Building a More Meaningful Business Environment Post-Crisis

Then came the piece in 2011. I think this was the year that I was inspired by John Lewis to write about their partnership values and about meaningful business models:

Dec 2011

One of the most popular television ads this holiday season depicts a little boy counting down the days to Christmas. Time just can’t seem to pass by quickly enough for him, and one assumes this is because he can’t wait to open his presents.

However, the final sequence of the ad – where he wakes up on Christmas morning – sees him running past the pile of presents at the foot of his bed to retrieve an awkwardly-wrapped package from his wardrobe. As he presents the gift to his sleepy parents, the tagline appears on the screen: For The Gifts You Can’t Wait to Give. 

This is the sort of feel-good ad that most people have come to expect from John Lewis, the UK’s favourite retailer. Much loved by Middle Britain, the John Lewis brand is often associated with exceptional customer service, reliability and trustworthiness, qualities that have been attributed to its unique business model.

The John Lewis Partnership – which owns the John Lewis departmental stores and Waitrose supermarkets – is an employee-owned company; all permanent staff are ‘partners’ who own a share in the business and participate in its profits. This sense of ownership is seen as a strong incentive for employees to perform well; its executive chairman Charlie Mayfield has been quoted as saying that ‘if we treat our partners well, it will lead to good customer service.’

The global financial crisis and the ensuing economic recession in much of the Western world has given rise to much anger and disillusionment, as demonstrated by the Occupy protest movement against economic and social inequality. And in an effort to restore better accountability, ethics and trustworthiness to business practices, business and government leaders have been prompted to seek alternatives to the current shareholder value model and its short-termist view of profits and share ownership by distant, disengaged shareholders.

As such, the John Lewis model of employee ownership and other similar business models such as co-operatives and mutuals which promote a stronger sense of ownership and greater stakeholder involvement, are increasingly being seen as alternative business models for the future. So much so that the British government is keen to see such models replicated not just in businesses but also in the delivery of public services.  

Research by the Cass Business School show that employee-owned businesses create jobs faster, are significantly more resilient in an economic downturn, deliver far better customer satisfaction, and boast substantially higher value added per employee, The Guardian reports. In the UK, they contribute some £25 billion to the British economy, and according to law firm Field Fisher Waterhouse’s UK Employee Ownership Index, outperform FTSE All-Share companies by an average of 11% annually.

John Lewis’s partnership model has enabled it to weather the current challenging times; despite the downturn, the company saw a 20% jump in pre-tax profits to £367.9 million in the year ended Jan 29, 2011. The business shared £194.5 million in the form of bonuses with its 76,500 partners, equivalent to 18% of their individual annual salary.

Finance mutuals

In the financial services sector, remutualisation is now being seen by some as a way to restore faith in the industry. When the government put up nationalised bank (and ex-building society) Northern Rock for sale, there were many calls for it to be remutualised into a new building society.

Mutuals in the British financial sector are represented mainly by building societies. They are owned by their customers, known as members, and therefore are expected to act in the interests of their members rather than being driven by external shareholder pressure for profits.

There is however only a handful of building societies left in the UK, as 10 of the largest 12 building societies demutualised to become banks in the mid-1980s. Ironically, mutuals were then derided for their inability to fulfil the ideal norm of the shareholder value model due to limits on participation in wholesale funding and high-risk businesses; these constraints in fact safeguarded them during the financial crisis. Interestingly, none of these demutualised societies exist independently today, having been either merged or taken over by a larger bank.

Building societies have reportedly weathered the financial crisis well; a majority of them have remained profitable despite continuing difficult market conditions including very low interest rates and low mortgage activity, KPMG’s Building Societies Database 2011 reports.

The case for remutualising failed financial institutions was put forth in a report by Oxford University’s Centre for Mutual & Employee-Owned Business, which noted that building societies are less prone than banks to pursue risky speculative activity. Having more diverse models of financial service providers would also help produce a more stable financial sector and enhance competition within the system, it added.

