Equality. I spoke the word
As if a wedding vow
Ah but I was so much older then
I'm younger than that now.
- Bob Dylan
For the past 37 years I have been a strategy consultant, working for the CEOs of FTSE 100 and Fortune 500 clients. In 1977, I came out of university with an Eng Lit degree, had no idea what to do and by chance bumped into management consulting. There were 20 people in McKinsey London, five in Booz Allen Hamilton where I worked, no BCG, Bain or Accenture. I knew nothing about business, so I had to bluff and learn fast on the job.
For fans of capitalism and markets, the late 1970s in the UK was a low point: 30% inflation, the IMF called in, the winter of discontent, oil shocks, stock markets at all-time low valuations, the US in retreat.
It was also, with hindsight, a great turning point. Then we had the Thatcher and Reagan revolutions, privatisation and deregulation, the break-up of the USSR, 'The End of History', the opening up of China, and a 20-year stock market boom.
So it is strange to read the thesis du jour, Piketty's Capital in the Twenty-First Century, and see those past 40 years on a totally opposite trajectory: a descent from the sunlit uplands of equality achieved in the late 1970s - the most equality ever - to a slough of despond of terrible mounting inequality.
The topic is being enthusiastically adopted. Christine Lagarde said in a recent speech in London: 'One of the leading economic stories of our time is rising income inequality and the dark shadow it casts across the global economy. Since 1980, the richest 1% increased their share of income in 24 out of 26 countries. The 85 richest people in the world, who could fit into a single London double-decker, control as much wealth as the poorest half - that is 3.5 billion people.'
I was reading Piketty as a way of getting my mind into the topic I had been asked to write about for MT: given I had just got my over-60s Oyster card, what key themes would I pick out looking back over my business career?
I came ready to scoff. 'The Paris School of Economics' - surely a contradiction in terms? Should the book be subtitled 'France Bites Back'?
But five minutes in, I was really enjoying it. The research is interesting: the history of income and capital distribution, the history of tax. I like the way he uses Balzac and Jane Austen.
As I thought about the three themes I would pick out from my past 37 years, there was a confluence with what I was reading - sometimes in ways that ran with the 'terrible inequality' view, other times absolutely the opposite.
Like Piketty, we should follow the money.
My arrival in the workplace coincided with the arrival of the first high-profile SuperManagers in the UK: Michael Edwardes and Ian MacGregor. Edwardes, a South African, was brought in from Chloride in 1977 to run the disaster that was British Leyland. MacGregor, from the USA, was hired in 1980 by the new Thatcher government as chairman of the nationalised British Steel Corporation; he went on to be head of the National Coal Board from 1983 to 1986, through the miners' strike.
Both appointments were paradigm-shifting. This was the new idea of a highly mobile, international, 'mercenary' SuperManager brought in from the outside to run a business in which he had no prior experience or emotional investment - and not just any business, but a nationalised asset owned by UK taxpayers.
The pay packages involved were startling for the time. In today's money, Edwardes was on £600,000 a year, and MacGregor on £1m-plus. These sums were made public and discussed by the Cabinet. It was an enormous multiple of average earnings, while the new bosses' main job was to take on unions, cut pay, fire thousands and close facilities.
In the UK and the USA, the top 1% earners' share of total income has more than doubled since the 1970s, getting towards 20% today. Most of that increase is due to SuperManager remuneration. The concentration is really extreme if you look at the top 0.1%. This has been particularly an Anglo-Saxon phenomenon, although there are similar tendencies in Europe.
It was very different in the late 1970s. Managers just did not make so much money, certainly not in the UK. Consulting partners were making more than most of the MDs or even CEOs of the UK businesses who were their clients. As a junior consultant, you might make more than the marketing director.
This pay acceleration took its time getting going. I recall in the late 1980s, in New York, the CEO of my biggest client, not a financial services firm but a multibillion-dollar business, got given a package of $1m, and it was huge news inside and outside the company, with much admiring comment around the water-cooler - 'Al's a million-dollar man!'
