Ethical capitalism

We have waxed long and hard on these pages about CEOs acting like pigs at the trough, robbing their businesses, the golden geese that should be improving the lot of all in society, by paying themselves huge unjustified pay and bonuses and maximising their share prices (and hence their shareholdings) whilst paying their employees the bare minimum and investing little for growth

At the same time, we’ve often applauded the John Lewis retail chain, in particular Spedan Lewis, founder of the company – his aim was: “Solely to make the world happier and a bit more decent” – JL now has 400 shops and 83,900 employees, called partners, who share profits made in an annual bonus scheme – this has obviously increased employee motivation levels, improved their attitude towards colleagues and customers and been a significant factor in their success

Now, another splendid example has hit the headlines

Julian Richer founded his eponymous TV and hi-fi chain Richer Sounds in 1978 – the company has a gross turnover of about £200m, is worth £9.2m and has 522 employees:

  • He is to give control of the company to an employee trust i.e. a 60% share of his company
  • And a further £3.5m as a cash bonus so each employee will receive £1,000 for each year of service – an average of £8,000 each
  • And all this on top of giving 15% of profits to charity

Apparently, Richer regularly monitors his employees’ morale by asking them for their ratings from one to ten – he also calls anybody suffering a bereavement or health treatment – and 70% of his employees use his 12 holiday homes at least once a year, funded (he says) by ‘reduced internal theft’

Overall, he says: “Companies should be encouraged, not forced, to act in a similar way”

Richer explains: “I am increasingly angered by what I see elsewhere – disreputable people running their companies in a way that involves taking as much as they can from society and then sneaking their profits out of the country”

The Times says:

  • “Richer’s decision shows a laudable commitment to the company’s employees and an acute understanding of how capitalism rests on public-spiritedness rather than avarice
  • Companies have more obligations than the enrichment of their shareholders, and acknowledging this can be a route to business success
  • The good company owes profits to its shareholders, secure jobs for its employees, good products or services to consumers, and an obligation to society – it’s how the market economy can serve the many, not the few
  • There are a mere 350 employee-owned businesses in the UK – aligning the interests of employees and owners is good for business by stimulating productivity”

Conclusions:

  • Nowadays, many bosses are more concerned with feathering their own nests than building their own companies for the benefit of all – they display what Prime Minister Ted Heath called ‘the unacceptable face of capitalism‘ – how do they get away with it? – “Because they can” according to President Barack O’Bama
  • Richer’s whole attitude towards his employees is key to his own financial success – he not only ups their pay and ownership status but treats them as equals and shows genuine concern for their welfare, both at work and at home – no wonder Archie Norman consulted him when boss of ASDA and is doing the same now he’s boss of M&S
  • Too few managers realise the potential lying dormant within their teams, not least because of them
  • Some believe most teams could perform at least 30% better if only their bosses thought and acted like Spedan Lewis and Julian Richer

WHERE MEASURING ENGAGEMENT GOES WRONG

An article by Peter Cappelli and Liat Eldor in the Harvard Business Review is reproduced below close to its entirety

Surveys to assess how engaged workers are in their jobs are highly popular among employers, who hope the results will help them improve employee productivity and creativity and reduce turnover – but consultants and academics have long differed in their conclusions about how much can be inferred from the results of these surveys

Based on our own work as academics, we caution business leaders implementing such surveys – they may not tell you much about your employees that you can do anything about

One reason for this is that there is no universal definition of “engagement” as it applies to workers – another is that while engagement has been shown to have some ties to employee performance (e.g., absenteeism, turnover, performance appraisal scores, self-reports of performance), those ties account for a small amount of the variation in individuals’ performance

Typically, companies are interested in employee motivation when they conduct engagement surveys – the more motivated workers are, the higher their level of performance will be, the thinking goes

We do know that employees tend to be more motivated and engaged when they feel their jobs are crucial to their employer’s success or contribute to society, when their leaders support them, and when they can try new things – but changing those factors and, in doing so, increasing engagement and motivation — is devilishly difficult to do

Before canvassing employees on engagement, business leaders should understand the surveys’ shortcomings, clarify what they want to accomplish, and explore whether they might be better off with alternatives

Surveys that gauge workers’ satisfaction with specific factors such as pay, benefits, and work schedules, for example, or that evaluate how they are being managed by their immediate superiors, might be more useful in reducing turnover

