“More Like People”?

My working life has been spent with organisations, in one way or another. (And of course my life before that: schools and universities are organisations too…) I love exploring the way organisations work – what makes them tick. That is why, believe it or not, I loved auditing: auditors dig into organisations, discovering the real processes and structures that enable to them to function. (Clue: it isn’t what managers tell you. And it doesn’t have anything to do with shareholders!)

When talking about organisations – something I do often – I repeatedly find myself describing them as dysfunctional. I don’t think that I have come across or worked in an organisation that couldn’t work better in one way or another, from multinational banks to small, two-man operations. I have long wondered why this is. It isn’t that people in the organisation don’t know this: one thing consultants learn very quickly is that what they tell their clients is very rarely news: organisations know what’s wrong, even if they need someone from outside to help them articulate it.

Their processes could be better, their communications could (almost always) be improved, their structures changed to help the business. Hierarchy and structures get in the way rather than enable, and people in organisations know the work arounds – big and small – to get things done.

(A caveat: “could be better” is a value statement: the corollary has to be “better for whom?” Customers? Employees? Managers? Owners? The wider population? The environment? These groups may not be exclusive, but better for one may very well not be better for all.)

Organisations could be – well, better organised. They are dysfunctional.

I have only one answer. Organisations are made up of people, not processes; people make the organisation work. And people are dysfunctional.

Despite the idea that organisations are separate from people, it is people that are the organisation. We pretend they aren’t. We even pretend that organisations are people!

The thing is that whilst some organisations behave as if they were psychotic, most large organisations’ dysfunctionality works in peculiarly non-human ways. (Small organisations’ dysfunctionality is just like the people behind the organisation!) The veil of incorporation lets everyone in an organisation hide behind the processes, hierarchy and bureaucracy that lets the organisation continue to believe they are “rational”.

Liam Barrington-Bush started a campaign to counter this and humanise organisations, “#morelikepeople“, and he’s developed some of his ideas into a book, “Anarchists in the Boardroom“. (I should declare an interest: I’ve known Liam for quite a while, we’ve discussed his ideas many times, I was involved in focus groups around his book, and I read early drafts of a couple of chapters; he and I agree on much, and probably disagree on more!)

Liam’s focus is on not-for-profits and social enterprises, but I think his ideas are relevant to all organisations. Broadly, Liam reckons (amongst other things) that new media – particularly social media – can act as a counter to the rigid hierarchies and management processes that twentieth century industrialisation created. This is a topic has interested me for a long while – Benjamin Ellis covered it particularly well in a one day conference at Cass Business School three years ago.

Using collaborative tools to develop self-organising structures and flatter structures would clearly have an impact on the nature of work and business; if large organisations were able to embrace them, they might become flexible and responsive.

More likely, I feel, is that small organisations – already more flexible than large, and often unencumbered by rigid structures and processes – that are likely to adapt faster to social media, perhaps becoming more openly networked rather than hierachical.

(Liam is using crowd sourcing to publish his book – itself an interesting example of the changing nature of business in a new, social and collaborative world; he is still looking for supporters.)

John Kay on Bankers’ High Salaries.

John Kay, economist and chair of the Government review of equity markets and long term decision making [PDF; and it’s long!], was speaking to the Edinburgh University Business School, ostensibly on “Why are financial services so profitable?”, but essentially discussing remuneration in financial services. (This may because the answer to the original topic is a quick “they’re not!” – profits from the boom years were wiped out in the crash of 2007 and the ongoing global financial crisis: the profits were illusory).

Remuneration is of course a hot topic. The EU is developing proposals to cap bonuses; bankers’ salaries and bonuses regularly feature in the news.

The standard economic model of wages is that workers receive the same as their marginal unit productivity (I think!). The article in Wikipedia explains it better than I could… A big problem with this model is that it is very hard for organisations to know what the marginal productivity actually is. In large corporations through to the smallest business employing people, whilst the theory might say this is how wages are calculated, my guess is that actually no one knows. What is the marginal productivity of a waiter, a bar tender, a bank teller – or the CEO of a major company?

Kay discussed three different economic theories to explain real remuneration patterns and income distribution, each of which comes from different economic and political assumptions.

The first is that what may be perceived as excessive wages reflect political power and rent seeking. Economic rent the amount paid for a resource in excess of the amount to get that resource into productivity. In the example Kay used, the amount that Wayne Rooney is paid by Manchester United is probably far more than the minimum that Wooney would need to be paid to get him to play football: the difference is because ManU have to pay this excess to stop him moving to another club, who might pay more: in an open market, those other clubs bid up the price. (Kay may have been a little premature on this specific point, though the principal stands…)

The economic power in this case is with Rooney; similarly, successful bankers can threaten to move to another employer – or even another country. They could work anywhere – they have highly transferable skills – and their employers might worry that if they don’t pay their high salaries, they would lose access to the bankers’ skills. (I am not so sure that this threat is a problem now that much of their success has been proved to be illusory.)

