Five Slow Poisons that are Killing the Western Businesses, and making CEOs’ jobs harder than they need to be
(Sydney, Australia based Vivek Sood is the world’s foremost authority on Global Supply Chains which are the commercial engines sitting deep within modern economies and driving them. He is a Chartered Financial Analyst (CFA), and has done courses from Harvard, MIT, and University of London. As the Managing Director of Global Supply Chain Group, he works as a consultant to CEOs and boards of directors of large global corporations, and helps them multiply profits by using the full power of global supply networks. He is also the author of “The 5-STAR Business Network”.)
Recently, while on a business trip through Spain and USA I was struck with a thought that western businesses are gradually but surely being killed by a number of slow poisons which are so ubiquitous and accepted by all of us, that we fail to notice their impact on the businesses, economies and people. All of these slow poison were useful and necessary at a previous time and served well at that time. However, they have far outlived their usefulness and are now detrimental to the health of western businesses, economies and societies. Let me outline what I think five of these slow poisons are.
In the 1930s and 40s unions made great strides in betterment of working conditions of the factory workers, dock workers and most other trade workers. Since then, unions or their glorified cousins such as American Medical Associations, Pilots and Harbour Masters Federations and similar bodies are doing no service to the companies, the economy and even to their own membership.
Why? Because – they have made conditions so tough for businesses and consumers that they will do anything they can possibly do to go around union labour. Think about the medical tourism, outsourcing, offshoring, double-stack trains and other means devised to circumvent having to use unionized inputs.
In my view, the places unions are needed today are Dubai, GCC, Bangladesh, Vietnam, China, Myanmar, Philippines and Indian Call Centers. These are the places where conditions should be improved to make them more acceptable. The unions serve no useful purpose whatsoever in western economies where the pendulum has swung too far on the other side.
Now, before you accuse me of bias – let me put it on record that I was a member of a powerful Maritime Union for more than a decade, and have observed the workings of unions from a very close quarter. Without going into too many distracting details, let me state the conclusion I draw from my observations – the places where unions have existed for more than 25 years they hardly benefit that supposed beneficiaries – their memberships. Ironically, the places that need the unions the most – as stated above – do not allow effective union activity.
Wide Income Disparity
Aligned with the poison of the unions is the second key killer – the wide income disparity between the incomes of the top-tier and the bottom tier of the society. At one time the top tier in a company would earn no more than 15 to 20 times the wages of the bottom tier in the same company. Now 40-50 times is the norm, and in some companies a multiple of up to 100 or more can be seen.
Nothing saps the morale in a company more than the feeling of injustice and unfairness among its employees. If the remuneration committees of the boards of directors were really serious about the performance of the company, and shareholder interest – the first step they would take would be to link all the salaries in the company to the lowest paid workers’ hourly wages and put guidelines in place to limit the multiples thereof. Ironically, this will help not only the shareholders, but also the management itself. They will find their jobs a lot easier as a result and massive spends on culture change, and change management can be avoided by one simple step.
The sense of entitlement, complacency and the imperial privilege can be observed even today in almost all the nations that once had a great empire – Spain, Portugal, Britain and France. As I sit here in a small Spanish town cafe, writing this blog, I am flabbergasted to see nearly 40% unemployment on one hand, and vash wastage of public resources to maintain an old heritage palace from the colonial era. It was evidently built in the days of gold rush where delusions of everlasting grandeur led to building of such monuments even in small towns across the nation. It is, no doubt, proving to a mixed blessing now – not just because of the maintenance expense but also the feeling it reinforces in the populace.
Don’t get me wrong – I am not arguing for its demolition or dereliction. Maintaining its peoples’ heritage is an important part of a nation’s duty. However, alternative narratives, focused on a future growth based on industry, smarts and intellectual property must be available to the population.
Unfortunately, now the same feeling can be quite frequently seen in the United States, Australia and even Canada. There seems to be a belief among a large number of people that the world (or nature, or universe or some such entity) owes them a comfortable living, whether they do anything to deserve it, or not!
In the former imperial nations it is understandable because generations grew up hearing legendary stories of fabulous riches derived from the empire where just being part of the winning team ensured a comfortable lifestyle. For example Cecil Rhodes famously said “Remember that you are an Englishman, and have consequently won first prize in the lottery of life.”
However, many people – perhaps even the majority – in new world, long famous for its work ethic seems to be getting caught in the same degenerative disease of wanting something for nothing. That game can continue only for a limited time.
Wall Street and other similar institutions
Being a Chartered Financial Analyst, it pains me greatly to add wall street and other financial institutions to this list. After all the function of finance serves a useful purpose in the economy – capital raising, allocation and performance monitoring. However, the events of the last decade have demonstrated that wall street does less than adequate job at all of these functions.
That in itself is not enough to include it in this list. For that to happen, its impact on the rest of the economy, and the businesses at large has to be sufficiently detrimental to be deemed poisonous. The fact that instruments of risk management such as esoteric options and other derivatives have now become instruments of unbridled speculation where risks are rarely fully explained to the other side, the vast growth in the virtual economy of derivative trades that far surpasses the real economy and repeated bail-outs due to propensity for moral hazard trades by too-big-to-fail institutions have all created a two-tier economy of real businesses that make and sell things and banks that conduct business that no one (not even their own CEOs) fully understand. Like the priests in the Pharaohs courts they continue to exhort people to trust their skills and intentions while their actions wreak havoc on the economy.
Ivy League MBA institutions
This inclusion also pains me a lot because I do have an MBA from an elite business school in Australia. However, on balance, after studying the theories emerging from these business schools over the last 25 years or so, I have to say that while most of the economic and finance theory is hogwash, most of the strategic theory is merely a late codification of existing practices of the companies. Tenured professors in most these business schools merely conduct research that feeds on each other while of little practical use to the businesses.
After all, If it was useful, you would expect the businesses to be thriving and the economies to be robust. I can give hundreds of examples of such theory but in the interest of brevity of this piece let me give just one – business schools continue to teach the importance of market risk (beta) when it is clear that in the era of zero interest rate policy all the underpinnings of the Capital Asset Pricing Model are flawed.
As a result, in an era when technical advances and scientific research have created an abundance of outputs ( agricultural, industrial and other material needs of human existence), convoluted economic and strategic theory has managed to create an environment of anxiety, uncertainty and scarcity among the population.
Does this mean that there is no hope for the western economies. I would not be writing this blog, if I thought that was the case. As I said at the beginning, each one of these poisons served a useful purpose at one time. And, they can serve a useful purpose again, once a purposeful antidote has been designed and used to neutralize the poison. That is a topic for the next few blogs.