Tag Archives: economics

RBS – My Part In Its Downfall…

Actually, I don’t think I had much part in the downfall of RBS, although I did work there for twelve years from 1994.

I am about to read an account of the bank’s collapse – Making It Happen, by Iain Martin (I also want to read Shredded: Inside RBS, the Bank That Broke Britain by Ian Fraser, but it wasn’t out in paperback when I was buying) – and I thought it would be a good idea to jot down my thoughts about RBS and its fall before I did so.

I don’t believe I have any special insight into RBS, and I don’t think I will have anything to say that isn’t already in the public domain. My job was far too lowly for that. My redundancy settlement, eight years ago, also had a clause about not bringing the bank into disrepute, but I think RBS has done a pretty good job of that without any assistance from me since I left.

DSCN5129
RBS flagship branch in St Andrew Sq, Edinburgh.

I joined RBS over twenty years ago as an analyst within a large change programme called Project Columbus, which, after a couple of bad years for the bank, was established to rethink the way the bank worked. It was Columbus which put RBS back on track and gave it the muscle and discipline to acquire NatWest in 2000, after a bidding war with local rival Bank of Scotland. (How many firms contain the name of their main rival within their own? People always confused RBS and BoS.)

Columbus refocused RBS on its customers. It brought in much better costing of its products and services – before, the bank hadn’t been able to tell how much it made or lost on each customer; it split (“segmented”) its customers into specific types, depending on the type of business (individuals – retail – and three different types of enterprises); and it established different types of specialist customer managers to meet the needs of those different types of customers, and in doing so it removed the generalist bank managers from branches.

Goodwin joined RBS in 1998, after Columbus was completed, as deputy CEO to George Mathewson. Goodwin masterminded the NatWest takeover.

By chance, I was one of the first RBS staff into NatWest. I had been at meetings in London the day before RBS took control, and, looking for people who could act as a presence, I was told to stay down in London. Three Jaguars drove a small raiding party from our midmarket hotel – there had always been a focus on cost management at RBS – to NatWest’s headquarters in Lothbury, in the shadow of both the Stock Exchange and the Bank of England. Fred Goodwin, the chief executive; Graeme Whitehead, the FD; Neil Roden, the HR director; Tony Williams, head of HR operations and systems (or something like that). And me.

(Actually, there were one or two other guys, too – I think we were six in total. All men.)

It was a symbolic occasion. Whitehead was wearing a kilt. There was little for me to do; I was secreted away in a small room, twiddling my thumbs, whilst the board directors established what there rules were.

At lunch, though, we all sat in the staff canteen, in a prominent spot; making a point. Jocks in kilts. This was a change. This bank was under new management.

* * *

Up until the NatWest takeover, RBS has been a medium sized regional bank. After it, it was (or saw itself) as a global. Before, it owned Direct Line, an insurance company, Citizens, a similar sized regional bank in north east USA, and a few other businesses. (The one that I always remember was Angel Trains, a train finance house that was spun off a few years later.) NatWest gave RBS global clout.

I believe the NatWest takeover was successful, though it probably lay the seeds for many of the problems that beset the bank later on.

RBS was a lean operation, with costs tightly controlled, and the same ethos. Fred Goodwin had earned the nickname “Fred the Shed” whilst at Clydesdale fire the way he shed costs – largely people (or alternatively, “Fred the Shred” – “shredded”). There was little fat at RBS, and there was much fat to be shed from NatWest. There were extensive wine cellars, an art collection, and lots of business units. And lots of efficiency savings to be made. RBS had a low cost/income ratio, one of the key measures city analysts and investors use to measure bank performance, and shifting NatWest’s operations to a similar C:I ratio would generate lots of profits.

The purchase of NatWest was based on cost cutting and removing duplicated services – essentially, economies of scale. NatWest, for instance, had something like twenty seven different versions of PeopleSoft (the database system used by HR departments) – which didn’t talk to each other. It was similar across other systems – there were multiple tax and accounting systems, all of which needed reconciling. Trimming the fat wasn’t difficult. (Bear in mind that there were many redundancies, too – a lot of people lost their jobs, from both NatWest and RBS.)

