Co-ops and employee-ownership

These two forms of business organization are interesting since they align two of the three main stakeholders of organizations.

REI Co-op is a retail co-op that sells outdoor recreation equipment. I am a co-op “member”. I paid a $20 one time fee for the honor.

I receive my dividend each year in the form of product discounts that add up to 10% on what I spent the previous year.

The co-op aligns the interests of the customer and owner, because they are the same people. Customers want good quality products and services and good prices.

As owners, though, we also want the co-op to stay in business so we can keep buying good stuff, so we don’t want prices to be too cheap, or else the quality we desire as a customer may be sacrificed.

Because of this co-op customers may more aware that reasonable prices (rather than rock-bottom prices) serve their interests than customers of other types of organizations.

Credit unions are similar. They are essentially banks owned by the bank’s customers.

One of my parents worked for an employee-owned company.

Employee ownership aligns the interests of the employees and owners, because they are the same people.

The employees want to be paid well and also want the product quality and prices to be reasonable so the business will continue to do well.

Employee-owners may be a bit more aware of where their paychecks come from than employees of other types of organizations.

I wonder why these types of business organizations aren’t more common.

What if the union bought GM? Instead of having to bargain with management about compensation, they could pay themselves what they want.

Or, how about a streaming service owned by it’s members? What would that look like? Could that compete with Netflix?

Idea for Hostess Union Workers

Buy your employer.

That way you can run it however you like and pay yourselves what you like. You’d have nobody to negotiate with but yourselves.

Also:  I’d be willing to bet $20 that we will be able to buy freshly made Twinkies a year from now. Any takers? I don’t see an Intrade market on this.

Also #2: I’m surprised we’ve made it this far without any calls for government to step in and bail Hostess out to save 18,500 jobs.

Are auto workers are more deserving of being bailed out than cupcake workers? Are we more willing to see what really happens in bankruptcy this time?

Someone doing their job


I enjoyed McGurn’s opinion piece in the Wall Street Journal today, …Lehrer Got it Right.

Despite all-around criticism that last week’s Presidential debate moderator ‘let things get out of control’, McGurn described Lehrer’s response to the criticism.

“I’ve always said this and finally I had a chance to demonstrate it,” he told Politico. “The moderator should be seen little and heard even less.”

He followed up Monday on radio’s “Imus in the Morning,” saying he wasn’t in the least “apologetic” for how things went. In particular Mr. Lehrer insisted that it wasn’t his job to challenge Mr. Romney on issues favored by the cognoscenti…

“If somebody was going to challenge Romney about the 47%,” Mr. Lehrer said, “it was going to have to be . . . the president and vice versa. They were there to do the challenging.” What a novel idea: Instead of leaving it to the press to decide what issues take priority, let the candidates choose and go at it.





And that resulted in…what??

I enjoyed this Forbes column from Jerry Bowers.  I’ve had experiences similar to the one he describes here:

Several months ago I was on the phone with the managers of a very, very large international bond fund. They wanted me to support the recommendation of the staff of an investment committee, on which I sit, to put a lot of money under their care. Their performance had been poor lately, but as a long-term investor, I didn’t hold that against them. I wanted to know how they thought, especially about risk.

But no matter what question I asked them about their way of thinking they always seemed to give an answer in terms of the intelligence, resume, or academic qualifications of their analysts. So and so studied under Barry Eichengreen at UCLA;  this guy has been analyzing bonds for X years; this other guy has lived in South America analyzing bonds for his whole career, etc. Well that’s nice. Smart is better than dumb, but right is better than smart, and right is largely a matter of fundamental principles.

I have one nit.  Smart isn’t always better than dumb.

But I like the story because I’m amazed by how often we put a premium on “smart” over actual results.

I’ve heard pitches from business consultants who tell me how smart their consultants are. They graduated from [insert top-tier business school name here] and have worked on projects at [insert Fortune 500 company names here].

Ask them to describe the tangible results they have produced and they’ll again point at their degree and list projects they worked on.

Then I ask, And those projects resulted in…??

Blank stares.

What do you mean?

I mean, can you tell me if the projects you worked on increased that company’s stock price?  Did it cause more customers to want to buy their products?  Did those projects improve profitability?  Are those companies still following your advice?  Have they asked you back or made you any job offers? 

