Here is my post about the ownership of natural capital on the ICAEW website.
Do mergers and acquisitions make sense?
Kraft and Heinz are to merge. Is that good or bad? The answer depends on who you are. But mergers and acquisitions rarely create shareholder value, according to received wisdom. Of course some (some shareholders, the advisers) are going to benefit otherwise they wouldn’t happen. But the businesses as a whole usually suffer.
And so do other stakeholders. Staff will typically suffer as one of the rationales for such deals is usually staff savings. Suppliers are similarly likely to suffer because the rationalisation of procurement is another driver. But such stakeholders are never consulted in advance of an agreement.
And the environment is rarely mentioned – when was the last time you heard about a big deal that was justified as necessary to preserve the environment?
Beyond the particular companies involved in any deal, through the consolidation of organisations of such scale the economic system as a whole loses diversity and resilience. With fewer participants and fewer, more controlled connections between them, the economy becomes more fragile and less responsive.
The debate about the tax paid – or not paid – by companies doesn’t seem to have questioned whether the right thing is being taxed. Corporation tax is levied on profit which is the typically the difference between two much larger quantities: income and expenses. Companies have got very expert at adjusting the difference between the two, so that the tax due can be manipulated at will. What makes that possible is a very complex network of treaties between most countries. That network would be laborious to unravel.
But the moral outrage seems to stem from the fact that while for example Starbucks’ profit in the UK may be minimal, its turnover is substantial. So why not tax the turnover directly?
And we already have a system in place that could perhaps be adjusted to ensure that all businesses pay according to their turnover. It’s called VAT.
Here is a panel I chaired for an ACCA virtual conference in the autumn of 2012. The panelists are Luke Wreford from WWF, David Aeron-Thomas from Forum for the Future and Tony Manwaring from Tomorrow’s Company.
The session covers issues such as what the green economy is, what it will mean for companies, what its key sectors will be.
Europe teeters on the edge of the Eurozone and markets thrash. So whose fault is it?
Is it the fault of those who cannot pay back their loans (poorer countries like Greece)? Or of those who made them in the first place (richer countries like Germany and investors in debt)? No doubt both sides are guilty to some extent.
But what all sides are equally guilty of is blind faith in ‘the market’. Markets will not reflect reality unless:
- participants know the underlying economic situation of the other party
- failure to honour a debt is always punished.
Yet the first proposition is usually untrue and the second is both untrue and undesirable.
You may think that McKinsey (the consultants) is an odd choice of adviser for governments trying to conserve their rainforests. And you’d be right. They may be good at economic analysis, but they seem to have got REDD+ and carbon around their necks.
Greenpeace have been looking at the activities of McKinsey in advising governments how to go about saving the forests. McKinsey applied standard economic thinking to create their ‘marginal abatement cost curves’ or MACCs. That sounds very impressive – and perhaps it would be, if it weren’t for the fact that, according to Greenpeace, it is so dangerous.
The McKinsey method is proprietary. So despite the fact that it could affect the lives of millions, it is largely secret. Its problems are many, including:
- flawed assumptions which favour big forestry at the expense of small farmers and the forests themselves and ignore social costs and implementation costs
- an exclusive focus on economic consequences – not on carbon consequences or other environmental consequences such as biodiversity loss
- technical inadequacies of MACC method which cannot cope with real world issues like interactions between alternatives and cumulative effects.
The end result seems to be that it would be perfectly consistent with their advice to clear virgin rainforest in order to establish a palm oil plantation. That’s not economic thinking gone mad, it’s just plain old economic thinking. But of course there is more at stake here than simply money.
All of which goes to show that you can’t solve deforestation with the same mindset that created it.
Can insurance be fair?
The European Court decision to prohibit insurance premiums varying between men and women is going to upset the insurance industry. They are crying that it is not fair, since women drivers, for example, are safer than men.
But it also raises some basic questions about insurance. The whole point about insurance is to share risk. If you are not sharing it, then you are ‘self-insuring’: just paying for disasters yourself as they come along. Many large companies do just this, effectively simply saving up for a rainy day. But it doesn’t so work well for most people.
What people pay for insurance cover is on the whole determined by the risks they run, but that risk depends on how many people and of what kind are sharing or pooling the risk. If the only people who are in that pool are just like you, then you are not sharing risk, you are self-insuring – and paying the insurance company to manage your savings on top.
So the more closely targeted insurance cover is, the more profitable it will be for insurance companies, but the less it will make sense for people to use it.
Niall Fergusson thinks that there are six reasons the West has been successful over the past 500 years. Things like competition, science, medicine, representative government, consumerism and the work ethic. And now the rest of the world is catching on…
What’s wrong with this?
- the West is only ‘successful’ in purely financial terms. And even that might be questioned given the financial crisis. The deepest roots of the world’s current problems stem from the assumption that the social and environmental consequences of economic development scarcely matter
- the Western model is not the only one – even for financial success. China seems to be doing it differently
- he forgot the seventh factor of ‘success’: colonialism.
The BBC is reporting that additional flights from Heathrow are an indicator of economic recovery.
What is not being reported is the carbon impact of that ‘recovery’. There seems to be no recognition at all of the connection between air travel and climate change – let alone between economic growth as currently structured and climate change.
A terrible tale of negligence is emerging from the Chilean mines disaster. The mining company San Esteban Primera says it cannot even pay the wages of the trapped miners, let alone fund their rescue. So the government steps in.
It would have been cheaper for the company to pay for health and safety measures beforehand. But the global price for copper seems not to be able to sustain this. And a better use of government revenues would have been to enforce health and safety monitoring in the first place, rather than pick up the tab for a disaster afterwards.