But relatively quickly RBS started to become as bloated as NatWest. When I joined RBS, the emphasis has been on servicing the customer-facing parts of the operation: I worked in a head office department which had cobbled together, second hand furniture in a building above a bus station; if you opened a window, you got a whiff of diesel fumes. True, this was somewhat the exception, but it made the point that we were an overhead, and what we were doing was working to make the customer-facing, revenue-generating parts of the organisation more successful.

RBS had central departments scattered throughout Edinburgh, many of them in somewhat dilapidated buildings, and it had been planned to redevelop a city centre site to house them all. After the NatWest takeover, Fred Goodwin apparently decided that something else was needed. Something out by the airport.

When Gogarburn was opened in 2005 – by the Queen – it seemed very opulent. There is an old investing adage – maybe from Jim Slater – that when a business starts investing in sparkly new headquarters, it is time to short the company. It would have been a very effective sell signal for RBS.

Gogarburn was very self contained. It had very good restaurants, a health club (with a full length swimming pool), a social club and bar, several shops, and a couple of Starbucks franchises. It had a nursery and a management school, delivering courses for the large numbers of executives it now had. It had a separate directors’ wing. There was no reason to leave.

Whereas RBS had been part of the city, after Gogarburn opened it was apart from the city. Gogarburn was isolated, and RBS became very insular. Being in Gogarburn felt like being part of the “Truman Show”. Everyone there worked for RBS. There were no more serendipitous meetings with contacts from other firms. You only saw people from outside RBS at Gogarburn if they were there for a specific meeting. Whilst communications within RBS undoubtedly improved, a broader understanding of and communication with those outside plummeted.

It was as if RBS saw itself above all that.

(I don’t think I lasted a year at Gogarburn, taking the opportunity to leave when I was offered a redundancy package during yet another internal reorganisation, in 2006.)

* * *

There were stories that Goodwin was intricately involved in the design of Gogarburn. Many may have been apocryphal – such as one saying he had personally been responsible for sending a shipment of marble back because it was the wrong shade, or that he personally spoke to the CEO of Vodafone to get a mast put on the roof to ensure adequate mobile coverage (under threat of removing the RBS contract). Either way, it was apparent that he was involved in details of RBS, rather than delegating and letting others get on with it.

He apparently held early morning meetings – “prayers” – add which he would grill his direct reportees. Failure was not an option. Some described his approach as bullying. It certainly don’t seem to have been particularly collegiate or collaborative. I don’t imagine he was easy to work for. The watchword was JFDI – “just ffffing do it!”

This permeated the firm, I would say. People were not happy making mistakes or getting things wrong. Success at any price. Thinking too much – or at all – was seen as a weakness. Decisions were made quickly and, once made, that was that.

Success at any cost is what probably broke the firm. When Barclays bid for ABN Amro (a year or two after I had gratefully left RBS), it was seen as a risk to RBS’s dominance – it’s claim to be the biggest bank in Britain – and, as a part of consortium of other firms (Santander, which had a long standing relationship with RBS, and a Belgian insurance firm), a counter bid was made. ABN Amro would be broken up and each member of the consortium would get the bits they wanted. RBS wanted the US retail business, which fitted well with Citizens, and some of the investment banking bits.

I’m sure the figures stacked up, at first: the deal would have made sense. But then as part of its defence ABN sold its US retail arm. And more importantly, the downturn started, and kept going. Barclays had dropped out. RBS continued. And ended up paying a lot of money for lots of toxic assets. And effectively going bust, and relying on a UK government bail out.

Between 1994 and 2007, RBS made accounting profits of £55bn before tax, and £39bn after tax. In 2008, it wrote off about £47bn according to Robert Peston on BBC Radio4’s “Today Programme”. In the seven financial years 2008 to 2014, RBS has has reported total losses attributed to shareholders of, by my calculation, £49bn. Basically, RBS hasn’t made any money since 1994, despite paying billions to the government in tax and to shareholders as dividends.

* * *

Personally, whilst I believe Fred Goodwin was the driving force both of the bank and the sour deal, I don’t believe all blame for the collapse of RBS lies with him. A lot does – it was his strategy – and his hubris which pushed forward with the ABN takeover.

Wanted Poster at Holburn Station (London, UK)
From takomabibelot on flickr, used under Creative Commons licence.

