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Tuesday, October 13, 2009

Accounting, For Tastes

"I reclined on a sofa reading TGWKTHN for the last three hours, I am placing the piece in a place of honour (for pot-boilers)..." James Joyce. Well he said it about "Gentlemen Prefer Blondes", so there's obviously no accounting for taste, what?

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I just had to get up and come here to write this as a) I am sick of sitting on the sofa (recliner chair actually) and b) I had to pass on a bit from the book. This will not involve any spoilers (we all know Salander survived obviously or there wouldn't be a third book!) but this is about a relatively minor sub-plot (or so it seems at the moment, who can tell?).

There's this great little snippet about Erika Berger, who has left Millennium, and is now at the helm of some staid daily paper in Stockholm (known as S.M.P.) that need rejuvenation due to drastically falling revenues and circulation. It has been propped up and has maintained something like profitability by a continued and drawn out series of staff and wage cuts that have sapped the vitality of the paper and turned the journalists sour*, while the board members continue to reap their dividends and the shareholders hold their cyber fortunes. Sound familiar? She is being told by members of the board that more staff cuts are required... Instead of acquiescing, she rips them a new social democratic asshole!

"The board approved your measures [at cost-cutting], of course they did, because you guaranteed them a dividend each year. That's what has to stop, and now."

"So you're suggesting in all seriousness that the board should decide to abolish dividends and bonuses. What makes you think the shareholders will agree to that?"

"I'm proposing a zero-profit operating budget this year... If the newspaper were stable and bringing in a tremendous profit, then pay out as much as you want in bonuses. But this is no time for you to be increasing your own bonus. I propose cutting all management salaries by half."

"What you don't understand is that our shareholders bought stock in the paper because they want to make money. That's called capitalism. If you arrange that they're going to lose money, then they won't want to be shareholders any longer." [Well duh, then they could sell their shares to some other sucker. Sorry. E@L]

"I'm not suggesting that they [the shareholders] should loose money, though it may come to that. Ownership implies responsibility. As you yourself have pointed out, capitalism is what matters here. S.M.P.'s owner want to make a profit. But it is the market that decides whether you make a profit or take a loss. By your reasoning, you want the rules of capitalism to apply solely to the employees of S.M.P., while you and the shareholder will be exempt." pg272.


All I could think about was the book, The Divine Right of Capital which, I believe - so therefore am probably wrong - argues for what they call "Economic Democracy". Who said that the shareholder is the most important person in the company? Where did that come from? How has that become the last unassailable right in the world? Why did we allow The Shareholder to replace The King in such an all-powerful, all-hallowed role?

How do they suggest fixing this? Speaking of accounting (for tastes, remember?) - by placing the employees and the shareholders on the same side of the accounting equation. Just another little flip in the spreadsheet in order to a) give EQUALITY to workers and shareholders and b) to give them the FREEDOM OF SPEECH to have their say in running of the company that after all means much more to them, being often their sole source of income, than it does to those profit-hunting day-trading shareholders who'll flip their "ownership" to someone else at the beep of margin-call. Hardly any loyalty or commitment there. The idea too, is to prevent the widespread and enormous corporate corruption that has been exposed recently - SHOCK HORROR - but which of course is part of the unspoken mainstay of the capitalist system, at least once the company gets to a certain level of capitalization, and usually shrugged over as just another way to make money.

It's the "capitalism with responsibility" theme that is so important in the above quote. Corporatism and monopolisation and the inevitable exploitation that such one-sided power ushers in crush the meaning out of that phrase. No wonder people like me (and frequent commenter Mark), who have seen something of the world, balk at the damage done by the lack of freedom in the core of all unregulated free markets.

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* Which reminds me of what I was reading about in The Economist about the horrendous plague of suicides affecting French Telecom and about the tug between the demand for that overwhelming loyalty (something I never bought into at that crap-hole Philips where I worked for several years) modern companies seem to expect, and the worker's awareness the company doesn't give a flying fuck about the welfare of its employees when it comes to maxing up the Profit/Headcount Ratio (a genuine metric in Philips, I swear to Darwin) come dividend time. No wonder I was so cynical there. I spent half my time filling in forms about what I was doing, but nowhere on the forms was there a place where I could say that I had spent half my time filling in forms.