There is no denying the appeal of mutuals and employee-owned companies in these troubled times. Increasingly, more people are drawn to the principle of building businesses that also benefit employees, customers and society as a whole, as opposed to the individualistic, profit-oriented practices which many believe were the root causes of the current financial chaos.

Such business models are however not without their downsides. For one, they are more complex to run, depending on the ownership and management structures. There are also questions as to how much business risk they can take, and how an external injection of capital would affect mutually-owned organisations. Financial Times’ Tony Jackson also pointed out that Lehman Brothers and Bear Stearns had very high levels of employee ownership when they imploded. And of course, pro-capitalists would be downright uncomfortable with the socialist and communist connotations of such business models.

One can however hope that there is some real effort to seriously reflect on the failings of the current economic system, and rather than just going back to ‘business as usual’ when things improve, that we may find ourselves with a more meaningful business environment; one that goes beyond making profits in the short term and looks at gaining value not just for shareholders but for society as a whole over the long term.

A Repository of Thoughts, Beginning with the Happiness Index

It's been a long while since I've blogged. But now I've decided to use this blog for another reason - as a repository for my column articles for The Edge Singapore, mainly the year-ended opinion pieces to begin with. Who knows; it might spark off more blogposts in the coming months....In the meantime I am looking at this process to give me some inspiration for ideas on what to write for this year's year-ender which is due in a week!!

Well, I guess the best place to start would be my first year-ended piece, which I wrote in 2010.
this one was about the Happiness Index. I have always tried to find a human/psychological aspect of business in my year-ender pieces, to find a way to tell people that it's not just all about money. It was also my way of tapping into my interest in behavioural economics. And so the first piece looks at how countries around the world were beginning to introduce a national wellbeing or 'happiness index' so to speak. Here it is:


Dec 2010

Bhutan’s done it, France and Canada have been talking about it. And now, the UK is planning to launch one as well.

More and more countries around the world are beginning to look at alternative ways to measure their success by going beyond traditional economic indicators like the Gross Domestic Product (GDP). Instead, measures like Bhutan’s Gross National Happiness (GNH) Index, the Canadian Index of Wellbeing and Australian Unity Wellbeing Index focus on the non-economic factors of wellbeing and happiness.

Efforts to look beyond financial benchmarks like the GDP and Gross National Product (GNP) are not new and in fact, hark back to Robert Kennedy’s 1968 campaign speech when he noted that the GNP ‘measures everything, in short, except that which makes life worthwhile’. It is however a clarion call that’s increasingly being taken up even by the likes of the European Commission and the OECD; both are part of the Beyond GDP initiative that aims to identify the most appropriate indicators of progress, true wealth and wellbeing.  

Yet when UK Prime Minister David Cameron recently announced plans for a national wellbeing index from next April, it was dismissed as ‘woolly’ and ‘airy-fairy’. Granted, the timing of his announcement couldn’t have been worse, coming at the heels of the country’s most severe austerity budget cuts since the Second World War. And the fact that the government is spending £2 million to measure the nation’s happiness at a time when people are facing not-so-cheerful issues like unemployment, tightened household budgets amidst rising living costs, and mass protests against public spending cuts has caused many to see red.

Critics like the Daily Mail’s Melanie Philips have derided the plans as the government’s attempts to control people’s minds. By discovering what people want, she says, the government can develop policies to manipulate people’s choices and behaviour; in short, ‘nudging’ them into wanting ‘the things that the Government wants them to want.’ As expounded by behavioral economist Richard Thaler and law professor Cass Sunstein in their book Nudge: Improving Decisions About Health, Wealth And Happiness, the ‘nudge’ theory asserts that governments can create environments in which people can make better choices for themselves and society. Cameron is said to be so taken with the theory (another big fan is Barrack Obama) that he has set up a ‘nudge unit’ known as the Behaviourial Insight Team in his government, with Thaler as its adviser.

