The Bennett Newsletter
"Obliquity" Professor John Kay
Are the happiest people those that pursue happiness? Is profit maximisation the best way to maximise profits? Are the wealthy the most materialistic? Often not! I dealt with some of these paradoxes a few years ago with a series on the “economics of happiness”, and have recently found further thought in the remarkable work of Professor John Kay, visiting professor at the London School of Economics.
Who is John Kay? Obviously one of the most important contemporary thinkers, he has made a notable contribution to solving the financial crisis in “Narrow Banking” (more later) and “Obliquity” (more soon). Kay founded the consultancy London Economics in 1986 and became intrigued by the behaviour of businessmen. He sold it in 1999 to write, but he is also the longest serving director of the Institute of Fiscal Studies (IFS) a think tank which is one of the UK’s most respected sources of analysis.
According to the Telegraph, the IFS’s "Green Budget", delivered the day after the Chancellor's annual statement, has become the media's preferred method of understanding what the Budget actually means and vies for coverage with the real thing. “Certainly the numbers in it are given far more credibility than the Treasury's”. On Treasury, Kay says they talk of evidence-based policy but what we have is policy-based evidence, “the figures are jiggled”.
“Obliquity”
Kay made up the word “obliquity” to suggest that the direct approach is rarely the best way to achieve goals. His experience in business is that those companies that have their primary goal of “maximizing shareholder value” often end by destroying their company.
Kay decided a book was necessary after a conversation with Nobel-Prize winner Sir James Black. Black is the father of analytic pharmacology and the developer of two extremely important prescription drugs: beta-blockers and H2 antagonists (used for treating gastric ulcers). But he left ICI because the company demanded he spend time selling the drugs he had invented; rather than conduct more research.
Kay’s perception is that ICI is a case study in obliquity. It tried to maximize profits by pushing Black into marketing. If it had focused on research it would not have ended up as a Dutch subsidiary.
Boeing Corporation is another example. Under the rule of CEO Bill Allen (1945-1970) it built great planes like the 737 and 747. He defined the business as “to eat, breathe and sleep the world of aeronautics” and had no idea of the expected rate-of-return on the 747. Bill Condit (CEO beginning in 1997) said “unit cost, Rate -of -Return, shareholder return is the measures by which you will be judged”. Bill Allen made huge profits, Condit did not.
Similarly, Kay observes that many books advise individuals to maximize profits as a goal, but the most successful like Bill Gates cared about creating a great business: not making lots of money. Warren Buffett (aged 78) is also business -focussed, working hard and living in a modest bungalow.
Kay questions “rationality”. Business and institutions believe that there is a rational process for hiring people, or risk assessment or staff appraisal. It leads to box-ticking. For Kay, the real skill in management is people selection and giving them autonomy. Good decisions need experience and judgement.
Obliquity goes against the current wisdom of maximizing effort on an object; be it wealth, happiness or profit. Obliquity says life is too complex for us to predict the most direct route to success. A more meandering route enables adaption to changing situations, and to learn more about our objectives and the means of achieving them through experiment and discovery.
Those who assume an oblique approach tackle problems whose natures emerge only as they are being solved. As in all the best adventures, we learn about the nature of our objectives and the means of achieving them through a process of experiment and discovery gathered on the way. Obliquity is about adapting and improvising as you go along.
So the achievement of the successful business leader is not to articulate and realise a comprehensive vision of the economy and industry, but to continuously adjust the capabilities of the firm to the changing market environment. The test of financial acumen is not to predict the future (because you can't), but to navigate successfully through insoluble uncertainties. We make better decisions if we are endlessly adaptive, recognise the limits of our knowledge, and range widely in our sources of information and opinion.
Some Principles –
• Have objectives, but keep your approach flexible so that you can overcome unforeseen obstacles and take advantage of surprise opportunities.
• Know that your knowledge is always imperfect and incomplete. Cast your net wide - always go fishing for more.
• Don't be afraid to change tack once you've started if you see a better course.
• Meandering can lead to serendipitous discoveries and unexpected benefits.
• Think laterally to solve problems: indirect solutions can often be the most effective answer
Narrow Banking
The financial crisis was the direct result of many decision–makers assuming knowledge of the world that they did not possess. None accepts blame now. As Kay says” Politicians, public officials and bankers…point fingers in any direction but their own”. The cause lay in banks acting as casinos. They speculated. They were allowed to do so by deregulation.
Kay argues that the conflict between retail and investment banking is central to the present crisis. The deposits of the retail arm were used as collateral for trading by the investment arm. Banks also incorporated two incompatible cultures; the bureaucratic of routine processing of a myriad of transaction and the aggressive opportunism of proprietary trading. Banking conglomerates were unmanageable and, effectively, unmanaged.
“Narrow banking” is the answer. Kay calls for ring-fencing the payments system to routine deposit-taking and lending to consumers and small and medium business. Retail banks should not be allowed to indulge in investment banking activities. Retail banks would have a state guarantee. Investment and wholesale bank activity would be underwritten by shareholders alone. Kay’s paper was proofed by the Bank of England Governor and Chair of the Financial Services Authority. One assumes he has their ear, and a widening public.
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