This huge increase was supposed to be tied to pay-for-performance: if CEOs increased shareholder value at a fantastic rate, they should get a serious share of the benefits. Shareholder value analysis (SVA) was a great product for strategy consultants in the 1980s and 1990s; one of its usual outputs was a new comp package for the CEO and top team. I did work on a few of those studies, mainly with Booz in New York in the 1980s.
Fast forward 30 years. Has this new mega-compensation culture proven to be really performance-based?
In several cases that I know well, it has been. I was working for a FTSE 100 company through the recession, in a very cyclical industry that was badly hit. Senior exec pay did go down significantly with the downturn, and only came back strongly when the company both outperformed its competitors and the market recovered.
However, many facts are pretty challenging. In aggregate, stock markets are only now regaining the high they hit in 1999, 15 years ago. Disastrous CEOs have received $100m-plus packages for total failure and value destruction (Bernie Ebbers at WorldCom, Robert Nardelli of Chrysler, Carly Fiorina at Hewlett-Packard ... see 'Portfolio's Worst American CEOs Of All Time' for an entertaining list). Think Fred the Shred, Ken Lay at Enron, Dick Fuld at Lehman Brothers, Dick Grasso at the NYSE.
Piketty is in no doubt that 'pay for performance' is complete tosh, that it is more like 'pay for luck'. He thinks the reason SuperManager comp has gone stratospheric is exec and non-exec mutual back-scratching - an ability to set their own pay that verges on 'hands in the till'.
I don't really agree with that. I have seen big companies trying to get more professional and more objective with their remuneration decisions, with better governance, arm's-length committees led by the chairman or a non-executive and so forth. But therein lies part of the problem. The chairman says, let's be objective here, let's find out what other senior managers make for similar jobs. Call in the compensation consultants and their databases. Then, after looking at the data, where do we want to pay in the distribution? Well of course we are a top-quartile company, with top-quartile challenges and aspirations, so how can we need less than a top-quartile person? We certainly are not going to pay below the median and get a below-average CEO! How could we ever defend that to the City if we had to give a profits warning?
You only need to run the maths on the ratchet effect of top-quartile decisions for a few rounds and you get the SuperManager comp explosion.
There are other reasons, all of them worse. There's the argument that, well, what's an extra few million bonus if he or she can add a few per cent to market cap? (That is really like saying, let's take a punt.) There's a growing tendency to look for senior people outside the company, rather than promote internally, despite the evidence (Jim Collins) that internal is better. Then there's the detached nature of big-company ownership: the representatives of big funds that own much of the stock market have no personal skin in the game, so no incentive to wrestle with management on pay.
This ratcheting must logically have a ceiling, but I can't see it stopping soon.
Interestingly, the public don't seem to mind much when top sports people get paid mega-dosh - SuperStars are more tolerable than SuperManagers. The total pay packet of the 650 players in the Premier League is around £1.2bn, £1.8m average, which is fortuitously almost exactly the same as the total comp of the 400 executive main board directors of the FTSE 100, which is an average of £3m.
Footballers were paid exactly the same as the UK median wage back in 1960 - £20 per week - until a PFA rebellion got rid of the pay cap. The PFA meeting turned on a speech by the Bolton rep, Tommy Banks. Someone said it was unfair to want more than £20 a week when miners earned less. Tommy, who had worked at the coalface himself, said he admired people in the mining community but it didn't mean they could cope with marking Stanley Matthews on a Saturday afternoon. Today, Rooney is on £250,000 a week.
Wired and global
My second theme: the change in globalisation and technology in my working lifetime is astonishing, and the change that I personally experience the most.
China now makes 80% of everything, the same China that was being run by Mao's ex-wife when I graduated. Now everybody in the UK knows where Bangalore is - we trust an engineer in India to take over our PC remotely, and we watch her move the mouse icon around our screen while we chat about the weather.
We can drive across Europe from the south-west tip of Portugal to the Ukrainian border and not have to show our passports. My daughter has just moved to Sydney to seek her career fortune in digital marketing - the move felt a bit like going from Wandsworth to Hoxton, she's got a job inside a few weeks, and we video-call on Skype most mornings.