The second model Kay covered is what he called “the estate agent problem”. The economics of estate agency is, according to Kay, curious: the rate of fees is generally static, with competition not acting to drive down prices. Estate agents generally charge the roughly the same fees as their competitors. This is because users want to pay for the best service; no one want to pay for an ok, but cheap, estate agent (let alone a bad but dirt cheap agent!), since the benefit accruing from paying a bit more for an excellent agent would far outweigh the cost.

Banks therefore pay for the quality they perceive they receive. They don’t want to pay for a mediocre performance when they believe they can pay a bit more and get excellent performance. Similarly, no board of directors is going to hire a CEO or MD they believe to be average: they will all want the best, and their recruitment firms will help – and bid up the price. But it is doubtful how much difference CEOs can actually make. Luck has an awful lot to do with their success or failure, as do the people they hire.

(Recruitment agencies and remuneration consultants have a lot to answer for, too. All firms want to be seen to be good payers – management roles, at least: job ads often describe roles – firms – as “top quartile pay”; I don’t think I have ever seen a role described as “bottom quartile pay”, though of course 25% of jobs, and firms, must be! Remuneration consultancies produce regular reports showing the market rate for specific jobs, which firms expect to have to pay to get the people they want – and the market rate inflates each year as firms adjust their rates to stay with the market.)

The third issue Kay identified is that of “bezzle“, a word coined by J. K. Galbraith to describe the undetected amount of corporate fraud. Before the fraud is discovered, the victims believe themselves better off than they are. Prior to the global financial crisis, we all thought we were better off than we actually were, because of those non-existent banking profits. As someone said (attributed to Nassim Nicholas Taleb), “we borrowed from the future, and now the future wants it back!”

Until a fraud is discovered, we are all better off! (Kay has writen about the global financial crisis in terms of the bezzle.)

The asymmetric information between financial institutions and their customers – that is, just about everyone – and between fraudsters (call them bankers, fund managers… people who are claiming their bonus for no special performance) and institutions are able to make excess profits. Until of course they get found out. Clearly, even though they have been found out, a great many still think they are worth it.

There was a discussion about how better to align reward and performance – locked-in long term share options, maybe – and perhaps a more apposite debate on the kind of people we want running our companies. This last is important. The traders who do the jobs in banks may do so precisely because they are attracted to the high risk, high return environment. Whilst we might benefit from people with less risky approaches, they are unlikely to be attracted to those jobs. Similarly, the CEOs we appoint might actually be wrong for the job – but less aggressive, flamboyant people aren’t going to apply. And what board would appoint a wall-flower against an alpha male bull? Maybe we get the management we deserve.

I’m not sure if any of this really explains extravagant remuneration and the bonus culture that has been laid bare by the crisis. Maybe it is simply greed, and people gaming the system: trying to get as much as they can.

This Happened Edinburgh and Creative Edinburgh

Four years ago, I spent an evening at the first This Happened Edinburgh – an interesting, collaborative event where technical and creative people discussed some of their innovative projects. (I thought I had blogged about it at the time, but clearly I failed to do so!)

After a four year gap (whilst I was down in London – where there is also a regular “This Happened” but where I found it impossible to get a ticket, such was demand!), I went to This Happened Edinburgh #9 last week.

This Happened Edinburgh #1 was the first event like that I had been to: four creators discussing their projects; this time, I knew what to expect. First time around, it was in a crowded upstairs room of a pub; now it was in the much more salubrious surroundings of Edinburgh University’s Inspace gallery, a white space which may well have been designed for events such as this. Much techier, much smoother, much cooler – but much less “funky”, too, and more deliberate and knowing.

The four projects were as interesting as those four years ago – I was particularly taken with Shenando Stals examination of the emotional geography of walkers’ Edinburgh – how our emotional sense of a city is created and alters our everyday experience of place – and Gianluca Zaffiro’s description of a project involving the users of social networks managing their own data (rather than the firms running the social networks).

The mantle for the funkier side of things has been taken up by Creative Edinburgh who, amongst the other things they do, have been organising a series of irregular events called “Glug” (part of a broader programme of Glug around the UK – I do like the subtitle “Notworking”: for all the self-unemployed out there…) where entrepreneurs and artists give short talks about their projects. Loosely curated around a theme – the first one I went to was on “collectives” (from I learned that collectives come in all shapes, sizes and ideologies – and it is the people not the idea that make it work! And I meant, and failed, to write about that at the time, too); the last one, in December, was on “materials matter“, though I’m not sure the case was proven: it was the creativity and the ideas that came through for me, the materials just being the medium.

Creative Edinburgh’s Glug evenings are more entrepreneurial and less academic than This Happened; maybe a bit more social, too. Not necessarily better – just a different focus. Both present a series of fascinating, engaging talks, and I look forward to more.

Internships

On Wednesday I had a debate on Twitter about internships. Liz Cable tweeted

I tweeted my immediate reaction (well, thought about it, and edited it down to 140 characters, thought better of sending it and then changed my mind – as one does…):

And hence I got into a friendly discussion with Liz, and also with Doug Shaw, who joined in. (As an aside, this kind of discussion emphasises some of the values of Twitter: we clearly hold different viewpoints, but are able to engage with each other and debate a topic back and forth. In 140 characters…)

I was surprised by strength of my reaction, and thought I’d set out my reasons hear.