But many other people need to share some – or even much – of the responsibility:

  • other executive directors – the management team – should have been up to challenging Goodwin’s behaviour, including the more bullying, trampling aspects of it. I don’t know if any doubts were expressed by other members of the management team, but they probably should have been. Except that they would probably see their jobs and salaries get bigger as a result of the takeover. Could they be objective, even if they could stand up to Goodwin? Groupthink might also have played a role: it might have been hard to break rank. No one loves a naysayer
  • the board – particularly the non-executive board members. It should have been their role to make Goodwin and the management team accountable. Perhaps they did, though they all left under a cloud following the collapse of RBS
  • other employees. It is hard to tell the boss he’s wrong. It’s harder when the response is “jfdi!” But someone must have had doubts – all those people poring over the figures in finance; all those providing management training in the brand new management school
  • shareholders. Under market capitalism as practiced in the UK, shareholders are more likely to sell a firms shares than try to engage with management about corporate strategy that isn’t liked
  • regulators. They could easily have put an end to the folly. Following the crash and the collapse of RBS, the role if regulators had been greatly changed. (Until the next crash …)

I must point out that I fall into two of those categories – though as a fairly insignificant employee and a very small investor, I believe I had little influence (but lost a lot of money!).

I believe the real issue – the blame – lies with the board, both execs and non execs. They had oversight of the strategy and the deal. When the crash came, they should have pulled the plug. RBS would have looked weak – it might even have become a takeover target itself – but it would have survived the deal. Instead, they pushed on, buying illusory assets which quickly turned to dust, taking much of the UK economy with it.

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Hans Rosling on “The Big Picture”

My first event in this year’s Edinburgh International Science Festival was to hear Hans Rosling give a statistics lecture.

This wasn’t the typical kind of statistics lecture; I reckon I have had at least four stats courses over the years, and whilst I know enough to know what to do (or where to find out what to do), I think it is fair to say that I don’t really get statistics. I can do it, but it never really makes sense. And all those stats lectures were dull, dull, dull, and dry.

This one was different. Not talking so much about stats as our ignorance of stats, and largely based on data rather significance tests, Rosling was as much entertainer as statitician. (I think on of his slides described him as “edutainer”.)

He was talking about how numbers can be used to describe the world – not to the exclusion of other inputs, but to produce a rounded picture.

The bulk of his talk was about population growth and world poverty, and the causes of change in these global phenomena – largely economics. In between, he told stories of his life amongst the numbers, when to trust them and when not. (“Not” seemed to be mostly when you don’t actually have the data – he highlighted how wrong our assumptions about the world can be.)

Rather than try to reproduce what he said (without the laughs), here are some of his TEDtalks covering similar issues…

…on stats

…on poverty

…on population growth

All the data and the manipulations he used can be viewed on Gapminder, where one can play around with the data and visualisation. A great way to while away the Easter break…

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.

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.

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.

“A Just Scotland”?

Last month, just after discussing “caring capitalism“, I spent the day at an event organised by the STUC to consult on A Just Scotland.

The campaign describes this as a “more equal and socially just Scotland”. This is undeniably a worthy aim but it doesn’t actually say what it means by “just”: equal income, wealth, oropportunity? How would we know if we had got there – and can we ever get there?

I’ll admit to being right outside my comfort zone: whilst I had known that it was organised by the STUC, I hadn’t expected it to be quite so old-world (party) political. As an open meeting, covering such a broad, important topic, I had expected a wide range of views and stances. As it is, I was way to the right of just about everyone else there, and there was a somewhat lazy, unquestionning attitude from other attendees (not necessarily the organisers or those speaking from the platform) that everyone there was a socialist of one form or another.

For me, the objective of “a just Scotland” is way beyond politics. Though prompted by the desire to explore what Scotland could be like following a constitutional settlement on independence (or “devo max” or “devo plus” or – whatever!), and the STUC wanting to help shape political thinking, seeking a just Scotland is also way beyond independence: it ought to be a valid political goal whatever the outcome.

As well as old-school politics, the meeting also felt old-school: there were pre-prepared papers from the STUC, and then points from the floor – but little real discussion: the way the meeting and workshops were managed meant the audience could make their points but not really engage in dialogue with each other. I think a freer discussion might have prompted more debate – personally I’d have gone for an “unconference” format to fully explore the issues and come up with actions for engagement (though you would have expected me to say that). I’m a bit worried that by raising the topic and setting a political agenda: it is too easy to then leave it to politicians to deliver; if that had been a good idea, the STUC wouldn’t have needed to have a series of discussions to set the agenda, because politicians would have had social justice as an objective long ago. (I don’t think this is something one can just lay at the door of the coalition – nor even the 1980s, Thatcherite Conservative party: measured by the Gini coefficient, income inequality increased during the last Labour governments.)