In 1973, when I first went abroad, you had to get Bank of England approval to take more than £40 out of the country. One of my first consulting projects at Booz in 1978 was with poor old British Leyland, where most people hadn't noticed the Japanese were now making proper cars - its in-car-electronics effort was one guy half-time. My wife is a Kiwi who got here from New Zealand in the late 1960s on the six-week slow boat via Suez; we now get to Auckland in 30 hours.
Back in 1977, the idea of writing a piece like this, with all the bitty and wide-ranging research involved - if it was feasible at all, it would have involved months in libraries.
For the past 15 years I have been on the board of a Bangalore and Seattle-based software business, a competitor to Infosys. Such a business epitomises how globalisation and technology have moved hand in hand and reinforced each other's potential. Offshore services have been made possible by the convergence of low-cost, high-speed telecoms, the internet, English as the global language, low-cost air travel, personal computing, software itself. Our monthly management calls have people dialling in from West Coast, East Coast, UK and Indian time zones. (The UK is a great place to be in those battles over what time the call will take place.)
The tidal waves of globalisation and technology have been a very good thing for most people on the planet - and offer the strongest challenge to Piketty's rage about increasing inequality. A huge percentage of humanity has been lifted out of absolute poverty since 1950, more than ever before in history. That process has accelerated since the 1980s, as China, India and Vietnam have joined the global economy and seen their per capita growth rates explode. Inequality on a global basis, across rather than within countries or within the west, has declined since 1980.
This 'Flat World' effect has suppressed lower and middle income wages in the west, as cheaper labour in China and India has competed for manufacturing and call centre jobs. On the other hand, it has raised wages for senior managers everywhere, in the developing world as well as the developed, as the management task gets more global and complex. In Bangalore, our annual 'fresher' intake of engineers, straight out of college, still only get paid 25% of what they would cost in the USA. By the time we get to project managers with 10 years' seniority, there is no wage gap.
So globalisation has reduced global inequality, but contributed to increasing inequality within countries, and to SuperManager inequality.
How much we value technology and innovation influences how we think about billionaires and inherited wealth. Piketty sees inherited capital, like that of the ultimate lady-who-lunches, Liliane Bettencourt, as undeservedly 'devouring the future'. He hardly mentions technology in his book - 'innovation' isn't even in the index. But libertarian right-wing American economists would see inequality and wealth as just non-issues compared with the growth produced by entrepreneurs such as Steve Jobs, and what does it matter if he makes however many billions on the way?
In Forbes' latest World's Billionaires list, about two-thirds were self-made, and within those the biggest industry category was 'technology'. Almost all the tech industry billionaires are self-made in this generation. So we are clearly not talking ancien regime ratios, when wealth was mainly agricultural land and a lot more concentrated. And I really do like all the stuff that innovation has given me (apart from Angry Birds).
Money, money, money
Back in 1977, banking was just boring. Money of course was never boring, the getting and the spending of it, but the business of managing it was. If you joined Barclays you might end up after 30 years as branch manager Captain Mainwaring, signing off the occasional small business loan.
Consulting projects in banking were solid earners but also rather boring. Branch cost reduction, trying to save a few FTEs (full-time employees). Cross-selling savings accounts to current account clients. Could we charge for newfangled ATMs? In the USA, banks still had to operate within one state only, so there were no big national banks, just local operators.
Then, wow, we had the 1980s. It was as if money was discovered anew and in particular that you could make a lot of money from money itself. The old dry definitions of what money is - medium of exchange, unit of account, store of value - no longer seemed to capture the essence of what you could make from money, which was piles of dosh.
I worked in New York for most of the 1980s. Mike Milken was the man: head trader at Drexel, creator of the high-yield bond market, paid (as a pay package, not options) one billion dollars over four years. And then the tragic end: a 10-year jail sentence for insider trading (actually he served only two years and came out a philanthropist, and he's still worth over two billion). He was the true greed-is-good man.
