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.
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* 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.