Regardless of the motives, political or otherwise, it is interesting to see that governments are beginning to pay more attention to people’s happiness and wellbeing at a time when one would consider them to be at an all-time low, what with the far-reaching effects of the global economic recession. In fact, it was in Sept 2009 – a year after the world’s banking system crashed – that Nobel prize-winning economists Joseph Stiglitz and Amartya Sen called on global leaders to consider not only economic production but also human welfare, environmental and social sustainability when measuring their nations’ prosperity.

A cynic could contend that focusing on wellbeing detracts attention from dismal economic figures. On the other hand, an optimist could see this as recognition from governments that the relentless pursuit of economic and material success does not necessarily equate happiness and wellbeing at the end of the day. And that in the aftermath of the global financial meltdown, there is realisation that we may have perhaps lost sight of the fact that money and wealth are a means to an end, and not an end in itself.

Measuring happiness and wellbeing is very subjective and unlike financial numbers such as the GDP, is not absolute. After all, what constitutes happiness anyway, as it can mean different things to different people. For its GNH Index, Bhutan looks at psychological wellbeing, education, health, time use, culture, ecology, living standard, and good governance.  The privately-funded Legatum Prosperity Index considers wellbeing issues like health, freedom, governance, safety, education, entrepreneurial opportunity and social capital, as well as economic growth to measure a nation’s prosperity. Potential indicators for the UK’s wellbeing index include health, education, inequalities in income and the environment, as Cameron aims to focus on ‘how together we can build a better life.’

Whether or not GNH will really replace GDP as a global measure of a nation’s success remains to be seen. But at a time when many of us are becoming increasingly disenchanted with the existing economic order, this could serve as a timely reminder that in measuring our own personal success, not everything that’s important in our lives can – or should – be measured in economic or monetary terms. It’s not just our personal GDPs alone that counts, but also our personal GNHs.

Yin F Lim would love an iPad for Christmas, but will settle for good health, peace of mind, the happiness and wellbeing of her family and friends, and peace and goodwill to all mankind.  

Financial literacy - a bunch of hooey?

Today, I chanced upon a blogpost in the Guardian entitled 'Why 'financial literacy' is a bunch of hooey - and why the banks promote it'.

In it, the blog author Helaine Olen discusses how the financial literacy movement is ineffective, and how it basically puts the blame of the recent financial crisis not just on the financial services sector but also on those who have become victims of the crisis - individuals themselves.

In other words, by highlighting the need for financial literacy, we are basically saying that individuals are equally to blame for the crisis as we did not educate ourselves about the financial products we were buying, when the blame should solely lie at the door of these purveyors of personal financial products and services; the banks, the financial institutions that got us into this trouble in the first place.

Olen draws this conclusion from the research she did for her book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, and she is quite strident about how financial literacy is being promoted by these same institutions who continue to churn out financial products that are hard to understand.

My initial reaction to the blog was 'whoa - hang on there'. As an advocate of financial literacy myself, having spent years building up a magazine on the premise that financial education empowers us to make better decisions about our money, it made me feel a bit defensive.

You can't just dismiss financial literacy like that, I thought. I believe it is important to teach children and young people about money and how it works, and to have an understanding of financial products and services. They need to know that money doesn't just automatically shoot out of a machine from the wall whenever they need it. They also need to know how investments, mortgages and debt work so that they know what they are getting themselves into when they become working adults and start making use of these products.

But this blogpost really got me thinking.

For one, I can't argue with Olen's point about how the financial services industy is quite two-faced in the way they promote financial literacy on one hand, while continuing to sell products that are not necessarily in the best interests of the customer.

For the industry, advocating financial literacy is a savvy PR/CSR (corporate social responsibility) exercise. Not only does it help deflect some of the blame of the financial crisis, it also promotes the perception that by helping you understand how money and finance works, we have your best interests at heart.

But do they really? One can't help thinking what a brilliant branding exercise this is; the next time I decide on a financial product, am I more likely to go to the bank or company that is trying to teach me to make better decisions about my money? (Ironically, Olen's blog on the Guardian website is sponsored by HSBC Premier - wonder what they thought of her comments).