Fundamentally, it stems from a belief that if one is engaged in productive work, one should be paid for it. We have laws protecting workers from exploitation – including setting a minimum wage. (Which isn’t much.) Using interns to do “real” work – tasks which an organisation would otherwise have to pay someone to do – is exploiting them. And, because of those laws, illegal.

If firms couldn’t use interns, they may need to hire more employees, paying them real wages at the minimum wage or above.

Only those who can afford to work for (more or less) nothing can be interns. They are therefore the realm of the privileged, increasing inequality and reducing social mobility.

I also think internships teach some of the wrong lessons. If someone’s first experience of a working environment is exploitative, exploiting others appears to be ok. Indeed, by allowing this exploitation, society is implicitly making it ok. And yet we bemoan a lack of business ethics as a cause of some of our economic ills.

I can understand why young people want to do internships: in a tough job market, anything that can demonstrate skills, determination and ambition – anything that might make a CV stand out from the crowd – will be pursued.

I can definitely see why companies want interns: a cheap supply of labour; and potentially seeing able candidates perform in a working environment must be better than more formal interview processes. The major benefit will accrue to shareholders: those firms using interns will make more profits (none of which go to the interns).

It is of course not this black and white. Interns are, I’m sure, willing: they want the experience. But the power in such a relationship is so skewed towards the firms that willing or not, it is still exploitative.

I can’t reconcile where voluntary work fits in to this, either. I have done voluntary work at different times in my career, and it can be rewarding for both the worker and organisation they volunteer for. But I think the power in this relationship is much more toward the volunteer.

I’m not the only person who thinks like this. The Guardian website describes internships as “institutional exploitation” and “a scandal” – as does the Daily Telegraph’s website (the latter referring specifically to internships with MPs in Parliament). The website JobMarketSuccess outlines many of the objections I’ve expressed.

None of my criticism of internships is directed towards Liz: I’m sure she is trying to do the best those for whom she needs to source internships, and I have no doubt she, the organisations she works with, and any interns placed would work in an ethically fashion.

“DemoMax”: looking at Scottish democracy.

The Electoral Reform Society Scotland has been running “an inquiry” (I’d call it a series of meetings!) into looking for a better model for politics, or what politics should look like – what it calls “Democracy Max” – or DemoMax. (A nod to the third, unexplored (and unanswerable) question in 2014’s Scottish referendum on independence, “DevoMax“.)

I came late to the DemoMax party, attending a public meeting last week. It felt like I was coming in half way through a conversation.

There were three speakers, who varied in their passion and direction, discussing three themes (already set by “the people’s gathering” and some roundtable discussions): participation in politics; sovereignty of the people; and the mechanism of engagement. After each speaker, there was a bit of open discussion and then a show of hands vote on a specific question set. These were different, but related, to the three questions set out on the ERSS website, namely

  1. Sovereignty of the people – How do we return more power to the people?
  2. Defending our democracy – How do we stop vested interests having too much influence?
  3. How do we write the rules – How do we get the checks and balances our democracy needs?

(I didn’t write down the questions we were asked to vote on, and I can’t find them on the website.)

A bit about the process. Despite the efforts of facilitators, I didn’t feel it worked very well. The setting – a university lecture theatre – didn’t really engender debate. We were constrained to speaking to our neighbours, followed by a “feedback” session after each speaker. The votes seemed a particular waste of time, since we didn’t know the detail of what might be proposed: I abstained in them all, being assured that would be taken as a need for more information. (Though the lead facilitator’s omission to count abstentions to the first question didn’t bode well – he had to be prompted by a member of the audience to do so.)

The evening was held under the Chatham House rule. I’m not sure if that extends to the three main speakers or not, but in case it does, I’ll respect it and not say who said what.

The evening opened by postulating that there was something wrong with the state of political parties in the UK. The Hansard Society Audit of Political Engagement [pdf] shows decreasing levels of engagement with the political process (p18), which the speaker blamed on parties: he reckoned people were disillusioned and detached, that parties were suffering a crisis of their elites, and that they were hierarchical, bureaucratic, tribal and adversarial. I agree. But he also though parties were essential – indeed, he believed that if political parties didn’t exist, we’d have to invent them.