A more subtle problem lies in the mixed messages that companies send about loyalty and commitment. Many firms—particularly successful ones—demand extraordinary dedication from their employees. (Microsoft, according to an old joke, offers flexitime: “You can work any 18-hour shift that you want.”) Some provide perks that are intended to make the office feel like a second home. But companies also reserve the right to trim their workforce at the first sign of trouble. Most employees understand that their firms do not feel much responsibility to protect jobs. But they nevertheless find it wrenching to leave a post that has consumed so much of their lives


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Yes, indeed. And at the moment my previously wonderfully paperwork-free-zone company is going through a certification process due some clause about us importing medical products, even if only for demonstration, and so I spent most of today writing up my own job description, rather than doing anything that is actually ON that job description.

I was about to leap from the window with the panoramic view of the east end of Sentosa myself until I received a hint from boss-san: only put down stuff that you can actually prove with documentation... Well, that's a lot easier! Nothing!

Plus it sounds a lot like a book I am currently reading...

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Speaking of Brand Loyalty, I will give this to Philips, they make crap TVs...

But if you used to work there, or if know someone who still works there, or even someone else who USED to work there, you can get cheap deals on the ex-display stock from their Tao Payao showroom. I'm picking up a 42" LCD for SGD$600 to replace the old 42" plasma (SGD$1300 three - or was it four? - years ago), which is starting to go on the blink again - only got a pure red colour first thing this morning. Not only is old one about to kark it, it doesn't take digital signal. Might need that one day if I get a Blu-ray player. Or a game-console. When my shares dividends come in.

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Speaking of shares,etc - just want to let you know that the Hong Kong restaurant I invested in hasn't returned a cracker in the last 18 months. I'm in it for the long haul. At least that what my investment advisor keeps telling me.

OK, enough rambling, time to get back to The Book.

E@L

13 comments:

knobby said...

feel like i've gotta comment on this one. and not frivolously, for once! a few points:

1. shareholders are always LAST when it comes to claims on the company's assets. what do i mean by that? if a company goes into liquidation (which doesn't necessarily mean the company goes bust), the first people in line, and this is one of the fundamental tenets of corporate law, are employees and the tax man. not other creditors, not shareholders. next come other creditors, the order of priority among creditors depending on the type of debt they hold. finally, shareholders get whatever remains, if anything.

2. control: do you really think shareholders control companies? you talk about day traders in the same breath as shareholder control. how can a guy who owns some shares of a company for a few hours, months or even years "control" the company from the outside when the people actually running the company, who know the most about the company, are the ones in charge of the company? and yet at the same time, the investor is the one that provides the capital to run the business (which includes paying salaries). which brings me to...

3. i think the role of the board of directors depends on which country you're looking at. in many countries, the board is responsible to "the company", which is a nebulous concept that is generally taken to mean ALL stakeholders, ie shareholders, employees, creditors, debtors, etc. in general, the incentives for all these parties should be roughly aligned (if the company does well, they all individually do well). only when a company goes bust, do directors have a direct duty to creditors. at the point of going bust, employees are generally classified as creditors, ahead of all other creditors except taxes.

knobby said...

4. any investor buying shares in a company provides capital. it's not true that a trader who buys shares in a company from another shareholder doesn't provide capital to the company. here's why. (this is a bit involved and you need to know both economics and accounting but i'll try to give you the gist of it) i'll use a counter-example, rather than starting from first principles, because that might help short-circuit the explanations.
every business needs capital to function. to finance investment, to fund on-going costs, to pay salaries, etc. to do this, the business needs to raise equity (from investors) or debt (from lenders). let's assume it's a private company for simplicity.
you know what raising equity means- people, you, me, whoever, plonks some money down in the company and receives shares in return. new shares, that is, not existing shares sold by another shareholder.
raising debt is even more straightforward- someone loans the company money and the company (ie shareholders!) promises to pay back the money at a certain time plus a certain interest.
but here's the rub: if no one wants to hold shares of the company, obviously raising new equity is out of the q, but, equally, raising debt is just as hard. why? no lender will lend money to a company that doesn't have a sufficient equity base. the easiest analogue to the lay person is a mortgage. you, e@l are a rich man. that is, your personal balance sheet has a large equity cushion, and any banker would therefore be willing to lend you pots of money to buy a house/castle/planet/whatever. i, on the other hand, have a tiny equity cushion and no banker would lend me the amount of money he would lend you. but if tomorrow, a wealthy stranger died and left me pots of money, i'd be able to raise a lot more debt. the wealthy stranger has added to my equity base and this, and only this, allows me to muster up a larger amount of capital.
the upshot of this is that, if the company has too little equity, it can end up with no capital. no business can survive without capital and therefore it goes bust, employees and the tax man get their bits, then creditors, etc. who loses? (this, by the way, is what happened with many large banks recently. too little equity stretched across too much debt.)
happy to talk in more detail about this point over a drink whenever you like. if you disagree AFTER i've explained the concepts, that's fine :) but at this point, i don't think you have a good enough understanding of it. i didn't myself until pretty recently so no offence to you!