Certainly, the financial services industry has a lot to answer for in terms of churning out opaque financial products (structured products anyone?) that stumps the average consumer. This is Olen's point I believe - that no amount of financial education can help us make better decisions about our money because the industry creates complex products that are not transparent which makes it hard for us to understand them.

Olen cites 'survey after survey' which shows that high school students who attended financial literacy seminars do not necessarily have a better grasp of basic financial concepts compared to those who didn't. That these classes "no impact on credit management outcomes, including: credit scores, credit card delinquencies, or the probability of declaring bankruptcy or experiencing foreclosure."

This makes me wonder if another reason that people are failing to make better decisions about their money is because they fail to consider their own behaviour about money.

Take credit card usage for example. We've all read the reports - credit card debt and defaults have been on the rise over the years. This has largely been attributed to the fact that banks and finance companies have made debt easily available - this happened in the UK and US during pre-financial crisis days, and it has been a growing trend in Asia as well.

With easy access to money, people overspend and grow accustomed to a lifestyle that they can hardly afford to maintain on their income alone. And then it all comes tumbling down when they can no longer service the mountain of debt that they have accumulated. Hence the defaults and delinquencies.

The financial literacy approach would be to educate them about the risks of building debt, teach them how dangerously high credit card interest is and how to avoid it and be smart in your debt management. Educate them about the importance of credit card scores and the impact of a bad credit rating. That would be the rational approach.

But what about addressing the irrational behaviour that overshadows the rational side? For instance, credit card usage takes away the pain of paying; I feel less pain using my card to buy the latest It designer handbag than if I were to dish out the actual cash, so I am more likely to buy it now and worry about the bills and credit score later.

Managing our spending - and credit card usage - has as much to do with understanding our behaviour (why some of us feel compelled to use up a month's salary for a handbag or refuse to see that debt mountain we have built while continuing to spend - on our credit cards) as with understanding how credit works.

Of course, the financial services industry needs to shape up and become more responsible with their actions beyond paying lip service with financial literacy PR exercises. Consumers deserve transparent, straightforward products that they can understand. They deserve to be treated fairly and honestly. And they deserve to be put first instead of the industry's bottomline.

And I say don't ditch financial literacy altogether. But instead of just teaching people about how finance and money works, they should also be taught to understand how and why they behave the way they do with money.

With these three elements in place, perhaps we will stand a good chance of making better decisions with our money and our lives.

Chasing GNH vs GDP growth 


Ever heard of the Easterlin paradox? 

No, me neither. Or at least I didn't realise it had a name. 

The Easterlin paradox, named after Professor Richard Easterlin, the founder or happiness economics, expounds the theory that more national wealth does not necessarily translate to a happier nation once basic needs have been met. In other words, having more money does not necessarily make a person happier, once his or her basic needs have been met.

Perhaps I've put it a bit simplistically. Many people think that the more money we have, the happier we will be, because the money will enable us to achieve our needs and wants, our dreams and aspirations. Money to buy all the things that you want, to do all that you want, to stop working, to take care of your family well, to provide the best for them. While we admit that money can't buy everything, it sure can help especially to provide the best education, healthcare, service. Can't argue with that.

Hence, nations chase economic (GDP) growth as that signifies growth in wealth which in turn is expected to attain national happiness. But is that the right way to go? Can money buy peace of mind and security?

In a recent lecture at the University of Warwick, Prof Easterlin discusses how 'growing material circumstances was cancelled out by a substantial decline in peace of mind with their life, health and job satisfaction. Under socialism, jobs, healthcare and childcare had been assured.' 

(More about his lecture here at Warwick Knowledge - with a catchy headline like 'Does Money Make Us Happy? how could I resist reading it?)

Reading this really makes me think of Asia, and how people have such bad work-life balance because they are working so hard to achieve greater wealth and the material lifestyle they aspire to. I do realise that the cost of living - at least in Malaysia -  has risen substantially since we moved away in 2006, and that many people have to work long hours to provide the basic necessities for their family. 