On that, I really don’t agree. The subtitle to “Democracy Max” is “Politics is too important to be left to politicians.” Politicians are what you get with political parties. They want power. (I hope they want to change things for the better too, but power is their tool.) The speaker didn’t believe non-hierarchical systems could work, but there was no (public) discussion of the role social media might play, nor on the distributed power demonstrated by the Occupy movement (despite ERSS listing OccupyEdinburgh as one of the bodies involved in the process). The National Council for Voluntary Organisations reckons

…[p]eople are now increasingly drawn towards single issue campaigns and organisations providing opportunities for involvement that cut across traditional lines of division between political parties. This allows people to engage in a less structured and less formal way [pdf] (p2)

I don’t think we need hierarchical, bureaucratic, adversarial political parties. But then I’m a strange beast who believes that coalition is a viable way to run a country…

The second section of the evening looked at the democratic deficit. Interestingly, despite the previous discussion, the proposed solution was to have more politicians: or at least, more elected officials. Whilst France has 125 local councillors (or equivalent) to every member of the population, Spain about 700 and Norway 800 (figures quoted during the evening – I haven’t tried to verify them), in Scotland that ratio is 1:4,270. European countries generally have many more councillors than the UK, and it was suggested that by devolving power as low as possible locally people would have more direct interest in political decision making. I was sitting next to a Spanish (Catalonian) national who disputed this – he reckoned that whilst political issues are gripping Spain and more than a million march in favour of Catalan independence (against the meagre 5,000 who turned out in favour of Scottish independence two weeks later), people were no more engaged in Spain than Scotland. This is only anecdotal, but salutary.

The UK has long had centralisation, both in Westminster and Holyrood. It makes sense to me that decisions are made as close to the issue as possible – as the speaker pointed out, the frequency of rubbish collection shouldn’t really be the concern of Westminster politicians. But how local is local? My street, my neighbourhood, my town? Who knows. And I am not certain that increased localisation will increase respect for politicians and the political process.

I did however like the idea that rather than central Government(s) pushing power down to local institutions, it should work the other way: a kind of zero-based political process, the default should be local decision making, and power only then passed to larger, more central organisations. Someone also talked about the myth of economies of scale – whilst economically big may be better, that isn’t the only answer: there are other issues to be taken into account.

The last speaker looked at how we might hold politicians to account. It was a fiery, heart-felt speech, proposing a “people’s chamber” for Holyrood to balance the power of MSPs – a “citizen’s assembly”. (Albeit that without a formal constitution, Britons are subjects, not citizens…!) This assembly would need to be representative of the population (neither Westminster nor Holyrood is, in terms of gender or race; or probably, age and wealth…), perhaps chosen by lot rather than elected (to remove the need for parties?).

Part of me thinks this is a great idea; part of me thinks it would be a disaster and unworkable. In a country as sparsely populated as Scotland, representatives would need to be based where the assembly was – even if it moved between cities and towns, that would mean the central belt most of the time (where 70% of the population is based) and those far away islands would feel as isolated as ever.

Would business people want to spend their time on the assembly rather than running their businesses (or making money, or paying taxes…)? Would there be opt outs?

Lots of questions, as the proponent of this idea pointed out, but no answers.

The idea of representativeness was interesting. Because the meeting to discuss DemoMax was anything but representative. It was pretty well balanced in terms of gender, but it was 100% white and, I would guess, uniformly middle class. I would also guess that there were few there who represented the political right. And everyone there was engaged politically. It felt ironic that the politically engaged should be spending their time discussing how to involve the politically unengaged – because of course, they weren’t there to talk for themselves. (I do expect and hope that ERSS will have other ways to reach out to those not happy spending an evening in a university lecture theatre.)

But I guess that is politics.

“I Am Seeing Things”. Or not.

I have had many conversations over the past few years about “the internet of things” – giving any object an ability to communicate, a specific URL and putting it online – particularly with Tony Hall and Martha LaGess; their interest lay in particular in what the internet of things might mean for cities and society – a kind of “quantified self” for buildings and social structures.

I don’t get it. (Actually, I get neither the internet of things nor the quantified self!) But that makes it interesting. So when I learned about I Am Seeing Things a few weeks ago, I signed up.

It was an interesting day, though in some ways it didn’t live up to expectations: the papers were not as focused on the internet of things as I had expected, and there was a fair bit of academic dissociation from reality. (But hey, it was a symposium held in a university – clearly my expectations were off-kilter!) There was a lovely moment when one of the organisers described playing with augmented reality apps on his phone in the park; he turned to his companion, expecting her to react like ecstatic characters in a Vodafone ad – but instead she said, “You’re a sad little man!”, demonstrating the gap between virtual and physical reality!

I think that gap is crucial. There are some neat tricks one can do – or experience – by connecting everything to the internet: the ToTEM project allows people to record their stories about objects, linked by a QR code, for instance – every object could have a narrative, adding to the way one experiences the object. But fundamentally I think most people respond with a huge “so what”, and get on with their lives.

There is also something a bit too exclusive about it all – a bit too “clever-clever”: partly this is down to the use of QR codes, which I feel is currently limiting – users have to be pretty interested already to use QR codes, and you are excluding anyone who frankly can’t be bothered to download an app or find out what the pretty chessboard patterns actually mean. (As an example of how bizarrely dissociated from reality people that use this stuff – mainly marketeers, I guess – can be, I saw an advert in last week’s “The Economist” for IMD. It contained a QR code – and they want you to download an IMD-specific app to your phone, then scan the code and see what happens. Because that is so much easier than just, say, providing a URL. I mean, FFS! It’s not just me that thinks so, either.)

