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The wealth distribution obsession

To the point of incapacitating wealth creation itself.
When the three economic states try to maximise their own benefit, service delivery suffers and that has a big impact on wealth creation, writes Schuitema. Picture: Moneyweb

It’s a cliché, I know, but one can only imagine the positive change that is possible if South Africa, or any economy for that matter, switches focus from wealth distribution to wealth creation. No matter which way one looks at it, one cannot share what has not been created. Eventually all the intangible vapour that has been created through debt, financialisation and asset appreciation, will have to find some anchor in the production of goods and services.

That means being market-driven, serving customers and creating a link between meaning and money. In my first article (see here) on following meaning in wealth creation, I argued that our customer focus is in an appalling state as shown by poor service delivery, customer neglect, streams of cases before the Competition Tribunal, lack of competitiveness, and poor levels of innovation.

One could argue further that all of that is due to a very narrow focus on wealth distribution; on reward rather than contribution, which translates into exploitative behaviour by the key “internal stakeholders” of labour, capital and state in the form of wages, profits and taxes. It spawns a relationship between them that is inherently antagonistic. That is highly counter-intuitive to wealth creation: detracting from the only common purpose that those stakeholders can have and which gives not only meaning to their involvement but fosters the source of all rewards.

No amount of stakeholder management, concessions and tolerance will be effective if each maintains a narrow self-gain purpose without swearing full allegiance to a common serving purpose. That will only happen when each appreciates that they all also have a common fate in the enterprise.

Given the unprecedented re-examination of macroeconomic theory, the time has never been better to extend that to the micro; to companies and organisational theory itself. That world has been changing even more profoundly since the early 1980s, with South Africa in some respects ahead of the pack, and in others trapped in outdated theories and ideologies as well as onerous demands for transformation. When these externally-driven forces translate into a tug of war between the main internal stakeholders of labour, capital and state trying to maximise their own benefit, the biggest loser is service delivery and customer focus. That has a far bigger impact on wealth creation than global economic conditions or the external economic environment.

There are laudable attempts at a national level, through organisations such as BLSA, Nedlac and others, to create greater economic cohesion between the three economic estates. But this is mostly in the form of a haggle around trade-offs, and often gets derailed by political rhetoric, distrust and exaggerated demands. Stalemating can only be broken by facing an existential reality: all have a common purpose in serving markets and creating maximum wealth, and all are dependent upon the value added for their respective rewards. That distribution can at the very least be pegged to some broad principles: it has to meet legitimate expectations and it has to encourage continued contribution. 

That, in a nutshell, is the base of meaningful relationships between the contributors or beneficiaries of wealth creation in business. Those critical relationships, as I have argued before, are destroyed by having absurd theories, abstracts, metrics and aggregates define them. That demeans the entire venture to a mechanical money-making process, away from its true nature as an eco-system of people serving people.

Largely through its own doing, labour has commoditised itself as an institutional abstract, priced according to supply and demand for skills and qualifications, and accommodated as a “cost to production”. That crass understanding simply disappears when one argues that labour has made a contribution to the market through the company structures and processes, and then receives a legitimate share of the value that has been added. In my consulting and training days, I was constantly struck by the extent to which the true meaning of all work, that of creating something of value for others, is simply lost in conventional expression. But more encouragingly, attitudes become far more flexible when the link between task and contribution is made, incumbents are involved in customer and productivity improvement processes, information is shared more openly and fortune sharing incentives are introduced.

The hard nut to crack, is the dogmatic approach to capital interests, and the absolute holy cow of shareholder supremacy. A good example of this can be found in an attempt by BLSA research (see here) to debunk the corporate cash hoarding “myth”. Apart from some magic with metrics that can be challenged, the key trap that the researchers fell into is the assumption of a “generic capital model” that applies to all investment in business and that has unshakeable and invariable expectations. Even if that were true, the whole construct of investment in business has changed dramatically in the past few decades. It is simply impossible for normal ventures with even acceptable risk profiles to compete in financial markets with quadrillions of dollars incestuously looping around for quick and lucrative returns. American author and columnist, Rana Foroohar estimates that only 15% of the money in the financial sector is invested in business.

