Tag Archives: stockholder

What Happens if U.K. Exits the E.U.?

On June 23, 2016, the U.K. population will vote on whether to stay a part of the E.U.’s 28 countries or to leave. It’s a once-in-a-generation decision, and it is likely to dominate U.K. press for the next six months. But what impact would a British exit, or “Brexit.” have on the insurance industry?

A report by Euler Hermes, a consultancy backed by Allianz, indicates this exit would include:

  • Massive loss of U.K. exports, which could take 10 years to recover
  • A heavy hit to financial services
  • London’s loss of its supremacy as a financial center
  • The likelihood that trade barriers would be imposed by continental Europe

Global insurers would inevitably be affected. Zurich Financial Services says it is “monitoring developments carefully.” The AXA chief executive described the situation as the U.K. “playing Russian roulette” and predicted a severe negative impact on London. Moody’s says the U.K.’s credit rating would be hurt.

Despite the recent challenges of Solvency 2, the argument that there will be less regulation if the U.K. leaves the E.U. doesn’t hold weight with Lloyd’s of London, whose Chief Risk Officer Sean McGovern recently said, “None of the alternatives will be as beneficial for the London market as the current relationship.”

Companies are already indicating they will need to make stockholders aware of the consequences of leaving—if only to avoid directors and officers (D&O) claims down the line. Because most annual reports are published only months before the vote, there’s likely to be a swell of activity; social media analytics measuring citizen sentiment will have a field day.

In October 2015, U.S. administrator Michael Froman ruled out a separate trade deal with the U.K. in the event that it leaves the European Union. He said, “We have no free trade agreement with the U.K., so it would be subject to the same tariffs—and other trade-related measures—as China, or Brazil or India.”

At face value, staying in the E.U. seems like an obvious choice, especially as the U.K. population—like the insurance industry—is risk averse and often reluctant to change. But there are other issues at play here, especially those regarding the emotional response.

Some are suggesting that London would be at greater risk of terrorism if the U.K. remains part of the E.U. Others are concerned about the immigration issue and the effect of the Euro crisis. Others simply argue that that the U.K—which has the fifth-largest economy in the world, is the fourth-greatest military power, is a leading member of the G7, has more Nobel Prizes than any other European country and is one of only five permanent members on the U.N. Security Council—is entitled to greater autonomy to make its own decisions and should not be constrained by politicians who are not elected by U.K. citizens.

“After all,” say those in favor of an “out” vote, “isn’t the current safety and prosperity enjoyed by the U.S., Australia, India, Canada and others founded on the principles of democratic self-government created by those who were once prepared to take matters into their own hands?”

Luckily, even with an “out” vote, the exiting process won’t happen overnight. There will be processes to follow, some of which could take years. It’ll give plenty of time for insurers and intermediaries, (not just those in the U.K. or Europe) to think carefully about the consequences on their businesses, the economy and their customers.

Here are some issues that would have to be considered:

  • As London reduces its influence and there is a brain drain, where might the power shift to, physically, and will some of the big broking houses move house (again)? Where will the new powerhouse occur? Singapore or Shanghai?
  • If there are new trade tariffs, how will this affect the flow of global business? According to U.K. government data, in 2011, the U.S. exported $3.5 billion of insurance services to the E.U.—that’s nearly $1 in every $4 in global insurance services exports.
  • How might an economic squeeze in the U.K. over the next decade affect consumer behavior in terms of buying both property and life insurance, and will this lead to further consolidation of an already saturated marketplace?

There is a basic insurance principle used to establish negligence that dates back more than 100 years. It refers to the “man on the Clapham Omnibus,” a hypothetical character epitomizing the “common man,” who is described as reasonably educated and intelligent but nondescript and against which a defendant’s conduct is measured.

So, on June 23, 2016, everyone in the U.K. over the age of 18 will get to vote regardless of their expertise on the topic. On that day. it will not just be a matter for the entire U.K. population but for the “man on the Clapham Omnibus.” At this moment, we can only speculate whether his head will rule his heart, or vice versa.

How Milton Friedman Got It Wrong

Add Nobel Prize winner, economist Milton Friedman to the list of smartest guys in the room who said, did and taught the dumbest things.

Just what did Friedman say in 1970 that American leaders in 2015 have become so infatuated with?

Here it is. Word for word.

“When I hear businessmen speak eloquently about the ‘social responsibilities of business in a free-enterprise system,’ I am reminded of the wonderful line about the Frenchman who discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe that they are defending free enterprise when they declaim that business is not concerned ‘merely’ with profit but also with promoting desirable ‘social’ ends; that business has a ‘social conscience’ and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are — or would be if they or anyone else took them seriously — preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”

Friedman actually said this stuff about businesses having no social responsibility. And American leaders believed it, and then acted on it.

The result?

It took 45 years, but American leadership finally created for today’s knowledge workers– but not themselves, of course — what University of Massachusetts Professor William Lazonick refers to as “profits without prosperity.” The problem isn’t just the fox guarding the hen house. This is the fox in the hen house, waiting for the chickens to come home to roost.

Sadly, both for American employees and for Friedman, the well educated economist’s theory has for years replaced the golden egg (continuously improving people and process, which should have come first) with the smell of rotten eggs (the remnants of command and control). The evidence: America’s all-time-low employee engagement, our virtually stagnant economy and wage deflation.

American leadership’s hen house now appears, instead, to be more of a dog house.