You are also adding to the work people have to do to get at your object, story, information or other experience – in effect pushing them away, rather than bringing them in. (As you probably noticed, I don’t really get QR codes…)

There were several interesting presentations, though some seemed only tangentally connected to the internet of things.

My reaction to Mark Shepard‘s vision for the Sentient City veered from “so what” to out and out paranoia as the ability to track things through the physical world (the internet of things apparently started up as a way to better manage logistics, using items tagged with RFID transmitters) turns into a Orwellian surveillance nightmare. The smart city could seem more like a prison than we would care to admit.

Mike Philips talked about using sensors or “ecoids” – Arduino-like systems – within the environment, detecting and managing dynamic systems: pollution, for instance, or the internal environment within a building. Such systems interact with people already – the nature of a building depends on the people using it – and tying in active monitors allows greater control and management. Including biological data from personal sensors – an extension of the “quantified self” extends the person into the environment: we are already part of the environment, not separate from it (and as Philips pointed out, we are ourselves environments for significant number of organisms – we contain more cells of bacterial than human origin!), and becoming part of the internet itself is perhaps the next step. Perhaps…

“Things” can take on a different meaning when they are connected. Chris Speed discussed how attaching stories to objects changes them. Using QR codes and the internet so that any object has its own URL, meaning can be stored in a readable database: objects can be tagged with meaning, and they can tell their own stories. (But they don’t: the stories are stored in a database; we put them there, we retrieve them; the objects are and always will be inanimate. It is our stories and our meaning we associate with them.) He reckoned this changes the value in objects – though of course this has been the case for valuable objects forever: a painting with known provenance is more valuable than one without. Most things don’t have stories attached to them – they are purely utility – and I’ll admit to remaining pretty sceptical of this.

Maria Burke and Irene Ng both took a business-view of value (a broad term!) and the internet of things: what it means for the value chain. This was a fascinating, hard-headed take on TIoT: what difference it could actually make in the way people do business. Value depends on context (as Speed had pointed out): connecting things to the internet changes both the value proposition and the relationship to the object. Value becomes more of the moment – an digitised object may have no intrinsic value until it is used, pushing value down the value chain. With the proliferation of mobile services, value becomes “on demand”.

Mike Crang took this one step further by following objects through their life to destruction and salvage. This was fascinating – the way objects become incorporated into others, attract meaning and stories (“social biographies”), and change and are destroyed. The meaning remains – “ghost stories” (or as Craig put it, “the afterlife of things”). Despite being the most functional of processes, there was real poetry here. Some people don’t want their objects to have stories or history – in the market for second hand clothes, one doesn’t normally want to know the history of the bra you’re wearing (unless it was worn by Madonna or Monroe!). But at the end of their lives, even waste materials can attract value from thoses who have been part of their history: naval vessels being scrapped attract souvenir hunters, often those who have sailed in them. Almost any removeable part can have value.

Throughout the day, inanimate objects on the internet of things seemed to develop their own identities and personalities: we anthropomorphise our objects in relation to ourselves. When discussing the internet of things, people talk about the objects tweeting, for instance. They’re not: a computer sensor, programmed to respond (still anthropomorhising…) in specific ways to particular conditions or data is doing just that. It is possible to have “Death” of an object is part of an natural (re-)cycle. But on the internet of things, the dead objects survive as digital ghosts.

Addendum: Tony Hall has directed me to this download on the internet of things: a critique [pdf] – which looks interesting!

(I also liked the artworks demonstrated by Torsten Lauschmann and Geoff Mann – but it was hard to see how they fitted into the internet of things: rather, they struck me as being digital art. I missed the connection. But here are a couple of works I enjoyed:

“Greed, Governance and Ethics”: a talk about corporate failures.

Stewart Hamilton spoke at the Business School on the history of economic bubbles and business failures. Unfortunately, he had a lot to go on. His main thesis seemed to be that we were incapable of learning from history: and governance and ethics were no match for greed…

I found four different kinds of failure in the sorry list of collapse that he ran through:

These are widespread market failures engulfing many organisations, often arising from speculative asset bubbles (in all those above, either commercial or residential property, but he could have included the 2000 dot.com bust, resulting from a bubble in internet company shares, or the Dutch tulip crisis of the 17th century, where the asset bubble involved the price of tulip bulbs – bizarre but true). In these bubbles, no one wants to be left out of rising asset prices, causing assets prices to rise further, pulling more buyers in – until something pricks the bubble and the asset prices tumble, leading to an economic crisis.

  • corporate malfeasance, such as

    • Enron
    • BCCI
    • WorldCom
    • Olympus (not mentioned by Hamilton, but a recent, agressive example)
    • Ferranti through its takeover of ISS (again, not raised by Hamilton, but one that affected a great many citizens of Edinburgh)

where illegal or unethical behaviour is widespread and systematic at a senior management and board level, with many people involved.

and perhaps RBS and HBoS – these last three all victims of the global financial crisis, but their collapse specifically related to bad management decision-making.

Not all of these cases resulted in the complete corporate collapse of the organisation in question – AIB is still going (albeit mired in tax evasion and overcharging issues), as is Olympus; RBS and HBoS survived thanks to government intervention.