The response to that is usually, Well, we can’t discuss specific outcomes of our other clients.  That’s proprietary and confidential.  But, I can assure you, we are the best and the brightest.  Then, they’ll usually try to throw a jab at my intelligence for asking such questions.  Besides, we can’t really measure the impact, for sure.

Unfortunately, their standard “we’re smart” pitch must work well enough to keep the work coming without having to demonstrate their actual results.  That’s too bad.  So, I was happy that Jerry Bowers didn’t buy it.

Business consulting and bond funds isn’t the only place the “I’m smart” pitch seems to make up for lack of results.   We often vote for “smart” candidates in elections.  We defer to the “smart” guys in the papers for political and economic opinions.  A few years back, we trusted those smart quants to reduce the risk of lending money to folks with bad credit histories.

When you hire a plumber or electrician you usually don’t care how “smart” the person is.  You don’t want the plumber to “figure it out” on your dime.  You expect a plumber to know because he has fixed the same problem hundreds of times before with good results.

We could avoid a lot of messes by putting more weight on actual results and less weight on how “smart” we think people are.

The my-s**t-don’t-stink crisis

In his book, The Secret Knowledge, David Mamet gives a brief and apt explanation of the economic term moral hazard, which played a key role in causing the financial crisis.

This is from a footnote on page 187 (emphasis added):

Is it not evident that any organization believing itself to be “too big to fail,” will more likely, indeed, inevitably make disastrous decisions? Why should it not–it is Too Big to Fail.

We all know people who (and perhaps have experienced this of ourselves), at one time or another, began to believe that their own s**t did not stink.  And we all know how that story ended.  Not well.

Our last financial crises could be called the my-s**t-don’t-stink crisis.

Also, we should remember how those stories end whenever our “experts”, politicians and economists tell us that such-and-such an industry or company is too important and cannot be allowed to fail (though it usually already has, and few people recognize it yet).

Ben Stein wants the rich to pay more taxes

I listened to the podcast of the April 20 Ben Stein interview on the Dennis Miller Radio Show while mowing the lawn last weekend.  It’s worth a listen.

Ben Stein said that he doesn’t see any way to fix the budget deficit other than raising taxes on the rich.

Here’s my paraphrasing of his comments:

The folks I live near who have three Bentleys and homes here and in Monaco have enough.  It’s not going to hurt them to pay more taxes.  I don’t see what else we can do.  The deficit is an emergency. I remember when tax rates were 90% and everyone had a smile on their face.  The deficit has gotten worse since Bush’s tax cuts and we need to fix that.  It’s a matter of arithmetic.  I don’t know where else the money is going to come from, without big changes in the structure of our government and how it spends money — and that’s not feasible.

Miller made some good points in rebuttal.

He said raising taxes on the wealthy will cause them to shift their activities to avoid paying those higher taxes.  Thomas Sowell explained that well recently on Fox Business.

Miller also expressed his difficulty with expecting the rich to bail out the reckless spending of politicians and that doing so would only lead to more reckless spending and deeper deficits.

He believes a fundamental reduction in government spending is in order and he doesn’t want to be beholden to Stein’s nostalgia (for the days of 90% tax rates).

All good points, but Stein kept asking, “But then, where’s the money going to come from?

I think Miller’s best point for those who support raising tax rates is that it would lead to more government spending.  The problem has never been revenue.

The cause of the deficit has always been politicians who cannot restrain spending to revenue. Even after Bush’s tax cuts and a bad economy, the Federal government collected $300 billion more revenue in 2010 than in 2000, while it spent $1.8 trillion more (source – first table).

This problem may be caused by voters who do not wish politicians to restrain spending. Which in turn might be caused by disproportionate shares of government being paid by a small groups of voters.  If everyone had to pay a fairer share of government — even as a percent of their income — they might be more interested in holding politicians accountable to spending.

The Fatal Conceit in Organizations

If you find yourself justifying  centralized decision-making in your organization, especially when you have decision-makers who you will be overriding, you should consider three things.

1) You may have the fatal conceit.

2) You have hired the wrong people.

3) It is not likely to end well for you.