Is a capitalist-socialist economy inevitable?

 

Lay-offs are the worst of the bleak options facing recession-hit companies

Some groups are becoming more creative, offering short-time working rather than redundancies observes Andrew Hill in the FT

From the videotapes to the workplace hugs, much of Broadcast News, the 1987 satire on media, looks old-fashioned. But when I watched the film again recently, as an escape from pandemic-provoked gloom, the scene where the network announces a round of redundancies seemed raw and relevant. 

“If there’s anything I can do,” says the network director, relieved at how a veteran newsman has accepted the news of his forced early retirement. “Well, I certainly hope you die soon,” responds the departing colleague. 

Similar scenes are playing out at companies around the world. Marks and Spencer, the retailer, Melrose, which owns venerable manufacturer GKN, New York-based Macy’s department store, and European aircraft-maker Airbus have all announced potential cuts in recent weeks. Manufacturing trade group Make UK has warned of a “jobs bloodbath”. Newsrooms have been particularly hard hit. 

One added twist is that some of today’s lay-off conversations with unlucky staff will take place by video link rather than in person — easier for nervous managers, but crueller for the people they are laying off. 

Another, more positive, development is that companies are becoming more creative as they brace for recession, turning to short-time working rather than lay-offs. As governments remove subsidies, what was a simple decision to hold staff in reserve, rather than fire them, will become more complicated. But avoiding permanent cuts makes sense, according to David Cote, former chief executive of Honeywell. The sheer cost of severance — in time, money and administrative hassle — mounts up. Often you have to hire the staff back to meet demand as the economy recovers. 

“If someone told you that it would take you six months to build a factory, six months to recover your investment, you’ll get a return for six months, and then you’ll shut it down, you’d never go for it because it would be ridiculous,” he writes in his new book Winning Now, Winning Later. “Yet somehow leaders think it makes sense to do the same with people.” 

Honeywell’s reliance on furlough — combined with its commitment to customers, sustained long-term investment, and attention to supplier relations — helped it bounce back.  

Research also backs up the hunch on which Mr Cote acted 12 years ago. A 2011 OECD review of 19 countries’ experience of short-time working confirmed such schemes preserved permanent workers’ jobs beyond recession. In a recent article for Harvard Business Review, Sandra Sucher and Shalene Gupta applaud US companies such as Tesla and Marriott for using furlough to soften the blow of this crisis. Such schemes let companies “maintain connections with their employees, cut costs while still providing employee benefits, and create a path to a seamless recovery”. 

Yet defending the decision in 2008 was one of the toughest points of Mr Cote’s tenure as Honeywell’s boss. 

Management, employees and investors were not “trained” to accept short-time working as a solution, he told me. Laws differed from country to country, and even state to state. In regions where furlough was put to a vote, support varied in line with the enthusiasm of managers for the measure. Elsewhere, while workers backed short-time working publicly, as Honeywell pushed through successive rounds of furlough, Mr Cote received private notes from staff urging him to “lay off 10 per cent of our people and have done with it”. As one FT reader commented when we asked recently about individuals’ experience of furlough: “Loneliness, anxiety, depression and guilt are hourly occurrences.” 

“All recessions are different,” Mr Cote says, “but they all feel miserable.” He remains convinced, though, that irreversible job cuts would have undermined Honeywell’s ability to respond to an economic upturn, ultimately harming staff, investors and customers.  

Jamie Dimon, chief executive of JPMorgan Chase, has declared that “this is not a normal recession”. Mr Cote suggests, rather, that 80 per cent of the actions companies take to respond to recession are common across downturns, whether triggered by oil crises, inflation, terror attacks or mortgage mis-selling. To managers, he offers this advice: don’t panic; think independently; keep investing for the long term; communicate; and “whatever you do, let people know you’re sacrificing too”. 

Some things, though, don’t change. “This is a brutal lay-off,” remarks Jack Nicholson’s smug anchorman, visiting the newsroom in Broadcast News, supposedly in solidarity with his colleagues. “You can make it a little less brutal by knocking a million dollars or so off your salary,” says his boss, before rapidly backtracking in the face of the trademark Nicholson glare. 

As a doctor, I say it’s time to nationalise GP surgeries

Practices refuse to take on work that benefits patients because it isn’t in their business interest. Let’s bring them into the NHS writes Dr Paul Williams, a GP and the Labour MP for Stockton South, in the Guardian

  

‘Public satisfaction with general practice remains relatively high, but not all practices work as well as they should for their patients.’ A receptionist at a GP surgery. Photograph: Anthony Devlin/PA


General practices support patients through every stage of their life. They are the heart of their communities and the gateway to our NHS. Every day, around a million GP consultations take place in English practices. We should rightly be very proud of our system of primary care.

But it isn’t perfect. As data published this week shows, patient demand for general practice services is increasing while the number of GPs is actually falling – according to the survey, one in 10 GPs are in contact with 60 or more patients a day, which is double the safe limit. At a time when people are living longer, and health problems are becoming more complex, the government has spectacularly failed to deliver its promise of an extra 5,000 GPs. Not enough medics want to be GPs, and too many doctors leave general practice too early.

Simple changes might make things better for staff working in primary care, and for patients. When the NHS was founded in 1948, hospitals were brought into public ownership and general practice was left in the private sector, where, mostly, it has remained. Most of the time your GP doesn’t get a salary. They have contracts with the NHS and local authority for a variety of services and they take home the “profit” that they make.

While some think the partnership model is more productive than being employed like hospital colleagues, it is not right for everyone. Increasingly, GPs do not want to become partners because of the levels of responsibility and financial risk involved. Evidence suggests that many GPs would be open to moving to a salaried model. At the same time, there are many other staff who work in primary care who would like more influence over the organisation they work for.