Greed (from which stem fraud and other illegal and unethical behaviours) and incompetence are nothing new. The real problem is that corporate governance is no real counterbalance to them: similar issues seem to have affected UBS, which lost $2bn as a result of a “rogue trader” seems to have learnt nothing from the collapse of Barings, as a result of Nick Leeson’s illegal trading. Organisations have processes and controls in place to stop people exceeding their authority – and risking the bank. But these didn’t work at Barings or UBS, nor at any of the huge institutions like AIG, RBS or HBoS, nor smaller banks like Northern Rock. They didn’t understand the risks of the products they traded and held (and they weren’t alone – Chuck Prince, CEO of Citibank, said in early July 2007 “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing” – days later, the music stopped, and banks started to go bust – but not Citi (though it apparently came close).

Hamilton used AIG as an example of an organisation that was not only “too big to fail”, but more importantly too big to manage or regulate. He said AIG comprised of over 7,000 legal entities in 150 different countries, trading in countless different business areas. How could any one regulator – or the company’s auditors – know what was going on, and what or where the real risks were?

Hamilton reckoned the real problems lie when there is a combination of a dominant CEO and an ineffective board – the board failing to keep the CEO in check, particularly regarding the governance of poor strategy. (Of course, poor strategy may only be knowable with hindsight: Fred Goodwin was hailed as great leader after the takeover of NatWest by RBS, and it was perhaps only the timing of the RBS bid for ABN AMRO that was RBS’ undoing.) Large corporations attract strong leaders, though that might not be what they need. Strong leaders see attraction in growing their organisations – not least because, as Hamilton pointed out, the bigger the company, the bigger the remuneration (it doesn’t take long for greed to creep in!): and acquisition is the quickest way to grow. But maybe the least sustainable.

Throughout all this, I was unclear on the role of management education. Hamilton is emeritus professor at a management school, IMD; we were sitting in the lecture theatre of a business school. I have done an MBA; there was an ethics course, but little more – I don’t remember any specific teaching in, for instance, directors’ responsibilities. Anyone can become a company director. One cannot legislate for ignorance or foolishness; but requiring directors to be educated on their role might be a start.

Entrepreneurs and Scottish Independence: a debate.

The Entrepreneurs Club at the business school held a debate (jointly with MBM Commercial, a legal practice) about independence and businesses.

There were five speakers (plus Bill Jamieson in the chair, who recommended this report by ICAS on taxation and independence): J.P. Anderson; Gavin Gammell; Jim Mather; Ian Ritchie; and Ian Stevens. Of these, one was vehemently pro-independence, one vehemently pro-Union and three uncommitted but, I felt, leaning pretty much towards the Union’s camp. This surprised me somewhat – it made the panel feel pretty much unbalanced (albeit in a way that I strongly agree with). Could they really only find one business person who favours a “Yes” vote? (Also, why no women and no minorities?)

The two who felt very strongly both appealed to largely emotional arguments, in ways that, judging by the questions following the speeches, didn’t go down particularly well with the audience. The pro-Union speaker talked about the shared history of the Union, our strength as part of a large nation, and the fear of economic collapse under independence. The pro-independence speaker talked of England (and, specifically, London) creaming off capital and talent, how it was time for Scotland to stand on its own two feet, and how Scotland had to find its own destiny. His speech was painfully low on detail, and frankly jumped all over the place – though I will admit that I was never likely to be convinced by his emotional appeals.

The key issues for the three uncommitted-but-leaning-Union seemed to be

  • the damage caused by long periods of uncertainty (for a minimum of two years until the referendum, and in the case of a “Yes” result, perhaps another five whilst all the details are decided and the Union is unravelled), particularly regarding
    • relationships with EU and NATO
    • the currency
    • taxation
  • access to capital and markets
  • risks to funding research and education (specifically, Scottish institutions receive more from funding bodies on the basis of their research projects than a per capita share; and Scottish universities currently charge fees of English students which they would be unlikely to be able to do under independence, since they can’t charge students of other EU nations)
  • regulation, particularly of financial institutions (an independent Scotland could not afford to be the lender of last resort for either RBS or the HBoS arm of Lloyds, both of which might therefore need to be headquartered in England)
  • the role and size of the public sector in Scotland

Neither those for nor against independence were able to come up with a “business plan” for their outcome – indeed, one of the weaknesses of the Unionist argument seems to be the inability to produce a positive message for the Union: I agree we’re “Better Together“, but where are the positives of the Union (as opposed to scare stories)?

The crux of the debate came down to the inability of the “Yes” campaign to provide answers to many questions, so that people don’t know (and won’t know by the time of the referendum in two years’ time) what they’ll actually be voting for. Not their fault, necessarily (though the SNP government has been woeful in its obfuscation), but clearly critical for the key “don’t knows”.

The results of the poll at the end of the debate were:

77% vote No

Pretty categorical: 77% of attendees voted “No”, out of 115 votes cast (which means about 35 people, or 23%, couldn’t be bother to vote Or, more positively, a 77% turnout!).

