political instrument, a continuation of political intercourse carried on with other means. What remains peculiar to war is simply the peculiar nature of its means.” Carl von Clausewitz, On War, 1832

“All diplomacy is a continuation of war by other means”.   Zhou Enlai, Saturday Evening Post (27 March 1954)

The firm does not just interact with the outside world through cash denominated markets, but also has to deal with and through politics, and many also interact with other parties by employing force itself either as a matter of its own choice or in response to other party’s resort to direct action. Although there may be hybrids and crossovers, the sanctions available to the firm fall into one of these three categories: commercial exchange, political influence and power, and physical force.

The quotations from Clausewitz and Zhou Enlai illustrate the recognition by soldiers and politicians that they may have something in common in their purposes, but employ different means.   Ultimately both are seeking power or control over assets or people, on behalf of the institution (nation, party, faction, class, tribe) they serve. The widespread use of military metaphors by business leaders, and particularly management consultants and business academics, illustrates a degree of recognition of crossover between the commercial world and the political and military as the business seeks to secure control over assets, services and revenues. No wonder that Lawrence Freedman, in his comprehensive history of strategy[1] – from the Book of Genesis to the gospel according to Michael Porter – divides his subject into “Strategies of Force” (military), “Strategy from Below” (politics), and “Strategy from Above” (business).

The classical model of the firm assumes that all its business involves commercial exchange, with goods, services and investment rights exchanged for cash or entitlements to cash. But even at the time the classical model was evolving, it failed to describe the world as it existed. The men behind the chartered companies that exploited the new worlds for the British, Dutch and French in the eighteenth century understood that their business would employ all three sanctions, to the extent that the East India Company had its own standing army, whilst back at home its mandate to trade depended on a charter that in turn depended on political bargaining. The slave plantations of the West Indies that provided the investment for the Industrial Revolution depended on the labour of slaves who were bought for cash in West Africa and then worked under the overseers’ lash until the trade in slaves was banned and eventually the institution of slavery itself as a consequence of the plantation owners losing the moral and political argument. There are plenty of examples in the twentieth and twenty first centuries where businesses employ, or have to respond to, political and physical force sanctions, even if only at the level of coping with the union picket line or employing security services to protect their assets, and lobbying politicians to secure favourable, or less unfavourable, legislation.

The three sanctions are distinct from one another in a number of ways, although the boundaries between them in their deployment depend in part on the other sanctions: weapons and allies may be bought with cash or political influence; the rules that govern commerce generally depend on political sanction that may in turn be backed up by force. They can be seen as a hierarchy, with the cash based, commercial sanction claiming superiority over the other two as the basis for the market solutions that allow individuals to make the vast number of choices about the goods and services they consume, how they deploy their own labour to generate income and create wealth, and invest in capital goods – whether roofs over their heads or equipment to make human labour more productive. But for the cash denominated marketplace to generate equitable and efficient outcomes and address externalities that diminish the aggregated wealth of a society, the state has to be summoned into existence, which requires deployment of the political sanction. Hobbes was right: without the state, life in the state of nature is nasty, brutish and short. Adam Smith may have betrayed a charming naivety when he asserted that “When the trade or practice becomes thoroughly established and well known, the competition reduces them to the level of other trades” and failed to recognise many of the conditions that frustrate the development of perfect competition, but he also acknowledged the very same self-interest that fuelled his economic model also contained the seeds of the cartel in his memorable observation that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

The legitimacy of the commercial exchange derives from the possession of currency whose value is recognised by the counterparty, of goods on which they place a value, or of the ability to provide services on which the counterparty places value. Through the medium of money, commercial marketplaces provide for highly granular exercise of choice by individuals and, despite all the limitations of market failure and moral questions about unequal distribution of income and wealth, have underpinned most of what is generally recognised as the progress of the human condition and liberation from decisions imposed on them by others.

The legitimacy of the political sanction is derived from potentially a variety of sources. It may be underpinned by the threat of force (of a ruler with backing from his tribe or his loyal palace guard, of a military class, or of popular uprising), or a widely accepted value system which generally finds is voice in a written constitution interpreted by courts but may have its roots in religion, cultural values, political theory, or reference to totemic elements in a nation’s heritage. In practical terms, the exercise of political sanction will be in reference either to values (for example, an appeal to principles embodied in a constitution), to potential levers within a constitutional framework (for example, the potential influence on how voters may cast their votes in a future election) or to direct influence, whether by strength of logical argument or emotional appeal, to those with political power. The limitation of political sanctions is that the political process is less granular and frequently binary: you may be able to exercise some influence over what goes into the manifestos of political parties, but when elections come around the voter is confronted by a choice between the platforms of the parties and unable to cherry pick the policies they like. But for all the shortcomings of political processes compared to commercial markets, they are all we have available to address the problems created by market failure and address the issues of equity surrounding the unequal endowments we receive at birth and the unequal outcomes for individuals from untrammelled exercise of the market[2].