Public satisfaction with general practice remains relatively high, but not all practices work as well as they should for their patients. In many practices you can see a doctor on the same day, but in the area I represent as an MP, in March 4,437 people had to wait more than 28 days between making an appointment and having a consultation. In some parts of my constituency, poor access to a GP is the biggest issue that people contact me about.

 ‘Evidence suggests that many GPs would be open to moving to a salaried model.’ Photograph: Alamy Stock Photo

As a health service leader, I was astounded by the number of times practices wouldn’t take on work that was clearly beneficial to their patients, because it wasn’t in their business interest. I have battled with GPs who told me that they weren’t paid enough to do annual health checks for adults with learning disabilities (they get more than £100 per check), wouldn’t take student nurses on placement because the profits weren’t large enough, and wouldn’t offer appointments in early mornings or evenings because it was “optional”. That clearly isn’t right or fair to their patients.

Our health services should be designed around need. The places with the oldest people and the highest levels of deprivation should get the greatest resources. The inverse care law tells us that in the real world the opposite happens. Practices emerge where doctors want them to be, rather than where public health needs assessment tells us they should be.

Culture and leadership are always more important than organisational structure, but a new ownership model for primary care would create an environment that facilitates happy staff and healthier patients.

Employee-led mutuals should be created within the NHS with nurses, doctors, pharmacists, therapists, managers and patients all having a say in how the organisation is run. These new organisations – instilled with a progressive and innovative culture – would be much better working environments for staff, with improved career pathways for nurses and more incentives to invest in people. As they would be within the NHS, there would be no profit motive. Crucially, they wouldn’t be able to pick and choose which services to offer to their patients. Struggling practices could receive investment to bring them up to the level of the best.

This model would enable a strategic shift from reactive and hospital-based care to preventive community care – without the NHS having to pay a premium price that includes GP profit. All existing GPs should be offered salaried employment within these organisations. Those that wish to retain their existing contractual arrangements should be allowed to do so. This is likely to be particularly important in rural communities.

Groups of general practices are already coming together into primary care networks. This is a step in the right direction. Why not give them the option to go one step further, become NHS primary and community care organisations, and complete Nye Bevan’s NHS?

More freeloaders than free market. How Britain bails out the business chiefs

 

‘In an age of untrammelled greed, company executives are rewarded for cannibalising their businesses and bilking their staff.’ Illustration by Andrzej Krauze

 Aditya Chakrabortty in The Guardian


On Wednesday, two very different men will have to explain themselves. Both appear in London, to a room full of authority figures – but their finances and their status place them at opposite ends of our power structure. Yet put them together and a picture emerges of the skewedness of today’s Britain.

For the Rev Paul Nicolson, the venue will be a magistrate’s court in London. His “crime” is refusing to pay his council tax, in protest against David Cameron’s effective scrapping of council tax benefit, part of his swingeing cuts to social security. In order to pay for a financial crisis they didn’t cause, millions of families already on low incomes are sinking deeper into poverty. In order to pay bills they can’t afford, neighbours of the retired vicar are going without food. The 84-year-old faces jail this week, for the sake of £2,831.

Meanwhile, a chauffeur will drive Philip Green to parliament, where he’ll be quizzed by MPs over his part in the collapse of BHS. A business nearly as old as the Queen will die within a few weeks, leaving 11,000 workers out of a job and 22,000 members of its pension scheme facing a poorer retirement.

There the similarities peter out. Nicolson was summoned to court; Green wasn’t going to bother showing up at Westminster. When the multibillionaire was invited by Frank Field to make up BHS’s £600m pension black hole, he demanded the MP resign as chair of the work and pensions select committee.

But then, Green is used to cherry-picking which rules he plays by. Take this example: he buys Arcadia, the company that owns Topshop, then arranges for it to give his wife a dividend of £1.2bn. Since Tina Green is, conveniently, a resident of Monaco, the tax savings on that one payment alone are worth an estimated £300m. That would fund the building of 10 large secondary schools – or two-thirds of the annual cut to council tax benefits.

Just as Green underinvests in society, so he underinvests in his companies. The man to whom he sold BHS last year, Dominic Chappell, told MPs last week that “for the past 10 or 12 years there had been little or no inward investment in the stores”. A staple of the high street had been run down.

Then again, what incentive has he had to do otherwise? Green bought BHS with just £20m of family money and borrowed the rest. Within four years, he had pulled £400m of dividends out of the firm – 20 times his initial outlay.

He used the same tactic to buy Arcadia – stumping up £9.2m in equity and taking out £1.2bn three years later. This isn’t retailing as you might think of it, it’s balance-sheet shazam – the kind of financial engineering that posed as real business in Britain’s bubble years. And it’s enabled Green to turn major retailers into what Robert Peston, in Who Runs Britain?, calls “giant gushers of cash”.

But in today’s Britain, the poor are forced to pay the unaffordable, while the tax-avoider is honoured for his contribution to society. Green was knighted by Tony Blair, while David Cameron appointed him a government adviser.

Just as Green pretends to be a cheeky chappy even though he went to boarding school, so any charlatan in pinstripes can claim to be a businessperson – and be handsomely rewarded. The barons who run our rail services tout themselves as “investors”, but for every quid they put into their trains, they take out £2.47. That level of underinvestment ensures commuters are never sure of getting in on time and having a seat – but shareholders and managers can make a fortune.

From Margaret Thatcher through Tony Blair to David Cameron, successive prime ministers have preached the virtues of free enterprise. We’ve ended up with an economy comprised of what parliament’s public accounts committee calls “quasi-monopolies” – from water to banks to electricity to public outsourcing – and big businesses being treated as money-sponges to be wrung dry by their owners and managers.

In the 1970s, £10 of every £100 in corporate profits was paid to shareholders. Now between £60 and £70 of every £100 is handed out. Workers, companies and the economy are thus starved of investment and growth opportunities so that, as Andy Haldane at the Bank of England warns, firms are “eating themselves”.

