MARKET PERSPECTIVE

By J Mulraj

Mar 21 -27, 2021

Shareholder capitalism needs to be tweaked

The world, indeed, is enigmatic.

Technology is addressing all sorts of problems. Renewable energy is increasing its presence in the global energy mix, although we still need the more dependable fossil fuel based supply for reliability, as Texas discovered recently. Increasing use of 4^th generation technologies of robotics, Internet of Things, Artificial Intelligence and others would provide the productivity boost needed to maintain standards of living. Agritech provides solutions to food shortage, including the vulnerability of the supply chain to fossil fuel (used e.g. in farm equipment on the farm, in refrigeration at the sale point and in trucks for logistical supply line), and in the development of precision farming, to plant crops suitable to the soil,  and vertical farms, in urban areas, to collapse the supply chain.

In India, too, we have some remarkable examples of innovation from new entrepreneurs. Like the hand held device, developed by EzeRx, which measures, in a non invasive way (no blood taken) levels of haemoglobin, bilirubin and oxygen saturation, at a modest cost of Rs 200-300, in less than a minute.

Yet, we also do things that cause despair. The accusation of alleged extortion by a senior politician has led to a burst of faugh protest. The root cause of corruption, and extortion and other crimes, is not addressed. Too much concentration of power, with too few checks of oversight. Coupled with a judicial system, too slow and ineffectual (perhaps deliberately so) this provides a noxious mix of criminal activities.

So, we have the enigma of a bright future, driven by technology, and a dark future, propelled by insatiable greed and lust for power. And ineffective governance.

This is global. Shareholder capitalism is at the heart of several of the problems we face today, and should be tweaked.

Take the crisis of a 224,000 tonne container ship, Ever Given, being stuck in the Suez canal and blocking it. As pointed out by Captain John Conrad in this video, ships have become far larger, but the technologies to maneuver them, and the size of the crew to run them, haven’t. He says that this ship was travelling at 13 knots, faster than the average speed in the Canal, of 8 knots, to try to counter the wind that made it swerve into the sand, where it is now trapped.

But the role of shareholder capitalism too needs to be examined.

Shareholder capitalism focuses on creation of shareholder wealth. Of the four stakeholders, it gives primacy to money, overriding the others, viz. customers, suppliers and employee. Management policies are geared towards creating the highest return for suppliers of money.

This is in contrast to stakeholder capitalism, which Japan and Germany followed in the ’80s, and which gave them an economic boost, under which all stakeholders, including employees (hence, lifetime employment), suppliers (hence just in time delivery), and customers (hence total quality control) were given equal importance to money.

So, in pursuit of only shareholder wealth creation, supply chains have extended (thus making the Suez crisis a bigger one than if supply had been closer), production is concentrated (a manufacturer must be in the top 3 largest to really count), and senior management is incentivised by stock options (ultimately resulting in wealth inequalities with the top 1% of Americans possessing 40% of the nation’s wealth).

The Ever Given crisis is blocking  $ 10 billion of global trade every day and will be a nightmare for insurers. Freight costs will shoot up as ships will have to go around the Cape of Good Hope until the blockage is removed. So there are multiple impacts of this disaster, higher oil prices/freight costs, hence higher inflation, delayed shipments, lots of litigation and reduced trade.

Perhaps the lesson will be to reduce over dependency on China, which was created thanks, in large part, to pressure on management by institutional shareholders, to boost shareholder returns under the form of capitalism mentioned above.

Combine this with a lot of mutual hatred and distrust, that is pernicious. Several countries distrust China, and the feeling is mutual. China rues about its lost century, and the opium wars, and now seeks to assert its monetary, technological and military power. This circle of hate never stops; it becomes more sensitive. China is, for example, offended by any criticism of its handling of the minority Uighur community and boycotted firms like Nike, H&M and others for objecting to its alleged use of forced labour to pick cotton.

Simon Wiesenthal was a holocaust survivor, Nazi hunter and writer. As Simon  says, the combination of hatred and technology is the greatest threat to mankind.

In addition to the disruption in global trade caused by the Suez incident, investors must also watch out for another potential threat. As per an article in Financial Times, US fears China is flirting with seizing control of Taiwan. China has always considered Taiwan to be its breakaway province. It now has the technological capability (militarily) to act on its hatred of the breakaway province. A military misadventure by China would be a grave threat the the global stockmarket.

Last week the sensex was flat, dropping 850 points to close at 49,008.

Stockmarkets are being driven by a lot of global liquidity, and on the back of better corporate performance after the Covid hit 2020 disaster. New technologies are providing new opportunities. Mukesh Ambani, delivering a virtual lecture at the E&Y virtual Awards ceremony, said he sees a tsunami of opportunities for entrepreneurs. India is forecast to have the highest GDP growth of any country in 2021.

Yet, at the same time, our governance leaves a lot to   be desired. Everyone publicly displays disgust at stories of high level corruption or extortion, but it is forgotten once the storm has blown over. We do not tackle the root of the problem. The focus of our polity is to win the next election, of which there are many, each year, at various levels.

Indian democracy is OFF the people, BYE the people and FLOOR the people.

Hopefully, it will change.

Image source: quotehd.com