On Friday 10th June at the Hull & East Riding Business Week Event at Bridlington Spa, Terry Hill, the Arup CEO quoted Vince Cable, the UK Business Secretary: “Capitalism’s natural end state is when companies become monopolies”. Globalisation has driven huge consolidation in all sectors from aviation to retail; pet food to pesticides; cars to ports such that anything from 30 to 85% of market share is in the hands of the top ten companies. The danger here is that these companies are owned by shareholders who may not have the long term interests of the company at heart and have little interest in the local roots of the business or, even the staff themselves. Dog-eat-dog capitalism takes no prisoners but claims that this is the only way to do business are being challenged more than ever.   

The drive to build shareholder value – which reached fever pitch before the credit crunch – is being questioned in various quarters. In simple terms, equity investors like to see themselves as owners – but they rarely act that way. A typical actively managed institutional portfolio on the London Stock Exchange comprises about 100 to 200 stocks with a three to five month timeframe. The average share on the NY Stock Exchange is held for no more than seven months.

Everything about mainstream portfolio investments leads to shares being no more than financial tokens rather than certificates of ownership that carries management responsibility with a strategic and operational focus. Given this reality, there is no guarantee that such short term “ownership” of a share in a business is good for business. There is mounting evidence that all the information you need to know about a business is NOT in the share price.

Terry Hill built his talk around an alternative solution to Corporate ownership – the increasingly well viewed Mutual Company. This is a “catch all” phrase for any organisation owned by its members: these include cooperatives, fully bound by the principles of the Co-Operative Alliance, social enterprises or knowledge based partnerships. The turnover of UK co-operatives has grown by more than 25% since the credit crunch – from £13 bn in 2008 to £16.1 bn in 2010. There are close to 10 million members of co-operatives in the UK alone.  This is a totally commercial concept of the firm in which the interests of the customer and the staff are paramount. The members own the business and, with no shareholder in sight, profit maximisation and the bonus culture are relegated as social purpose and long term sustainability drive the business forward. As he pointed out, people are not the biggest asset; people are the only asset of the business.

At the Financial Times IFC Sustainable Banking Conference in London last Friday, Neville Richardson, CEO of The Co-Operative Financial Services gave further illustrations of the merits of a business set up to serve staff and members not just shareholders. It is a compelling co-operative alternative to consumers feeling let down by financial services providers following the credit crunch and global recession. CFS is seeing significant growth in private banking but remains no more than 3 per cent of the business lending market in the UK. This will take time to build but, the business model across retail and other sectors, has the potential to offer a real alternative to the monopoly capitalism driven by quarterly results.

The annual report from Co-operatives UK, to be published this month, shows that while the likes of John Lewis grab the headlines, a new generation of smaller, grassroots organisations are developing fast. Take Seven Hill Farmers, a group of lamb producers on the North Yorkshire Moors who banded together after the foot-and-mouth disease crisis wrecked the industry. The Edinburgh Bicycle Co-operative was founded in the 1970s to produce bikes now owns a chain of retail outlets. Energy4All, which works to establish community owned windfarms to generate local energy.

In his challenging book Why Doesn’t Micro Finance Work?  Dr Milford Bateman explores a number of alternatives to conventional and micro finance models for small businesses. There were a number of local financial models that emerged out of the economic rubble of World War 2. In Japan, usually known for the huge keiretsu business conglomerates, thousands of small enterprises (smes) emerged with backing from local credit unions. This bottom-up economic development approach  inserted thousands of microenterprises and smes into industry industry-based supply chains. For example, the Tokyo suburb of Ota, which became a centre for machine tool parts production and servicing. With growing outsourcing demand from the large industrial Keiretsu, these credit unions made funds available for innovation and, sustainable growth. In this context, the market was largely a passive force as credit underpinned the eco-system of supply and the surety of market access.

Bateman uses numerous examples of locally based credit unions. For example, Mondragon from the Basque Region of Spain – a network of industrial cooperatives that in 2010 it was providing employment for over 83,000 people in 256 companies in four areas of activity: Finance, Industry, Retail and Knowledge with a combined turnover of more than €12 billion. There is Eroski, a highly popular Supermarket chain and the white goods manufacturer Fagor. At the core of this enterprise is the Caja Laboral Popular (CLP, Working People’s Bank). At Mondragon, there are agreed-upon wage ratios between the worker-owners who do executive work and those who work in the field or factory and earn a minimum wage. These ratios range from 3:1 to 9:1 in different cooperatives and average 5:1. That is, the general manager of an average Mondragon cooperative earns 5 times as much as the theoretical minimum wage paid in his/her cooperative.

The principle of fair pay is becoming a hot topic. The US Dodge-Frank Act urges greater transparency on wages and, Chapter 2 (Pay Multipliers and transparency) of Will Hutton’s UK based Fair Pay in the Public Sector Report (March 2011) urges greater attention on this. In 1970, the average “gap” between CEO and new entrant in the FTSE 100 was 10 to 1.2; by 2011 features stand out numbers such as Sir Martin Sorrell of WPP at 550:1 though Willie Walsh of British Airways stands at 15:1 and several Cooperative or Mutual businesses are at about this figure. The point is that there is growing disquiet with the need for fair pay as a social norm and that too great a gap between the top and the bottom or the rich and the poor can have serious consequences.

Back to credit unions. Northern Italy is another area seeing this at the heart of “inclusive” development through enterprise. Again, these financial institutions take a pro active role in the impannatori, the “putting 0out” networks that are key to industry supply chains. The same is true of Vietnam with the UK’s DfID aid agency producing a report that celebrated the state-driven supply of small-scale finance as being “more than adequate for the country as a whole.”

What relevance has this message for the majority world?

Emerging, developing and devastated economies are a natural habitat for these types of firm. After all, few of these markets have a fully functioning stock exchange; are dominated by an informal business culture and, do not have the best of governance. The business landscape is dominated by micro firms or, SMEs and, the big Corporations are usually multinationals that set up supply chains that are better, cheaper and faster than that which is in place but, which lack a local perspective and all too often extract rather than add value in country. For example, in the 1970’s growers of coffee beans would retain over 25 per cent of the retail price in the developed world whereas today this is less than 5 per cent.

This approach is starting to have an impact on food security as agricultural commodities offer speculators an alternative to sub prime mortgages and other such financial alchemy. Some would say that such short term speculative activity as practiced by hedge funds is not a serious threat though longer term investments made by pension funds could be. The issue is that global investment strategies are not likely to be loyal to a given location over the long term as alternatives emerge and, maximising shareholder returns does not always factor in the negative impact on local players of a shift in sourcing.

The transformational agenda seeks to build more inclusive value streams from food to fridge; cow to the consumer; loom to room; wool to wardrobe such that more value is added in country. This is not a race to the bottom price driven by shareholder activism, shareholder promiscuity and footloose management chasing short term results. This is a strategy to develop livelihoods not at the expense of the lifestyle tastes of the developed world. Working with the University of Hull Logistics Institute; GITAM International Business School in Andra Pradesh, India and others; this transformational agenda is moving from logistics into a wider scope. There is a real need to understand the nature of firms in these markets and more research is needed to explore business life beyond the huge multi-national corporations. After all, this is where the Majority world works and, earns a livelihood.

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