In an age of untrammelled greed, company executives are rewarded for cannibalising their businesses and bilking their staff. The typical FTSE-100 boss is now on a total pay of around £5m, the High Pay Centre calculates, even while the average employee is still earning less in real terms than in 2008.

This is less about the free market than freeloading. The banks collapse and are bailed out. The Sports Direct billionaire Mike Ashley walks away from a collapsed business, giving hundreds of workers 15-minutes notice of redundancy – and handing taxpayers the £700,000 bill to clean up the mess. Tax-avoider Amazon receives tens of millions of public money to build warehouses, and even has a road in Swansea built for it. Richard Branson takes £28m to open a call centre in Wales.

The public pay for apprenticeships, so that companies get readymade workers. We shell out for upgrading the railways. Most of all, we top up poverty pay. Official figures show that 37% of working-age households in this country now take more from the public purse than they pay in. Not because they’re lazy or unemployed – employment has never been so high – but because their bosses can rely on the rest of us to pay their way.

Survival of the fittest? This is a deformed capitalism, barely worthy of the name – and it won’t improve by slinging a few rotten tomatoes in parliament. We need a working capitalism, where the public no longer give away their protections and subsidies for free – but instead make businesses take their responsibilities seriously.

If rail operators rely on taxpayer billions, they should train staff and pay them a living wage. Why shouldn’t big supermarkets that need public planning permission and licensing to trade be required to stock some locally sourced goods? And why shouldn’t local and central government, which allocate billions in procurement and tendering, foster a diversity of business models – from not-for-profit to mutually owned.

Some of you may think such measures impossible, others may see them as baby steps. They should be the first heaves on the pendulum, turning our economy away from the interests of the wealthy to the rest of us.

Last week Nicolson promised: “I shall start paying my tax again when they stop taxing benefits.” Good for him. The rest of us taxpayers should do the opposite: asking businesspeople what they’ll do to deserve our corporate welfare. That question should not just be put to Green and Ashley, but to those who run all our major corporations. Otherwise, we’re merely chasing out a few big names and hanging up a sign over Britain that reads: “Under new owners, business as usual.”

It's obvious that Jeremy Corbyn is the real tax dodger – that's why he paid more tax than he owed

Now we know that the Labour leader has 'taken £1.5m from the state'. Thank goodness we have intrepid investigative reporters who can multiply his salary by 34

Mark Steel in The Independent

Jeremy Corbyn filed his tax return late AFP


It was highly moving to hear our Prime Minister explain that the reason he gave misleading answers about benefiting from offshore tax arrangements was because he was angry with comments made about his dad. It makes you realise that, when it comes to tax avoidance, the Camerons are the real victims.

Offshore tax deals may deprive the country of billions of pounds, but that’s only money. Insulting comments are made about your father, such as ‘did you benefit from his offshore tax account?’ would make anyone get angry and confused, and spend all week implying you didn’t benefit when you did.

I remember when someone asked me if my dad liked bananas, and for the next month I told everyone I was the world discus throwing champion. Being devious was a natural reaction to the anger.

How dare people spread smears such as ‘he set up an offshore company in the Bahamas’, when the only evidence he did any such thing was that he’d set up an offshore company in the Bahamas. Some people even insinuated the reason the millions of pounds were placed in the Bahamas was to avoid tax. But there are many other valid explanations, such as the need to keep the money warm.

But now, at last, some people are directing questions at the real tax dodger: Jeremy Corbyn. According to the Daily Telegraph, Corbyn has “taken £1.5m from the state”, and the sneaky method he’s used is to “make this from his salary as an MP” (over 34 years).

Another MP is quoted as saying this revelation is “remarkable.” Thankfully there are dedicated journalists prepared to root out this astonishing figure – by multiplying his annual salary by 34. We must be grateful to those gallant crusaders prepared to go to such lengths to expose this scandal.

But this is only the start. Further investigations reveal if Corbyn lives another 80,000 years, and remains an MP for that time, he’ll have taken more off the state than the entire defence budget of Argentina. Even more remarkable, compared to someone travelling on a rocket flying at close to the speed of light, his week would last as long as one of their minutes, meaning he could make a million pounds EVERY SPACEMAN DAY.

That’s socialists for you.

Having published his tax returns, it also emerged Corbyn was fined for sending in his accounts late, which David Cameron tried to make a joke about. This was reassuring because it suggests he’s got over the deep trauma he suffered last week. And you can understand his point: as any businessman knows, it’s far better to be paid nothing on time rather than the right amount a week late.

It also turns out Corbyn paid too much tax, having stated he earned more than he did. We could quibble about the too much/too little detail – but he paid the wrong amount. This seems to be the Conservative argument about tax avoidance: we’re all up to it in our own way, so if you give your son three quid for mowing the lawn without paying VAT, you’re no different to an investment banker squirreling £10bn in the Virgin Isles so he can keep the lot and buy a Rembrandt to use as a dishcloth.

If you express discontent about it, you’re asked ‘do you have an ISA, because THAT’S tax avoidance’? I suppose it is. If you buy an apple rather than spending that money on a house, you’re sneakily avoiding stamp duty. Who are you to complain about Google?

And, as they insist, none of these people named have done anything illegal. That may be because the characters using accountants in Panama were rich to start with, so they could afford to employ an army of lawyers and accountants to make sure their avoidance was legal. If burglars had those resources, they’d inform a specialist firm about a house they were planning to rob so it could be registered in an archipelago off Alaska where it’s legal to walk off with someone’s telly and do a dump on their carpet.

But the saddest part of this story, as many Conservatives have suggested, is that if we’re going to be such sticklers over people in public life and where they put their £10m, we risk putting decent tax avoiders off from offering their services to the state. For example, William Hague said if Winston Churchill had to be open about his accounts, he wouldn’t have stayed in politics.

