Flip Chart Fairy Tales

A hospital doctor has been awarded a record £4.5m for sex and race discrimination by an employment tribunal. It is an enormous amount of money but, according to the tribunal report, the employer’s behaviour was enormously bad. So bad that the HR Director and Medical Director were, together with the Trust, held jointly liable for the award.

However, it brought to mind a similar case I came across a couple of years ago. Again, the employer had behaved badly. It wasn’t discrimination, just plain old-fashioned bullying culminating in a political knifing during a corporate restructure. The employee on the receiving end, a relatively senior long-serving manager, won his tribunal case. Like Eva Michalak, he was in his 50s and would never work again in such a senior capacity. He was awarded around £65,000, which was the maximum the tribunal was able to give him for unfair dismissal. It was barely half a year’s salary.

It doesn’t sound fair does it? Employers can be punished for behaving badly but the reason behind their behaviour can lead to radically different financial penalties. For illegal discrimination, the sky is the limit, in theory. For any other reason, such as personality clash, bullying or a good old corporate shafting, the payout is capped at around £80k.

Of course, as Mrs Markelham notes, huge discrimination payouts are rare and employers are more likely to lose an unfair dismissal case than a discrimination claim. But, because of the publicity, around them, discrimination claims scare the hell out of managers. A grievance or performance management issue with even the possibility of turning into a claim for racial or sex discrimination will have most managers running for cover. Even the most confident organisations, with the best HR and legal support, go into a tizzy when faced with a discrimination claim.

The government is unlikely to do much to equalise the penalties for unfair dismissal and discrimination. If anything, it is weakening unfair dismissal protection even further which will only make people look for ways of claiming discrimination. These days, a lawyer advising the chap in the case I described above would probably suggest shoving in an age discrimination claim for good measure.

Massive payouts like the one awarded to Eva Michalak are rare but the publicity around them scares managers and emboldens those employees who fancy having a go at their employers. If the unfair dismissal route is gradually choked off, more people may try their luck with a discrimination claim. You might not get £4.5m but you’ll sure as hell put the wind up your boss.

Last week, in the pub, a friend of mine was reflecting on her recent consultancy assignments. From the outside, all the companies she worked for seemed to epitomise corporate excellence, with their gleaming headquarters and slick public images. Yet, once inside, she found chaotic management, fudged decisions and barely functioning teams.

This didn’t surprise me at all. Companies are rarely as efficient and sorted as they appear from the outside. J G March was onto something when he came up with the Garbage Can Model of decision-making, which still, in my view, comes closer than most to describing what actually happens in organisations.

Corporations are made up of people. People sometimes do bonkers stuff. Furthermore, large organisations are almost impossible to control. Therefore people continue to do bonkers stuff. Business leaders just have to do their best to minimise the effects of the bonkers stuff and hope that some of it leads to good stuff. And, of course, the business leaders sometimes do bonkers stuff as well.

The trouble is, the gleaming HQ and slick public image can sometimes fool the leaders of the business too. They start to believe their own propaganda. That’s when corporate hubris sets in. With the benefit of hindsight, it seems obvious that Lehman, Merrill Lynch, Enron and RBS were destined to fail but that’s not how it looked when they were at their peak. To the outside world, these organisations seemed like models of corporate efficiency. The wisdom of their leaders was rarely questioned. They were unassailable.

Someone reminded me earlier this week that it is ten years since Andersen went down the tube. They, too, seemed unassailable. One of the biggest accountancy/consultancy firms, and surely the most arrogant of the Big 5, the Andersen Androids thought they were the business. Which they were…until they weren’t!

At the time I was working for one of their major competitors and the news that Andersen had fallen was initially greeted with amusement. But schadenfreude soon gave way to shock as a there-but-for-the-grace-of-God unease descended on our firm. If Andersen could collapse overnight, well so could anyone.

