Monday, August 09, 2004

Commitment and Self-Interest

In response to Richard's post with same subject, of July 31st, 2004:

The idea of offering shares or share options to employees and directors, as Richard says, is to align their interests with those of the public shareholders.

This would make excellent sense if the share price accurately reflected the wealth-creating activities of the company. In the days when the wealth-creation capabilities of a company could be accurately measured by looking at the balance sheet, this might have been sensible (although, in fact, the ease of measurement also rendered this kind of incentive mostly unnecessary).

The difficulty we are all faced with is that measures which made perfect sense up until about 1980 no longer work. This is because the real wealth-creating assets of public corporations are now intangible, because of the dependency for success on branding and other forms of knowledge which are mostly locked up in individual minds.

Directors of companies, like politicians, now recognise that it is far easier to manipulate the perceptions of other people than it is to change the underlying reality of what is going on. In other words, ramp the share price by concentrating on positive perception of your company in the eyes of key stakeholders, rather than paying attention to enhancing the wealth-creation process. The latter is rather hard work, because it requires subtlety, whereas the former is a well-understood process, known as marketing.

This works fine, as long as the belief system can be sustained. Like the emperor's new clothes, everything looks ok until the small boy in the crowd notices that the emperor has no clothes.

The first reaction of the emperor is to suggest that there is something wrong with the small boy. Maybe he needs a dose of Ritalin to make him better? If that doesn't work, maybe he ought to be punished (like the whistleblower who gets fired)?

Some people hanker for the good old days, and want us to rely on "common sense" to separate the wheat from the chaff. Surely decent folk can tell the difference between real wealth-creation and bogus manipulation of perception? This seems to be the idea behind the Christopher Alexander school of architecture. We can tell what is real by direct perception, so we don't need to measure anything.

Monetary fundamentalists want us to believe than anything that can't be measured in money terms doesn't exist, and can therefore be ignored. If the numbers in the spreadsheets look ok, then everything is fine. If the money is flowing into my coffers, that is all that matters. The question of whether the money is being effectively stolen from elsewhere is irrelevant.

The only way out of this mess is to devise convincing measures of wealth. Until that is done, there is no way to distinguish between wealth-creation and wealth-interception.

It is impossible to measure wealth until we can agree on what it is. Without convincing means of measuring it, we are at the mercy of the people who say they can measure money, that money is wealth, so everything that doesn't produce measurable money returns produces no wealth and is therefore worthless.

The inability to measure wealth-creation in any terms at all is disastrous. Take a look at the terrible damage caused by the Soviet Union if you are not convinced of this!

Regards,

Trevor