That’s possible – although it may be that he’d have stayed in politics and paid his tax. Or he might have said: “I was planning to warn about the perils of Hitler, then if necessary become Prime Minister and oppose the attempted fascist domination of Europe. But if I’m expected to pay the legal tax rate, I don’t see why I should bother.”

This only shows the slippery slope we go down if we insist our politicians stick to the same rules as everyone else.

If we expect them not to drive at 120 mph the wrong way down a motorway, or set fire to public buildings or sacrifice llamas in the woods in Satanic rituals, we’ll simply deter the high quality individuals we need.

How a corporate cult captures and destroys our best graduates

George Monbiot in The Guardian

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People who had spent the preceding years laying out exultant visions of a better world were suddenly sucked into the mouths of corporations dangling money like angler fish.’ Photograph: Daniel Pudles

To seek enlightenment, intellectual or spiritual; to do good; to love and be loved; to create and to teach: these are the highest purposes of humankind. If there is meaning in life, it lies here.

Those who graduate from the leading universities have more opportunity than most to find such purpose. So why do so many end up in pointless and destructive jobs? Finance, management consultancy, advertising, public relations, lobbying: these and other useless occupations consume thousands of the brightest students. To take such jobs at graduation, as many will in the next few weeks, is to amputate life close to its base.

I watched it happen to my peers. People who had spent the preceding years laying out exultant visions of a better world, of the grand creative projects they planned, of adventure and discovery, were suddenly sucked into the mouths of corporations dangling money like angler fish.

At first they said they would do it for a year or two, “until I pay off my debts”. Soon afterwards they added: “and my mortgage”. Then it became, “I just want to make enough not to worry any more”. A few years later, “I’m doing it for my family”. Now, in middle age, they reply, “What, that? That was just a student fantasy.”

Why did they not escape, when they perceived that they were being dragged away from their dreams? I have come to see the obscene hours some new recruits must work – sometimes 15 or 16 a day – as a form of reorientation, of brainwashing. You are deprived of the time, sleep and energy you need to see past the place into which you have been plunged. You lose your bearings, your attachments to the world you inhabited before, and become immersed in the culture that surrounds you. Two years of this and many are lost for life.

Employment by the City has declined since the financial crash. Among the universities I surveyed with the excellent researcher John Sheil, the proportion of graduates taking jobs in finance and management consultancy ranges from 5% at Edinburgh to 13% at Oxford, 16% at Cambridge, 28% at the London School of Economics and 60% at the London Business School. But to judge by the number of applications and the rigour of the selection process, these businesses still harvest many of the smartest graduates.

Recruitment begins with lovebombing of the kind that cults use. They sponsor sports teams and debating societies, throw parties, offer meals and drinks, send handwritten letters, use student ambassadors to offer friendship and support. They persuade undergraduates that even if they don’t see themselves as consultants or bankers (few do), these jobs are stepping stones to the careers they really want. They make the initial application easy, and respond immediately and enthusiastically to signs of interest. They offer security and recognition when people are most uncertain and fearful about their future. And there’s the flash of the king’s shilling: the paid internships, the golden hellos, the promise of stupendous salaries within a couple of years. Entrapment is a refined science.

We have but one life. However much money we make, we cannot buy it back. As far as self-direction, autonomy and social utility are concerned, many of those who enter these industries and never re-emerge might as well have locked themselves in a cell at graduation. They lost it all with one false step, taken at a unique moment of freedom

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We have but one life. However much money we make, we cannot buy it back.

John Sheil and I sent questions to eight of the universities with the highest average graduate salaries: Oxford, Cambridge, Imperial, the LSE, the London Business School, Warwick, Sheffield and Edinburgh. We asked whether they seek to counter these lavish recruitment drives and defend students from the love blitz. With one remarkable exception, their responses ranged from feeble to dismal. Most offered no evidence of any prior interest in these questions. Where we expected deep deliberation to have taken place, we found instead an intellectual vacuum.

They cited their duty of impartiality, which, they believe, prevents them from seeking to influence students’ choices, and explained that there were plenty of other careers on offer. But they appear to have confused impartiality with passivity. Passivity in the face of unequal forces is anything but impartial. Impartiality demands an active attempt to create balance, to resist power, to tell the dark side of the celestial tale being pummelled into the minds of undergraduates by the richest City cults.

Oxford University asked us, “isn’t it preferable that [the City] recruits bright, critical thinkers and socially engaged graduates who are smart enough to hold their employers to account when possible?”. Oh blimey. This is a version ofthe most desperate excuse my college friends attempted: “I’ll reform them from within.” This magical thinking betrays a profound misconception about the nature and purpose of such employers.

They respond to profit, the regulatory environment, the demands of shareholders, not to the consciences of their staff. We all know how they treat whistleblowers. Why should “bright, critical thinkers and socially engaged graduates” be dispatched on this kamikaze mission? I believe these universities are failing in their duty of care.
 

The hero of this story is Gordon Chesterman, head of the careers service at Cambridge, and the only person we spoke to who appears to have given some thought to these questions. He told me his service tries to counter the influence of the richest employers.

It sends out regular emails telling students “if you don’t want to become a banker, you’re not a failure”, and runs an event called “But I don’t want to work in the City”. It imposes a fee on rich recruiters and uses the money to pay the train fares of nonprofits. He expressed anger about being forced by the government to provide data on graduate starting salaries.

“I think it’s a very blunt and inappropriate means [of comparison], that rings alarm bells in my mind.”

Elsewhere, at this vulnerable, mutable, pivotal moment, undergraduates must rely on their own wavering resolve to resist peer pressure, the herd instinct, the allure of money, flattery, prestige and security.

Students, rebel against these soul-suckers! Follow your dreams, however hard it may be, however uncertain success might seem.

