Compensation for Externalities

The UK government is reported on today’s FT front page (and in this FT blog http://on.ft.com/15UGVUK ) to be considering offering some recompense to (i.e. bribing) those communities who agree to the fracking of shale gas. Various alternatives, including cheaper energy bills and funding for local amenities, are apparently under consideration. Presumably, although not covered in the FT’s analysis, this would be funded by some sort of Pigovian tax on the drilling companies; thereby constituting a Conservative government recognising an economic concept that their recently feted heroine could never get her head around when she was in power, the externality.

For all her reputed intellectual abilities (which I confess always remained hidden from me) Margaret Thatcher refused to accept that there could be costs or benefits other than those captured within the Profit & Loss account. The classic example of this was her reaction to Ken Livingstone and Dave Wetzel’s ‘Fairs Fare’ initiative in 1981. Whilst the Thatcher government employed as many tactics as they could to scupper a policy for which the people of London had voted, the key plank of their argument was that only those amounts actually appearing in the accounts of London transport and the GLC could be considered when evaluating the decision to lower fares. Other issues such as reductions in congestion, environmental improvements or indeed the very existence of subsidies to motorists were rigidly excluded.

However, lets not look backwards, but rather let us consider the possibilities now the concept of externality has been conceded. I spent many years living in Hounslow in West London. Every day I had to put up with the traffic on the A4 and M4 plus that on the Chertsey Road and the North Circular, causing noise, emissions and travel disruption to the locals whilst only benefiting those who lived on one side of the borough and worked on the other. On top of that of course there was the stream of planes coming in on the flight path to Heathrow, the trains carrying nuclear waste to Sellafield for reprocessing and so on. All of these activities cause costs to those otherwise uninvolved and who did not choose to incur that cost – the definition of an externality. So, I have no doubt that at the same time as announcing compensation for fracking the government also will be unveiling plans to compensate the residents of such places as Hounslow for the inconvenience that they currently suffer for the benefit and profit of others.

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What motivates you?

Say what you like about George Osborne (and in the interests of full disclosure I must admit to having said quite a number of things about him over the last three years), but he certainly isn’t the sort of chap to give an idea up simply because no-one else seems to think that it’s a good idea. And so it has proved with the shares for employment rights swap that he announced some time ago to a complete lack of enthusiasm and acclamation. So why has he done it? I personally always favour the simplest explanation at times like this, so I would discount the suggestion that this is simply a harbinger of an all out assault on employee rights or that it is a convoluted attempt to create a tax break for his rich cronies. I am inclined to believe that he really thinks it will increase motivation.

I’m sure that we all have our preferred theory of motivation and mine is McClelland’s Need Theory; once again because it’s nice and simple. He stated that managers were motivated by the need for achievement, affiliation and/or power. (As an aside, Aristotle said essentially the same thing a couple of millennia  earlier, but McLelland is the one they teach on MBA courses – possibly because Aristotle was never on the faculty at Harvard). Anyway, you’ll notice what’s missing from that list: that’s right, money. I don’t like to bite the hand that feeds me, but if I have one slight criticism of private equity houses it is that they tend to make the same mistake as the chancellor. I once worked for a mid-tier firm that had acquired a terrific specialist engineering business, but set about things as if the incumbent management would suddenly and automatically change their behaviour because they now had the carrot of large amounts of capital gain being dangled in front of them. In fact the team’s motivation had always been engineering excellence (i.e. achievement) and the fact that they had been together for twenty years (affiliation). Funnily enough, the result was simply mutual incomprehension and a lot of liaison and interpretation work for the non-exec chair and myself.

In addition, we can safely assume that George has not only never heard of McLelland, but also he has never come across the Motivation Crowding Theory (extrinsic motivators undermining intrinsic) or Herzberg’s Two-factor Theory. The latter would seem to suggest that even if one can motivate people by offering them money, one can at exactly the same time demotivate them as they observe others having rights that they don’t enjoy.

So, my conclusion is that it won’t work (even if any companies ever offer it or any employees ever accepts it; both of which can’t be taken for granted) and that whilst basic management theories can never tell one the right direction to go in, they can – and should – stop one blundering off in the wrong direction.

As an aside, I am assuming George Osborne’s own motivational need is power, because while he may have gained that, he hasn’t achieved anything and no-one much likes him.

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Don’t throw out the micro with the macro

Economics, the dismal science, is once again coming in for some stick. One comment that I saw today ranked it alongside with homeopathy and astrology. Much of this has to do with Chancellor Osborne’s sleight of hand with government borrowing figures (although as I’ve built a career out of just that sort of thing I’m not going to cast the first stone) and with Reinhart and Rogoff’s spreadsheet inadvertency (which again experience tells me not to shout too loudly about). But the major part is surely to do with the fact that, by and large, macro-economic theories don’t seem to be working too well at the moment.

But, should micro-economics be treated with the same disdain? I would suggest not. More than once my first thought at the beginning of an assignment has been that the client company’s problems could have been avoided by simple application of the elementary micro-economics that we all learned at one time or another. I once did some consultancy for a sizable (but bust) player in the oil & gas support sector whose management and funders would have done well to bear in mind the kinked demand curve of the oligopolist. Similarly, in sectors with no differentiation and or barriers to entry (I do try to avoid these, but beggars can’t always be choosers) owners and the board often seem unaware that in a market where no-one is making a profit micro-economic theory long ago established that it isn’t because costs are too high, it’s because prices are too low. Add to that the fact that I can honestly say that no discounted cashflow presented to me has ever incorporated any recognition of the marginal theory of value or of opportunity cost in general. And don’t get me started on the voodoo mathematics of internal rates of return.