Peter Kelly of Poverty Alliance ran through some frankly disturbing statistics on the impact of poverty, particularly on children. He said 20% of children live in low income households. (The Scottish Government’s figures show 15% of the population in “relative poverty”. Interesting, they also show the Gini coefficient for Scotland to be lower than Great Britain as a whole – meaning Scotland has a little less income inequality. I couldn’t find figures for child poverty on the Scottish Government’s site, despite a link saying they’d be there, but the End Child Poverty campaign shows 35% of families with children in Glasgow are on benefits, and whilst the average elsewhere in Scotland comes out at about 18%, the large population of Glasgow might give 20% across the nation. Of course, defining poverty is one of the ongoing difficulties.)

His main point was that these statistics are not fixed: they are the result of choices politicians – and their voters – make. Low pay has persisted for many years; the gap in education between those in poverty and those not lingers for years, with a youth unemployment rate of 12% pre-dating the recession. He saw these as issues of power and democracy – and addressing them would cut across reserved and devolved constitutional powers.

There were several comments from the floor. Most powerfully, I thought, was Andy Myles from Scottish Environment Link, an umbrella body for environmental NGOs, who said that climate change was more important than constitutional change: that is, in making decisions about Scotland, we should ask what it is we want: Scottish Environment Link have set out what they think [pdf], and they are hard to argue with.

Angus Reid read out his “Call For A Constitution” – and again, it is hard to argue with his goals. (This could be an issue: I agree we should have less poverty, more equality, better care for the environment, and everything… I want it all – but there are bound to be some conflicts: do we just leave it to the politicians to decide the priorities?)

These things are of course the nuts and bolts of politics. Someone else pointed out that the political choice people make in Scotland, whilst similar to north England, Wales and Northern Ireland, differ from those of south England, where much of the nation’s wealth is now concentrated.

There were two workshop sessions and several that sounded interesting, so I picked the two that were most closely attuned to my interests. First up was a discussion on the economy and fair taxation. There wasn’t actually much discussion about taxation – somewhat surprising given how much tax has been in the news recently – and a lot about the economy.

Economic arguments seem to be key in the debate about independence – and of course there are rarely clear answers in economics. STUC is calling for changes to the economic model to make it more just – moving to fair, progressive taxation and a distribution of wealth from the rich to the needy; but I couldn’t help thinking that much of the STUC’s thinking is rooted deeply in the old economic model of 20th century industrial orthodoxy – such as seeking to maximise employment. (The STUC’s job is of course to act for the benefit of its members – those employed, largely in the public sector.) As those present discussed way to reintroduce growth to the Scottish economy, I was once again struck by the thought that if radical change is needed, it won’t be obtained by working within the same old economic models which have clearly failed to deliver over the past fifty years.

In a world dominated by global markets, the options for Scotland – independent or otherwise – are limited. Someone pointed out that there is sufficient wealth in the world, but it is unequally distributed. Of course, in global terms, even the poor of Scotland are probably comparatively well off.

The Scottish government does have some limited tax raising powers: it could impose an additional 3% of income tax (the Scottish government held a consultation on local tax raising powers a few years ago – but using such powers might be political suicide), and it controls council tax (held static for several years – a potentially undemocratic, regressive move) and business rates. The Scotland Act 2012 will give the Scottish government more tax raising powers from 2015, although according to Jon Swinney of the SNP, this will only account for 15% of all taxes raised in Scotland. (The rest will be covered by VAT, corporation tax, national insurance and so on.)

There was much discussion of the the nature of currency post independence. There seem to be three options:

  • maintain sterling
  • join the euro
  • establish Scottish “punt”

The last of these seems unfeasible since it would have no value in global markets: transactions with other economies would probably be denominated in pounds, euros or dollars. But if an independent Scotland had sterling or the euro, it would have no control over money supply and interest rates (we have seen how well this has worked for the smaller economies of the euro over the last five years or so). Scotland would thus not control its economy – and not really be independent at all. (For me, this is the killer argument against independence. Economically, it just won’t work.)