Seattle CEO Dan Price cuts own salary by 90% to pay every worker at least $70,000

Adam Whitnall in The Independent

The tech business founder says CEO pay in the US is 'way out of whack'

A chief executive has announced plans to raise the salary of every single employee at his company to at least $70,000 (£47,000) – and will fund it by cutting his own salary by 90 per cent.

Dan Price, the CEO of Seattle-based tech company Gravity Payments, gathered together his 120-strong workforce on Monday to tell them the news, which for some will mean a doubling of their salary.

Seattle was already at the heart of the US debate on the gulf in pay between CEOs and ordinary workers, after the city made the ground-breaking decision to raise the minimum wage to $15 (£10.16) an hour in June.

But Mr Price, 30, has gone one step further, after telling ABC News he thought CEO pay was “way out of whack”.

In order not to bankrupt the business, those on less than $70,000 now will receive a $5,000-per-year pay increase or an immediate minimum of $50,000, whichever is greater.

A spokesperson for the company said the average salary was currently $48,000, and the measure will see pay increase for about 70 members of staff.

The announcement of the plan was made on Monday (YouTube)

The target is for everyone to be on $70,000 by December 2017, while Mr Price has pledged to reduce his own pay from $1 million a year to the same minimum as everyone else, at least until the company’s profits recover.

Making the announcement, Mr Price said: “There are risks associated with this – but this is one of the things we’re doing to try and offset that risk.

“My pay is based on market rates and what it would take to replace me, and because of this growing inequality as a CEO that amount is really high. I make a crazy amount.

The New York Times, which was invited along for the Wolf of Wall Street-esque announcement, reported that after the cheering died down Mr Price shouted: “Is anyone else freaking out right now?”

Mr Price told ABC News he settled on the figure of $70,000 for all after reading study published by the University of Princeton, which found that increases in income above that number did not have a significant positive impact on a person’s happiness. He said that while he had an “incredibly luxurious life” and super-rich associates, he also had friends who earned $40,000 a year and said their descriptions of struggling to deal with surprise rent increases or credit card debts “ate at me inside”.

Mr Price set up Gravity, a credit card payment processing company, in 2004 when he was just 19. Entrepreneurship runs in the family – his father Ron Price is a consultant and motivational speaker who has written a book on business leadership.

And even if the measure to set such a high minimum wage is a publicity stunt, it has resonated with people in a country where some economists estimate CEOs earn nearly 300 times the salary of their average worker.

Mr Price said he “hadn’t even thought about” how he was going to adjust to earning 90 per cent less, adding: “I may have to scale back a little bit, but nothing I’m not willing to do – I’m single, I just have a dog.

“I’m a big believer in less,” he added. “The more you have, sometimes the more complicated your life gets.”

Needed: An exit policy for bad businessmen

S A Aiyer

Vijay Mallya has not paid employees of Kingfisher Airlines for months, and has defaulted on thousands of crores due to suppliers and creditors. Yet he has just donated three kilos of gold, worth almost one crore, to the Tirupathi temple. In August, he offered 80-kilo gold plated doors to the Kukke Subramanya temple in Karnataka. Possibly he believes that the gods can be bought off in ways that employees and creditors cannot.

How can a man who owes enormous sums to employees and creditors be free to throw gold around like small change? If there were any justice, surely the gold and golden doors should be seized from the temples and handed over to the employees and creditors. Surely they should have first right to Mallya’s assets.

After two decades of economic reform , we have not yet evolved rules that facilitate the exit of poor managements before they ruin a company beyond redemption. Kingfisher Airlines has been ground to the dust by Mallya, a liquor baron who should never have entered this space.

A free-market economy is not just a device giving owners the freedom to sack employees. It is one where creditors and employees have the right to seize a company defaulting on dues, and sack the management. The managing shareholder or promoter is only one of many stakeholders. If he cannot meet his obligations to other stakeholders , they should oust him in a true free market economy. In India, alas, our unreformed regulations and procedures leave promoters in control no matter how big a mess they make.

In the US, creditors can quickly seize a company that defaults on dues, and reorganize or sell it to a new owner . The owner can get temporary protection from creditors through Chapter 11 proceedings. In this, a judge determines whether the company is so far gone that it must be liquidated, or whether it can be saved through mutual sacrifices by creditors, employees and owners. In the process, the judge can change the owner. So, often workers survive bankruptcy proceedings , but the owner does not. That is what we should aim for in India too: an exit policy for incompetent, defaulting owners.

Kingfisher Airlines never made a profit, not even in the boom years when its rival airlines were profitable. Creditors should have moved in years ago when it became clear that the skills of a liquor baron were irrelevant for an airline. But in India creditors cannot quickly seize a company, least of all when the owner has political clout (as in Mallya’s case).

In the old licence permit raj, banks and financial institutions had to support existing managements and keep rescuing them. This has not changed despite the 1991 reforms. Banks have to keep throwing good money after bad.

Today Kingfisher is so worthless that it no longer makes sense to seize it and find a buyer. SBI Chairman Pratip Chaudhuri estimates that rehabilitating Kingfisher will cost a billion dollars. Nobody will do so — a new airline can be started for maybe just $100 million. Kingfisher has just lost its flying licence. Mallya’s hopes of being rescued by Etihad Airways of Abu Dhabi look like pure fantasy.

Even if it makes no sense to seize the airline today, why not seize his liquor business? Why not seize his prize luxury possessions, ranging from paintings to yachts or jets? Why not take over his cricket team, Royal Challengers ? Why not take over his football team Mohun Bagan, and his Formula 1 racing team Force India? Why is he allowed to keep all these, along with gold that he donates to temples, when he says he doesn’t have enough to pay employees or suppliers? He has given personal guarantees to banks: why are these not being enforced?

Mallya can be congratulated on one thing. Service was top-class in Kingfisher , and the airline gained a good reputation for quality. Had the airline been seized early on, it could definitely have been sold to a new owner. However , its reputation has steadily fallen with its continuing financial crisis, leading to cancelled flights and official grounding.

