Business is wrong
A thrilling big bang to start CISI’s autumn London season at CISI with Sir John Kay, FCSI(Hon) speaking on “The corporation in the 21st century” at lunchtime on Thursday 19 September 2024 in the historic splendour of Merchant Taylor’s Hall in Threadneedle Street.
You can book your place at this event here
Sir John will be introduced by Michael Cole-Fontayn, CISI Chair and until recently Master Merchant Taylor. One of the twelve great livery companies of the City of London, Merchant Taylor’s was once the regulator and trade body of tailoring and its related industries within medieval London. As the world changed, so did Merchant Taylors’; over time it became a grant-making organisation whose members are driven to channel their collective good into volunteering, raising funds, or offering their time to support causes that can create transformative good to many lives.
With such a long history – which spans fires, wars, political upheavals and plagues – Merchant Taylors’ is a vibrant community, with members keen to play their part in all aspects of the Company’s activities. Through their shared history, Merchant Taylors gain a fascinating insight into London’s past and enjoy a unique connection to the City of London and the wider world. So we are delighted to be holding this important event in their wonderful Hall.
For generations, we have defined a corporation as a business run by a capitalist elite, that uses its accumulated wealth to own the means of production and exercise economic power.
That is no longer the reality. In the twenty-first century, our most desired goods and services aren’t stacked in warehouses or on container ships: they appear on your screen, fit in your pocket or occupy your head.
But even as we consume more than ever before, big business faces a crisis of legitimacy. The pharmaceutical industry creates life-saving vaccines but has lost the trust of the public. The widening pay gap between executives and employees is destabilising our societies. Facebook and Google have more customers than any companies in history but are widely reviled.
John Kay, one of the greatest economists of our time, describes how the pursuit of shareholder value has destroyed some of the leading companies of the twentieth century. Incisive and provocative, this book redefines successful commercial activity and leadership, the knowledge economy and what the future of the modern corporation might be.
Sir John Kay is one of Britain’s leading economists. A Fellow of the British Academy and Royal Society of Edinburgh, he was the founding dean of Oxford University’s Saïd Business School and held a chair at London Business School. He is a winner of the Senior Wincott Award for Financial Journalism for his Financial Times columns. Other People’s Money won the Saltire Prize for non-fiction and was shortlisted for the Orwell Prize for Political Writing. His other books include Obliquity, The Long and Short of It, Greed is Dead (written with Paul Collier) and Radical Uncertainty (with Mervyn King).
‘A brilliant analysis of how business really works. Informative, funny and full of deep insights. It truly is a magnum opus’ Mervyn King
‘Few writers come close to matching Kay’s analysis of what makes good businesses succeed and bad businesses fail incredibly expansive, and yet also with a depth of argument you won’t often find in a business text. A very entertaining read’ Evan Davis
Yesterday’s blog about TPR’s very slow road to guidance for master trusts reminded me of Sir John’s 2012 report for Vince Cable’s BIS department:
eg “… Risk models used in the regulation of the investment process should focus on risk as perceived by savers, not risk as experienced by market participants. These risks are the failure of their investments to meet their reasonable long-term expectations over the time horizon for which they wish to invest.”
Sir John recommended inter alia:
“The Government and relevant regulators should commission an independent review of metrics and models employed in the investment chain to highlight their uses and limitations.
“Regulators should avoid the implicit or explicit prescription of a specific model in valuation or risk assessment and instead encourage the exercise of informed judgment.”
I looked in vain to see what happened next. Vince Cable’s department did issue an invitation to tender “To conduct necessary research into the metrics and models used to
assess company and investment
performance, further to
recommendation 13 of the Kay
Review of equity markets, and to
prepare a report of the findings to be
published by BIS.”
Cable even appointed a panel of experts to steer the process:
Sarah Breeden – Head of Markets, Sectors and Interlinkages Division, Financial Stability, Bank of England
Professor Alexander Ljungqvist – Ira Rennert Chair of Finance and Entrepreneurship, Stern Business School, New York University
Anne Marden – Managing Director, J.P. Morgan Asset Management
Saker Nusseibeh – CEO and Head of Investment, Hermes Fund Managers
Anne Richards – Chief Investment Officer and Executive Director, Aberdeen Asset Management
John Thanassoulis – Lecturer, Department of Economics, University of Oxford
I can find nothing was ever published about this, kicked into the very long grass.
Was further research even commissioned at the time?
Possibly not.
Was ever thus?
I owe an apology to everyone named above.
Research was published in 2014. For some reason I couldn’t find this yesterday via Google or Duck Duck Go.
at https://assets.publishing.service.gov.uk/media/5a7dc7c4ed915d2ac884d824/bis-14-1158-metrics-and-models-used-to-assess-company-and-investment-performance-research-paper-190.pdf
Also more recently Sir John wrote a serious critique of the economic ideas that lie behind current pensions policy. It can be downloaded from his webpage here:
https://www.johnkay.com/the-biggest-avoidable-policy-disaster-in-british-politics/
It has not received anything like the attention it deserves and ought to have provoked debate among pensions policymakers.
With the rise of modern finance theory, economists have forgotten the key fundamental difference between the concepts of uncertainty and risk, that they once understood very well. In consequence the habit of trying to model the unknowable future using simplistic – albeit mathematically complex – risk models has led to pensions disaster.
Thank you for the link to Sir JK’s truly brilliant paper, providing a clear exploration and explanation of the place / mess we are in.
The problem now is different and potentially more dire.
I truly think regulators and consultants unwittingly led and coerced schemes into this economic culdesac of which the consequences are truly dire.
But the issue is now known, cause and effect understood, yet still the latest derivation of the TPR DB Funding code makes but lip service to any scope for investment. Why? A primary consequence of the TPR induced de-risking debacle has been “the great confiscation”, under which Schemes en-masse swapped out of equities and growth supporting assets and into UK Govt gilts, to the obvious delight of DMO at UK Exchequer. If the policy announcement for the 2004 pension act had been a confiscation of +c£1bn of Scheme equities for Gilts, there would rightly have been an outcry. Yet that has been the practical effect of the last 20 years of unguided regulation.
As Jeremy Hunt said UK DB pension schemes play an important role in supporting vital public services through their purchases of uk gilts. The slight problem however, is that that is not what they are constituted to do [note to file – watch for class actions against Trustees a decade from now]. How long will the actuarial profession continue to toe the regulatory line favouring DMO issuance, rather than assessing portfolio construction on the fundamentals of actual long term returns, with diversified risk as John Kay implores? Who will tell the Govt that it’s not the job of the DB schemes to be its piggy bank? And that – in the long term – the only way to pay for our public services and pensions promises made is through an invested, risk on (!) economy.