The second workshop I attended was on education, participation and democracy. (The briefing paper is apparently missing from the website.) Education is already wholly devolved, and the Scottish education system has always been separate (and many would claim better) than its English counterpart. The Scottish Curriculum for Excellence (on which I worked several years ago) is designed to deliver learning outcomes appropriate for each learner, for ages from 3 to 18 years (ie pre-school to leaving secondary education) and across all abilities. The curriculum is built around “four capacities” – creating

  • successful learners
  • confident individuals
  • responsible citizens
  • effective contributors

All very laudable, and clearly forming the foundations for a just society, I’d say.

In the discussion, education was suggested as the bedrock of democratic participation, and this is certainly encompassed in the curriculum capacity of “responsible citizens”. But about of quarter of Scots have problems with literacy or numeracy (compared with 16% for England – I’m not sure if the same things are being measured, but it is a guide; for the UK as a whole, about 20% are functionally illiterate). That is quite a big difference, and the Scottish Government has long had a strategy to improve adult literacy. (It also questions Scotland’s apparently superior education system.)

Comparatively low levels of literacy may also hamper economic development – and certainly reduce the options for employment.

It was said that poverty reduces participation in democracy, with a lower turnout in elections in poorer regions than rich. The Electoral Reform Society found a link between social exclusion and political engagement [pdf] – with “near universal association between political participation [electoral and political] and socio-economic status” (p20).

The election for the Scottish Parliament of 2011 had a 50% turnout whilst the turnout in Scottish seats in the UK Parliamentary election of 2010 was 64% – quite a significant difference. The difference is consistent, too: the 2007 Scottish Parliamentary election had a turnout of 52% [pdf], the Scottish turnout in the 2005 general election was 61%. I believed devolution was meant to increase engagement, but apparently this hasn’t happened.

After the workshops, there was a debate between Ewan Hunter, representing the “Yes” campagin, and Kezia Dugdale MSP representing “Better Together” (as the “No” campaign has styled itself). Frankly, Dugdale knocked Hunter’s contribution into a cocked hat – but then she is a professional politician. Hunter failed to address the topic of day – that of a just Scotland – focussing instead on the arguments in favour of independence. He highlighted one of the major problems with the Yes campaign – that voters don’t actually know what they will be voting for: the details can’t be worked out until the vote has decided. Sterling or Euro? Inside the EU or not? In NATO or not? Let alone what the financial settlement with Westminster would be – I’m sure HM Treasury would be more than pleased to offload RBS and HBoS and their billions of pounds of debt.

Dugdale did address the issue of a just Scotland, highlighting the SNP had rejected proposals for a “living wage” (which, lets face it, even Tory London mayor Boris Johnson has signed up to – albeit on a voluntary basis). She proposed to devolve power down to give communities more say (the Scottish government consulted on the Community Empowerment and Renewal Bill during the summer). My only caveat to Dugdale’s contribution was that her party, Labour, were dominant in the Scottish parliament for two terms, and failed to address the issues of poverty and inequality raised by A Just Scotland.

It was an interesting, challenging day; at a fundamental level, I agree with the objectives of the campaign for A Just Scotland, and believe that they are bigger than political parties and the old arguments between right and left; and indeed bigger than the constitutional settlement. Whatever the outcome of the referendum, these issues should be addressed: how to do that is a much bigger question.

“Caring Capitalism”?

There was a bit of an unintentional theme running through a couple of events and conversations I’ve been to over the past few weeks regarding the future of capitalism and corporations, and then last week Ed Miliband’s speech at this year’s Labour conference continued his emphasis last year on “predatory capitalism“.

Miliband was talking about aggressive capitalism which he saw as damaging the economy, and I doubt anyone could really disagree right now.

Last month I went to a talk on “caring capitalism” – perhaps the antidote to Miliband’s “predatory capitalism”. Focusing on social enterprise – as the speakers pointed out, a broad term with no real definition (though Wikipedia has a go) – as a means to create a more just society, a few different models were explored: though frankly none of them seemed particularly new.

For Helen Chambers and Mary Duffy, a social enterprise is one which exists specifically for social purposes, working within a commercial, for profit model – with a commnon principle “to do good”. Two specific organisations – Haven Products and Rag Tag ‘n’ Textile – were used as examples though the latter is a registered charity (and hence a not-for profit – although presumably just as many charities run retail, for profit operations, it does too). Both these organisations work largely for the benefit of their employees, providing opportunities to those who might otherwise not find employment.