THE ORIGINS OF ENGAGEMENT SURVEYS

The current surveys sent out by human resources departments have their roots in the morale surveys conducted by the U.S. military during World War I – “morale survey” was a catchall term for evaluations covering a wide range of topics, but the military was especially interested in the troops’ willingness to fight

After the war, many of the experts who had conducted the morale surveys moved into the private sector and created organisations to apply the lessons from military psychology to employees

The popularity of these kinds of surveys among employers grew in the 1930s, when companies such as Sears, Roebuck used them to figure out how to fight off unions – this explains the initial focus on whether workers were satisfied with factors like pay and supervision – if companies were aware that their workers were dissatisfied, and knew why, they could address the problems before unions had a chance to step in

The Big Idea

By the 1950s, major corporations’ worries about unionisation had waned, as companies either succumbed to unions or were able to keep them out

HR departments kept the surveys alive to ask workers about issues in HR’s purview, such as satisfaction with pay, benefits, and work schedules, which can indicate whether employees will leave for new jobs

The notion that satisfied workers are productive workers made surveys even more popular, until more sophisticated analyses starting in the 1980s found that satisfaction did not predict much about job performance

These findings, combined with a new field of research, caused employers to embrace the idea that measuring worker engagement, rather than satisfaction, could tell them something about how hard their employees were working

The concept of engagement came out of the academic research of William Kahn, a Boston University psychologist interested in examining the degree to which individuals brought their “full selves” and energy to their jobs

The idea advanced with the identification of employee burnout as an issue — the finding that work performance suffered when employees were psychologically and emotionally exhausted from their work experience – if lack of energy was a bad thing, then the opposite (engagement) should be a good thing, posited Wilmar Schaufeli of Utrecht University and his colleagues

A number of contemporary definitions of engagement tap into employee commitment (Do I care about my employer’s interests?) and motivation (Am I actively trying to advance those interests?)

THE PROBLEMS WITH ENGAGEMENT

One problem that companies often stumble over when using engagement measures is that different definitions of the term abound – the European version, for example, associated with Schaufeli, emphasizes the idea of “vigour,” and there are an array of others

Consultants also tend to use different definitions from their competitors, which contributes to the confusion:

  • Gallup Consulting, for instance, says that engagement is pride, passion, and enthusiasm for work
  • Willis Towers Watson defines it as “employees’ willingness and ability to contribute to company success.”
  • One of the most widely cited pieces of engagement literature defines it differently still, as “the individual’s involvement and satisfaction with as well as enthusiasm for work”

The predicament is when an employer wants to find out, say, how hard employees are working, and the engagement survey it uses measures something else, such as pride in one’s job or ability to contribute

A second major problem with engagement surveys is that many employees don’t respond to them because they don’t believe management will do anything with the answers

A recent survey found that 70% of employees do not respond to surveys and nearly 30% of them think they are useless – and anecdotal evidence suggests that the pervasiveness of those sentiments hasn’t changed since then

When we survey employees, we are signaling that we care about what they think and that we are going to actually do something with their answers – if we don’t really care, and our employees know this, because they didn’t see any changes after the last survey was conducted, an additional survey will only increase worker alienation

Finally, many employers are interested in the idea of engagement because they believe it tells them something about job performance and, in particular, whether people are working hard – but job performance and other employee behaviours are influenced by many factors that most engagement surveys can’t take into account, including the tasks people are given, which sometimes change daily; what their supervisors are doing; what is going on with their project or the company; and so on – in addition, many factors outside the job affect an individual’s performance, such as ill health or family problems

The results also vary depending on what a business does – engagement has been shown to be far greater in organisations with a clear social mission, such as saving children’s lives, than in those that lack one, like investment banking

Given all this, the hope that we can predict someone’s future job performance with accuracy based on any self-reported statement about that person’s current mental state is unrealistic

Consequently, employers should rethink their survey strategies and make sure they are using the type of survey that can give them the best information for achieving their goals

WHAT YOU SHOULD DO INSTEAD

Before conducting an employee survey, figure out what you actually want to know:

  • If you want to find out whether employees think your compensation and benefit policies are fair, ask them that question directly
  • If you are concerned about who might quit, ask about that directly as well
  • If you want to know how employees are performing their jobs, you can survey them on their perspective (or, better yet, ask their supervisors – we believe their assessments are better indicators of job performance than the self-reports from individuals about their motivation levels)

