Attila the Pun
Thursday, January 06, 2005
Ephemeral and meaningless column

James Rose is having a swing at nasty corporations in today's Age:

Rewarding managers for something as ephemeral and meaningless as financial performance alone is clearly unsustainable and is becoming increasingly difficult to sell to shareholders and the wider community.

Ignoring the patently stupid claim that financial performance alone is "meaningless", what evidence does he have that it is "clearly unsustainable"?

It's getting worse.

As evidenced by what? Increased numbers of bankrupt companies? Oh, sorry, didn't mean to ask for proof of an assertion.

Financial success today now appears to mean that if the company is still in business - growth, profits, or otherwise - then the managers should have their pockets filled with bonuses.

He likes to wave the "manager's bonus" around as some sort of evil symbol. Would anybody reading this article not welcome a bonus from their employer if they have met established performance targets? Is it only wrong if you are a *gasp* manager?

In the past 10 years, the concept of corporate responsibility (CR) has moved more and more into the business mainstream. Companies such as BP, Shell and GM have sought, not always successfully, to raise their CR credentials.

Yeah, we call that "lip service".

But CR is effectively illegal. Corporations laws around the world, including in Australia, generally place the legal emphasis on financial returns or, indeed, financial survival, as the central obligation for corporate managers.

Imagine that - the central obligation for a "corporate manager" (insert your own dramatic music here) is to ensure the survival of their company, and possibly generate a finanical return. What a scandal.

Even if they wanted to be more responsible, they are not legally enabled to do so as shareholders are supposedly entitled, at the cost of other more wide-ranging considerations, to expect maximum financial rewards for their investment.

Shareholders are "supposedly entitled" to expect a financial return on their investment? What nonsense is this?

Law changes, such as the Sarbanes-Oxley corporate governance laws and the Alien Tort Claims Act in the US, have begun to erode this systematic imbalance around the world. However, it remains so that here corporation managers pander to their shareholders, mainly their major shareholders, and ritually pad their financial accounts to reap the dubious rewards written into their salary contracts.

He seems to be missing a fundamental point here - managers don't 'pander' (as defined as catering to the lower tastes and desires of others) to their shareholders, they answer to them. Why? - Because the shareholders own the business. They have contributed their own money towards the capital of the company in order to gain a financial benefit. His second point out ritual padding of financial accounts is, of course, not supported by proof.

The results are that nobody wins, other than the tiny population of corporate Brahmins that sashay through the world's economies.

This line is particularly stupid. Does he consider the millions of Australians who have made money on the stock exchange to be part of the tiny populations of corporate Brahmins?

Even shareholders end up losing as their companies whose books have been cooked will eventually be burnt.

Oh, he wasn't referring to shareholders when he said "nobody win". He must have thought he was terribly clever coming up with that line, too bad that it is meaningless. He is also trying to conflate two seperate concepts - a) the 'pandering' to shareholders by managers, at the expense of other considerations and b) cooking the books to increase their bonuses. The first of those is perfectly legitimate, the second is illegal and contrary to the interests of shareholders. To try and refer to both of them, and suggest that it will end up destroying a company, is disingenuous.

As long as financially based performance indicators are slavishly and exclusively followed, the absurdity will continue. But the truth is that there are now no excuses to continue this skewed approach to performance measurement. Despite the obstacles, developments in corporate responsibility have produced the tools to begin to undermine the untenable domination of financial indicators.

mmmm, adjectives and adverbs. I am sure he was working himself up into quite a typing frenzy during this, but that doesn't make it any more persuasive. He has not established that using financial indicators is absurd or untenable, therefore he has not made out a case why we should adopt the 'tools' that he is now going to offer.

Probably the easiest place to start is the Global Reporting Initiative. The GRI was established in 1997 as a multi-stakeholder body designed to develop and communicate a range of guidelines to be used in sustainability reporting around the world. The group has developed about 100 principles to allow stakeholders to assess corporate performance in social, environmental and economic areas.

This is like a sweet and sour dish - we have the untenable domination of financial indicators boo hiss) followed by a warm and fuzzy "multi-stakeholder" body which is busy developing and communicating principles.

These might be useful, but frankly the GRI is CR-lite - a starting point only. To be really honest about this, we might need a second level of indicators.

One hundred principles is only CR-lite?

In Australia, for instance, it is particularly common for corporate leaders to carve off slabs of staff to bolster an annual report. This is the sort of thing that many managers continue to receive fat bonuses for.

Do annual reports have a "number of employees fired" column? Again, he does not cite a single example of "slabs of employees" being fired to bolster an annual report. If this is particularly common in Australia, surely it wouldn't be too hard to name drop a couple of examples?

Perhaps if the company's financial performance were anchored in social responsibility, via a ceiling on employees fired in the course of a year, then executives might have to find more creative ways to grow a business.

Now we are in fantasy land. He is actually suggesting that a cap be put on the number of employess who are fired in a year, irrespective of business performance, market conditions, economic factors etc. If this were done, then executives (a cousin of the evil "corporate manager") would magically find growth opportunities that they otherwise would have ignored. After all, everyone knows that given the choice between a growth opportunity and firing people, any manager worth his salt would take the easy option and fire people.

The starting point for such a system would have to be the few remaining state-owned companies left, such as Energex. Governments can take the lead in ensuring their business operations are sustainable. With such a lead, shareholders and other stakeholders might become emboldened and demand the same from publicly listed companies too.

A Government could ensure their state owned monopolies are sustainable by capping the number of employees they can fire? And shareholders will think this is such a great idea that they will follow suit? Does this guy believe any of the stuff he writes? As unfortunate as it is for the employess affected, firing people is sometimes the best option for a company. There are situations where a responsible corporate manager should fire people, in order to save the company as a whole. If doing this will damage them financially (by losing a bonus) then their interests will be in conflict with those of the business (and therefore shareholders). Why would a shareholder agitate for such a thing?

In this context, Telstra becomes a fulcrum in Australia's corporate-stakeholder relations. If we are to have a sophisticated and sustainable corporate culture into the new millennium, then the inevitable sale of Telstra should incorporate a change to the company's constitution to factor in such non-financial performance indicators as part of the company's everyday management.

For a start, the constitution of a company, like that of a country, does not govern its everyday management. It couldn't possibly do so, particularly for a company as large and complex as Telstra. Secondly, James could get the Government to include whatever touchy-feely measures he likes in the constitution, and it wouldn't make a lick of difference. Why? Because as soon as the company is sold (to its shareholders, not to these mysterious "stakeholders"), they can change the constitution to remove them all.

The problem with James' approach is that he is coming at it from the wrong angle. He wants to change a company's behaviour by breaking its commitment to its shareholders. He should instead be trying to exploit that. A company answers to its customers (whereby it generates profits) and its shareholders (who own it). If one of these groups is not happy with the way the company is acting, be it financially, socially or environmentally, then they can exercise the immense power they hold over the company to change this behaviour. A company will react to such an exercise of power a lot more quickly and effectively than they would to 100 vague corporate responsibility principles.

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