Costs of living have gone up but the quality of living hasn't. Why? Because what is deemed as basic necessities - a safe and secure home, good healthcare, good education for one's children - are no longer at 'basic' costs. Property prices have soared thanks to speculation, and most middle-income families are opting for private education as well as healthcare, because they feel that public schooling and hospitals are not up to mark. 

Beyond those basic necessities however, there are also the aspirational (yes, that word again) wants which to me is fuelling the increasingly material consumerism that is very conspicuous in Asia. Yes, the Pradas, the LVs, the iPhones, the Beemers. But conventional economic theory says that more consumer spending/demand fuels economic growth which in turns generate more wealth. 

But does more of it really make us any happier? Or does it make us more stressed and pressured to climb the corporate/career ladder chasing better salaries (ie more wealth) to sustain the lifestyle we have grown accustomed to? 

On Wikipedia, it says that the implication of the Easterlin Paradox is that once basic needs are met, government policy should focus on Gross National Happiness (GNH) and not GDP or economic growth. 

I would second that, but then again I'm a sucker for achieving happiness (which I personally believe, is not necessarily directly correlated with great wealth). 

Rational vs Irrational debate

So, it’s the first week of Dan Ariely’s Coursera course and I have yet to find the time to check out the lecture videos. But what did catch my eye though, was the special offer to buy Ariely’s three books on Kindle for a special bundle price of £12.99, an offer only just made available outside the US and Canada, available only for students on his course.

I was already planning to get Ariely’s first book Predictably Irrational as I felt it was the best of his three books, and this bundle of three books looked like a real bargain. But it is fast becoming a test to my rational vs irrational side; an apt beginning to my journey on this course.

So, £12.99 for 3 books makes for £4.33 per book.  This is 34p than the £3.99 I was going to pay for the Kindle copy of Predicably Irrational, but  £2.66 savings on the Kindle copy of The Upside of Irrationality and a whopping £5.66 discount on his latest book The (Honest) Truth of Dishonesty.  What can I say? It’s a no-brainer, this bargain of a bundle.

Except that I wasn’t planning to buy the other two books, having already read them. But hey, this would be my chance to get all three of Ariely’s book. But it also means I pay £9 more for two books that I wasn’t planning on buying in the first place. But won’t it be great to own them anyway, now that I have a chance to get them on discount?  But do I need them? I may one day, they make great reference material for this blog? So do I make Ariely richer by buying more books, or save the £9 for something else?  How?

So goes the debate between the rational and not-so-rational (and easily distracted) sides of my brain. I figure it’s a good chance to apply some behavioural economic theory to my dilemma.

How about Ariely’s cost of zero cost theory (as expounded in the first book)? Technically, the books are not free. Although for the total saving of £7.98 through the bundle offer, I would technically be getting The Upside of Irrationality (and a portion of another book) free. Perhaps Ariely should have employed the framing theory on promoting this bundle by selling the ‘free’ part – sales will jump for sure if his theory is correct. Certainly, the ‘discount’ is enough to distract me to almost forget that I did not intend to buy the other two books in the first place.

 Or perhaps it’s the kiasu effect (research must be done on this phenomenon one day) which could be seen as a form of loss aversion – bird in hand worth two in bush and all that you know…

So will the rational or irrational side of me win? Save £9 by not buying two books I wasn’t intending to get anyway, or buy two books and get one free?

 Isn’t shopping mentally tiring?

Aspiring towards more Debt 

 'Aspiration Nation' - UK Chancellor George Osborne's buzzword for this year's Budget has been hitting the media's headlines today.

I must admit that I felt some discomfort when I first heard that phrase. I have nothing against aspiration and in fact, I think that it is good to want to aspire towards something; it gives a person some sense of direction and purpose.

What I am uncomfortable about however, is that 'aspiration' to me is closely related to 'aspirational'. And immediately what comes to mind are status-conscious consumers looking to acquire the next new material thing in the market to keep up with the Joneses, whether it is the newest iPhone (is a smartphone a necessity or a luxury?) or the latest Prada bag. Images of aspirational middle-class Britons driving their Volkswagen Golf GTi, painting their walls with Farrow & Ball, and equipping their kitchens with the ubiquitious Le Creuset pots and pans, Nespresso coffee machines and Kitchen Aid mixers.