Thoughts on “Shareholder Value”…

A couple of weeks ago, after yet another corporate tax avoidance wheeze came to light, I was having a Twitter-based conversation with Steve and Gordon about “shareholder value” – specifically, whether the need to maximise shareholder value was dictated by company law. (The answer, by the way, is – predictably – “it depends”. More on that later!) It echoed something that economist Robert Shiller said when he spoke at he spoke at the RSA last May – he said something like the pursuit of shareholder value was so enshrined in (US common) law that social entrepreneurs needed new legal forms of organisation structures to do what they wanted to do – otherwise they could be sued for failing to maximise shareholder value. (I wasn’t convinced by Shiller’s argument that a new form of company was needed, at least within the UK.)

These exchanges made me question the concept of shareholder value: my background in finance meant that I took shareholder value for granted – a no-brainer: it was the orthodoxy when I was training, over twenty five years ago (that’s the late 1980s, in case you can’t do the maths!), and again, fifteen years later when I did my MBA. It struck me as being good to review my understanding of shareholder value.

“Shareholder value” – there are many definitions, but this one seems simplest:

the value that a shareholder is able to obtain from his/her investment in a company. This is made up of capital gains, dividend payments, proceeds from buyback programs and any other payouts that a firm might make to a shareholder

– is the be all and end all of management. It stems from the separation of ownership of an limited companies by shareholders from the management of those companies – the principal-agent problem. By focusing on shareholder value, managers should align their interest with shareholders.

I still think this is simply stating the bleedin’ obvious: managers of a firm should manage the firm in the interests of the owners (the shareholders). It is the same for all employees – if you behave in a way that is detrimental to the company whilst performing your duties, you are likely to be sanctioned.

In financial decision making, maximising shareholder value is often synonymous with maximising the net present value of future income streams – calculating the discounted cash flows of a company. That is essentially how the market prices of share are estimated (and they go up and down as the market reassesses those future values). Allegedly.

This gives a relatively simple way to estimate shareholder value, and companies regularly assess new projects to maximise shareholder value.

The duties of directors to act for the advantage of shareholders is set out in the UK Companies Act 2006 (and previous versions of it, too!). But CA 2006 goes beyond its predecessors by establishing “enlightened shareholder value”. Section 172 of the CA 2006 states

(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company’s employees,
(c) the need to foster the company’s business relationships with suppliers, customers and others,
(d) the impact of the company’s operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

So whilst the company is to be run for the benefit of its members [shareholders] (s172.1), it requires a long term view (s172.1.a), consideration of employees (s172.1.b) and other stakeholders (s172.1.c and d), and maintaining a reputation for high standards (s172.1.e). Shareholders come first, but clearly CA 2006 reckons that the best way to maximise the benefit for shareholders is through its relationships with others. And, though I’m not a lawyer, I reckon that s172.2 means that the directors have discretion to do things other than in the immediate interest of shareholders for a longer term benefit. (Like making contributions to charity, perhaps?)

In the US, corporate law is set at a state level; for historic reasons, though, the small state of Delaware has over 50% of company registrations, and they are determined by Delaware General Corporation Law ((DGCL). This doesn’t set out directors’ duties, which are governed instead by common law.

The key ruling seems to be Dodge v Ford Motor Co (1919): Henry Ford wanted to expand production the company (of which he was the major shareholder) for the benefit of employees and customers – cutting prices in the process. (A strategy of going for growth and market share at the expense of profits.) The Dodge Brothers objected, and the court ruled in their favour:

A business corporation is organised and carried on primarily for the profit of shareholders. The powers of directors are to be employed for that end.

Shareholders have primacy.

This might seem unequivocal, but of course it isn’t. There is a huge amount of discretion for directors.

In public companies shareholders will have a huge range of objectives. Some may want a stream of dividends to supplement their income now; some might want future capital growth; some might simply want to have a say in what a company is doing (like protester at BP’s AGM). The CA 2006 covers this in s172.1.f – “the need to act fairly as between members of the company”.

But most shareholders are shareholders because they want some form of their wealth to increase through income or capital growth. The UK stockmarket was, in 2010, owned 11.5% by individuals, 41% by financial companies and institutions (pension funds, unit trusts, insurance companies and banks) and 41% by “rest of the world” (overseas financial companies and individuals). Anyone with a pension plan or investment has a direct or indirect investment in listed public companies.

Those financial institutions are increasingly measured by their relative, often short term performance: fund managers (the people managing the share portfolios of those unit trusts, pension funds and insurance companies) are measured on their quarterly performance, and so they assess the shares in those portfolios on quarterly performance as well. Focussing on “shareholder value” allows them to do this.

Additional focus on shareholder value has come from the rise of shareholder activism – particularly from hedge funds. Activist shareholders are nothing new – the Dodge brothers in Dodge v Ford were activist shareholders: they wanted to influence the company’s strategy in a particular direction.