That demands a review of old paradigms around enterprise funding and even some of the dogmatic expectations captured in key measurements such as EVA, ROI, ROCE and the plethora of others. It may even need a new approach to capital formation in productive capacity generally, including more partnerships between capital and state, like we have seen in Asia and specifically the South Korean Chaebols. But let’s be clear: no one can accuse these nations and their companies of not being truly market- and customer-driven. That is a non-negotiable and it virtually rules out the South African government with its SOE track record as a trustworthy partner.

Most psychologists and life skills experts argue that meaning is to be found in having an external focus and making a difference to others. Business is the ideal and most inclusive platform to do that. But, if business is simply about making profits, it has little true meaning. If work is simply about earning a living, it has little true meaning. And if government sees companies simply as a means of generating revenue, that too has little meaning.

And because enterprise and work is such a significant part of most of our daily lives, it renders a significant part of those lives meaningless.

COMMENTS   9

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Exactly, a well argued article.

Vintage Schuitema. Again!

Pontificating philosophical discussions WITHOUT offering the SLIGHTEST practical solutions are as useful as the proverbial lead balloon.

The very dangerous mistake made by those “progressives” with socialist ideals, is that they believe a business is an inert or static object, like a mountain or a bridge. Those who advance the ideals of material equality and wealth distribution, do not realize that any business inherently is a highly unstable conglomerate.

Those well-meaning academics and socialist never realize that the default state of any business is bankruptcy. It takes constant focus, the application of great skill and superior risk-management strategies to keep a business together in a competitive environment. The blue-collar worker, the politician and the academic do not understand this. Therefore, out of ignorance, they believe that they are “poor” because management and shareholders are wealthy.

It takes a level of education, experience and insight for an employee to realize that he has got food on his table because management is successful at the perpetual struggle to keep the company from going bankrupt.
Sadly, it always takes the full cycle of socialism, followed by an implosion of the economy and the resulting famine, before workers welcome, and take comfort and pride in the fact that the managers of THEIR company and the providers of THEIR capital are wealthy.

Called the way of Africa. Combine that with the “Chief can do no wrong” mentality and you get Zimbabwe and Angola etc and seems soon to SA.

Agree with much of what you say. It’s interesting though, Sensei, that most of the big spectacular failures of our times (ENRON; Worldcom; Lehman and many others) were not caused by the blue-collar workers, politicians or academics and their theories, but by those very high-skilled, highly paid executives and managers and providers of capital intent on maximum extraction.

Public technology and banking behemoths become government concerns – large pension funds and business confidence is inextricably tied to their viability. To say the subprime mortgage crisis was not brought about by regulatory measures, as much as the legislation that enabled reckless lending did, is short-sighted. If Freddy and Fanny (state-bankrolled mortgage issuers) was allowed to implode without the cash injections that typified post-depression bail-outs, the market could have taken a smaller hit and recovered faster. But really ratings agencies were artificially propping up banks’ toxic assets until it became evidently bust.

Jerry I feel honoured that you reply to my comment. My point of view is simply this, businesses are created from nothing by an entrepreneur with the sole purpose of making money. The regulators, academics and workers did not start the business, although they also had the same opportunity. They had an equal opportunity to start that business, but they chose to wait for someone else to take the risk and get the capital, before they start making demands.

Bankruptcy, business failure and prison sentences are the penalties for mistakes made in business. Socialist policies only serve to dissuade risk takers and owners of capital to exploit a given environment. If I have to choose between a situation where business owners are taxpayers and contribute nothing else to society, and no businesses to pay taxes, I will take the stingy business owners with a narrow focus of self-enrichment any time.

Chaebol is a very inefficient structure based on the Japanese Keiretsu. The main inefficiencies of these structures are captive customers and captive suppliers. When Mitsubishi steel needs to borrow money it goes to Mitsubishi bank. When Mitsubishi motors needs steel it goes to Mitsubishi steel. The fact that any of these business units may be more profitably engaged in business ventures with others outside the Group bleeds shareholders of value and holds the company back. Look at Toyota versus Mitsubishi. Toyota= Kanban + outsource + JIT. The success of many chaebol is more a case of despite themselves not because of themselves.

“… despite themselves not because of themselves” should perhaps read “despite not following narrow, outdated prescriptions of the 80’s no longer appropriate for our times.” No?

It’s poor logic that insists that something that is successful should NOT be simply because it does not affirm your pet theories and assumptions. If it aint broke, don’t fix it! Also to argue that companies like Mitsubishi, LG, Hyundai, Samsung have “captive customers” is ludicrous. They are major international players BECAUSE of the way they have been structured.

End of comments.

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