Ok, perhaps I am too quick to judge people by what they buy. But what worries me about all this talk about 'aspiration nation' is whether that is really the direction we want to head towards. Wasn't that what got Britain into trouble in the first place? Cool Britannia aspiring to be top of the world, its citizens flush with money - easily accessible through credit cards, bank loans and 100% deposit mortgages - which led to a huge property bubble that eventually burst and left most everyone still nursing their wounds. Do we really want to go there again?

Osborne's Help To Buy scheme aims to help help first-time homebuyers secure mortgages with as little as a 5% deposit; the government will guarantee the remaining 15% needed to reach the minimum 20% deposit that most banks require for mortgages. According to the Metro newspaper, the initiative also includes an offer of interest-free loans for five years if people want to buy new homes, to be repaid only when the homeowner sells the property.

On one hand, it is a laudable move to enable more people to own their homes, many of whom are currently renting because they can't get onto the property ladder. On the other hand, it all sounds to me like a situation of easy credit all over again, and it potentially encourages people to get into more debt than they can manage.

Sounds to me like we're aspiring towards more debt.

Making better decisions?

Preparing for the Dan Ariely course next week by reading the pre-course material, and I'm still plodding through the Kahneman paper. To be more precise: Maps of Bounded Rationality: Psychology for Behavioral Economics which appeared in the American Economic Review. It's a revised version of the lecture Kahneman delivered in Stockholm, Sweden, on December 8, 2002, when he received the Nobel prize for his work in behavioural economics.

It's not an easy read, particularly for someone with no formal background in psychology such as myself. But there are lots of 'take-homes' from it, namely the few theories that Kahneman won the Nobel prize for, namely: prospect theory and the framing effect.

The framing effect in particular, set me thinking. In my profile for this blog, I say that I believe that financial education -- as well as a good understanding of our irrational behaviour -- can empower us to make better money and life decisions.

When I wrote that, it was an echo of the message that I used to drive home through my editorials in Personal Money (the personal finances magazine I used to edit). I used to write about how it is important to be informed, to have the necessary knowledge for your personal finances, to enable us to make the best decisions for our money. 

And I truly believed, at that point, that with the right information, you can make the right decisions. After all, that's what one of the first things we learn in Economics 101, right - that in a perfect market, an agent will have access to all market information to reach a stage of perfect information that will enable him or her to make the best rational decision. 


Except that is not what happens in the real world. There is no perfect information in the real world, no perfect market, and most of all, no best rational decision. And one reason for that is the framing effect. 

According to Wikipedia (which in turned quoted social psychologist Scott Plous), the framing effect is an example of cognitive bias, in which people react differently to a particular choice depending on whether it is presented as a loss or as a gain. (this seemed like a more straightforward explanation than Kahneman's paper). 

In other words, our reaction depends on how a certain situation is presented to us. And more crucially as Kahneman and Amos Tversky found in their work on prospect theory, 'a loss is more devastating than the equivalent gain is gratifying' (quoting Wiki again..)

So if an investment advisor wanted to push Fund A over Fund B, he or she could highlight how much Fund B could lose compared to Fund A, instead of mentioning that Fund B has a lower investment cost and better potential gains, albeit with higher risk. In other words, she frames it negatively rather than positively. 

So do we make the best rational decision - after dispassionately considering the research done on both funds and weighing the calculated risks? But what are the chances that many of us will make the decision based on our emotions, ie fear of potentially losing more money with Fund B than Fund A? And the fact is that we will do so because of the way the information was presented to us (ie how it was 'framed') plus the fact that we fear losses more than we value gains (loss aversion theory, also expounded in the paper).

So understanding our own irrational behaviour is important to help us see beyond the framing effect. But it doesn't necessarily mean we will  make the best decision for our money. More importantly, it should help us make a better decision for ourselves and our lives, based on our own risk appetite or what allows us to sleep at night. Does that make sense?!