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Beyond share empowerment schemes

Lessons from the failed Sasol Inzalo scheme.
Employee share option schemes, such as Sasol Inzalo, are limited in their ability to empower and can create an inherent conflict of interest in employees, writes Schuitema. Picture: Bloomberg

In their heyday, employee share option schemes, or ESOPS, were nothing more than an extension of the agency system: that much vaunted snake oil of the 80s which enticed executives to “think like shareholders” and pursue the narrow dictates of shareholder value growth.  

“The world’s dumbest idea”, declared American industrialist, Jack Welch back in 2009. Adam Smith, if he were alive today, would no doubt concur. Perhaps even Milton Friedman, the ultimate champion of shareholders, would agree. One can’t blame shareholders only. They are such a divergent, at times perhaps even naïve, group with varying interests that to attribute to them clearly defined expectations in the form of abstracts concocted in business schools, is misplaced at best.

At the same time it made them easy prey for a new mercenary breed of executives who understood those theoretical concoctions enough to create smoke, mirrors and myths around their exceptionality and exclusiveness and extract maximum short-term gain from that body. Finally along came King and regulations. It is not appreciated enough that governance prescriptions were not triggered by a social rebellion against executive misbehaviour, but by shareholder wrath. It’s a moot point whether the executive mercenaries have been curtailed by the outcry. They are by no means defeated and despite the mounting body of evidence against them, shareholder-value criteria, according to an article in Forbes magazine, still predominates most of executive thinking.

The key lesson from Sasol’s Inzalo scheme is the limitations these programmes have in Broad-Based Black Economic Empowerment. The costly and complex nature of a massive multi-billion rand exercise such as the Sasol scheme must surely beg the question of whether they can really deliver on their large promise, even if market conditions did not turn against them. From a labour perspective in particular, no one can still seriously consider ESOPs as a method of enhancing employee involvement in the destiny of the enterprise. If you view a company as a feedlot; as a means of extraction then you will focus on where you can extract the most. As a worker the more you extract through wages, the less you can extract through profits. That creates an inherent conflict of interest.

But one could use the same argument against all of the three estates of labour, capital and government – all viewing enterprise as a means of self-gain rather than an opportunity for contribution. This has naturally swung economic emphasis globally from tangible wealth creation to wealth accumulation and ownership. It is value-adding, or wealth creation, and not wealth accumulation that encourages inclusivity and broader empowerment. Because the latter naturally encourages concentration, it will always end up in the hands of the few and exacerbate inequality. It’s a disastrous formula for a country like South Africa, where even wealth creation itself fosters huge disparities through skills shortages, unemployment and barriers to opportunity.

In a world obsessed with possession it may sound counterintuitive to argue that possession on its own does not represent power. Ownership that exists purely for self-gain and self-gratification becomes barren as an economic factor, especially so when they are productive assets. Responsible major shareholders know this. And private owners of small and medium enterprises even more so.

Asset ownership, whether in the form of capital, land, property, equity, or companies themselves is a highly-flawed cornerstone of populist rhetoric and regulatory thinking. I have often argued that business itself has invited this response through its own championing of shareholder supremacy, of profit maximisation and of a narrow definition of purpose. But now politicians themselves seem to understand that power, or empowerment, cannot be narrowly confined to ownership, and have added “control” and “management” in their latest radical economic transformation framework.

That does not make the framework better, but indeed even more flawed. It’s a classic case of where macro theory simply clashes with, or is destroyed by, the micro reality. And I’m not even talking about the obvious of the shortage of skills, experience, and expertise to change the current racial composition of “management and control”. The entire empowerment framework has to change or be redefined to embrace tasks, operations and ownership: and in that order.

It starts with the individual taking ownership and responsibility of his or her own destiny and at the very least being willing to make a meaningful contribution to their social and economic environment. That willingness is reflected in their daily tasks, mainly at work, which are part of operations that have a common purpose in adding value to society, or customers. Such a commitment removes any barrier to being part of “management and control” and it is a small and valid leap to being given equity in the company itself. Only then will share option schemes make sense.

