thenextwave

Oligarchs and executives

Posted in business, economics, long waves, politics by thenextwavefutures on 31 October, 2016

governors_of_the_wine_merchants_guild

I read a couple of things recently that are connected, but perhaps not in a way intended by all of the authors. The first is by Sally Goerner, on the rise of American oligarchy. The second is a paper from McKinsey on capitalism’s short-termism problem.
The Sally Goerner post takes a long view–around 250 years–and positions America’s current political crisis as the latest in a series of 70-90 year cycles in which oligarchy flares up. It follows a familiar pattern, says Goerner, like so:

  • Economic “Royalists” infiltrate critical institutions and rig political and economic systems to favor elites.
  • Rigged systems erode the health of the larger society, and signs of crisis proliferate.
  • The crisis reaches a breaking point; seemingly small events trigger popular frustration into a transformative change.
  • If the society enacts effective reforms, it enters a new stage of development. If it fails to enact reforms, crisis leads to regression and possibly collapse.
  • Over time, transformed societies forget why they implemented reforms; Economic Royalists creep back and the cycle starts a new.

I suspect we could map similar cycles in other countries.

The systemic model that sits behind it is this:

“Scientifically speaking, oligarchies always collapse because they are designed to extract wealth from the lower levels of society, concentrate it at the top, and block adaptation by concentrating oligarchic power as well. Though it may take some time, extraction eventually eviscerates the productive levels of society, and the system becomes increasingly brittle. … In the final stages, a raft of upstart leaders emerge, some honest and some fascistic, all seeking to channel pent-up frustration towards their chosen ends.”

Cycles of change

There are shades of Peter Turchin’s secular cycles model in this account as well, in which oligarchies emerge when resource costs rise (good for asset holders, bad for workers), and use the money to indulge in positioning competition that only sometimes leads to political transition.

80-year cycles are always of interest to me because they seem to recur in politics. They are the spine of the Fourth Turning model, which can be read as a description of systemic patterns of change even if you don’t buy the psycho-social generational analysis that goes with it. It also pops up in David Runciman’s heuristic about 40-crises in modern British history (financial crisis leads to political crisis leads to institutional reform).

One explanation, based on the Fourth Turning model, is that the generation that was failed by the crisis rebuilds; the one that follows enjoys the benefits, Two generations on, and the system that has been created is showing signs of tension (all systems decay over time) and people either have forgotten why it was created or disagree with the values that underpin it. (It’s not coincidence that Britain has a Brexit crisis 40 years after joining the EU.) And so you get a generation of unravelling, before the whole system finally unspools all the way into another crisis. The contradictions finally become apparent, as Marxist writers would say.

Long-term thinking

Goerner, however, is not completely depressed about all of this; as she points out, the oligarchies have crumbled in the past. The future is not inevitable, no matter how gloomy the outlook appears to be.

This is where the McKinsey report, ‘Rising to the challenge of short-termism’ comes in. It’s on the need for long-term thinking in business, and it is co-written by McKinsey’s Managing Director, Dominic Barton. Of course, it’s easy to conclude that McKinsey is part of the oligarchy problem; its senior people move in the same circles and go to the same parties. The company has certainly been party to quite a lot of the financialisation of the company sector that has created the current oligarchy, as for example their [cheer-leading for Enron[(https://www.theguardian.com/business/2002/mar/24/enron.theobserver) in the 1990s reminds us.

But for the moment, let’s take it at face value.

Shorter horizons

Dominic Barton has been personally concerned about the problem of corporate short-termism for some time. McKinsey has now created an organisation, FCLT Global (FCLT = Focussing Capital on the Long Term) and has partnered with Blackrock, Tata, Dow Chemicals, and the Canada Pension Plan Investment Board (CPPIB). Its report is trying to put some numbers on the short-termism problem using its global panel of senior managers.

Although the evidence suggests that companies with long term cultures deliver better results in both the long term and the short term, and according to McKinsey executives also believe this, that’s not how most companies behave.

65% of McKinsey’s respondents say that the pressure on senior executives to deliver short-term results has increased in the last five years. The data also suggest that planning horizons are getting shorter.

Struggling with contradictions

Boards also appear to play a disproportionate role in decisions to distribute cash to shareholders or to buy back shares. But the biggest pressure for short-termism is seen as “greater industry competition,” which may be related to slowing growth, on which I’ve written elsewhere recently. It’s not only boards that are to blame: executives also point the finger at themselves for the increase in short-termism.

The McKinsey paper struggles with these contradictions, but not completely successfully:

“The most cited factors in rising short-termism, greater competition and economic uncertainty, are trends that do not inevitably result in excessive short-termism and that cannot be controlled. Rather, they are catalysts that affect nearly all companies and create an impetus for action. … That the response has been to focus on the short-term should give us pause, especially given that executives admit this response can sacrifice value. “

Shining the light of reason

McKinsey’s worldview, generally, is that reasonable people will see reason eventually if you support it with evidence and shine it into their eyes. So its solution is to create its Coalition for the Long Term to promote long term choices. In terms of Donella Meadows’ places to intervene in a system, it’s an intervention based on the structure of information flows.

It’s possible that this view of the problem is wrong. When executives say they believe one thing (long termism is good) and then act differently (short termism wins) you have to conclude that something else is going on here. In fact, it looks a lot more like the famous Upton Sinclair quote:

“It is difficult to get a man to understand something when his job depends on not understanding it.”

Systems should always be judged on what they do, on the outcomes they produce, not on what they say they do or what they say’d like to do. Changing information flows, which is the McKinsey model, is a lot less effective than interventions that change the way the system works.

The bottom-line

And actually, the McKinsey paper tells a different story. This story is of elites–board members and executives, who are, of course, the same people–protecting their financial interests by financialisng their businesses. Because that’s what short-termism is: a narrow focus on financial outcomes and returns, benefitting investors and executives at the expense of the other groups involved in building companies.

This usually goes along with a certain amount of door-knob polishing and corporate platitude about how regrettable this is, which on its kindest interpretation can be seen as involving a lack of reflexivity on the part of the executives. To quote David Graeber, they look like “corporate bureaucrats who use the pretext of short-term, competitive bottom-line thinking to squelch anything likely to have revolutionary implications of any kind.”

Of course, all corporate behaviour is not the same. Some companies, such as Unilever, have stopped producing quarterly results to discourage short-termist investors (and have not been punished by the markets, despite pessimistic predictions.) Others have turned themselves into B-corps to give their social purpose primacy over their financial returns. Mainstream business academics such as Michael Porter have been focussing on “shared value”. These may be an early sign of change, but they may not be substantial enough to shift dominant behaviour.

Changing the rules

Which takes us back to Sally Goerner’s post again. When interest groups produce poor outcomes, it requires a different kind of intervention to change the rules. In Sally Goerner’s account, that’s the rebellion against the Tea Tax in 1776 or Roosevelt’s New Deal in 1933, when he took very deliberate steps to constrain corporate power. These are interventions based on different sets of values.

When oligarchies collapse, they collapse in one of two ways. The first is they run out of money to extract from the society they preside over, having eviscerated it first, and take the society down with them. Or they split, because enough of the elite choose long-term self-interest over short-term. They switch to a new set of values and in doing so align themselves with the interests of the many and not the few. Our current crisis? It could still go either way.

The image at the top of the post is “The Governors of the Wine Merchants’ Guild” by Ferdinand Bol. Image: Wikimedia Commons.

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  1. […] By Andrew Curry, originally published by thenextwave […]


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