The madness, and the mad comp, just accelerated from there. The UK Big Bang in the 1980s. Total deregulation in the USA with the repeal of Glass-Steagall in 1999. Dodgy derivatives and very dodgy 'risk management'. Mortgages of 125% on self-assessed income. Icelandic cod fishermen rebadged as currency traders. Private equity. Leverage, lovely leverage, and fees on fees.
From the 1980s on, the UK financial sector started to grow much faster than the overall economy, and from the 1990s on, it grew twice as fast. A similar trend can be seen in the USA. In contrast, in previous years from the end of World War I to the 1960s, financial sector growth actually lagged behind the general economy.
In the USA, private sector debt went from 120% of GDP in 1980 to a peak of 320% in 2009. The biggest jump was in the financial sector itself, from 20% of GDP to over 120%. These are very large numbers and very big increases.
In the decade before the 2008 crash, dealing with The Great Leveraging Up was one of the key strategy issues for CEOs. If you had too little debt, you were vulnerable to private equity, which would borrow a few billion to buy you, do a property sale-and-leaseback, tell your suppliers they weren't getting paid for an extra month, sell off a subsidiary, halve head office cost, and in four years get the hell out with a fat profit. On the other hand, you could think about taking on a big pile of debt yourself and going on an acquisition spree that put you in a good position for the next recalibration of top-quartile CEO comp (RBS at its ABN-Amro peak of madness). The investment bankers were lined up outside your office with their M&A packs and their teams of eager analysts.
But of course when you get more leverage, you get more risk.
Cue autumn 2008. Panic in the annual budget meetings. Why did we sell our freeholds? Why did we just gear up for that terrible overseas acquisition? Will we break our covenants? As Warren Buffett said: 'You only find out who is swimming naked when the tide goes out.'
Where are we now, six years after the crash? A recent YouGov poll for the Sunday Times found that bankers were hated more than estate agents, car salesmen, tabloid journalists, even politicians, and 77% of respondents thought bankers had 'no ethics or principles'. Fred Goodwin had replaced Captain Mainwaring.
Bankers went rather quiet. A low profile seemed the best strategy in the face of cries for public hangings, or (even worse) caps on bonuses, or being described as 'a great vampire squid wrapped around the face of humanity'. And there was a bit of deleveraging, particularly of financial sector debt, with stronger capital ratios and fewer dodgy loans.
But then governments noticed the outcome and said, hang on, we don't want you to stop lending, we need some recovery, here's Help To Buy, and by the way we're keeping interest rates at almost zero, so lending is more profitable than it's ever been. Corporate and household debt dropped for a few years - but has recently been bouncing back. Public sector debt has shot through the roof. A tidal wave of investor cash is in desperate search for any kind of decent yield. Private equity is raising new rounds, IPOs abound, big global M&A is back. We are a long way from what some thought was going to be the era of The Great De-Leveraging.
While banking is back in Happy Days mode, there is very little chance of reining in inequality. SuperBankers are still at the top of the SuperManager food chain. Banks are still way too big to fail. The best and the brightest want to work for the vampire squid.
Certainly, managing money will never again be boring.
I've been a strategy consulting practitioner all my career, but in this article I haven't picked out the main waves of strategy thinking: early BCG growth/share matrix and the learning/experience curve, Porter's Five Forces, In Search of Excellence, Hamel's Capabilities, Blue Ocean Strategy. They all contain interesting insights, but also a fair amount of being deeply wrong.
The learning and experience curves gave no framework for comprehending how Toyota could come from nowhere to beat GM. Porter said you had to choose between a low-cost strategy and a 'differentiation' (quality) strategy, just when the Japanese were proving you had to do both at once.
Half of the Tom Peters' list of 'Excellent Companies' were basket cases inside a decade.
'Strategic Capabilities' turned out to be such a mushy concept that you could justify any mad strategy (ie, 'we're really good at corporate culture'), particularly when combined with a Big Hairy Audacious Goal.
Blue Ocean Strategy represents a bloated low point:
'The four principles of strategy formulation ... blue oceans of uncontested market space ... the six conventional boundaries of competition (Six Paths Framework) ... the four steps of visualising strategy ... the three tiers of non-customers ... aligning unprecedented utility with strategic pricing and target costing and overcoming adoption hurdles.'
