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THE ROLE OF “FINANCIAL SUCCESS” IN THE STATE OF THE GLOBAL NATION

March 2011

On the back of the upheavals in the north of the continent in which we are based, this newsletter focuses on the financial world we live in and how we define success. Global environmental evidence overwhelmingly shows that abuse in the name of profit is killing our planet. At the same time, social pressure on an economic system that is perceived to make profit at the expense of the broader community is growing. ‘Maximising shareholder benefit’ – often at all cost – as the main driver of economic effort has resulted in disproportionately benefiting a few. It is clear that there are structural shifts necessary. But what will these be?

It’s time for a newsletter again and, as always, there’s no lack of relevant topics, only a lack of time to trawl through some of the thought leadership out there and put our own thoughts together in a coherent and structured manner.

The financial world has still not settled down and with the upheavals in the north of the continent I live in, the consequent rise in the oil price and inflationary pressures, we could be in for another challenging year.

The social and economic structure of the world continues to be challenged across a spectrum of indices. This newsletter will explore some of these challenges and where we think some of the solutions might lie.

THE WORLD WE LIVE IN: OPTIMISING RETURNS FOR (A FEW) SHAREHOLDERS

While waiting for a friend in one of Cape Town’s best coffee roasteries, I stumbled across a very interesting newspaper article on developments in China. Premier Wen Jiabao in his state of the nation address reportedly expressed concern about not reaching their core goal of establishing a fairer society and reducing the wage gap. “The first step is to make a part of the people rich and the next step is to make everyone rich,” he said. A leading economist commented that “They have already done a great job on the first step. Some people have gotten very rich. But the second step is lagging behind.”[1]

It will be interesting to see if premier Wen manages to realise his intentions. China follows in the footsteps of a predecessor world leader who did not come close to meeting these ideals. Consider some of the following numbers:

• In the USA in 1953 executive compensation was the equivalent of 22% of corporate profit – by 1987 it was 61%.[2]
• Between 1979 and 1988 the salaries of Chief Executives in the USA increased from 29 times to 93 times the income of the average manufacturing worker. That’s an almost 65 times increase in just 9 years.
• 77% of all shareholder wealth in the USA is owned by only 5% of the population, among whom are the directors who are partly compensated through company shares.[3]

However, the disparity stretches far beyond the USA. In 1997 the world’s richest 447 billionaires had a combined net worth roughly equivalent to the annual income of the poorest half of the world’s population (2,7 billion people), and of the world’s 100 largest economies only 49 are countries, the rest are global corporations.[4][5]

An interesting recent development is that the number of billionaires in leading emerging economies (normally associated with high levels of poverty and disparity in income levels) has surpassed the number of those in Europe and is quickly closing in on the US. Also, the economic meltdown of the last couple of years has seemingly served the richest quite nicely. The total number of billionaires in Asia tripled in the past two years (!) and the total number of billionaires in the world rose to a record of 1 210 in 2011.[6]

Closer to home, that same newspaper reported that according to the 2011 edition of Who Owns Whom, the 15 highest paid directors of the JSE together earned a total of R662-million last year, an average of R41-million each, which included performance bonuses and a 20% gain in the value of shares. This was in a year when workers on average achieved a 9.3% wage increase and received a huge amount of criticism for fighting for it.

STRUCTURAL ORGANISATIONAL SHIFTS NEEDED

Global environmental evidence overwhelmingly shows that abuse in the name of profit is killing our planet. At the same time, social pressure on an economic system that is perceived to make profit at the expense of the broader community is growing. ‘Maximising shareholder benefit’ – often at all cost – as the main driver of economic effort has resulted in disproportionately benefiting a few.

It is clear that there are structural shifts necessary. But what will these be?

Re-think the core purpose of corporations
In a comprehensive article in Harvard Business Review (HBR), Porter and Kramer[7] argue for a redefinition of the purpose of the corporation to be to create shared value (societal benefit) rather than simply profit. They argue that the pursuit of short-term profit has been done while ignoring: longer term sustainability; the wellbeing of their customers and the economic distress of the communities in which they produce and sell; and the depletion of the natural resources they are dependent on for survival. A societal purpose and responsibility should be at the organisational core rather than at the periphery, which is where Corporate Social Responsibility (CSR) currently lies.