There is no time-frame for shareholder value, which is what makes it rightly subjective: focus on the short term profit, like many hedge fund managers, and you’ll stuff future value. Focus on customers, employees, suppliers and (erm…) the broader community – focus on relationships, if you will – and your business will grow for the future but perhaps at the loss of those short term gains.

For instance, Starbucks may have maximised its current shareholder value by legally minimising its corporation tax liability, but at the expense of its reputation once the story broke and, if customers act on this knowledge and choose to buy someone else’s coffee, future profits.

I know which I prefer.

Where I Stand on Scottish Independence

Much of my last post on “A Just Scotland” concerned the constitutional settlement for Scotland, and in particular the outcome of the proposed referendum in 2014 on Scottish independence.

I rarely post here about overtly party political matters, though much that I write about is “political”; but the arguments for and against independence go beyond (or, at least, ought to go beyond) party politics, and I thought it only right that I should explain where I stand on Scottish independence.

I have already made up my mind how I’ll vote (though of course I have plenty of time to change it – and if I do, I’ll post about it!).

I am against independence.

My decision stems from three arguments, any one of which I think would stop me voting “yes” to independence.

The first is the outright uncertainty in what we are voting for. Fortunately, the recent “Edinburgh agreement” restricts the referendum to a single question on independence. (The precise wording is being overseen by the Electoral Commission – the wording of the question may make a big difference to the outcome.) But quite what a “yes” vote may mean is unknown: in the EU or not, in NATO or not, contributing to UK armed forces or not, in sterling or the euro (or neither) or not, the amount of debt UK national debt that will be allocated to Scotland… The list of unknowables is long. Some of these might be decided – or at least a policy decided – before the referendum, but much which be decided as part of negotiations should there be a “yes” vote. Which of course means that we won’t know what we’re actually voting for in 2014.

The second factor is the complexity. Scotland and the rest of the UK have been so closely linked since unification in 1707 that common institutions are intricately tangled, and untangling them will be difficult. Rebuilding these from scratch would be costly. One of the advantages of union is the economies of scale resulting from being part of a larger whole. At its most basic, having the infrastructure for tax collection in place is a huge boon. (Imagine the economic hiccup in switching from one tax collection system to another: just as when one changes jobs, the Scottish government would need to build up a reserve to tide the country over the gap.) It might be possible to outsource much of the bureaucratic infrastructure – I’ll bet the UK government would happily do the job (for a cost). Or maybe not: HMRC might just laugh at us, and not hand over their share. Scotland would have minimal leverage. And no representation. Even if the Scottish government were able outsource the bureaucracy for so much of our day to day lives back to London, what then would be the benefit of independence? Nothing would have changed.

The difficulty for business would be immense: the large number of cross-boarder businesses which would, one way or another, need to account for their Scottish and other UK operations separately would make this a vast, and expensive, task. (I recently had a conversation with a friend who had been working on the transfer of over 300 RBS branches to Santander – a deal that has subsequently fallen through. Both organisations had large teams working on this, and the complexity of the process was mind-boggling.) Separating two countries that have been so tightly linked would be several times more complicated – an enormous and costly task.

It is also possible that there could be a large number of talented people who migrate from Scotland to greener grass south of the boarder if Scotland gains independence, leaving the country financially and culturally poorer.

The last, and frankly killer, argument is economic. Scotland’s economy is inextricably tied up with England’s. Excluding oil and gas, Scotland exports goods and services (excluding oil) worth £45bn (2010) to the rest of the UK (ie England), more than twice the £22bn it exported overseas [pdf]. (Of the £22bn of international exports, £10bn went to the EU, £4bn to the USA and £2bn to Asia.) For business reasons, it would make sense to keep sterling: the costs of transacting in another currency could be very large.

There are at least two other options: Scotland could join the euro (though it is doubtful that could take immediate effect – the Maastricht criteria for joining the euro have a minimum of a two-year lag period, during which the nation’s currency must be in ERM II (which sterling would not be, of course); or Scotland could issue its own currency (like Irish punts before Ireland joined the euro). Given the current state of the euro and the stringent economic conditions being set by the European Central Bank, it is unlikely the Scottish government would chose that path. And the costs associated with establishing its own currency (which would have no value in the money markets and which would impose large transaction costs on business) would, I believe, make this a non-starter.

(The SNP states that “…on independence day … the pound will be our currency“, but there are many views which dispute the workability of this.)

Without an independent currency, in what way could an economy be independent? Any economic decisions made by an independent Scottish government would be subject to decisions on monetary policy decided in London or in Frankfurt – that is, fundamental decisions on interest rates and monetary supply. Fiscal policy – tax raising and spending powers – would be determined in Scotland, but it is fair to assume that the yield on Scottish government bonds (the rate of interest charged by the money markets) would be higher than that on UK government bonds, if only because the market would be so much smaller (and hence less liquid). It would therefore cost more for the Scottish government to borrow money to fund its activities.

Either way, the Scottish government would have its hands tied – by the Bank of England, the European Central Bank – or even by the financial markets. It would be independent in name only, and at great cost.

And that is why I am against independence.

Other sources I looked at when trying to set out my views include