"It was sometime early in 2010, post GFC, and I had the Daily Telegraph, the “people’s paper”, spread out in front of me with a glass coffee cup marking out an ever widening milky stain across the headlines. And it was the headline of the day that caught my eye. The Australian banks had had their deposits guaranteed by the government, effectively giving them a triple A rating. One of the banks had just reported its full year profit of $7 billion and the headline screamed in fine editorial fashion…How Much is Enough?
And it stopped me in my tracks. I really thought, yeah actually, how much is enough?
The obvious reaction, the gut reaction, was that of course it was enough, it was clearly too much. But in fact, the answer depended very much on who you were asking. Which interest group was being asked that question? And it got me to thinking about the traditional business model and who is involved and what sort of influence do they have on a business and the drivers of a business.
Traditionally there are 3 interest groups in a listed entity, Shareholders, Employees & Customers.
The most powerful group is the Shareholders.
They drive the share price up and down depending on the results of the company. Management typically has their bonus payments tied to results. Shareholders, in theory, can hire and fire the management. All corporations law is written for the protection of shareholders. And most business models see employees as a cost centre and squeeze them to keep costs down and customers as a profit source and they too get squeezed to maximise revenue. That’s the model – maximise revenue, minimise costs and keep the owners of the business happy so that management is well rewarded.
But what actually is the outcome of this typical business model?
In a listed entity as an example, shareholders are openly disloyal. A shareholder will say, “I’ll hold your shares until your next set of reports are due, typically in 6 months. If you don’t perform, I shall sell your shares and go buy the shares of a better performing company in your sector. In addition, I will add nothing to your business, just passively hold your shares (usually through a super fund or some other vehicle). So the gift I am offering to your company as a shareholder is that I will add no value outside of my investment, I’ll offer no input as to how better to run the business and I’ll be openly disloyal to you if you don’t perform.
And what about the two other interest groups?
A business is really nothing about the money, it’s all about the employees and the customers. Money is certainly an important input and a lubricant of the business. But it’s just a resource like any other raw material or ingredient a business may need. It is however, the employees who run the company and the customers who buy their products or services that are in fact the business. Employees join a company expecting to be there for some time, 3 years maybe 5, or even 10 years. Customers sign up, especially to a bank, with a very long term view. I’ve been a customer at St George Bank for 25 years.
So we have the strange situation that the two interest groups that actually make up a business, employees and customers, who both have long term aspirations, add input, loyalty, growth and culture, who create and shape the demand for, and the supply of the business’ products or output, these two groups are the very ones who are squeezed for the short term goals of an interest group who add nothing and are openly disloyal.
What if, in the bank example above, that shareholders took a slightly longer term view and said, don’t give us $7 billion, just give us $4bill. Split the other $3bill evenly between employees for better remuneration and customers in better terms of trade. What would happen?
Simplistically speaking, you would expect all the best employees to stay, all the best employees from the other banks to join you because you have an extra $1.5 bill to pay them and get all the customers through your more generous terms of trade. What you’d then expect is that with higher quality employees and more customers that your $4bill profit would go back to $7bill or more, not only at the expense of your competitors but more importantly, you’d have happier employees and happier customers.
So the paradox is that when profit is not your focus, but a happier more engaged workforce and happier customers becomes the real focus, then the only outcome can be more profit.
Or put simply, when profit is not the motivator but rather a better workforce and customer base, you are more profitable. Which is another way of saying that by putting the shareholder last as the driver of a business you are actually better rewarding the shareholder down the track. It just requires slightly longer term thinking and perhaps more challenging for many people, especially those with cash that do the financing or investing, thinking beyond their own self-interest.
That’s probably the secret ingredient and one which spiritual paths and mainstream religions both advocate - think of others first and you’ll be ultimately benefitting yourself. Buddhism puts it this way - that the path to ultimate liberation comes when your goal is to act for the benefit of all sentient beings.
But can these lofty spiritual ideals ever really be applied to the world of commerce? Bloody oath! They can and I believe they eventually will be and the business model that evolves and one which we have embedded in the establishment of Vivienne Court (at least our first clumsy iteration) will be the only sustainable corporate model of the future.
So where does it start?
In the above example it’s pretty clear that shareholders are the problem in entities which are listed. I can see the problem but I too am part of that very problem. I’m sure that I own some bank shares through my super fund and I’d expect my fund manager to sell a bank if it reported only a $4bill profit when we were expecting a $7bill profit. I want my super as high as possible when I retire. I’d expect my fund manager to say bugger the long term, my investors need returns now so that their retirement pie is as big as possible.
If we could somehow remove shareholders from the business model we’d be able clear out many of these issues. But given that a company, to be an incorporated Pty Ltd, needs shareholders, who then would make the most ideal shareholders if we don’t in fact really want them?
And given that any business needs working capital, how do we get money into the business without the people supplying the capital from becoming these same, much maligned shareholders?"
Read the answers to these questions & more in Rob's next instalment: