Monday, April 28, 2008

Agenda coloured glasses

I was recently invited by the Economist to talk to a group of senior managers in Hong Kong on May 20th. As I am preparing for this presentation, I am repeatedly being drawn into the mechanism of decision making. I am concentrating on decision making at a business level, but this probably extends to the realm of the personal life too.
Are important decisions always based on objective assessment of facts or are they heavily coloured by the glasses of ones agenda. As much as I would like to believe that we make purely objective decisions, I am getting overwhelming evidence that business decisions are heavily dependent on the agenda of the decision makers. Of course the wikipedia has a wealth of information on decision making : but in the realm of business (which is NOT a science) I think the experts call Agenda based decision making as the "Naturalistic method"
In your organization have you come across Agenda based decisions. For example have you seen the decision to build a manufacturing plant in a particular location, not based on a comprehensive analysis on the core competence of the people or the infrastructure in the location, but instead on say heavily weighed by the the Agenda of "tax savings". Do you see finance professionals report an expense in a particular manner so that it best fits their Agenda?

In the business world Agenda based decisions are widely prevalent. However when the agenda based decision of a particular functional group is misaligned with the overall Agenda of the company - then we can have disastrous consequences like that of Enron, the failure of a number of banks in recent times - with the credit crises, etc.

As a parting note - do you understand the agenda behind the decisions that your organization makes. Do you agree with the Agenda, and most importantly if the agenda is against the overall good of the business, do you put your job at stake and openly question the Agenda?

Monday, April 14, 2008

Free Market and Social Responsibility

This note was prompted by an article that my dad sent me that was written by Ulrich Beck titled "The Free market farce - shows how badly we need the state" In the title he seems to make a case for the "State" but the in the article itself he does not clearly articulate this. I continue to believe that globalization, free market economics, and education will lead to overall reduction in poverty, good governance, justice, etc. However a major caveat is social responsibility and education of the free marketers. The financial industry with the current credit crises, the accounting industry in the early part of this decade with Enron etc., have already shown that the lure of short term profits and individual wealth accumulation take precedence over honesty, ethics, and true long-term success. But if you look at the performance of states - really, the scenario is no better. We have had states for thousands of years and they have not helped eradicate poverty, war, injustice, corruption etc. So the answer is not that the "State" can do the job better than the free market. Today, the traditional notion of power is very different. In the past the political figures were primarily the influencers. However, today the influencers in the world are not necessarily the statesman. Business leaders, Media personalities, sports professionals and a slew of others influence the world in addition to politicians. This changing mix of personalities makes it possible to recognize problems easily, but solve problems more difficult. However this mix of what I call free market influencers makes it more probable that people who society wrong will be more likely held accountable. I am still of the view that good educated citizens of the world in conjunction with the free market will lead to a better world. For instance the current credit crises was due to the fact that complex financial instruments that were unsound were bought and sold. But the fact that there was a market for these instruments is a affirmation of the general greed of our society, and the fact that the bankers fed on the greed to grow wealth exponentially in a short time. Old fashioned concepts of financial prudence and common sense still rule the roost, however old fashioned ideas that our politicians can run things better is a fallacy. Let the market correct itself with some rational intervention. People will suffer in the short term, but we will be forced to invest in instruments that they understand. If we leave it to the state, we will have a slew of legislation that will require a number of finance professionals to police the implementation and again lead to a large opportunity for wealth creation to the professionals that got us in this mess in the first place - remember Sarbanes Oxley!!!!

Monday, April 7, 2008

Tax, Pensions, Social Security and Security

Is it the responsibility of the government or the organization you work for to look after your needs when you retire?
In the thousands of years of human history, it is only in the last hundred and fifty years or so that our society has expected a third party (government, company etc. ) to help us ease our financial burden as we retire.

In the US the Social Security system is dysfunctional and I could write a long thesis on the subject. Basically, the system is bankrupt and is viewed more as an additional tax to the working class by a majority of the productive people in the economy. In Singapore there is no social security but there are mechanisms that are fairly successful in ensuring that people save for their retirement via the central provident fund. But this begs the question - Is it the duty of the government to ensure that people save?

From a a purely theoretical point of view it should not be the government's duty or mandate to influence private decisions of it's citizens. However one of the major responsibilities of government is to maintain social order - hopefully a just social order.

In this respect - taxes and mechanisms to save for a rainy day become important. The biggest threat to a large number of developed countries and fast developing countries is the increasingly divergent earning capabilities of people. Even in countries like the US, the middle class is in effect becoming poorer and smaller as a percentage of the population. In India and China, the earning gap for different sections of it's population is increasing at a rapid rate. So as much as most people do not like to pay taxes, the necessity for taxes and parts of the tax system that subsidizes the poorer sections of population is becoming more evident. In effect you are paying taxes to maintain you earnings capabilities by buying security. i.e. in the future taxes in many countries will increase so that the populations can be "controlled " against rebelling about the disparity in wealth. In developed countries the taxes will be used to "control " the sections of the middle class that are slipping into poverty. In countries like India and China, tax money will be used to control the large sections of the poorer classes that are not realizing the "middle class or wealthy class" dream.
So in effect are we all paying taxes to maintain status quo? - Once again feel free to comment on your thoughts!

Wednesday, April 2, 2008

Are manufacturing jobs moving east or were US wages inflated for four decades

There is a continuous stream of noise in the media about jobs moving east, and about the negative impact of globalization. In my discussions with an old friend Dave Wilson we came up with a contrarian view.
After World War II, the infrastructure in Europe and Japan were in shambles, the population losses sustained in Europe and Japan were orders of magnitude more than those sustained in the US, and the Asian and African economies were still primarily underdeveloped. This automatically led to the US being the only country ready to be the "factory" of the world. And since the other economies had not developed/redeveloped their infrastructure fully, the competition to the US was negligible. Hence the semi-skilled and unskilled labour could negotiate high wages, since the products could sell at artificially high prices.

By the 70s and 80s, many other regions in the world had infrastructure to support manufacturing economies, and the natural forces of market economy took over. Hence the current 20 -30 year trend of rationalisation of wages and cost looks like a job migration. But in reality it is just that it took 30-40 years for the rest of the world to play catch up.

I know this is an over simplification, but is this a plausible explanation?