The solution they propose is an expansion of the current pool of resources, rather than sharing/ re-distributing it, by rethinking all the elements in the organisational value chain for greater innovation, efficiencies, collaborations and productivity, while at all times considering the core communal/ societal ‘bottom-line’ imperative.

Though many examples are given of organisations that have gone the Corporate Social Value (CSV) route, the writers acknowledge that it will not be optimally achieved without government regulations that encourage and incentivise this.

Re-think the organisational funding model
The role of capital markets and stock analysts in driving the current state of the world in favour of ‘the shareholder’ (a small minority, as we have seen) can surely not be underestimated. In 1993, it was estimated that 96%[8] of all investment was ‘parasitic’, i.e. investors betting on stocks – with very little interest in the long-term future of the company and the communities that it influences.

Is there and alternative? In a recent HBR interview, Prof Rita McGrath, from New York’s Columbia Business School, said she expects a different approach to investment to come out of the current wave of business model changes. She argues that family controlled businesses have a better record of patient investing compared to the impatient private equity players.[9] They are also more likely to be kept accountable by the community they live and work in.

Re-think the organisation as a community within an interdependent organism
The author Scott Peck argues that by introducing genuine community into your business, you will guarantee its ethical integrity.[10] We want to add that an organisation with a well-developed internal community consciousness would naturally make better decisions for the benefit of the whole, including the external community. A values-driven approach, in our experience, guides organisations in this process.

Re-think the definition of success (“how much is enough?”)
The corporate facade has individuals behind it. Ultimately it is individuals who make decisions, who make up management and boards, who drive organisational direction. It is individuals who determine the level of organisational stewardship, individual values that steer organisations to a short-term profit-driven approach and individual egos for whom the indication of their success lies in the accumulation of more wealth. Can a shift in individual thinking contribute to an overall shift?

In his book the Paradox of Success, John R. O’Neil (then the president of the California School of Professional Psychology) amongst others blames the pervasive societal definition of success for what he called a ‘decade of greed’ in the 1980s. O’Neil defines the Western definition of ‘mythical success’, as he calls it, as ‘a potent compound of wealth, power, privilege and freedom from care’, and I would add, more recently fame.

O’Neil’s definition of mythical success calls for individual reflection on how each one of us has or is being influenced directly by this concept, and on our definitions of what it means to be successful and how this has influenced the bigger picture. We would like to argue that moving the definition of success from something external, to something internal, might be an important way in which all of us can contribute positively towards the challenges facing our globe. Maybe a shift in how we define success will influence senior executives’ ethics about ‘how much is enough’?

HOW CAN STRATEGIC HUMAN CAPITAL CONSULTING HELP?

On a corporate level, Strategic Human Capital Consulting has vast experience in objectively assisting organisations in thinking through their organisational strategies and how they need to adjust these in view of external realities and challenges.

On an individual level, if you don’t know or don’t like your answers to questions like: ‘What does success mean for me?’ and ‘When have I earned enough?’ – maybe it’s time that you approach a coach. We have access to a network of excellent and well-qualified coaches that can assist you.

REFERENCES

1] China focuses on curbing price rises, Zhou Xin & Koh Gui Qing, Cape Times, Business Report, 7 March 2011
2] The End of Work, Jeremy Rifkin, New York
3] Today’s Stock Investment Dilemma, Perspectives on Business and Global Change, Vol. 11, No. 2, World Business Academy 1997.
4] The Top 200: The Rise of the Global Corporate Power, Institute for Policy Studies, Washington 1996
5] All the references above as referred to in Liberating the Corporate Soul, Richard Barrett
6] Bric’s billionaires outnumber Europe’s, Allan Rappeport, Financial Times, March 10 2011
7] Creating Shared Value, How to reinvent capitalism and unleash a wave of innovation and growth, Michael E. Porter and Mark R. Kramer, Harvard Business review, Jan-Feb 2011
8] Ibid 3
9] When your business model in trouble, Harvard Business review, Jan-Feb 2011, p.96
10] Interview with M. Scott Peck in April 1994, as reported on in Liberating the Corporate Soul, Richard Barrett, 1998