To summarise then, the progression of empowerment is from self-accountability; to ownership of tasks; to operations and then to assets. A lot of this presupposes the existence of means and abilities to pursue that process, but the most important is individual willingness and a shift from expectations to aspirations. Achieving this in society starts with parenting, then schooling and then proper skills development. In companies themselves, individual ownership can be much enhanced through appropriate strategic, transparent, and governance models such as the Contribution Accounting methodology.

Self-worth is not simply about self-gain. The ownership-equals-power assumption rests on a shallow understanding of power itself. Authentic and legitimate power is earned by its contribution to others. When it does not do that it is simply control, which relies either on seduction or coercion. Ultimate empowerment is that which enables one to make a positive difference to people’s lives. It’s based on the simple premise that our true value lies in our capacity to make a contribution to others.

That’s how we judge others. That’s how we should judge ourselves.

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Negative. Wealth accumulation is not an exercise conducted by a latter day Scrooge mcDuck where the evil fascist capitalist imperialist stashes gold coins in a vault (the latter simply because the mattress is full). Capital is invested for the benefit of mankind which in turn lowers interest rates and produces jobs as well as goods and services people need.

The lack of this investment capital is South Africa’s main problem. Too many consumers too few producers. The marginal productivity of capital is sky high despite an erstwhile healthy appetite for SA bonds. Now it is even higher owing to the mess in which the ANC has landed SA. More productive capital idled in favour of bonds.

I am not a Friedmanite ( I am a new Austrian) but Milton the magic midget demolishes the wealth accumulation argument better than anyone could.

Check this out:

There is a case to be made for union-owned enterprises such as the co-ops arranged by the United Steelworkers Association in the USA. The co-op model is flourishing across the world to uplift communities by solving a social ill or deficiency through a profit-based endeavour that is communally owned. This could be in the form of providing fresh produce or even health facilities where it is in short supply.

To say workers’ ownership leads to conflict of interest is in contradiction to accepted practice that it incentivises productivity and results in prosperity, greater share price and dividends, and the creation of auxiliary industry that owner-workers have dibs on. This bridges the gap and animosity between management and labour as the value of sound business decisions dominate discourse instead of ambush tactics to force the hand of paymasters and coax a higher wage by throwing a spanner in the works. The alternative is inefficient wages, symbolic jobs that subtract from gross product, and defiling of market principles as inherently master-slave in nature.

Delayed gratification is the only basis for financial “empowerment”. This is the crucial difference in the psyche of “wealthy” and “poor” people. There is no way on earth to circumvent this truth, although socialists keep on trying.

Material wealth, or empowerment as it is called in South Africa, is the result of a person with a certain level of sophistication, disciplining himself to delay his consumption, because he understands the power of compound interest. Now the naive socialist on the other hand, out of ignorance of these facts, wants to tweak reality to empower a unsophisticated person with zero discipline, who is on a quest for instant gratification, and has zero understanding of compound interest, to become wealthy.

Some people are relatively wealthy and others are relatively poor, not because of the difference in their material position, but because they think differently. The difference in psyche, insight, understanding, self-discipline and knowledge manifest in differences in material wealth.

The reason why “empowerment” as it is enforced in South Africa is so destructive, is twofold. Firstly, the less sophisticated beneficiaries are led to believe that they are entitled to assets they did not work, study and discipline themselves for. A law is simply made to supported the BEE beneficiaries in their quest for instant gratification by confiscating the delayed gratification of a sophisticated saver.
This creates generations of slaves and ever increasing pressure for more

Secondly, the part of society that would be savers, and a source of capital, are now disheartened because they see the fruits of their efforts disappear and given to “undeserving” people. They either stop saving altogether, or they emigrate to jurisdictions where their discipline and level of sophistication gets rewarded, not punished.

BEE is the biggest disaster to have hit this country because of the damage done to the psyche of beneficiaries as well as the damage done to the resolve of savers.

End of comments.



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