A Silver Lining? (part 1)

Would it be wishful thinking to hope that that there is a silver lining to the Covid-19 cloud hanging over the world? All the rather wild fiscal and monetary experiments could lead us to changing our perceptions on long held economic beliefs. Who would have credited a Conservative Government with turning Jeremy Corbyn’s dreams into a reality? Perhaps we could even rethink the World economy in a way that improves the well being of all.

You might find my ideas a little Utopian, but, as we are going to need to reboot the economy, we might as well see if there are things we could do differently  to try and improve the circumstances of all. If we don’t at least try, we will never make the world a better place.

If we look at the UK economy.

Some years back David Cameron suggested that we try and find a happiness index to measure the economy. Currently we really look at GDP, as a measure of success, yet GDP only measures turnover to the final consumer, and every businessman will tell you that while turnover is important, it is no use if it is not delivering a profit. I suggest that we should be looking at the profit of the economy and the extent to which that profit is shared among the population. I also contend that happiness is a natural result of feeling that you are sharing in the fruits of your labour.

When we look at the two main political parties, we see them as representing two ends of a spectrum. The Conservatives as a low taxation, small government party while Labour represents a tax and spend party with the consequences left to future generations. In terms of economic philosophy, we might say, the Conservatives lean toward Ricardian or classical economics, while Labour takes a more Keynesian position. Neither party is absolute in their convictions as both tend to ignore the less palatable consequences of their ideologies.

If we got ourselves out of our ideological adherence to one or the other and rather looked for the good parts of both parties we might make some progress toward a fairer and more equitable society where people are generally happier.

Over the last decade we have seen a transition toward a more contract related form of employment, with some 25% of employment now in the format of Zero hours contracts or direct contracting to businesses. Many of the so called self employed are only contractors, who are absolving the companies, for whom they work, from normal obligations to an employee. In a way this is akin to ‘piece work’ of yesteryear.
We have seen corporate pension funds largely annihilated, and a growing belief that you must change jobs fairly frequently to progress. Politically we point to the so called high level of employment as a success of the economy. Yes there are many who, because of child caring obligations or other reasons, might prefer to work only 30 hours a week, but that should be a choice, not the only option available.

Once we emerge from the current crisis we are likely to find that unemployment has risen to between 10 and 15% and maybe even as high as 20%.. Many small businesses will simply not open their doors. While bigger ones, like aircraft industry and oil industries, will face a period of scaling down. Many things will not return to normal, social distancing, might moderate but, will mean shops are less crowded, pubs and restaurants will tend to have a far lower footfall and many businesses have learnt that quite a few of their staff can work as well from home. This will result in less commuter traffic and business traveling as people have learnt they can have effective meetings over the internet. In the medium to longer term this will also result in a reduction of demand for office and retail space, placing downward pressure on rentals.

A thought, that springs to mind immediately, is that we should consider reducing working to a 35 hour week, without a corresponding drop in wages. Naturally this would impact on costs, and prices would need to rise to cater for it. If we look at the economy as a whole then we would see that cost, or price, is made up of wages + rent + interest + profits and tax. I have previously said that there is a strong case that rents need to fall, and will cover this later. Consideration could also be given to restricting the maximum rate of interest that can be charged.

The biggest impact of such a policy would be on the lower paid members of society, like our waste bin collectors, shop assistants, nurses and carers for example, who are generally needed to work 40 hour shifts or longer. The business community might object, but the adverse effects could well be ameliorated.

However, we should be thinking on a far wider scale.

During the 1980’s I had strong relationships with businesses in both Japan and Germany and was struck by the parallels in their business culture. In Japan I found that people started working for a company with every intention that it would be for life, because the business accepted a far greater responsibility toward that employee and his family. In Germany I found that companies had board representation by the workers with decisions being made with workers consent, in fact the employee was almost like a family member. Both of these countries can be looked on as being among the most successful of the capitalistic economies in the world, yet there were very strong socialistic tendencies.

During my time as a business and systems consultant, I was struck by the number of companies that succeeded not because of their management, but in spite of their management. I have always found that the vast majority of people always try to do their best for the company that employs them. I often quote from two case studies, one in the 1950’s and another in the 1970’s, which both show that by giving greater freedom to workers, and limiting management interference, businesses are more successful. This has left me forever pondering the basis of reward. Can a CEO truly be worth a million+ while many of his workers are on minimum wage levels? I remember being told that in Japan, a factory manager’s salary would be less than 5 times greater than the worker who swept the factory floor.

When I look at companies like Microsoft and Apple I see that a fair proportion of the reward system was based on share options, certainly two of the most successful companies in modern times. Naturally this only works for publicly quoted companies. In my younger days I was quite keen on bonus systems, however I found that it was never easy to measure output, nor to quantify an individual’s contribution to that output.

In the run up to the last election Labour proposed giving workers a share in the profits of businesses of around 10%. I am not sure that this was clearly defined, nor whether that also amounted to giving a share of the capital of the business, but found it an interesting proposal.

The mechanics to achieve this would be fairly simple. By legislation we can automatically add to each company’s Articles of association a new class of no par value preference shares, that are automatically increased to equal the required percentage of other allotted dividend entitled shares. In other words if there was a new allotment of shares there would automatically be a new allotment of the employee preference shares. The shares would rank ‘parri passu’ with other ordinary shares for dividends including a liquidation dividend. The mechanics of sharing the dividend among the employees would be on a basis of the proportion of man days actually worked by the employee during the period for which the dividend is declared, to those employees employed by the company at the time of dividend declaration. Note I have included liquidation dividend simply to overcome cases of asset stripping. Perhaps one should also think about disguised dividends (share buy backs) or other forms of capital distribution also being deemed a dividend.

Consideration could be given to granting the employees, as holders of these shares, the right to nominate a Director. Obviously impractical for small companies, but, where there are more than say fifty or a hundred employees it could bring us much closer to the German model, which can be looked on as a sort of partnership between capital and labour. One could also debate whether the share should be higher than 10%, perhaps even as much as 20%, phased in over 5 or more years.

For those who argue that this is an attack on the entrepreneurs or holders of the main shares, I contend that a drop of 10% in your current dividend yield is neither here nor there in the general scheme of things, and would barely have any impact on share prices, mainly because the new shares would be non trade-able. As time passes investors will have got used to the idea. In return the company will have a far more loyal and productive workforce, simply because they feel they are sharing in the fruits of their labour.

These are simple remedies aimed at addressing the immediate consequence of a sudden increase in unemployment, as well as some of the ills of our current economy. I could confuse the issue further by quoting stats to show that our quoted growth in the economy over the last 20 years, has not been replicated by a similar growth in median incomes of the population,.

In parts 2 and 3, I will attempt to cover some politically more sensitive issues, which I have perhaps hinted at above, that could also help toward making a brighter future.

See Part 2

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