knobby said...

so if you take the four points above in conjunction, #4 in particular, why should it be any surprise that in return for these very valuable things that shareholders provide to the company with no certainty of getting any money back, let alone a profit, their expectations are higher to adjust for the risk they take on? the concept isn't fundamentally different from other players. a lender expects interest and repayment in return for a loan, employees expect salaries, bonuses and intangible benefits in return for work, suppliers expect to get paid in return for whatever they supply, etc. the only major difference is that shareholders by definition have no protection or claim over the company until everyone else first gets their entitlements. a pretty high bar, don't you think? this isn't to say that abuses don't occur, of course.

smoot will be able to explain all of this much better than i can. but her hourly billing rate is higher than mine (zero!)

i can share my own personal experiences with some of the above, about shareholders getting screwed (ie losing every penny invested in the business) and everyone else, at worst, ending with a net zero (as opposed to shareholders ending with a net negative).

two other points that i'm sure you know as well but worth a mention:

1. employees are, generally speaking, free to leave for other jobs at any time. this is separate from and in addition to the point about control.

2. employees are also free to buy shares of the company, assuming it's listed.

by the way, if you follow this link in the economist article, you'll also see that france telecom isn't an outlier. its suicide rate is right bang in the middle of france's national average. not that that's great but it's not like they're especially suffering from a "horrendous plague" of suicides.

knobby said...

sorry, typo, "which brings me to" in #2 was meant to refer to #4 not to #3

expat@large said...

Knobby; sit down, have a Black Russian, chill.

a) I am NOT rich. I might have more money than you at the moment but I too work for a salary, for a living. I am not a "gentleman" in classic economic sense, who has capital, such as workers and shares, that does the work for him.

b) If I buy shares from you, the company does NOT get any money. I am not talking about the quantity of shares that make an issue with the raising of debt (as if debt should really mean money, anyway), just day to day trading. On a global scale, maybe, but do we really need to keep weighing weigh things on a global scale?

c) Only insiders know what is going on with a company.

d) No-one is ever inside enough to REALLY know what is going on with a company. e.g. Enron, Lehman Bros, etc...

e) Why would no-one want to buy shares? Becasue the company is not showing increase in the rate of profit growth. How does the company increase profit(^3)? It decreases costs. How does it decrease costs? It makes the workers more efficient. How does it make the workers more efficient? By making them work harder for the same pay or/and reducing the number of staff. That's what Philips does! Their reason for doing this is often fluctuations in the share price, not necessarily in the market for Philips's goods. Fuck the inbuilt obsolescence mean I have to buy a new TV every four years.

f) Company growth should not be the main marker of success but the share market needs growth to succeed.

g) Making money on the share market is fuelling the end of the world (why I have been saying for decades that it is the Beast of the Apocalypse) because economic growth is fucking up the planet. Why, because ecological costs are not factored into a company's bottom-line. Imagine and India or China with the wealth and the waste and the carbon footprint of America... Imagine the planet... Fucked. And while India claims to be getting richer, I'm only seeing a few more billionaires and a billion slumdogs.

h) We need a new paradigm or a new planet.

(I am talking big public corporations here, not mum and dad companies, such as Wooloomooloo in HK in which I do hold private shares.)

It all started with Thatcher and Reagan and Milton fucking Friedman.

knobby said...

lol.. black russian.

was just kidding about (a) ;)

looks like i wasn't able to properly explain (b)
you're right that the company doesn't get money if you buy my shares, but that doesn't mean you're not providing capital to the company. weird, i know. someone much smarter than me needs to explain why this is true.

(e): increase profits, ok. why do you say cost-cutting is the only way to do this? there is a limit to cost-cutting. beyond a certain point, the company dies. the other way is increase revenues. also, even if you go down the cost-cutting route, it doesn't necessarily have to mean only worker efficiency. it can also mean manufacturing efficiency, logistics efficiency, marketing efficiency, blah.

(f), (g), (h): it's hard to disagree but these are unrelated to your original point about workers vs shareholders.

expat@large said...

Most of my investment money came from when I sold my 3 bedroom house in a great position in Geelong Australia. It's currently sitting OCBC waiting to be ploughed back into a one bedroom glorified hotle room in Noosa Heads! My salary seems high because of the low tax in Singapore and because I am living beyond my means.