Let’s face it, we can’t compete globally because modern leaders have failed to capture and engage man’s curiosity and creativity. Because if they had, we would have exchanged our arrogance for our humility, and listened to learn rather than tell. We’d be continuously improving people, because learning comes from people, and improvement comes from learning. Which, in turn, comes about from the detection and correction of errors in our thinking. And we’d be using that employee knowledge to show leaders where wasteful activities exist,  destroying the American people, their personal productivity and their well-being.

I suppose it was easier for Friedman to assign blame to the “intellectual forces…undermining the basis of a free society these past decades,” rather than teach executives the true human value of respect and continuous improvement. Especially when today’s executives earn 300 times more than those they serve.

Who could successfully argue that paying executives so much money doesn’t make their companies better?

Maybe Japanese executives like CEO Akio Toyoda of Toyota, who in 2013 earned just $2.9 million on $18 billion of profit. Respecting people; improving people; and improving process and wasteful activities that affect people. And, of course, selling cars to — of all the crazy things — more and more people.

Seems like people do matter, Mr. Friedman. They’re called customers and employees, fathers and mothers, friends and family.

The Japanese circle of Kai and Zen — the art of making change through continuous improvement — is something we need more of in America and throughout the world.

Let’s stop turning to pontificating prognosticators: today’s Tarot card readers using computer-driven analytics. The kind now used to determine people’s job security and personal productivity, especially average people when the time comes for their annual review.

Let’s stop teaching children, employees and, sadly, future leaders, the wrong things about man’s intrinsic motivation.

Let’s stop sending the message to society that man’s intrinsic value is irrelevant. An unnecessary component in improving this strictly extrinsically valued society.

In a 1991 article written by Alan Robinson from University of Massachusetts and Dean Schroeder from Valparaiso University paid close attention to the effective use of employee suggestions. Turns out, man’s intrinsic value in other cultures and countries is extrinsically valuable to leaders and stockholders.

Japanese employees turned in 32.5 suggestions per person. American employees turned in 0.11. American leaders implemented just 37% of the employee’s recommendations, while Japanese leaders implemented 87%.

American employers were too busy to listen, and employees too disengaged to contribute.

Meanwhile, America was losing the luster on her once global competitiveness crown, and she didn’t understand why.

Perhaps emphasizing our need to nurture man’s intrinsic value over his lifetime, not just nurture his extrinsic net worth quarter by quarter, still makes sense. Especially if we’re going to improve one another, ourselves and our ability to compete in the global economy. And in that distinct order.

The results of America’s inability to compete today are simply the consequences from the consistent leadership message sent to the willing workers of today and yesteryear: We have little value for your mind, your heart or your soul. Your value to corporate America is, strictly speaking, only from the neck down. Don’t speak or think; we know what’s best for you.

A message better understood by reading Steven Denning’s, Forbes 2011 article, titled, “The Dumbest Idea In The World — Maximizing Shareholder Value.

Or, if you are really ambitious, and enjoy learning from history, read Out of The Crisis. The anti-gospel to today’s American rhetoric on economic and management theory.

The author, Dr. W. Edwards Deming, railed against American leaders, who, way back beginning in the 1940s, assigned regularly occurring production variances to employee failings. This while leaders continued to miss the true causes behind increasing production costs and poor quality. Deming assigned blame for this directly to American leaders, calling for a radical transformation to how America leadership conducts business.

Deming knocked on American leadership’s door but couldn’t come in. Friedman’s puppets had dead-bolted it shut; double locks; top and bottom.

The unlimited asset of human capital Deming talked about — once free for the asking — has now all but dried up.

Will the first country that really wants our human capital please come forward?

As Professor Lazonick points out in his Harvard Business Review article, “Profits Without Prosperity,” during the previous 45 consecutive years, real wage increases, (wages adjusted for inflation) have not increased more than 2% in any three consecutive years but once. And that was during the Internet bubble of 1997, 1998 and 1999.

To put this in lay terms, my 24-, 22-, 20- and 18-year-old children now earn substantially less per hour for the same job that I performed in 1984. And even when I don’t adjust for inflation.

Got milk?

At least recently?

Mine’s going sour; seems I can’t afford a new gallon.

So what can we do differently to improve America’s ability to compete domestically and abroad?

Let’s turn to history and Gen. Douglas MacArthur, Taichi Ohno and the millions of other leaders and customers who collaboratively helped Japan become the second-most productive nation in the world, very shortly and efficiently, after World War II ended.

Rebuilding a nation ravaged by war, but then greatly improved upon by humans — and almost exclusively from the customer’s point of view — Japan used human capital and man’s intrinsic creativity and curiosity to compete on a global basis. Adding greater and greater value to the products American consumers frequently told the Japanese they wanted more of, by putting their money where American leadership’s mouth once was.

What did Gen. MacArthur demand American leaders (working in Japan to re-build the country and the culture) do with the Japanese’s people’s curiosity, creativity and craftsmanship after WWII ended?

He demanded leaders use the people’s intrinsic cultural talents to create sustainable, corporate and societal advantages. In fact, MacArthur required the culture of Japan — one of a highly curious, creative and respectful people — not be challenged, changed nor interrupted by American occupiers. He feared that creativity — Japan’s cultural backbone — could be lost forever.

Sorry, Mr. Friedman, you were wrong in 1970, and you’re even more wrong today.

People matter. All of them.