Market Thinking

making sense of the narrative

Politics and Business

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While many investors and company analysts may think themselves puzzled by the current behaviour of politicians, they really shouldn’t be, for in many senses it is exactly the same behavior regularly demonstrated by the senior management in large corporations. Indeed, in Enterprise Owned States like the US, and increasingly the UK, it could be said that the most talented politicians are the ones at or near the top of the large corporations, while the notional politicians are in a lower tier altogether..

A large corporation, like a country, tends to run largely on auto-pilot, its success or otherwise dependent to a significant extent on its institutional structure. As such, the CEO, as head of the business is, usually someone with strong presentational skills and indeed might best be considered the ‘Head of Marketing’. They may notionally chair the operational committee that runs the business on a day to day basis, but in reality it is usually the Finance Director (FD) and the Chief Operating Officer (COO) who actually run the business. A good stock analyst knows this and as a result tends to be a lot more interested in the skills of these officers and assesses the ability of the CEO more for their success in not only searching out, but also in encouraging, high quality juniors, for the good of the company and its shareholders. The quality of the ‘C Suite’ is a far more important determinant of corporate performance than the CEO. So too with the White House Staff or the Cabinet. However, too often, the CEO or their political equivalent has an ego that can not cope with the implicit competition, hence the expression that ‘first rate people surround themselves with first rate people. Second rate people surround themselves with third rate people’.

Regardless of quality, the CEO, in their role as de facto Head of Marketing, tends to be surrounded by the marketing and PR department and Boris Johnson as de facto Head of Marketing for UK PLC would not be the first CEO to become fixated by PR, nor indeed to actually run off with his Head of PR. Generally, this doesn’t matter too much so long as the rest of the board continue to guide the business/country in the right direction.

The risk here of course is that, as the old expression goes, “There is nobody easier to sell to than a Salesman” or indeed no-one easier to lobby than a marketing person and this leaves corporates (and countries) prone to fads and fashions as well as ego projects. The sad legacy of Lord Weinstock’s ultra conservative GEC and its destruction by Lord Simpson and John Mayo with their dash for high tech is a classic cautionary tale and now a business school study. History is similarly littered with similar siren calls from self interested lobbyists to politicians, whether it is the ability to ‘pick winners’ or in this case develop ‘world beating’ test and trace systems or vaccines. Simpson and Mayo were finally forced out, but not until after their deal making frenzy and attempt to turn GEC into a ‘high tech leader’ under the Marconi brand had left shareholders with a value down 99% from their peak.

The real problems of course arise when a crisis hits. Then all too often we find ourselves in the situation described in a recent post as a Kakistocracy – rule by the least able, experienced or suitable. Literally Rule by the Worst.

The first response to a crisis from a non strategic and marketing led management team is generally to check what the competition is doing. And then copy that. Thus after China locked down in January and particularly after France locked down in early March, it was only a matter of time before the rest of Europe followed suit – save for Sweden of course. The second response is then to call in the ‘experts’, usually in the form of Management Consultants. They then tend to speak to the next layer down of management to find out what might really be going on outside of the ‘C-suite’. Evidently Dominic Cummings in the UK would force Cabinet Ministers (the equivalent of C-Suite executives) to actually talk to ‘ordinary’ MPs to get a view of the world outside their bubble. This was not very popular with the self defined elite to say the least, especially as it tended to blame the government for its track record so far.

The ‘Boilerplate response’ from the Management Consultants tends to be to to try and identify the main competitor and the one that is currently doing best and advise their client to ‘copy that’, whatever it is, rather than just follow the first mover in the group, but regardless of whether or not it is appropriate. This is seen as a low risk strategy by management not looking to stand out from the pack in the crisis and is usually eagerly adopted as ‘expert advice’ (don’t blame me) and then aggressively marketed by the CEO/Head of Marketing as a great solution to the problem. Again regardless of whether it is actually appropriate.

More often than not however, this also fails miserably, not least because it falls into the trap of the logical fallacies we discussed in a recent post, most notably the ad hoc, ergo proctor hoc fallacy. This states that because a) and b) are correlated, a) must have caused b). Because competitor x does thing y and succeeds, the surest way to success is to also do thing y. Or as a contemporary politician might have it, because Asian countries tend to wear masks and because they have relatively low Covid deaths, therefore we should mandate compulsory mask wearing.

When, almost inevitably, this doesn’t work either, the next response is to blame someone else; the staff, the customers, the competition. Just not management and definitely not the management consultants. For Covid, it is the fault of the people for not doing as they are told and thus they recommend a short term strategy of cutting costs – or in this case more lockdown. This is treating the symptoms of course rather than the root cause of the problem/disease and naturally tends to make things worse rather than better, leading in turn to the next response, which is to bring back the management consultant ‘experts’. The problem here however is that the consultants are now heavily tied in to their previous recommendations – the ones that haven’t worked – and so tend to ‘double down’, blaming the management for not properly implementing their previous marvelous recommendations.

There are also the issues with management incentives to consider here for despite the rhetoric of maximising shareholder returns, the real motivation in too many cases is to maximise returns to the largest individual shareholders, in many cases the management themselves. In the US this is particularly true thanks to the share based incentive schemes and the egregious use of corporate debt to buy back those stock options at higher prices, meaning balance sheets are stretched for all shareholders to the particular benefit of those in the C suite. In our political context, the notion that Politicians are considering the welfare of the country as a whole over and above their personal ambitions is obviously naive; debt is being loaded onto the balance sheet to offset the economic damage being caused by the Politicians’ incentive to avoid blame for their failed policies.

The only way out of this sort of corporate mess is for an economic boom and a bull market to provide a rising tide to lift all ships or a complete corporate restructuring. Time to call back a new set of management consultants. This time, their advice is usually to get rid of the CEO and, more likely than not to replace them with …. a management Consultant.

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