So what about the legitimacy of physical force? It is the sanction of the Hobbesian state of nature. If we accept the analysis of Thomas Pinker[3], mankind has moved inexorably away from using violence. However, there are still people who have recourse to physical force when they cannot see any resolution of disputes through political means or they have concluded that the benefits of remaining within the laws created by the state and exercising whatever limited economic power they may have within the market moderated commercial system are outweighed by using physical force. This applies equally to London low life snatching a handbag on Oxford Street or a Mexican cartel member or Mafiosi assassinating the local police chief getting too close a drug deal. But it also applies to the Occupy Movement and to campaigners against fracking: when something is sufficiently important to you and you cannot achieve your goals through commercial means or the normal instruments of politics, it is entirely rational to resort to physical force, accepting that it is very crude, inefficient, and not without cost to all concerned. In the same way that we require political instruments to address failures in commercial markets, an individual, a movement, a social class, or an ethnic minority may conclude that the failure of the political process can only be addressed by resort to physical action. There is also a reciprocal implication: if you are using physical force to respond to physical force, you should recognise that you are engaged in a political process and addressing political problems, as Emile Simpson articulates in his account of operations in Afghanistan[4]

[1] Lawrence Freedman Strategy: a history (Oxford: Oxford University Press 2013)

[2] Thomas Pickety, Capital in the 21st Century

[3] Thomas Pinker, The Better Angels of Our Nature

[4] Emile Simpson, War From the Ground Up.

“It’s 80% Dark Matter”

I attended the launch of “Collaboration Strategy: How to Get What You Want from Employees, Suppliers and Business Partners”, the new book by Felix Barber and Michael Goold of the Ashridge Strategy Management Centre. The book contains plenty of good material on structuring terms with the parties who you work with and aligning incentives. Reflecting the past service of both authors with the Boston Consulting Group, it has plenty to say about focusing on those activities in which you enjoy competitive advantage and outsourcing the others.

Publisher’s glass in hand, I was listening to Felix deliver a short lecture providing a synopsis of the themes of the book when someone¹ muttered in my ear:  “they’re talking entirely about markets and financial incentives, but in reality it’s 80% Dark Matter”.  This is a powerful metaphor and an important insight: we need to recognise that there is lot of dark matter out there in the economy and without it nothing works.  Market forces and financial incentives alone do not explain how organisations, partnerships and collaborations operate and why we need them.  Barber and Goold do acknowledge, buried deep in their text, that there may be more going on by commenting that they “don’t wish to downplay the importance of other approaches to motivating employees and other partners”.  But, possibly reflecting lifetimes as consultants and academics, they convey in the book the impression that they don’t recognise the amount of Dark Matter that the system needs.

 

¹ David Pitt Watson, sometime managing director of BCG rivals Braxton Associates, Labour Party Finance Director, boss of the activist investment fund Hermes Focus and now social entrepreneur and responsible investment guru.

 

Strategy: a dialogue between desire and possibility

When someone as eminent as military historian Sir Michael Howard reviews a new book by a young former soldier by describing it as “a work of such importance that it should be compulsory reading at every level in the military” and (recognising himself that he is “really go[ing] overboard” ) that the book “deserves to be seen as a coda to Clausewitz’s On War” you know that you have to read it and that your expectations have been set very high.

Emile Simpson’s War from the Ground Up: 21st Century Combat as Politics deserves a much wider audience than just the military.  It sparks ideas about analogies in other parts of life; the experience of a young officer in Helmand Province has meaning elsewhere.

One of his most powerful ideas is the recognition that we need to understand how our actions will be interpreted, and when then they can be interpreted in multiple ways they risk becoming ineffective:

To use an analogy, the market is an interpretive structure whose function is to impose a specific type of meaning, a price, on a product. When the market cannot allocate a price (which is one of its basic functions), its mechanism breaks down and it loses utility. This happened in the financial crisis of 2008, when many derivatives were so complex that the market could not price them.  The market seized up its basic mechanism stopped working. When an action in war can be interpreted in a multitude of different ways depending on the prejudice of the audience, it is very hard to make armed force have political utility in a Clausewitsian conception of war: for a military outcome to set conditions for a political solution it needs to be recognised as such.  (p.74)

But his comments on strategy are more powerful still:

Essentially strategy is the dialectical relationship, or the dialogue, between desire and possibility. At the core of strategy is inevitably the problem of whether desire or possibility comes first. Does one start with the abstract idea of what is desired, or should one commence by consideration of what is realistically possible? This is a chicken and egg situation.

The two should ideally be in perpetual dialogue, not just before but also during a conflict. Desire must be grounded in possibility; possibility clearly requires an idea in the first place which informs any analysis of possibility…..

Understood as dialogue between desire and possibility, strategy is as much the process that handles this dialogue as the output of the dialogue itself. (p.116)

“Shareholders do not own companies, nor do they own the assets of companies”

Six academics,  from law schools and business schools in the US, UK, and continental Europe, have written a first class letter to the Financial Times today, printed under the headline “Acknowledge that companies remains separate legal entities”.

They take the Business Secretary to task for slipping into the trap of asserting, in the course of the controversy over bankers’ pay, that shareholders “own” banks.

Kent Greenfield and his colleagues write:

“….the notion that shareholders own companies is simply incorrect.

Shareholders do not own companies, nor do they own the assets of companies.

Shareholders own shares of stock – bundles of intangible rights, most particularly the rights to receive dividends and to vote on limited issues. 

Unfortunately the erroneous notion….that shareholders own companies seems to have side tracked the discussion, and policy formation, around corporate governance leading to an inappropriate and ultimately counterproductive focus on shareholders. 

…..companies are separate legal entities, without owners, and effective corporate governance involves the consideration of a variety of parties not, necessarily, shareholders.”

Signatories to the letter:  Kent Greenfield (Boston College Law School); Andrew Johnston (University of Sheffield); Jean-Philippe Robé (Sciences Po Law School, Paris); Beate Sjåfjell (University of Oslo); Andre Spicer (Cass Business School); Hugh Willmott (Cardiff Business School)