Other objectives for social enterprises include working for the benefit of employees more generally, suppliers (such as fairtrade), the environment, and the wider community.

Whilst social enterprises might explicitly have such objectives, I can’t help thinking that most commercial corporations implicitly act in a similar fashion: a business which works against customers, suppliers or the community should not prosper, at least in the long term: if you work against customers, they will move (that’s what competition is about). Many commercial, profit-seeking organisations make large donations to charity – including banks such as the near-collapsed RBS. The rising interest in corporate social responsibility has focused investors, managers, employees and other “stakeholders” on organisations’ governance, ethics, ways of working and their internal and external relationships. (Much of this may be mere window dressing, though…)

Much of the talk was about social investment. It sounded like a wall of philanthropic finance was pouring into a small, undeveloped and fragmented sector: this could distort the economics and lead to imperfect allocation (one of the things markets are supposed to be good at – though the economic crisis has clearly dented that particular claim). But the amounts of money are still chickenfeed compared to the amounts spent by governments.

Nor is philanthropy anything new – Andrew Carnegie distributed his large wealth, endowing libraries, museums and universities; other “robber barons” such as Frick, Rockefeller and Vanderbilt did the same. Indeed, contrite financiers such as Michael Milken have tried to make amends through charitable donations and work, though the rich have long been using the gains – ill-gotten or not – to buy forgiveness.

Most social enterprises are small: perhaps it is easier of small organisations working outside the usual constraints of (non-social) investors “to be good”. Certainly large, international corporations seem to suffer from much of the criticism – perhaps because they are further from their suppliers, customers and communities: and of course one of the main advantages of large organisations – the ability to leverage economies of scale – means that someone, somewhere is paying more or getting less than smaller firms.

I still believe that outside a few industries – tobacco, arms and extractive industries, perhaps – all businesses benefit from “doing good”, if they want returning customers. Perhaps some organisation structures are better fitted for this than others – cooperatives, employee-owned firms or mutuals, perhaps. With businesses focused on customers, employees and suppliers, all organisations would be “social enterprises”: exploitation of one or oanother of these key groups would be to the detriment of the business.

Or what am I missing?

Trying to Understand the Financial Crisis…

Some time back, someone shared a new acronym with me: GFC. For those, like me, not in the know, this is apparently the hip shorthand for the global financial crisis – the economic mire that engulfs us all. It has been going on, more or less, for five years now, with every indication that it will get worse. It is its evolution from a banking crisis to a sovereign debt crisis – at least within the Eurozone – that gives me my optimistic outlook. I’ve been trying to write this post for ages, but every time I do, the story gets bigger and and seem to be constantly changing. It still is.

I have written this in an attempt to understand how we got here. I must stress that, whilst I have taken a couple of classes in economics, I am not an economist. I am sure I am missing large chunks, and I look forward to being corrected by people who have a greater understanding of these matters than I have.
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Trends About Trends

William Nelson and Richard Hepburn explored some long term trends in the UK – reassessing them and exploring new qualititative techniques such as crowd sourcing. Such trends have an impact on economics and government policy, as well as fundamentally affecting the way we live our lives (ten years ago I would never have guessed the impact carrying a mobile phone would have on my behaviour!).