You can also learn a lot simply by asking employees open-ended questions such as “What would you change about your job and how you are managed?” and by having meaningful conversations with supervisors about what prevents them from getting more work done

You are likely to learn more about how to improve performance from these kinds of questions than from surveys about engagement

So, if you are truly interested in your employees’ motivation and commitment and decide to conduct engagement surveys, just be sure to keep their limitations in mind:

  • Once you have the scores, be realistic about the meaning of the results
  • You shouldn’t expect your workers’ engagement to be anywhere near 100% – few people are completely focused on their work even when they are at the office
  • Engagement scores are also reasonably stable over time – employees who are highly engaged tend to stay that way
  • The same holds true for those who are not
  • Don’t expect that a new compensation system or a culture change initiative is going to result in higher engagement scores

Second, remember that engagement scores measure the perceptions of a group of employees, but this does not address causation – and while some surveys try to ask employees directly why they are disengaged, this is often difficult for workers to self-diagnose

The best approach is to ask employees directly about factors that research has shown matter to engagement:

  • Employees want to have a sense of purpose in their work and to feel that their role is meaningful to the organization’s success
  • They want leaders who lead by example, who are supportive, who set clear goals, and who give regular, meaningful feedback
  • They want a safe environment where they can take risks and try new things

Are they seeing that at work?

Finally, do something about the results – improve the factors employees report are lacking

Engagement scores, for all their prominence in HR and media circles, are ultimately about something both remarkably simple and also difficult to do successfully – doing a good job of managing your employees every single day

Economists’ information gap

Robert Samuelson, an economic journalist writing in the Washington Post, says: “Many economists often don’t know what’s going on”

How refreshing to read this breeze of commonsense after being buffeted by gales of expert opinion and advice from the government and its agencies, economic think-tanks or the media

The following is a precis of his article

The most intriguing thing we have learned about economists in recent decades is that they don’t know nearly as much as they thought they knew

Their forecasts are usually badly wrong:

  • They don’t see major turning-points coming in the economy, at least not until afterwards
  • They can’t explain the current growth in jobs, nor how long it will last
  • They missed the long term decline in interest rates – and can’t fully explain it
  • They did not predict double-digit inflation many years back – worse still, they advocated policies which kindled it – and they’re now baffled by current inflation remaining low
  • They were completely surprised by the recent 2008-09 financial crisis – “Why did nobody notice it coming?” Queen Elizabeth famously asked
  • And, over the last 50 years and more, they have consistently failed to forecast correctly any major shift in productivity growth, whether up or down

Samuelson concludes: “There is an ignorance gap between what economists know and what we need to know which is huge”

The cause of the ignorance gap is the very complexity and obscurity of a $20 trillion economy (United States) or an $85 trillion economy (World) – it’s changing in detailed and often-unanticipated ways – and we humans, including economists, have never been very good at predicting the future

Most economists may be extremely smart and well-informed – many are also public-spirited and generous with their time – they elevate the level of public discussion

But many exaggerate what they know and how much they can influence the economy, not least to gain and retain political relevance and power – the result is often disappointment, with government performance falling short of promises

Samuelson suggests: “A little more humility might be in order”

We say: “Better basic data on the economy would do better”

20s to be greatest decade in history

According to Ian King, banyanhill.com, we were promised flying cars by now but got Facebooknot to mention Google, Twitter and Skype

He admits Facebook has its uses but the utopian future expected has yet to arrive – all these new technologies have not yet led to widespread prosperity

In 1930, John Maynard Keynes predicted we would be working 15-hour weeks around now – the impact of the Industrial Revolution led to a sharp decline in average weekly hours – new machinery powered by technologies such as electricity and the internal combustion engine allowed workers to produce more with less human input

Weekly U.S. Manufacturing Hours 1940-2010

Keynes expected this trend to continue with the rise of new technologies – however, the last 50-plus years have bucked that trend – the steady decline of weekly hours flat-lined during the Great Depression and has continued to do so ever since

Despite recent technological innovations, workforce productivity hasn’t rapidly improved yet their productivity determines the average standard of living, including their work hours input