And that’s the truth of it. Many of these seemingly all-powerful organisations could be gone within months if the right (or wrong) set of conditions happen to coincide. Suddenly, something in the business environment changes and dozens of bad judgements come home to roost. The arrogant organisations are more prone to making such errors of judgment. Hubris is often followed by nemesis.

Still, though the collapse of Andersen was sobering, it didn’t stop us all laughing when that clever Heineken video appeared. For the youngsters, or those with poor memories, to appreciate this, you need to remember that, just before Christmas 2001, Andersen’s employees were caught trying to shred the evidence of their work with Enron. The patricians of the accountancy world were left looking like some dodgy geezers on an industrial estate the day before a tax inspection.

So, for some seasonal cheer, and a gentle warning against corporate hubris, here is the video that marked the end of Andersen’s party.

Yesterday’s rise in unemployment took the total to a seventeen year high but the 128,000 rise over the last quarter hides something just as significant. Over the same period, the number of employees fell by 252,000. Much of the difference between the two figures is due to a massive jump in the number of self-employed people. A further 166,000 people became self-employed over the last three months, an increase of 4 percent, taking the total to 4.14 million, the highest since records began.

Is this a good thing? Almost certainly not. Doubtless some commentator will hail this as a sign of a new entrepreneurial spirit but we all know that this is complete rot. It’s difficult to infer too much from these raw figures but the sharp rise in self-employment probably tells us something about the sort of jobs that are being lost, especially in the public sector. Many of these people will be former in-house professional and technical staff who have become self-employed interims or contractors. Some will be IR35s; working for a single employer, often the one they have just left.

And the sad truth is that, for a lot of these people, life will be less secure and nowhere near as well paid as their corporate roles were. Few will make the equivalent of their last annual salary in their first year. Those that last that long will be lucky to do so in their second or third years. In large organisations, a certain proportion of a person’s pay level is due to organisation-specific factors. In other words, their pay is enhanced by their ability to navigate the waters in that particular organisation. The longer they stay in one place, the more of their salary is likely to be a function of this capability. As soon as they leave, that capability becomes obsolete. Before cutting loose from your employer, it’s always worth asking the question, “What are you without your company’s brand?“

When you are Director of ImportantStuff at WellKnownBrand Plc, getting in to see people isn’t a problem. The kudos comes with the job and so do the rewards. When you are Managing Director of NoOnesHeardOfYou Ltd, it’s a lot more difficult. Building up your reputation takes some time. It will be a while before you can afford the big office and the Jag again.

For many people, self-employment comes as a psychological shock. The lack of routine, the constant search for work and the roller-coaster peaks and troughs are too much for them. The lack of a clear place in the world unnerves some people too. It’s easy to be confident when you are a director of WellKnownBrand Plc. When it’s just you on your own, the doubts set in, even among the most self-assured.

As David Blanchflower said, most people shouldn’t be self-employed:

The problem with self-employment is that failure rates are high and for most self-employed people, incomes are low. Indeed, many have negative incomes as they make a loss. So, unlike bankers, they do have pay for performance and, when things go wrong, they make losses. For many, a business failure is devastating, as they have pooled rather than diversified their assets. It often involves loss of business, job, savings, pension, home and sometimes even marriage. For most people, becoming self-employed is a bad idea.

On average, he says, the salaries are lower for the self-employed than for those in employment. For every highly paid IT consultant or £5k a day motivational speaker, there are hundreds of people scratching around trying to  make a living.

The rise in the number of self-employed people therefore has implications for tax revenues. Many of these people will not deliver anywhere near the same amount of tax to the government that they did last year.

The recession of the 1980s also saw a sharp rise in self-employment, as people sank their redundancy pay into new businesses. At the time, I was a grubby student, helping out at my local Citizens’ Advice Bureau. I remember people coming in asking for advice on setting up businesses. The debt counsellor would put her head in her hands and cry, “Oh no, not another one!” for all too many of them ended up at her desk a year or so later.