I constantly hear that India has gone in for neo-liberal policies. That’s pure rubbish. Neo-liberalism would have given employees and creditors the right to quickly seize and sell a company that cannot meet its obligations. The problem is not liberalism but the continuing old illiberalism that keeps promoters in charge, forcing other stakeholders to take a hit. Temples and religious trusts can keep enormous donations from defaulters instead of handing them over to others who, in all justice, should have the first right to such money or gold. This area desperately needs reform.

Rating agency worker: 'I am genuinely frightened'

The global meltdown terrified the City. But many are more worried that no controls have been introduced since 2008

• This monologue is part of a series in which people in the financial sector speak about their working lives

'I was on holiday in the runup to the collapse of Lehman Brothers, when the crisis exploded. It was terrifying, absolutely terrifying.' Photograph: Linda Nylind for the Guardian

We are meeting in the heart of the City after the banking blog called on rating agency employees to talk about their experiences. The man I am meeting is British, in his early 40s, a fast talker and very friendly, the sort of person to apologise profusely when arriving four minutes late. He orders an orange juice.

The Joris Luyendijk banking blog

1. Anthropologist and journalist Joris Luyendijk ventures into the world of finance to find out how it works
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6. ... or on Twitter@JLbankingblog

"Every time I read about a new financial product, I think: 'Uh-oh.' Every new product is described in those same warm, fuzzy phrases: how great they are and how safe. Well, that's how credit default swaps and asset-backed securities were explained when banks were introducing these.

"I still get so angry when I think about it. Taking a job at a rating agency seemed a perfect match: drawing a good salary while providing a service of genuine value for society. We need ratings to work out how safe a company or an investment bond is, what the risk of default might be. If you can't trust it, you shouldn't do business with it – it's that simple.

"The reality was very different. What's making me even angrier is that we don't seem to have learned from the crisis. It's back to business as usual. I am no longer with a rating agency, and when I ask former colleagues what lessons they've taken away from the 2008 debacle, they give me a blank stare and say: 'That wasn't us, that was Moody's and Standard & Poor's.' But we just lucked out: our methods were similar.

"Moody's and S&P are the two major credit rating agencies in the world. Between them, they control 80% of the market and they are large, rich and powerful. Then there's Fitch, desperately trying to get the training wheels off and grow. Finally, there are specialised smaller agencies, one of which I was working for.

I was there when the great collapse of 2008 happened, giving me a ringside view. My agency was incredibly lucky never to have expanded into areas we didn't understand. Our head office was very conservative. This saved us.

"I was on holiday in the runup to the collapse of Lehman Brothers, when the crisis exploded. I remember opening up the paper every day and going: 'Oh my god.' It was terrifying, absolutely terrifying. We came so close to a global meltdown. There I was on my BlackBerry following events. Confusion, embarrassment, incredulity … I went through the whole gamut of human emotions. At some point my wife threatened to throw my BlackBerry in the lake if I didn't stop reading on my phone. I couldn't stop.

Now here we are four years later, and the most incredible thing has happened – we've learned nothing from the whole thing. Everybody pretends it's all OK. Sometimes I feel finance has reacted to the crisis the way a motorist might respond to a near-accident. There is the adrenaline surge directly after the lucky escape, followed by the huge shock when you realise what could have happened. But then, as the journey continues and the scene recedes in the rearview mirror, you tell yourself: maybe it wasn't that bad. The memory of your panic fades, and you even begin to misremember what happened. Was it really that bad?

"If you had told people at the height of the crisis that four years later we'd have had no fundamental changes, nobody would have believed you. Such was the panic and fear. But there we are. We went from 'We nearly died from this' to 'We survived this'.

"Have you read Gillian Tett's Fool's Gold about the crisis? It was exactly like that. You had bankers who did not understand their own complex financial products but thought that they did, and then raters who took their word for it. And nothing has fundamentally changed.

"As most people understand by now, lots of sub-prime mortgages were bundled by banks into financial products and sold on to investors. These believed they bought a very safe thing because the products had been rated triple A, which meant that there was only a 1% or so chance of a default.

"When the crisis hit, it hit hard, reality kicked in and the rating agencies suddenly downgraded triple A products to junk status in a matter of days. I won't call it fraud; I will call it a 'desperate revision of history'.

"Overall, it was more incompetence than outright fraud. If the sub-prime mess had been a huge conspiracy, it would have been very, very difficult to keep that a secret all these years. Too many people were involved. As far as the rating agencies were concerned, it was incompetence brought on by short-termist, bottom-line thinking by senior management who just wanted to make money. That meant rating as much as possible, as often as possible.

"The big change in rating agencies started around 10 years ago. Before that time Moody's was seen as boring, quiet, nerdish. Analysts there were seen as researchers, studious types. Then new management came in and they threw this out of the window. They pushed a culture that was driven by a desire to just keep rating. And they hired people that reflected their thinking.

"Imagine you are a rating agency and you see this new product coming in. You realise: if we rate it, we can keep on rating products like it, as this is the beginning of a continuing stream. And a huge stream it was: thousands and thousands of products offered for rating – and each for a fee.

"But, at the same time, rating agencies senior management have become so focused on the bottom line. There's constant cost-cutting. Demanding more from fewer and fewer people. Obviously, the quality of a rating declines when there's less time to study a company and its business plan. In my time at the company, there'd be no paid overtime, no time off after you worked through the weekend, let alone a word of thanks.

"Ultimately the work suffers, more so when there are endless internal restructurings. Two heads of department in my agency had their department organised out of existence overnight. A little while later, one was resurrected when top management realised what it had done. Higher management often doesn't properly understand what's going on in its own organisation. They are constantly redrawing the map, to the point where it feels like the map has become more important than the journey.

