Some years ago I worked for a large insurance company. I was originally hired to help deal with a class action suit, but soon found myself working on something different, demutualizing the company. Mutual insurance companies are owned by their customers, not by shareholders. This has a number of advantages, but it means you don’t have shares, and thus buying out other companies requires cash, and you yourself can’t be bought. You also can’t give stock options to your executives (not a small matter, these days).
Mutual companies also have one big social benefit: they provide insurance cheaper, because they don’t have to pay dividends or stock options and they return profits beyond those expected to the policy owners. (Stock options supposedly don’t have a price, but they do in effect, both because of the rampant use of company profits for buybacks and because of how they change company behavior.)
Demutualization requires a vote by the shareholders. There was never any question that it would pass, however, since it amounted to cashing out a lot of money. For big policy owners the take could be in the millions, for smaller ones ten to twenty thousand wasn’t uncommon.
This part is important, so pay attention: this was the first cashing out moment, and what it was was a transfer from the past and future to the present. Going forward every future policy holder would pay more money for their policies in order that the current generation could take out value.
The price of the shares was set at about $18 dollars, as I recall, they fell a couple bucks, then they spent the next two years rising, peaking around $40. The CEO had bought five million dollars of shares at the initial price, which everyone knew was less than the company was worth, he did very well.
But the real change was driven by what is called “market’ discipline”. Suddenly we needed to make 15% profits every year.
Insurance isn’t a business where you should be making that sort of profit. Virtually no business is, but insurance in particular should be stodgy and boring and conservative, because its job is to be there when the customer takes their losses.
Friends would ask me about the company in those years, and I would say “it’s being run reasonably well, considering, but they’re burning down the house to make the profits.”
What do I mean by that? They were pushing out senior junior employees. In the pension department, for example, almost all of the senior customer service reps were gone within two years. Why? Because the new regime expected insane numbers from them. Those numbers could only be produced by, well, lying to management.
Meanwhile, every month the sales numbers were being manipulated more and more, with sales which hadn’t actually completed being moved forward as if they had been. Jobs were taylorized and de-skilled, so that employees had no real knowledge of the process, this in a company with the highest average face amount (amount covered, like a million dollars or 10 million) in the industry.
Products were designed overly fine, so that if customers missed a single payment by even a week, they would likely go into default, but those losses wouldn’t show up for years, since it would take time for the defaults to occur.
And the company went out and bought a big, moribund insurer, with an extraordinarily sick corporate culture and then struggled to make it work.
Bottom line: that company couldn’t make 15% without cutting corners which shouldn’t be cut. You can provide worse customer service to multi-million dollar clients for a few years, but eventually your rep catches up with you. My job was to deal with those customers, and as mistakes and problems occurred, I would burn through my social capital. Most of my clients loved me, but there are only so many problems people will tolerate. The same sort of thing was happening everywhere. Eventually it came home to roost, and they stopped sending us as much new business.
For a few years, heck, for a decade, it mostly looked good to outsiders. The company produced its 15%, the stock did well, and everyone outside the company was happy.
Then the shit hit the fan in 2008, and the company took the shock badly compared to equivalent competitors. All of the corners they had cut came back to haunt them.
When you have a good company, product or service, you can always cash it out. You just cut corners for years, and cruise on your reputation. And for years, it works, until it doesn’t.
Which brings us to this news story, about how the fashion company Hermes doesn’t want to be bought out by a conglomerate.
Family members recoil as they recall an LVMH official’s suggestion that Hermès bolster sales by creating a line of lower-priced bags.“It’s exactly what you shouldn’t do,” Mr. Dumas says. “Because you will make a cheap Hermès bag which will sell like hotcakes for three years, and after three years people will say, ‘Hermès is not what it used to be.’ ”
Mr. Thomas says: “If you tell me I have to double the profit of Hermès, I will do it tomorrow. But then you’d have no Hermès left in five years.”
There’s a man who gets it.
Here’s the rule, whenever greed becomes a primary motivator, and an acceptable primary motivator in a society, the society burns itself down. It extracts money by destroying actual long term value. This has been going on in the West, with its most extreme forms in the US, for over 30 years.
But as a society, what you get is money while destroying actual value. The society as a whole is poorer than it would have been otherwise.
An actual capitalist society (which we do not live in) makes cashing out very difficult. You don’t want people creating money by destroying value, and you don’t want viable ongoing concerns arbitrarily destroyed or weakened. Whenever a company is bought out by borrowing the money, then making that company take on a loan to pay back the original loan and then another loan to pay the buyers even more money, money has been extracted while value has been destroyed (layoffs and other cost cutting inevitably follow).
As a society, allowing this sort of behaviour is death. You must make sure that people do better by adding value than by destroying it. Forceful short term extraction of money destroys value. The only profits that most people should see are long term profits. Want to get rich? Great. Either create something genuinely new under the sun (and no, Facebook is not something genuinely new, it is merely the winner in a market someone was going to win) or stick it out for a good twenty to forty years, taking your legitimate profit each year.
When you make it possible for people to get rich by destroying jobs that actually create value, by destroying companies which are actually viable, you are destroying your own society’s prosperity.
