News Comment

The machinations over the “rescue” of the US car industry have been spookily familiar for those  old enough to remember British Leyland in the 1970’s.

The idea at one point that GM and Chrysler would be merged sounded like the forced merger of Austin/Morris/Rover (BMH) and Triumph/Jaguar (LMC) that created BL in the first place.  Now huge sums of money are being offered by the US government to help the companies re-structure similar in some ways to the UK government’s nationalisation of BL in 1975.  Indeed it does look like the US taxpayer will own significant ot even majority shareholdings in both companies if the re-structure goes ahead.

What prompted this post is the fact that the UAW, the main union involved, has been asked to take a significant shareholding as well, to recognise healthcare and pension liabilities.

This piece in the FT also points out the key dilemma for the union and its members.  Good investment principles for pension funds are to diversify risk, so the shareholding should be sold down as soon as sensible, however the shareholding provides a significant incentive for the staff to do what they can to ensure the successful recovery of the business and continued employment of their members

So will they chose to operate like a worker’s co-operative?  Will they learn the lessons of  the Meriden Motorcycle Co-operative, again from the 1970’s?

Or will the whole deal fall apart and the two companies go into Chapter 11?

It seems like Google is about to fall foul of the regulators / politicians which to me highlights another aspect of the “too big to fail” idea described below i.e. at what point is a growing company perceived to wield too much power?  This is a particular problem in technology markets where new companies can go from start-up to domination in a relatively short period of time; Google 10 years, Microsoft 15 years and IBM 20 years.

It seems like dominant market players are going have an increasingly hard time of things over the next few years.  Part of this may be cultural for the companies involved in that the period of entreprenurial excitement will end up being a lot shorter and large company bureaucracy relating to external regulation arrive earlier.

The phrase “to big to fail” has been bandied around a lot over the last 12 months; specifically in regard to the (assumed to be unacceptable) cost to society of the failure of large banks and now to large manufacturing businesses such as General Motors and Chrysler.

There is no doubt that the failure of both large banks and manufacturers would cause significant immediate pain to both the local and global economies not just directly but through the knock on effects on confidence (particularly important in banks) and the supply chain in the case of car manufacturers (the usual figure quoted is 6 component manufacturing jobs for each car assembly job). There is also the likely long term damage to the manufacturing skills base (ref the UK in the 1980’s).

Politically this is dynamite as people expect government to help in these situations. The latest approach from GM and Chrysler to the Obama administration is the latest and clearest example of this.  What interests me is what happens next.

If these businesses are “too big to fail” then it seems to me that there are two options for society going forwards to ensure this does not happen again. Either:

1. These businesses need to be broken up into chunks that are small enough so that their failure does not wreck the socio-economic system.  Competition / M&A policy also needs to be tightened up significantly to include a “will this acquisition / merger create a business that is too big to fail?” (note this should not include any assessment of the risk of it failing)
2. If they can’t (or shouldn’t) be broken up then society needs to make sure, as best as possible, that the organisation can’t fail.  This is what has happened in the case of the banks through both implicit and explicit guarantees and significant equity investment.  In return for these guarantees the organisations will, in future, have to be run with “society” as a (possibly the) major stakeholder.  In effect they will have to become like the utility companies where their detailed business plans are vetted by a regulator operating on behalf of society.

What this means for politics is the return of some sort of “planned economy” to the US and the UK in particular (it never really went away in France and Germany).  The major problem with this is that there there are very few politicians that have any experience of industry.

A new socio economic system is emerging, which is neither capitalism as we have known it, or socialism as it was practiced before.  More on this in the next post!

Robert Peston the BBC’s business editor has picked on on some of the themes (e.g. mutualisation) I have.  In his blog entry today, one of the telling passages is this

They (bankers) didn’t want to see themselves as the infrastructure of the economy, that couldn’t and shouldn’t attempt to push up their profits at an accelerating rate. Somehow it was a bit too humiliating to be no more than the pipework for the real generators of wealth, companies with genuinely new services, real products and real technology.

So bankers created and exploited new “financial technology” that enriched themselves (for a while, at least) and was supposedly benefiting all of us by providing unlimited quantities of credit at astonishingly cheap rates.

At last it is being recognised that “real wealth creation” is about commercialising new intellectual property and not financial engineering.  In my view, this is what capitalism should be about and where the real rewards should be found.  Most large mature businesses that don’t generate genuinely new ideas (rather than just process improvement) are really utilities and need to recognise that they have to satisfy the needs a broader stakeholder community.

The winners from this recession are likely to be mutuals like John Lewis, Co-op Financial Services and, in the recycling services sector, Valpak.  Shareholder owned businesses that want to compete will have to behave much more like mutuals and balance the needs of customers, shareholders, staff, management and broader society.

Stakeholder analysis and management is the now the critical skill for senior managers!

I have been tempted to comment on the grisly road crash that is the financial markets for a number of weeks, but each time, just as I have got my thoughts together something else has happened.  In many ways this just highlights that it is too early to draw firm conclusions.

I would just like to highlight a prescient post of mine on this website, two years ago to the day!!

In “Stakeholder Capitalism and the Mutualisation of PLCs” I commented on a number of trends which taken together meant that raw capitalism, where the only measure that mattered was profit, was in the process of evolving into stakeholder capitalism, where other stakeholder demands (e.g. no child labour, reduced emissions, fairtrade) are almost as important.

In the post I only mentioned the financial services industry in the context of de-mutualisation, however recent events, particularly the re-capitalisation of the banks, re-enforces my view.  When push came to shove it was decided (correctly in my view) that allowing any large bank to fail was not an option as our economic system would collapse with potentially apocalyptic results.

My key point, both two years ago and now is that capitalism in its “raw” form is probably finished.  It is not profit, per see, that is important, it is more how and why that profit is generated that is critical.

The broader sustainability agenda plays in here as well.  From my discussions with contacts, it is clear to some global companies that they can no longer rely on being able to grab hold of the resources to be able to continue to grow.  This poses some fundamental challenges both for companies and for the global economy, specifically that the issue hat we can see that the global economy cannot expand infinitely and we can start to see the limits!

John Maynard Keynes is seen as the key economist in these times because of his work analysing and dealing with the 1929 crash and subsequent depression.  However John Nash in the Times highlights another aspect of Keynes work. This is an essay where he imagined a world where we had moved beyond crass materialism…

“I see us free to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour and the love of money is detestable…We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well.”

I have a couple of Keynes’ books on the shelf already.  Might be time to find a copy of this essay as well!