"When asked about the crisis, rating agencies use the defence that the bankers who designed those complex financial products did not understand them themselves. So how can rating agencies be blamed for not understanding them either**?

"But you shouldn't just rely on the information given to you by the people whose product or company you are rating. Imagine a doctor who bases his diagnosis only on what patients themselves are telling him. If they are lying to him, the doctor is lost. If they are lying to themselves, ditto. Or imagine you went to rate the UK and all you do is ask George Osborne how things are with the country.

"With every new financial product, raters should be asking: have the products been tested properly? Are they modelled for all possible conditions, so boom as well as bust times? Do we even know what it does in every phase of the economic cycle? Do we know how the product is likely to evolve over time, how will it behave when it develops into a bubble? The thing is, you cannot ask these questions if you are permanently understaffed and under-experienced.

"Young analysts are much cheaper than experienced ones. And giving people a thorough training again costs money and takes a long time. If you're young, you will assume that what you've seen until now in your life is 'normal', when it might not be. More than that, young people lack not only experience in business but also in life*. When interviewing management, you need to be able to read people, to have developed alarm bells for when they might be lying to you – or worse, lying to themselves.

"This problem exists on both sides of the divide. Many of the most dangerous financial products are designed by the same kind of fresh-faced, straight-out-of-university boys and girls. They have never seen a market panic. They are too young to know the true face of the market; they don't see how products can be misused. What they do see, and tell their bosses, is how their product can make money.

"Finance is continuously evolving, so you have highly niche financial areas that fewer and fewer understand. This all but guarantees misunderstandings. Rating agencies have mostly generalists and very few niche specialists. Often you get someone specialised in product A to rate product B, even though they are 20% different. This is where misunderstandings are quite likely to arise, when a specialist mistakenly believes that his expertise is applicable to adjacent niches.

"I am genuinely frightened. What are the ratings agencies missing at the moment? What are the companies that they're rating developing? What's the next miracle financial product and how badly is it being misunderstood?

Also read

Ratings Agencies - The Power of Modern Day Astrologers 

IPL can't duck the F(FIXING) word

by Sharda Ugra in Cricinfo

On Wednesday night, Lalit Modi complained about how the TV channel that showed the sting operation and put certain information "in the public domain" was "totally misleading". He felt for the viewers, the fans and the sporting fraternity, he said, because the sting had no proof. 

Quite the contrary. What India TV's "Operation IPL" proved beyond doubt was that India's young domestic cricketers, those who drift away from centrestage, are quite happy to pocket any extra cash that the delusional or foolish may want to shell out.

If caught they will either be reprimanded - like Ravindra Jadeja or Manish Pandey - or be consigned to the some outer darkness like the suspended five players will possibly be. And that will be that.

What the India TV programme did not prove on camera was that any of the players stung on tape had either willingly accepted cash on camera and then bowled a no-ball, or "spot-fixed" as promised. That is not to say that does not happen - it just didn't show up on tape.

The IPL, set up to imitate the franchise model of American sport, is actually a very cosy family business. The owners are, for the majority, in this largely for individual and corporate mileage. They owe their original loyalty to the BCCI, which continues to play patriarch. It is why they are protected and if players are caught being invited to break rules, they are the ones who get punished. This is not to say that players are poor lambs being seduced by cash but everyone knows the difference between being the guy receiving the pay cheque and the guy actually signing it.

In leagues where rules matter, teams are punished - however powerful they may be. In 2006, Juventus of Turin, historically one of the richest and most powerful football clubs in Europe, were found guilty of rigging games with four other teams and stripped of back-to-back Serie A titles, relegated to Serie B, booted out of the UEFA Champions League and forced to play three home matches without any fans.

The National Rugby League in Australia has fined four teams more than US$165,000 for breaching the salary cap in 2012. A fifth team has just lost an appeal over a US$185,000 salary cap fine from 2010.

Sometimes it's not what the club itself does; earlier this month, football clubs AC Milan and Inter Milan had to pay 20,000 euros and 10,000 euros for insulting banners seen among their fans during a local derby as well as one that racially abused a player.

During a 2011 NFL lockout, three teams including the Tampa Bay Buccaneers received six figure fines - $250,000 was found to be the Buccaneers' fine - for breaking the rule that no players could be contacted during the lockout period. By this yardstick, Mumbai Indians should have been fined along with Jadeja but weren't. Over the last few years the players get flung the rule-books and the franchises offering extra frills are treated with respect.

If Ravi Sawani discovers that the black money being talked of casually by the suspended five was actually paid out, will any of the teams be punished? A sports law expert, Vidushpat Singhania, has said that for any code or investigation to actually matter, it had to be completely spelt out and it needed to have teeth. That is how the partnership between the ICC and Interpol is said to work. It is how the US anti-doping agency was able to ensure that Balco went to court and Marion Jones went to jail. If the BCCI is serious about its anti-corruption code, it must have the government, the cops and the courts on its side. The first problem with this, though, is that the BCCI has long avoided public scrutiny.

Modi, in that interview, spoke warmly of his "close", "great" and "best friends" who had "supported" his league in its early days, buying up franchises, and with whom he said was always "impartial".

Everyone involved with the league knows there are some franchises who can be a bit bendy with the rules because they are allowed to be, and there is another that is not required to bend rules because it cannot be argued with.

	Rules have been changed as the IPL has gone along: without warning, the retention clause was brought in, as opposed to all players going back into a public auction

It is why the addition of two teams in 2010 became so problematic - the new entrants came from outside the circle of friends and the flexibility of the IPL's rules was not about to be explained to them.

Rules have been changed as the IPL has gone along: without warning, the retention clause was brought in, as opposed to all players going back into a public auction. This helped some of the key "icons" stay with teams that could offer them rich pickings.