I fear that something similar will happen for many of the newly self-employed. Sure some will thrive. The lucky few will do so immediately, others will do so after a few tough years. A lot more will just get by; a slightly better alternative to the dole but nothing like the lifestyle they have been used to. And, unfortunately, some will crash and burn, ending up at the CAB to sort their debts out, if their borough is still lucky enough to have one.

This sudden increase in the number of self-employed people is no cause for celebration. A few people will have a ball but most won’t. And it won’t do much for the Chancellor’s tax revenues either.

Update: More on this theme over at Incomes Data Services

David Cameron claimed to be protecting British business and, especially, the City when he wielded his veto at the EU summit on Friday. You might, then, have expected him to return home to a rapturous welcome from bankers and business leaders. But he didn’t. There was no applause, just a bewildered silence. Eventually a few of the usual suspects came out and backed him but most business leaders were uneasy, to say the least. WPP boss Martin Sorrell, no fan of high taxes and business regulation, criticised the veto and the CBI, after saying nothing for days, issued a lukewarm and barely reported statement complaining about the potential damage from the political row. Even the IoD, whom you might have expected to shout ‘Go Dave Go’, limited itself to a grumpy prediction that the Euro is doomed.

The silence was deafening and there was a good reason. There was nothing on the table on Thursday night which posed a direct threat to British business or the City. The row centred on two pieces of paper. The badly worded and barely comprehensible fiscal compact was surpassed in vagueness and gobbledygook only by the British government’s attempt to amend it. In most organisations, if took something of this quality to your weekly departmental briefing, let alone to a board meeting, you’d be told to piss off and do it properly. Perhaps different standards apply in EU summits.

However badly worded, though, the fiscal compact only bound the countries of the Eurozone and, by extension, those preparing to join the single currency. The dreaded Financial Transaction Tax was not even discussed. As a tax measure, the UK has a veto over the FTT and would still have had a veto had the fiscal compact been passed in its original form. If David Cameron didn’t like the proposed treaty, and there are a lot of reasons not to, he didn’t have to use a veto. He could have done what the Swedes, Czechs and Hungarians did and just said, ‘We’ll think about it’. The agreement, such as it is, is still vague at this stage and may even fall apart of its own accord.

Using a veto in an EU summit is seen by many as a ‘nuclear option’ – it’s the diplomatic equivalent of walking out of a meeting and telling everyone to “f**k off”. It might make you feel good at the time but even those who agree with you will think your behaviour boorish and crass. In consensus driven organisations it sometimes helps if people shake things up a bit by being confrontational but they need to pick their moments. The moment to excercise a veto will be when a proposal for the FTT is being voted on, or when all these other terrible restrictions that the government claims are ‘in the pipeline’ are brought to the table as clear directives. Using a veto against a vague non-treaty which didn’t even commit Britain to anything was pointless.

If you hit a brick wall with a sledgehammer, it collapses. If you hit thin air with a sledgehammer you just get a vague whooshing sound and you look a bit silly. A collapsing brick wall, like, say, the defeat of a financial transaction tax, would win applause. Whacking the thin air of a vague Euro agreement just leaves people wondering what that strange bloke is doing wielding his hammer at nothing.

Something funny happened this weekend. Lots of right-ish Tories, some of them self-professed libertarians, started saying they wanted Britain to be more like Switzerland.

David Cameron’s veto means that Britain can be more like Switzerland, cheered Tory MP Mark Reckless. Howard Flight wants to see Britain as a large Switzerland. If only Britain could become a “super Switzerland”, wailed Tory parliamentary researcher Anthony Pickles. On news programmes, blogs and Twitter, anti-EU types proclaimed that Switzerland is the new model for Britain.

