Category Archives: Commerce

Risky Business by Jamie MacAlister


This book, written by a teacher at Hult International Business School and Ashridge Executive Education, seeks to identify how senior executives should develop a corporate strategy to deal with risk. So far, so worthy.

The first problem is to embrace what constitutes a corporate strategy. While the purpose of companies is pretty clear (to increase shareholder wealth), how to go about this is less so. For small businesses and many not so small businesses it is simple – sell more stuff to more customers, ideally at an increased margin. Achieving this can be very demanding, but that is the realm of tactics not strategy. Larger businesses, probably dealing with multiple products in multiple markets, must decide whether to invest and, if so, where. That decision is broadly called strategy and that is where this book is aimed.

The second thread, risk, is intended to be part of this. Clearly corporations that take a long time to develop strategy face the problem of the market places moving during their consideration of options, rendering the underlying assumptions questionable. Overlaid upon this are the risks of singular events, be they catastrophes, emergence of new technologies or loss of key contracts which again can dramatically alter the market.

Unfortunately for the reader the book never really pins down definitions of either. Instead it cites the hoary old chestnuts of Apple (Steve Jobs is a saint according to some business gurus), Proctor and Gamble (a company so large that it can borrow cheaper than most governments, and as such far from typical of the companies that most will work in), the inevitable bit of Sun Tzu and Clausewitz (taken out of context) and Napoleon.

To this the author adds a trite classification of business leaders into “tigers” or “elephants.” He goes on to develop a psychometric classification process that is as rich in catch phrases and jargon as it is devoid of insight, unless you consider sentences like “Good strategy means being choiceful about taking risk – its about taking the right risk” as anything more than a badly written statement of the obvious. (No, “choiceful” is not a word in my spell checker or any dictionary that I can find). And so it goes on. And on. And on.

The text is peppered with quotes from other business authors (many of them also from Ashbridge) which lead the author to also develop a theory of Creative Juxtaposition, whatever that means. Almost all the case studies I had read before, in more depth and with better explanatory context. Jargon aside, there is nothing new in this book, as the author actually admits in the penultimate paragraph. The cobbling together of other people’s ideas is neither compelling, necessary nor instructive. If this book is representative of Ashbridge – and that seems to be the intent – then it’s a spectacular own goal.

On the ARRSE site (where this review first appeared – it is reposted here with their kind permission) i had to rate it 1/5 as ARRSE has no facility for giving a rating lower than that.  On this blog there is no such problem.  It scores a big fat zero.

The US Electorate Trumps Their Political Establishment


Hail the Don!  Trump is the next president and the political commentariat are in meltdown.  I’m not.

Firstly, don’t be scared.  Such is the inertia of the US government machine that even with Republicans in the White House, Senate and House of Representatives it is very hard for any president to get anything tangible done, (c.f. Obamacare).  And few Republicans are Trump fans. Yes the dollar will wobble a bit – as will T Bond yields, but that is just the speculators adjusting their forecasts and unwinding positions.

Foreign policy might change a bit – President Don might be less willing to expend US lives in remote places – which, given the near disastrous last two US forays might be a good thing.  He may also be reluctant to prop up NATO members who don’t pay their way, which is also a good thing.  If he is a little less keen on confronting Putin that may also be a good thing; generally, wars are far easier to start than to finish.  Being selfish, Trump likes the UK despite the foolish comments of some recent Prime Ministerial failures.  The United States is already by far out largest export partner – with 11% of exports heading there.

How is that a problem for the UK?  Good question.  To the US political establishment, the unthinkable has happened, and outsider has won.  Worse, he won unexpectedly and despite little media support.  This is either because the US electorate is dumb, or the political establishment is out of touch (or both).  Expect a raft of psephologists seeking to demonstrate that Trump was elected by white working class males.  He may have been popular among them and in the rust-belt states, but there are not enough white working class males in the US to elect a president.  More people voted for Trump, and from many more electoral segments.

This squealing by political analysts, (akin to that in the UK post Brexit), is a symptom of the problem that both countries demonstrably face.  Their political thought is out of step with their population, and hasn’t noticed it. This is a surprising outcome in any country – and one that is potentially a source of unrest.  It is astonishing that it occurs in the two self-proclaimed bastions of liberal democracy.

That, not Trump or Brexit, is the problem on both sides of the Atlantic.  The question therefore divides into two; how did this happen and how do we fix it?

The first part of this is going to be a field day for left of centre social economists – inequality caused by free market capitalism.  That these are the same social economists who have been advocating the policies that led to these electoral shocks is a delicious irony and further demonstration of the problem.  I content that this is not about economics (broadly an outcome) but process.  And one (Bill) Clinton slogan – “It’s the economy, stupid.”

I am increasingly of the opinion that in a free market capitalist economy the best economic policy a government can hope for is not to screw it up.  An economically competent government may well lay the grounds for growth, but it is not the government who risks wealth to create the growth (and creating growth requires private capital).  Nor is it the government which suffers the pecuniary loss associated with commercial failure – and growth is risky. It is ridiculous for politicians to claim credit for the work and appetite for risk of a very few of their population.  When a Chancellor says “We have created growth of X% this year” what he should be saying, and actually mean is “I managed not to cock it up for another year.”  The hubris of taking political credit for the efforts of others is at the root of the problems of Westminster and Washington.

This tendency has been exacerbated in the UK by the politicisation of the Civil Service and the scourge of the Special Political Adviser (SPAD).  In the US they have had this problem from the start – many senior administrative appointments are politicised.  Such politicisation a government machine that seeks to curry political favour as well as do its job.  This leads inexorably to pork barrel politics, whether it is turning UK marginal seats into special economic areas or building NASA’s launch facilities in an alligator infested swamp.  And the politicisation is pointless; as three time New York Mayor Fiorello LaGuardia said “There is no Democratic or Republican way of cleaning the streets.”  So why politicise it?

The SPAD evolution has also led inexorably to the professional politician (who grew up as a SPAD).  How do you get to become a politician? Start as a SPAD.  How do you become a SPAD?  Know someone who is prepared to take you on.  The array of political individuals in the main parties is thus being homogenised and decreasingly aware of the non-political world.  Thus, political thought is succumbing to a group-think.

Of course, the media should be challenging this.  Unfortunately, the path between media commentator and politician is well trodden and, with some noble exceptions, few interviewers or reporters are able or willing to confront the delusions of our legislators. This is a problem of the BBC.  What was started as an impartial organisation to inform, educate and entertain at public expense has (inevitably) become highly politicised with an interest in “big government” to maintain and increase its taxpayer funding.

Murder has been illegal since Moses went hill walking, countless laws have been passed against it and yet it continues.  There is a limit to what legislation can achieve, and yet every year more and more laws are passed – many of which have unintended consequences and some of which are highly divisive in the real world that exists outside the capital.  As the American satirist PJ O’Rourke pointed out at the American bi-centenary, surely there comes a point when a society has enough laws?

Money is a problem too.  SPADs, researchers and the publicity process all cost money which political parties must fund from members or donors.  In the UK we have fairly tight rules on spending but even here there are moves towards the state (that is, taxpayer) funding of political parties.  In the US, with no spending limits, a candidate’s ability to get elected is constrained by their ability to raise funds.  In the UK most people don’t fund politicians – those who do tend to expect something for it, be it a bauble or access.  It exacerbates the shrinking of the political parties’ universe.

So, on both sides of the Atlantic we have had electoral shock after outcomes that the establishment neither wanted nor expected.  In the UK the government has (reluctantly) committed to Brexit but many politicians have not. Instead they persist in thinking and acting as if they better know what is the interest of the country and its population.  It is increasingly obvious that they do not.

What happens next?  The sun came up this morning despite the outcome, as it did on 24th June.  The world will continue much as before in the short term. In the medium term the relationship between political parties, political thought (such as it is), the media and the population must evolve and reconnect with their populations.  How this will happen is less clear, as is the time frame.  But it would be a foolish member of the political elite who considered Brexit and Trump one off aberrations.

TOM WATSON’S CONFERENCE SPEECH – A HOMAGE TO GEORGE ORWELL OR A CONVERSION TO REALITY?


Tom Watson MP, the Deputy Leader of the Labour Party, made a speech yesterday in which one passage explained fully clearly and succinctly the importance of the private sector. His words:

Capitalism, comrades, is not the enemy. Money’s not the problem. Business isn’t bad. The real world is more complicated than that, as any practical trade unionist will tell you. Businesses are where people work. The private sector’s what generates the money to pay for our schools and hospitals.
We can afford the best health service in the world because we are one of the most prosperous countries in the world. That’s a fact and we forget it at our peril. And I don’t say this because it’s what wins elections, I say it because it is true. And people know that it’s true. And that’s why it wins elections.”

He was applauded throughout, in itself strange given the members’ choice of leader.
But of course his problem is that is not what some of the Labour party believes – including its leader, his former consort (the absurd Dianne Abbot) and those who voted for a return to red socialism, state sponsored industry and the other lunacies.

And there you have the dilemma of the Labour Party; one part wedded to socialism – a philosophy that most of the world now realises does not work – and the rest craving power and trying to find a way of achieving that with a tarnished brand, a socialist infrastructure which includes the trade unions, several BBC presenters and assorted class warriors.

What Mr Watson does not understand (or dare not utter) is that capitalism requires free markets – which are a near impossibility under any form of interventionist government, including socialist ones. Note that free markets are not unregulated, the rule of law has to prevail and (as those who have actually read Adam Smith’s Wealth of Nations know) the law must prevent monopolies. So socialism and capitalism are incompatible – as any Islington Marxist could have told him.

So it seems that Mr Watson is either a complete charlatan or half way along a path that will lead him to a Damascene conversion to free market capitalism. In his 2015 conference speech he, correctly, identified that small companies with under 10 employees are the lifeblood of the economy and the engine of economic growth, increasing employment and social change. But they are not socialist.

It will be interesting to watch how Mr Watson squares the conflict between his logic and his soul; doublethink is alive and well in the Labour Party. Big Brother would be proud.  Whether Jeremy Corbyn is equally delighted we will find out this afternoon.

Is Frank Field about to throw some stones in the glass house of pensions?


Oh the irony.  The house of Commons committee on Pensions is to interview Sir Philip Green about the BHS pension deficit.  This is, of course, the same House of Commons that presides over  the largest Ponzi scheme ever created, the state pension.

Continue reading Is Frank Field about to throw some stones in the glass house of pensions?

NHS – Leading the world in insulting consumers


My GP’s noticeboard prominently displays a notice stating “This Organisation will not tolerate assault, abuse or threatening behaviour towards our staff.” You have probably seen similar notices.  What utter bilge, what an unwarranted attack on British decency.  What a stupid basis for a relationship with a consumer. And what a waste of paper.

For a start, any assault, abuse and threatening behaviour are, to a greater or lesser extent, criminal acts and so no organisation could lawfully tolerate them.  Secondly, the overwhelming majority of British people would never dream of assaulting, abusing or threatening anyone (except perhaps politicians).  To suggest that they need reminding of this is mildly insulting.  Thirdly, those who are so aggravated, inebriated or uncivilised as to be contemplating assault etc. are unlikely to either read the notice, or pay it any heed.

Continue reading NHS – Leading the world in insulting consumers

I Love Crickhowell….


Crickhowell is a small town in Wales on the road from Abergavenny to Brecon. For the early part of my life passing through it meant that either I was about to spend a week or so getting cold wet and miserable on the Sennybridge Army training area or, having got cold wet and miserable, I was on my way back to barracks to clean up, dry out and head up to London for some debauchery. Beyond that I didn’t think about the place much. That changed last week as the result of a BBC programme “The Town That Took On The Taxman.” I now love the place.

Essentially the small businesses in Crickhowell have adopted some of the (entirely lawful) methods used by multinationals to reduce their corporation tax bill. Good on them. Heydon Prowse, the presenter, did a reasonably objective job although he shared the BBC’s general disdain for profit (although it has no objection to running a surplus on its license fee). Perhaps unwittingly they put their finger on the nub of the problem; directors of a company have a duty to their shareholders to maximise profits. One aspect of this is the ruthless reduction of costs, and corporation tax is a cost so directors have to minimise it. It turns out that this is pretty straightforward.

First a quick bit of accounting theory and jargon definition. All businesses sell stuff, and the total value of the amount of stuff they sell in a year is called the turnover. Of course, the stuff sold was not free, so associated with the turnover is the costs of sales. Subtract the cost of sales from the turnover and you have the gross profit.

But the business has more costs than the stuff it sells. Typically it rents buildings, pays administrators and advisors, spends money on marketing and uses electricity and phones. All these costs are referred to as overhead. Subtract the overhead from the gross profit and you have what is generally known as the earnings (more precisely, the earnings before tax, interest, dividends and amortisation – abbreviated to EBITDA). If you subtract the interest from the EBITDA you get the figure used by HMRC to compute corporation tax. In essence the corporation tax bill is 20% of this figure. The remaining balance has to cover the costs of amortisation (essentially depreciation) and pay dividends to shareholders. Never forget that for public companies the shareholders are largely your pension funds. Paying them dividends is what produces a pension for you. Also, remember that if you receive a dividend you will be taxed on it as income.

It should now be obvious that the way to reduce a corporation tax bill is to reduce the value of EBITDA minus Interest. This can be done by either reducing EBITDA of increasing interest (i.e.by borrowing more). Reducing EBITDA means finding another cost, preferably one borne by shareholders (so they get paid). The easiest thing to do this with is a brand. If your company is benefiting form being able to use a brand it should pay for it. The payment for this is ascribed to overhead, and thus reduces EBITDA. Provided the brand is owned in a separate holding company (possibly domiciled in a tax haven) and the holding company is owned by the same shareholders as the trading company (easily arranged) then the payment for use of the brand is a transfer of profit to the shareholders free of tax (although there may be tax costs in getting the money from the holding company to the shareholders, which is why putting it in a tax haven is attractive). In essence this is what google, Manchester United, Amazon and the rest do. And now Crickhowell has joined them.

The BBC, Corbyn and Guardianista view is that this is immoral, which predictably misses the point. The real point is that the increasing globalisation of the world means that corporation tax is now pretty much voluntary. Governments can (and do) try to plug loopholes but companies (who have better lawyers and are generally better motivated) can find ways round it. The bottom line is that the UK is competing with every other country as a place for companies to domicile their activities. In this competition the UK has some huge advantages – the most obvious being its political stability, its currency, a permanent seat on the UN Security Council and (probably most of all) English Law, which is well understood and fairly applied. Other countries, with lower quality jurisdictions, compete on price -i.e. the corporation tax rate. For example, in Ireland it is 12.5% (with some sectors at 6%). In the USA it is 40%, most of the EU is around 30%. In the Isle of Man, the Channel Islands and Grand Cayman it is 0%.

So, you may say, at 20% the UK is looking pretty competitive. Clearly it isn’t as many companies are choosing to domicile elsewhere. So what can be done? The Guardianista solution is to ban companies from doing this – a policy that has failed utterly and can never win as the UK government’s jurisdiction ends at the coast. Naming and shaming has limited effects, particularly for quasi monopoly suppliers like Manchester United and Google. And it is a serious problem as those companies that have avoided their corporation tax bill are better able to compete (their costs are lower and so they can reduce prices while maintaining profitability. The lower pricing should get them increased market share).

How important is corporation tax? The 2015 budget anticipates government revenue of £672 billion. Of this just £42 billion (6.25%) comes from corporation tax. If the government cut the rate to (say) 5%, of even 1% it is a reasonable bet that the resulting £36bn shortfall should be recovered from the effects of increased employment and increased onshore profit. More importantly, and this is the main Crickhowell point, it would enable small companies to compete on a level playing field with the multi-nationals.

Crickhowell is now licensing its Fair Tax product to other towns. Forget Land of My Fathers – Crickhowell is in the land of the just. I might be moving.