The Watch That Didn't Tell the Time

Michael Reddy FRSA is an investor who’s got it in for his peers. Why? Because they are bewitched by promises of quick returns in a self-serving industry.

The Oxford Union once debated (it’s a long time ago now) that ‘All journalists should be hanged from lamp-posts not already occupied by scientists’. The formula is useful in allowing for innumerable variants, and making it convenient now to propose the motion that “all investors should be hanged from lamp-posts not already occupied by bankers”.

Admittedly the thesis is diluted by the fact that 90% of lamp-posts are already occupied by bankers and that there is limited space for anyone else. Not only that but a proportion of lamp-posts should always be reserved for journalists. Why would I focus the cross hairs of my Kalashnikov on the poor (rich) investor, especially given I am one myself?

Let me backtrack? The Franciscan friar who gave double-entry book-keeping to the world 500 years ago deserves not only a Nobel prize for economics but should have been canonised. However, for me the words ‘past’, ‘shelf’ and ‘life’ come together when I think of the conventional balance or profit and loss sheet. They were (and still are) very much fit for purpose in agricultural or manufacturing economies; but not in a knowledge economy, not in a digital economy and not in a global economy.

The fit-for-purpose litmus test depends how human capital is valued. For example, the farmer or factory worker’s labour can legitimately be recorded as cost in an agricultural or manufacturing economy, because their skills are widely distributed among the population at large. Any individual farm labourer can be replaced by any other (back and shoulder strength varies little between one and another), ditto for women in a cotton mill (level of eye/hand coordination and dexterity are common), and ditto tea pickers on the Indian sub-continent. In every case these are people who need work, are plentiful, can be replaced easily and counted as cost. The same for contact centre staff (not too difficult to replace if reported churn rates are anything to go by)? Cabin crew? Better to think of employing them as investment rather than cost?

The President of a certain European airline when confronted with a threatened strike by cabin crew (no, it is not who you think) declared that they should be let go on the grounds that ‘there are always a million girls who want to fly’. True or not, cabin crew are a multi-skilled lot who have already absorbed some upfront investment in their training.

But financial analysts? Investment bankers? Fund Managers? Here we are in the realm of irreplaceable, esoteric skills, aren’t we? Well no. Superior talent among financial analysts, investment bankers and fund managers is actually extremely rare. The majority of financial analysts, investment bankers and fund managers are quite ordinary, benchmark-hugging, computer generated algorithm devotees with untested IQs. The myth that they are a race apart is just that – a myth.

So, yes investors should be next for the lamp-post because they allow themselves day after day, to be inveigled and bewitched by the investment industry’s promises of double quick, double digit returns. The investment industry works like a precision-engineered Swiss watch that doesn't tell the time. Or rather it tells the time, tells it beautifully, but only for the benefit of those in charge of its movement. Its components, from sell side to buy side analysts, from investment managers to investment banks, from fund managers to pension funds work together in perfect harmony to make money from investors.

It is they, ultimately, who are behind the relentless pressure on terrified finance directors to produce a quarterly report that influences share prices, ability to attract capital and protection against predators. On top of everything else, the fact that the sacrosanct quarterly profit and loss account is predictably incomplete, inaccurate and misleading is a topic I’ll have to leave to another time.

The watch won’t stop by itself. A self-serving industry will see to that. But it would work differently if large institutional investors, maybe just one pension fund, insurance fund, pooled investment vehicle, were to establish the principle that quarterly reporting would be replaced by a more accurate mechanism or better still by an annual report. This could be along the lines of Paul Polman’s (Unilever Chief Executive) polite request for short-term investors to withdraw in favour of investors with longer term perspectives.

In turn that would offer the chance for a company’s investment in its people (necessarily with long-term implications) to bear fruit, and simultaneously offer better guarantees of sustainability to investors. It might eventually lead to finding a place on the balance sheet for “our biggest asset” and restore confidence in a financial reporting system that is no longer fit for purpose.

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Michael Reddy is a seasoned organisational psychologist. He created and ran an international psychological services business for many years, and is now owner and Director of Human Potential Accounting.