Then came the "secret" bid to help solve dead-heat tie-breaks during an auction. The most public 

secret of that new rule was the fact that whoever had the most cash would get the player they wanted and anything beyond $2m would remain unmentioned and be given to the BCCI as a bit of a sweetener.

Franchises will always talk about what it actually costs to get the best domestic talent into their side. There are many stories about offers that players couldn't refuse: extra cash or "jobs" as euphemistic extras, cars, owners criss-crossing the country in chartered planes to speak to the most desirable domestic players …

The Rs 30 lakh salary cap for non-India players began with noble intentions. It was the BCCI's attempt to try to keep domestic cricketers interested in playing all formats, to ensure that Twenty20 cricket does not become what it has - the one form of cricket that every kid wants to play - and the IPL contract the one legal but still flexible document everyone wants to grab.

Now Rs 30 lakhs in India is a more than decent income in itself - and more so for someone in his 20s. It puts the player in the top 1% of the Indian salary bracket, alongside the Ambani brothers, Sonia Gandhi and Shah Rukh Khan. According to the National Council of Applied Economic Research, any household earning an annual income of Rs 12.5 lakh (1% or less than 1% of the population) are India's "affluent or rich."

Yet the figure is a victim of its environment - and of the messages cricketers get. Some franchises are willing to offer more to ensure that they have at least four half-good domestic players once they have filled their quota of four foreigners and local "stars" in the playing XI.

The IPL's ecosystem grumbles that 'market forces' should come into play over salary caps. It will imply that market forces will put in more cash with the overseas buys and less with the Indian players, which would be fine if this were not an event that required teams have seven Indians in their playing XI.

The India TV sting operation will end up being misleading only if the IPL allows it to be. What the sting operation has revealed again is that some of the IPL's most influential stakeholders are willing to go the extra mile to get players they believe they need. The players, who cannot understand what the word 'enough' means, are just willing to bargain long and hard.

If the franchises are not pulled up or reined in, another sting operation in a few years' time will just offer up another round of suspensions.

Sharda Ugra is senior editor at ESPNcricinfo

------

Why do the IPL franchises get away with it

by Harsha Bhogle in cricinfo

The India TV "sting" this week, where players were caught on camera allegedly attempting to negotiate more lucrative IPL deals for themselves, was, I'm afraid, tame and misleading. There were some issues there that deserved airing, but they were concealed by the theatrical, incessant self-promotion of the TV channel in question. Cricket needs to be careful of those who write film-style dialogues and those who over-dramatise. 

And so, in a typically Pavlovian response, far too many people are screaming match-fixing. Or its cousin, spot-fixing. The greater issue in this sting - if you were patient enough to get to it - was the realisation that many players get paid more than they are entitled to. And that because there is a ceiling on how much uncapped domestic players can earn, there are some naughty money transfers going on.

It is a practice that has been whispered about, occasionally loudly talked about, for a long time now; especially in the days before IPL 4. With a limited number of capped Indian players in the auction, there was a rush to find the best of the rest, and strictly speaking, if one franchise couldn't pay more than another, very few players had strong enough reasons to move. But then, there are many things that are whispered about on the circuit, and just because something is whispered about, it need not necessarily be true. More important, it cannot be proved to be true.

And so the issue of players being paid more than the contracted amount remained a whisper. Now players are saying it happens. The BCCI can look at it two ways. It can disbelieve the players or it can accept what they are saying and launch a serious investigation (which has been done but I do not know what its scope is) though it is very unlikely the board would not have known about it in the first place.

It will be unfortunate if only the players are investigated because you cannot accept money unless someone offers it. If the players are saying they were offered extra money, then it means the franchises were violating IPL rules too. If players are to be punished for accepting money they shouldn't have from franchises, then the franchises should be punished too. In his recommendation in 2010, on the Ravindra Jadeja case, Arun Jaitley suggested as much, and I think his legal acumen and stature can be used to strengthen procedures in the IPL.

Eventually this league belongs as much to the BCCI as to the franchise holders, and if it has to become one of the great sports leagues in the world (and it should not consider a smaller objective), they need to work together to strengthen it. And so, this cannot be buried, it has to be taken as seriously as a corporation would a whistle-blower.

To be fair, the basic principle behind the founding of the IPL was sound: that each franchise has equal resources available to it and so has an equal chance of winning the title. If the transfer of uncapped players favours richer franchises, then the principle on which the IPL was conceived is threatened. And so to take it to the next stage it needs stronger processes, but it needs more openness, for the more transparent an organisation is, the less it can hide wrongdoing. It is also something the fans are entitled to, because without them there is no revenue.

Now to the other danger, which too was known, but which the sting has highlighted. Indian cricket, like the Mumbai film industry, lures many towards it. Some come with the dream of making it big and playing for India for ten or 15 years; some others quickly fall away and seek every opportunity to make a buck in the time they have. It is not wrong but it exposes them to all manner of people. As there are fine and respectable people, there are maggots, too, who prey on the insecurity of young cricketers and lure them onto the path that can only lead to fixing and other crimes. And match-fixing, or spot-fixing, remains the single greatest threat to the continued success of the IPL. This sting, if the videos were ethically edited, confirms that day might already be upon us.

The people who carried out the sting exploited this vulnerability among young cricketers. The only way to protect them from more such vultures is to educate them and provide harsh deterrents. Ironically, though, such stings seem to have become the only way of exposing loopholes. Maybe a law passed by the government making match-fixing a criminal offence will help.

In many industries, corporations are free to run their business as they want but are answerable to a higher entity. For its own good, the IPL needs to have a higher entity, one that seeks no political or monetary gain, to question its functioning. This entity could be self-appointed, and there are many champions of corporate governance with a track record of integrity who will be happy to serve on it. The IPL will thus become a stronger, more rigorous organisation, and in becoming so, will benefit Indian cricket enormously.

 

Harsha Bhogle commentates on the IPL and other cricket, and is a television presenter and writer.