So, managers are of course perfectly entitled to point the finger at macro-economic theorists, but should also be aware of the possible consequences of their own failure to follow perfectly sound micro-economic principles.

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Britain’s Greatest Prime Minister

ImageI’m achievement oriented; it’s one of the main reasons that I am an interim manager. Let me list Attlee’s achievements in his six years as Prime Minister:

  • Created the NHS
  • Implemented Beveridge’s plans for a system of social security
  • Introduce family allowances and greatly increased the property rights of married women
  • Built a million new homes
  • Passed the Town and Country Planning Act and established the National Parks and New Towns
  • Nationalised coal mining, railways and electricity generation
  • Fully implemented the 1944 Education Act for which he had been responsible as wartime Deputy Prime Minister

The list could go on. All these benefited the UK and its people for decades. For me personally the most significant was the last, because it enabled a poor kid from the slums of Bethnal Green to go to university. I owe everything I am and have to this man and his colleagues.

 

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Gone but not forgotten

I have been updating my c.v. for the umpteenth time; well I am 57. As usual I have been mainly concerned with format issues: length, level of detail etc. I did experiment some years ago with a functional format, but that proved a dead end, so it’s chronological albeit with a bit more narrative than I am used to; and a lot more self-promotion than I really feel comfortable with. Anyway, my stereotypical British reserve will have to wait for another day because what I wanted to discuss was the relevance of much of the information included.

 I have had a lot of jobs/roles. I have been an interim for fifteen years or so and I am (did I mention this?) 57. And a quick bit of mental arithmetic shows that more than 60% of the organisations that I have worked for no longer exist in a recognisable state. If I were do the calculation based on length of time that I had worked there – probably not in my head this time – the proportion would undoubtably be a lot higher. So, the first of a series of rhetorical questions coming up, how useful is all the stuff that I write about those jobs? It’s not just whether it can be meaningfully checked – although that may be an issue – it is whether the company names or even the industry sectors carry any resonance for anyone looking at it.

 Who, for example, younger than say 40 has ever heard of GEC or Plessey, both extremely important defence and electronics companies in their day? Would speaking of the Ferranti scandal (which is very relevant to a chunk of my c.v.) spark any recognition at all these days? Would they know that the GEC-Marconi that I worked for wasn’t at all the same Marconi that went spectacularly bust? I once had a long conversation with the late Paul Foot, the celebrated Private Eye investigative journalist, on the latter. If he found the story difficult to follow then what chance has a twenty-something researcher at an interim provider?

 Now, believe me I have already asked myself the question that is on your lips. Is it me that caused all these disappearances rather than being a distant spectator? I’d like to think not; apart from anything else that would rather overstate my importance in the scheme of things, particularly early in my career. To me it’s just tempus fugit.  ‘The old order changeth, yielding place to new’ as Tennyson said. Everything in business is moving more and more quickly and less and less is left of what used to be there. I would suggest that renders much of the c.v. content  of the more, er, experienced among us as, at best, very difficult to interpret and, at worst, rather a waste of paper.

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Ego and Self-delusion

“You’ve got to be smart and you’ve got to be lucky – and you’ve got to know which is which.” – Donna Dubinsky

There is a fascinating article in this weekend’s FT – http://on.ft.com/Zo5GRu  – about Ron Johnson’s disastrous 17 months in charge of JC Penney. His fellow hi-tech business leader Dubinsky summed it up rather well in the quote above. Another way of looking at it is always assuming that whatever good happens is entirely down to you, with no sharing of the credit among others or ascribing any part of it to luck in general.

Now there are no doubt many and various reasons for the specific failures of strategy in this company in this sector at this time. But Johnson’s hubris, certainly as described by Barney Jopson in the article, would seem to be the main driver of the department store chain’s dramatic loss of sales and market capitalisation.

I have seen similar situations many times in my career; let me give you an example. A large US group owned the fastest growing fmcg brand in the UK, supposedly built on a brilliant marketing campaign. But to an objective outsider arriving freshly armed with an MBA and its associated analysis tools – that would be me – it seemed obvious that the real driver for the growth lay elsewhere.  I thought that it was primarily the helping hand being quite openly provided by the major supermarkets, who wanted to take the category leader down a peg or two, in terms of non-aggressive purchasing, promotional support, placement etc, with a hat-tip to the R&D department for having come up with something that did what it was supposed to. Did anyone listen? That’s a rhetorical question, of course they didn’t. They applied, at great expense, what they thought was the winning formula to a related product. Didn’t work. Unabashed, they, again at great expense, rolled out the original product across Europe. Didn’t work. The end result was the divestment of the whole European division by the parent company; which was itself a disaster for both the vendor and the purchaser. But that story can wait for a different day.

Anyway, those who had claimed the success – and as is often the case there were quite a few of them – had mostly moved on to build careers elsewhere on the back of it by then. No doubt they experienced a reversion to the mean in their performance in due course as has Mr Johnson and, like him, never understood why.

“It is very often nothing but our own vanity which deceives us.” – Jane Austen, Pride and Prejudice

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