Tuesday, 13 February 2018

Corporate governance, short-termism and shameless greed neo-liberalism... and Carillion.

They do the hard work so that I don't have to!

At Flip Chart Fairy Tales, a good summary of 'what went wrong' at Carillion*, seguing into a general discussion about how to diagnose short-termism and whether its ill-effects are even measurable.

At Stumbling & Mumbling, a riposte:

We have some more empirical evidence here. Let’s say that stock markets were too short-termist. In such a world, we’d expect them to under-price growth stocks and pay too much for stocks that pay high dividends. 

Generally speaking, though, the opposite has been the case. For most of the last 30 years, high-yielding shares in the FTSE 350 have out-performed lower-yielding ones: the main exception came between 2003 (when tech stocks were under-priced) and 2010**. And the FTSE Aim index – which contains many “growth” stocks” has horribly under-performed the All-share index since its inception in the mid-90s. 

This tells us that stock markets have generally paid too much for growth and too little for dividends. They have been too long-termist, not too short-termist.

Of course, managers can be as irrational as the rest of us. But it’s possible to be too long-termist as well as too short-termist. The biggest problem with corporate governance – as highlighted by Carillion - is not that bosses are too short-termist, but that they have too much power to plunder firms for their own private gain.

Warming to his own theme in his next post:

One feature of neoliberalism is that restraint in the pursuit of self-interest is now absent. Bosses lack Smith’s “impartial spectator” which tells them to hold back, and instead feel no compunction about jostling others. They are content to plunder customers, pensioners, sub-contractors, workers or future workers.

Among her many claims for expenses, Glynis Breakwell, Vice-Chancellor of Bath University, claimed £2 for biscuits. Many of us would not have done so, thinking it too petty-minded to bother. Neoliberals, however, not only are petty-minded but don’t mind being seen as such by others...

And there’s the rub: where they think they can get away with it. My story here is not just about morality. Perhaps there never was a golden era of benevolent paternalistic bosses. What’s happened since around the 1970s is that the restraints upon bosses – from law, social norms and trades unions – have diminished. The problem isn’t just greed, but power.

* On the topic of Carillion, a look at their 2016 accounts is an eye-opener.

Page 92 "consolidated statement of changes in equity" shows that opening net assets were £1,016 million, to which they add reported profit for the year of £129 million and deduct £83 million of dividends and a £440 million increase in the pension scheme shortfall (plus/minus various other bits and pieces) to arrive at closing net assets of £730 million.A massive fucking loss, in other words.

They were honest enough to disclose the pension scheme shortfall, but why on earth was this not treated as an expense in the year, meaning an overall loss before tax of about £311 million? In which case, cancel the dividends and directors' bonuses for a start, methinks.

Page 93 "Consolidated balance sheet" is even more damning.

Gross assets were inflated by £1,670 million of "intangible assets" which is completely made-up numbers, they are worth nothing, in which case the balance sheet would have been negative overall (deduct £1,670 fantasy assets from reported net assets of £730 million).

What are these "intangible assets"?

They are accounting alchemy which enable you to book future profits before they are even earned. When you get a nice juicy PFI contract, with annual costs of £1 million and guaranteed income of £2 million, running for 25 years, you have actually landed £25 million in easy profits. So you sell this contract to somebody else for the net present value, let's say £15 million.

I met a former colleague who works for one of these sharks, who do nothing but buy and sell PFI contracts without ever lifting a spade. Each year, the company which has bought the contract books £1 million actual cash profit and writes off £0.6 million, 1/25 of the £15 million paid in advance, net income £0.4 million.

To what extent Carillion were selling contracts to themselves by doing an Enron with shell companies I do not know, but the end result is the same. And then they would trot along to the willing bank and borrow (say) £10 million secured on the £15 million fantasy asset and use it to pay bonuses and dividends. Pension scheme didn't get a penny, or course.

If that seems a bit esoteric, it is no different to taking out a second mortgage to "release" increases in "equity" in your home. The value of the home is just the net present value of the rental income. You can either collect/enjoy a bit more rental income/value every year in future, or cash in today, borrow against it and spend it all in advance.


Steven_L said...

And is Capita the same? Neil Woodford keeps saying they are worth a punt. But I've come to the conclusion his new fund is probably just a scam to offload all the over-priced, over-leveraged cyclical crap onto widows, orphans and the gullible.

Mark Wadsworth said...

SL, Crapita are far worse :-)

Shiney said...