The themes they identified were

  • changing structure of households (what Nelson called “home-alone v ‘all together now'”): there have been increases in young people staying at home, people living by themselves, couples cohabiting, and young people sharing till later in their lives.The current state of the economy and the jobs market is driving a lot of this as young people stay at home or have to because they can’t afford a place of their own (apparently leading to an increase in squatting in London and some novel approaches to communal living and working elsewhere), but of course it also has economic impacts. Immigration and demographics (which Nelson also covered) will have an effect, too.(
  • “smart v connected”: drawing on “the internet of things” – the ability to give any object its own internet identifier – Nelson argued against the need for “smart objects” (all those food-ordering fridges PR-savvy white goods manufacturers say we’ll be buying) but reckoned our homes would become more connected – but under our control. He foresees us using our mobile phones as universal controllers, switching on heating, lights and cookers remotely. As technology converged, he also believed that it would be gas or electricity companies who would own the interface, not the telecoms or media companies that currently own our broadband connections, prompting competition for control of our homes: remote controlled central heating might be the killer app. (Maybe Sky will buy British Gas?)
  • social networking to networked socialising: we’ve been living in a technology-mediated networked society since the advent of the telephone in the early 20th century, but we’re increasingly connected. The ability to carry the internet in our pockets has changed the way we behave. Whilst our lives might be more and more busy, we’re also procrastinating more: we might arrange to meet people, but the details – where, when, what – are more flexible and subject to change: we are less willing to commit to a fixed schedule, with frequent and repeat rescheduling. People are more willing to take the best offer that comes along (apparently 40,000 people are stood up every day!). A lot of this happens on mobiles – people are checking what’s on and booking more last minute tickets, which effects artists’ and venues’ planning and pricing strategies.Their is also an increase in “leisure as performance” – people tweeting or Facebooking (is that a verb? I guess so…) photos of themselves at events – the ease of one-to-many communications is turning us into a nation of show-offs – and sharing information about our plans to go to events becomes a currency. Interestingly, one doesn’t actually need to go to the event – you can share the information that, for instance, you’ve got a ticket for the Olympics (posting the details and a photo of the ticket, perhaps) before selling it on. Data about the event can be more valuable than the event itself.

    (It also means we are under self-imposed scrutiny: the more we share online, the more we are building the panopticon… And I am shocked that there is a data analysis firm called Panopticon. Maybe we get the future we deserve.)

  • the gender revolution finally happens: decades after the 1960s, Nelson reckoned that changes in gender relations have now become so normal as to cease to be newsworthy – and when things get boring, change has happened. (I know many feminists who may disagree with this; please don’t blame me for sharing his views with you!) There are now more female graduates than male, and they get better degrees; they’re also better at getting jobs than male graduates. Nelson said that women aged 20-29 now have higher hourly wages than men (I have searched the ONS website, which is full of fascinating data, but I can’t figures split by gender and age, so I’ll just have to take his word for it!).As women become more equal to men, they are becoming less equal to each other: there are growing disparities between women. And whilst pay hourly pay might have moved in their favour, women still spend more time on housework (in the US) and are the prime provider of childcare. It’ll be interesting to see if those roles change with women having the higher earning potential.

    There may also be pressure on employers to change their models of employment (strongly rooted in the early 20th century?) to cope with highly qualified, high earning women who want to fit in childcare and their home life, too: this might add pressure to develop more flexible models of employment.

  • ageing population: the “demographic timebomb” has almost become a cliche, but it remains important, affecting policy and opinions for decades. 2012 sees a spike of people reaching 65 – the results of a mini baby boom in 1946 and 1947 as soldiers returned from the war. Since Britain didn’t really recover economically for another decade or so – it was in 1957 that MacMillan asserted “you’ve never had it so good” – it won’t be until the 2020s that the wave of over-65s resulting from the 1950s baby boom reach 65.The ONS predicts that the proportion of over-60s will continue to grow whilst the proportion of under-14s is static and the proportion of those aged 15-59 decreases – hence worries of a decreasing working population having to support an increasing number of the old.

    None of this is news – the “demographic timebomb” has been written about for decades. But by looking at the detail, we can plan and change – both public policy and our personal choices. For instance, Willie pointed out the market for Saga will grow by 7% pa (I think – I didn’t write the figure down!), without the company doing anything at all. The effect of demographics on policy – the provision of health care, pensions and social care for the elderly, for instance, as well as indirectly affecting, say, transport, housing and industrial policies – and of course the economy

  • “the youth of today”
    It was in his discussion of youth that Nelson really challenged our assumptions. The young are not hoodie-wearing rioters drunkenly threatening passers-by: Nelson gave figures from the UK for reducing youth crime, decreasing youth drug and alcohol use and a decreasing teenage pregnancy rates – not the stuff of tabloid headlines.At the same time, parents are being more protective of their children – driving them to school and managing their leisure time (back to the panopticon there…) – in part driven by a culture of fear: children are taught about “stranger danger” when other risks may be more relevant. What effect will “paranoid parenting” have on future generations? Will they learn to assess risk if protected during childhood – surely a key part of growing up? And what will such cosseting have on our children’s future health?

These are just some of the trends that Nelson has worked on; perhaps most interesting is where they intersect: for instance, the effect of the changing nature of networked socialising as the population ages; or the changing form of households when examined through the lens of changing, less rebellious youth; or the impact of changing economic power of (some) women on household structures and the balance between generations.