Indeed, in the last 100 years, there has been only one big wave of productivity improvement and that occurred in the first half of the 20th century – it had taken a few decades before the breakthroughs of the Industrial Revolution translated into major productivity improvement:

  • The first automobile patent was awarded to Karl Benz in 1886, but it was decades before Henry Ford mass-produced the Model T
  • Thomas Edison produced the first light bulb in 1879, yet 50 years later only half the homes in the United States had electricity
  • Both thus started slowly at first, but then suddenly became part of everyday life, ushering in many other developments like the dishwasher and washing machine which freed us from the toils of home labour

Now, we are about to hit a tipping point with the Information Technology Revolution:

  • The internet has followed a similar trajectory as electricity
  • It’s been around for three decades
  • It’s only been used to search a giant database
  • That’s about to change

Within the next decade, nearly everyone on planet Earth will have internet access, putting the world’s information in the palms of their hands

Billions of devices will collect and transmit the world’s information over high-speed 5G networks, launching new disruptive trends into the 21st century viz:

  • Blockchains will create new financial networks, as users can own something of digital value that can no longer be duplicated
  • Robo-taxis will use artificial intelligence to shuttle kids safely to soccer practice
  • Robo-trucks will ship goods cheaply around the country, bringing manufacturing back
  • City traffic, congestion and parking will become a thing of the past
  • The world’s best surgeons will be robots
  • (And the above are just some of the tangible benefits possible – there’s a host of more valuable mental benefits in the offing)

King concludes: “It will be like the Roaring ’20s again — a decade of increased productivity and prosperity”

GDP – Flaws

At present, GDP is universally taken to be shorthand for national well-being

Richard Tomkin, assistant director of the ONS – Office for National Statistics – says: “GDP is used as an all-encompassing proxy for people’s living standards although never designed for this and it doesn’t fully capture” 

However, it was the late Robert Kennedy who said: “GDP measures everything except that which makes life worthwhile”

We agree

Indeed, in our view, GDP is well past its usefulness date:

  • First, it does not measure everything – much countable economic activity is not counted, whilst more is deemed uncountable – much is spent on failure and putting things right, examples being repairing or replacing shoddy goods, repeat visits to doctors or hospitals to be cured or dealing with youth suicides, exam failures or litter louts and fly-tipping
  • And much that enables people to live lives that are meaningful and satisfying goes uncounted – worthwhile modern living is much more than just consuming goods and services

Bank of Canada Governor Stephen Poloz agrees – he doubts the appropriateness of GDP and whether we are accurately measuring economic activity in the digital age, saying:

  • “Traditional measures were developed to measure the manufacturing-based economy of old – to count the number of widgets produced in the factory by the workers employed
  • But the economy has become a very different animal, dominated by services, and those services are hard to measure and properly value – digital services in particular”

The overriding concerns now are whether the gains from technology are being fully captured by GDP statistics – whether the apparent decline in advanced country national productivity levels over the last decade or so is because of slow economic growth or whether other valuable activity is being overlooked

At present, we guestimate the composition of any developed economy’s GDP to be as follows:

                          COUNTABLES       UNCOUNTABLES                           

COUNTED                 50%                        20%

                          _______________________________                       

UNCOUNTED            15%                       15%           

 

A. Counted Countables (50% – trend flat):

  • Private sector goods and services all have a selling price – customers assess the VFM on offer, some buy them – those sales are counted, albeit some are fraught with errors  
  • Public sector services usually don’t have a price – input costs are thus assumed to be equivalent to notional output prices paid and so the value obtained by tax-payers – but, if one pours extra tax-payers’ money into such services, GDP rises, so the economy and national productivity appear to improve when the opposite may be the case
  • Professor Hal Varian, Chief Economist at Google commented on the impact of technological progress in this quadrant:
    • “In 2000, there were 80bn photos taken worldwide – now, it’s about 1,600bn i.e. 20 times as many
    • The cost of each photo, the film, developing and printing was about 50p each – now it’s effectively zero, so a decline in GDP but a huge increase in enjoyment/ pleasure and so our standard of living”
  • Thus, if a nation keeps reducing unit costs of existing stuff, even if it keeps increasing the quality/ value offered, overall GDP will be reduced
  • Equally, if technology keeps replacing much existing stuff – for example, smart phones replacing files, letter paper and envelopes, postage stamps, diaries, watches, atlases, cameras, video-recorders as well as old phones – then GDP will fall
  • Hence, for GDP to grow, nations must either sell more volume of existing stuff at existing or higher prices and/ or sell new stuff too
  • Brent Moulton, formerly of the US Bureau of Economic Analysis which collects US GDP data, has two major concerns:

    • How to account for the effects of innovation on new products and quality changes

    • How to measure price changes – how much of any change in the sales of a particular good or service is due to price inflation and how much due to changes in real output, either the quantity or quality of that good or service

  • The scope to under or double-count in this quadrant is also considerable, especially when outsourcing abroad or several suppliers are involved for the one product – it’s not just assumptions, estimates and forecast errors that muddy these waters

 

B. Counted Uncountables (20% of GDP –  trend flat):

  • There are many sizeable private sector areas where the ONS says economic estimates are now made, including:
    • Drug dealing
    • Prostitution
  • The ONS claims the annual proceeds from drug dealing alone are worth some £4.4bn to GDP whilst prostitution clocks some £5.3bn 
  • Apparently some ONS investigator, maybe team, was able to establish that the average price of a prostitute in the UK was, at the time, £67 without giving more detail
  • And then they ask us to believe their official GDP statistics are accurate to within 0.1%

 

C. Uncounted Countables (15% of GDP –  trend rising)

  • New economy activities, including:
    • Millions of us now use our computers and phones to complete clerical activities once done by secretaries, typing pools, bank and insurance clerks, even stockbrokers – what once cost money and counted for GDP is now done for free and so doesn’t count
    • Many organisations get their customers to do, for free, much of the admin paperwork once done by paid staff e.g. HMRC and tax returns, supermarkets and self-server checkouts
    • Much R&D investment is made hoping to find new products/ services for later years – GDP measures only the revenue and profits obtained from products/ services this year
  • White economy activities, including:
    • Housework – cleaning, cooking, DIY, gardening
      • The ONS says the value of unpaid housework is £1.25 trillion p.a.
      • This is bigger than the output of the non-financial sector and equivalent to about 2/3 of total GDP
    • Hobbies, arts, music
    • Charity work – RNLI lifeboatmen
    • Most child/ elderly care
    • Ferrying family members to/ from school, shops, friends, healthcare
    • Unregistered unemployed earning a few bob
  • Black economy activities, including:
    • Moonlighting
    • Working for cash
    • Crime – fraud, muggings, black markets 
    • Tax avoidance
    • Hidden incomes

 

D. Uncounted Uncountables (15% of GDP –  trend rising):

  • Environmental benefits:
    • Costs to ensure the sustainability of the environment – not having to later repair damage done now e.g. from pollution, global warming, atomic waste, less bees for pollination
    • Enjoyment of countryside, seaside, fresh air, clean seawater, diversity of flora and fauna
    • More trees, less flooding
    • Better infrastructure e.g. transport convenience and speed, broadband capacity
  • Physical benefits:
    • Longer lives
    • Healthier lives 
    • More caring/ altruism/ concern for others
  • Mental benefits:
    • More/ better leisure/ pleasure – more choice, better quality
    • Less boredom/ tedium/ slog doing boring work
    • More contentment if not happiness 
    • Better educated/ more skilled
    • Better informed, and quicker, so can make better decisions
    • Better/ quicker diagnoses of illnesses
    • Better/ quicker searches of legal precedents before court cases
    • More social connectivity
    • More working from home – less stress, less wasted commuting time

CONCLUSIONS

  • In developed nations, GDP counts most old-world physical/ tangible goods and services but misses other new-world mental/ intangible benefits on offer which make peoples’ lives worth living
  • In particular, GDP misses:
    • Some 30% of total material wealth generated 
    • Maybe 90% of mental wealth 
  • This means GDP and national productivity figures derived from it can be dangerously misleading, especially to governments who determine economic policies and tax regimes based on them 
  • Famous economist Joseph Stiglitz supports this view: “What we measure affects what we do, and if our measurements are flawed, decisions may be distorted” 
  • However, there is also cause for optimism – people may be much better off now than official statistics would indicate
  • Charlie Bean, economist and ex Deputy Governor of the BoE – Bank of England – believes: “The UK economy may be growing 0.75% per annum faster than official figures say”