Interesting that SM cites an example or 'corporate' greed from a Uni vice chancellor.

"Bosses lack Smith’s “impartial spectator” which tells them to hold back, and instead feel no compunction about jostling others" - and this doesn't go on in the public and third sectors?

Do me a favour.

Mark Wadsworth said...

Sh, I liked the article because he says that shameless greed is in public and private sectors alike.

paulc156 said...

Stumbling and Mumbling is almost always backed up by evidence and or data to support it's arguments.

Lola said...

Capita. 'We' discovered a massive fraud with a 'scheme' run by Capita that they have now made I think £40m provision for. I've known that they've been scam merchants for years. Look into the rebrokering of GPP schemes.

Outsourcing. Is a double scam. Both the outsourcing and usually its client - some self serving bureaucrats - are engaged in massive rent seeking. The whole ay these deals are set up is just simply cronyism.

Lola said...

Pension deficits. I forgot to say that I am extremely cynical about a lot of these alleged 'deficits'. The accounting and reporting rules as well as the actuarial assumptions they are required to make and the regulatory requirements - often on short term asset price fluctuations - make it a practical impossibility to know whether or not the scheme is well funded, or not. Most FS schemes have faced multiple whammy's - increasing longevity, reducing membership, increasing costs, reduced returns (down to ZIRP, QE etc.), arbitrary levies, appallingly incompetent regulatory bureaucracy. The accounting can be just as creative as Carillion's.

Lola said...

Steven_L. Woodford had a good track record. But I could not exactly work out how much of that was down to luck with both stock picking and timing. And whether you are getting a fair return for the risk he is taking. Also his funds are expensive. As I have posted elsewhere on this blog, stick to a cheap tracker and you'll likely do just as well.

Shiney said...

@MW Didn't read the article so didn't pick that up.

@PC Yeah, I like his blog, its an interesting read.... even though he's a self confessed Marxist ;-D

My take is that shameless greed is usually a problem for big organisations - public private, whatever.

Greed is good (wasn't that Gordon Gecko) - its pretty much part of the human condition. In general, and in my limited experience, the smaller the organisational unit the stronger the ties that bind (team, family, company etc) and therefore its less likely the participants will rip off others. Its a trust thing I guess.

I own and run a small business.... I don't rip off stakeholders (ugh) - i.e. my employees, customers, suppliers in part because my 'identity', self-worth (or whatever appropriate pop-psychological term) is bound up with it. I've talked to others in my situation and they are the same.

And my employees - they are pretty loyal, probably take lower wages than they could otherwise get elsewhere, don't fiddle expenses or take the proverbial and put up with some of the crap that gets tossed our way because they are a bit more 'invested'. If we got a lot bigger they might not feel the same way and maybe I wouldn't either.... who knows.

paulc156 said...

Sh. That sounds like a good argument for co-ops or other worker owned and run enterprises. Perhaps not for very small firms but medium sized or large companies owned and run by its workforce would have similar incentives to offer better service, refrain from theft and freeloading and invest for the longer term even if it meant forfeited income in the short term.
The suggestion that small business has more of a sense of shared responsibility is quite reasonable. Anthropologists have argued that in pre modern times the largest group one might coexist with whilst knowing each others identity and all that entails is about 150. Once much over that you need additional measures to keep a level of order and cohesion nor previously required. Be it religion, a ruling class and other such enforcement mechanisms.
Big business needs cctv to prevent theft and an insecure labour pool to keep wages low and workers compliant.

Bayard said...

Sh, following on from P156c's comment, is the number of people in your organisation below the "Dunbar number" (150)?
My impression is is that some people will take the piss whatever, but in a smaller organisation, it's easier not to have such people working in it. Also, the more there is a culture of "them and us", bosses and workers, the more likely people are going to feel OK about taking the piss.

L fairfax said...

It is not just neoliberals who claim for small amounts, there was a union leader who claimed for everything included his radio
https://www.theguardian.com/uk/2000/may/23/davidhencke and 25p on a bun

Shiney said...

@PC and B

Tardy reply... sorry.

@PC - Agreed. ASI (I think TW) says (paraphrased) Ownership structure is not that important as long as there are a range of options and there is a 'market' in the forms of ownership so we know what works best - state, co-op ltd, llp, plc. There will times when each is appropriate. But please don't EVER quote John Lewis at me as a good example of worker ownership. They shit on their suppliers as much as any of the others (more so IME).

@B - yep we are below 150. And agreed. The piss takers are more visible in a smaller organisation.