Yes I DO get your point about requiring equity to increase debt, that is not why I buy or sell shares. So are companies always on the lookout to load themselves with more debt?? Maybe they are.

e) of course I know its only one way - you could increase prices too, or just sell more! The point about the book Divine Right of Capital is that is salaries were on the other side of the equation, trimming salaries and workforce would not be, for want of a better word, "imagined" as the right thing to do. With wages seen as an expense, of course you want to trim them, with wages seen as the haring of the profits you'd be looking for other ways. Sorry I really didn't explain fully the point of the Divine Right book (or the passage from Millenium).

I am really talking of what could be, not what is. Yet also criticizing what is from an standpoint of a radical sense of economic justice and fairness...

Like I said, what exists currntly is not working; we need, if not a revolution, at least a new paradigm if we are to lift poor people out of poverty. And get me a bigger house in Australia.

expat@large said...
This comment has been removed by the author.
expat@large said...

I really should take the protective cover off this keyboard - alf of my etter are issing.

knobby said...

yes, some companies like to keep expanding their balance sheet with external capital. which of course needs to be backed up by performance, otherwise no one is going to supply the capital, whether it is equity or debt or some hybrid. other companies take the organic approach: finance the company using internal capital, ie making the business work.

your way of looking at economic justice/fairness is one way. to which i have no objection (i can't, it's just your opinion, to which you're entitled). what i am pointing out is the other aspect of fairness to the shareholder. if you take your HK restaurant as an example: you invested some money in the restaurant and they spent it on various things, including employee salaries. i'm not sure whether you've seen any money from the investment, whether income or by selling part of your stake. if you've seen income, ie dividends, that's purely discretionary. the business had a choice to pay out dividends out of any profits they made. OTOH, there's much less discretion on whether or not to pay a salary. yes, you can fire someone or ask them to take a paycut, but that's MUCH harder than simply choosing not to pay a dividend, both legally and practically speaking. if i spin this argument to the extreme, you've invested in a business, the business has zero obligation to pay you anything thereafter, while someone else gets paid every month pretty much guaranteed. my point about fairness is: why should you be the one bearing the brunt of this?

IMHO if you run a business unprofitably, in the long run, not only its shareholders, but all its stakeholders including its employees suffer when the business goes bust. running profitable businesses is one way of keeping its employees gainfully, er, employed. how companies choose to divvy up their resources across employees, shareholders, operations, capital expenditure and all the rest is up to each company. that's one way of alleviating poverty--just being employed.

another way is via the microfinance model. aka the if-you-can't-beat-'em-join-'em model that allows low-income people to become business owners (shareholders!) in their own right. i'm sure you've already read a lot about microfinance so won't bore you with the basics! consider becoming a kiva user. i've been on it for a few years and i think it's great because it lets me support people in running their own businesses, yet it's not charity. of course i also do charity. but neither of these is the same as investing in a business and saying to people, ok, i'll pay you a too-high salary even if it means the business will eventually go belly-up.

expat@large said...

With the Divine Right book, if you put wages and shareholders on the same side of the proft/loss equation
then they wouldn't have to be constantly at war.

Socialism, capitalism, democracy: nothing seems to work as planned (or as unplanned; q.v. free markets).

The Bludger said...

Umm these arguments are beyond me, but I will add the following. Companies do not need to make (grossly excessive) profits. There are plenty of not for profit organisations that survive by trading and do not rely on charity to operate.
The mode of company operation that we consider to be "normal" if you break it down is a dog eat dog, kill or be killed mentality. There is something sick about this. If you follow this line of thinking to the logical conclusion each company would like to end up being the only one in it's market niche, so that they can make even more gross profits.
There are countless examples of companies which expect utter loyalty from employees and show no loyalty at all when times get tough. It would be nice to tell those companies where to go, but we all have to feed ourselves.
One day I hope to see the rise of altruism, where people and companies stop when they have enough and either charge customers less or put their profits into charitable works. Warren Buffet and Bill Gates are doing that, pity that they had to financially rape so many people along the way to do that. Even worse that they will be lauded as benefactors and philanthropists and awarded all sorts of honours and privileges. Makes me sick.
The Bludger

expat@large said...

American Express were in a tizzy today because their PROFIT has dropped for the last 3 quarters (what happened to releasing profit/loss statements every year?) to only $350million.

As far as I am concerned, all that means is that they are charging $350million too much.

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