These days, when I facilitate annual strategy reviews, I use a stripped-down framework, asking just Where To Compete, ie, which market segments, and then How To Compete, ie, what's the operating model. We (the management team and I) assume businesses will have to win on both quality and cost, although emphasis will vary. We move quickly from high-level theory to concrete decisions, particularly investment choices. Then we discuss what needs to happen over the next 12 months. We conclude by considering risks and what we might be getting wrong in our thinking. We try to do the review in one to two days, having put in a few weeks' prep, and we do it in June, not in the autumn, so it doesn't drift into annual budget-setting.
These are the three key themes that I've highlighted after looking back over 37 years: the rise of the SuperManager, globalisation and technology, and money, money, money, aka bankers.
The SuperManager and SuperBanker themes capture part of the reality of that top 1% share of income doubling since the 1980s. In both cases you could reasonably question whether this super comp is truly 'earned', that is based on super-productivity and market forces, or is it 'captured', that is, self-awarded or pay-for-luck, or underwritten by the taxpayer for too-big-to-fail banks.
On the other hand, the waves of globalisation and technology and their impact are the strongest counter-argument to Piketty. He assumes his readers will agree that inequality is a bad thing per se, that is, even if everybody's income is rising, if top incomes are rising much faster, then that is to be condemned; the bad outcome of rising inequality more than negates the benefits of a general rise. I'm not sure the 3.5 billion living in poverty would appreciate that Parisian nicety, I think they'd prefer to make an extra $100 next year and who cares how much more the billionaires are worth.
I'm hoping my kind MT editors will let me finish with a poem that's been a brain worm while I've been working on this. It's a riff on TS Eliot's Macavity the Mystery Cat (so my Eng Lit degree wasn't completely useless):
The Piketty, the Piketty, there's no one like the Piketty,
There never was a prof of such a cunning guile and suavity,
He always has a clever stat, and one or two to spare,
And as for 1968 - well Piketty wasn't there.
There are certain French professors whose wicked deeds you all will know
(I might mention Jean-Paul Sartre, I might mention M Foucault)
But they're trumped by Monsieur Piketty, with his killer graphs and stats,
Redistributing world capital - the Napoleon of tax!
WHAT ABOUT UK PLC?
When I submitted this piece, MT came back and asked: could I add a bit where I 'analyse our nation's problems short and long term and what we should do to put them right.'
Ha! Well, two things come straight to mind: potholes, and my wife being really untidy.
But, OK, seriously. The big short-term problem is housing in the south-east, particularly London, but also in the commuter zone. The supply/demand balance is completely buggered. London's population is growing at its fastest since World War II and there's a wave of foreign inward investment in London property.
But we are building less than half the new houses we need. This will cause inflation, a squeeze on disposable income, talent flight, generational inequity and slower growth. All of which will be worse if and when interest rates get back to more normal levels. The only sustainable fix is more supply, via looser planning controls, using all brownfield (and some greenfield) sites, taxing undeveloped house-builder land banks, building higher and denser, and almost certainly a big re-start of new-build public housing. Also useful would be technologies and company behaviour that encourage remote working.
The big longer-term problem is government spending, deficits and debt. Listening to the current situation being described as 'austerity' is an Orwellian language moment. This current tax year, after five years of 'austerity', and with GDP growth ahead of expectations, government net borrowing will still be over 6% of GDP. Broadly speaking, government expenditure is close to 50% of GDP, so a deficit of 6% of GDP means it is spending 14% more than it is collecting in tax.
The official UK government debt is close to 80% of GDP. Adding in the pension liabilities, in the same way as you would for BA's balance sheet, would take that to over 300% of GDP. Government debt has taken up the reins of the charging leverage wagon, replacing 125% mortgages, consumer credit and debt-fuelled corporate deals. There's a crash a-coming, maybe sudden and spectacular like Greece, or extended slow-motion like Japan.
What to do about that? Short answer: cut spending, raise tax. Long answer ...