So let me just get this right. They want:

• Full employment protection after three months service, instead of the UK’s one year, (soon to be extended to two).
• An employment law regime where, according to the Federation of European Employers,  ”dismissal is normally only lawful for either gross misconduct or serious economic reasons.”
• A ban on ‘non-essential’ Sunday and night work, requiring employers to apply for a special permit.
• A maximum 45-hour working week, as opposed to the current EU 48-hour week which the government wants to ditch.

As far as I’m aware, even the Labour Party isn’t proposing anything like this.

The libertarian right just ain’t what it used to be.

As David Cameron flies off to Brussels, promising to bring back powers from the EU (whatever that means) in return for his support for the Euro rescue, he will hopefully keep in mind just what is at stake here.

The EU may look horrendously complex but Britain’s long-term options are quite simple.

There are five ways the Britain’s relationship with the EU could develop:

1. Britain joins the Euro.
2. Britain stays in the EU but out of the more integrated Eurozone; part of a dwindling group of tier 2 countries and possibly, over time, losing some of its influence.
3. Britain leaves the EU and joins the EFTA countries, still paying into the EU and still subject to many EU laws but with no vote.
4. Britain leaves the European Economic Area altogether, its status in relation to the EU becoming no different from that of the USA, China or India.
5. Britain vetoes Eurozone reforms and the Euro collapses. Britain becomes an international pariah, blamed for bringing about the second banking crisis.

None of these options looks particularly attractive but, right now, number 2 looks the best of a bad bunch. Which, once the posturing stops and grim reality sets in, is probably where we will end up.

Update: Anyone who thinks Option 3 looks attractive should read this piece from Nosemonkey.

Before the 1930s, the period from the early 1870s to the early 1890s was known as the Great Depression. My A-level history teacher insisted that it still should be, arguing that, although the drop in GDP was less spectacular than in the 1930s, the impact on working people was worse.

Will Hutton thinks this period may offer some clues about how we might face the long period of austerity indicated by last week’s economic projections. What is now called the Long Depression was a period when economic growth struggled to get above 1 percent for several consecutive years and, even when there was a growth spurt, it would drop back again the following year. It’s a similar pattern to the anemic growth being forecast for many of the developed economies.

In the 1880s, though, people didn’t just sit around waiting for something to happen. As Hutton says:

[T]he last time Britain endured such an extended period of depression and falling living standards – the 1870s and 1880s – saw the mushrooming of the co-operative movement and the emergence of the Labour party as the more moderate expressions of anger that wanted to challenge the very basis of capitalism.

There was very little state welfare or legal protection for workers in the 1880s. People formed co-operatives to get cheaper food, trade unions to protect their wages and employment, friendly societies to provide welfare insurance and mechanics institutes to educate themselves.

With the benefit of hindsight, this all looks like an obvious response but, at the time, all these forms of organisation were new. The ideas had been around for a while but it was not until the second half of the nineteenth century that they began to take off. They were practical solutions but they also challenged conventional thinking. Perhaps bosses didn’t have the right to set pay and sack people at will. Maybe you could club together and bypass existing food retail and distribution systems. What if you didn’t have to rely on the parish if you were thrown out of work? Perhaps those with little or no education could set up libraries and educate themselves.

To an extent, this also reflected a disillusionment with the political system. In the early nineteenth century, most working class political activity had focused on political reform. Large rallies, Chartist petitions and even riots were directed towards extending the political franchise. With the recognition that revolution was unlikely in Britain and that the vote granted to male heads of households in 1867 would only bring very gradual change, working people began to look outside conventional politics for ways of changing things. When I was a student, I read a quote from an old Chartist complaining that the young working class men of the 1880s were only interested in union meetings, divvies and whippet breeding. However, in time, new political forces emerged from the institutions of the 1880s which would eventually become the labour movement of the twentieth century.

As Andew Rawnsley said, only a fool would make predictions about the next decade but, as in the 1880s, innovative thinking and new types of organisation will be needed if we are to get through it. This is especially true for public services. Our ancestors found ways of dealing with their precarious situation and we will have to too.

That was the reaction of many of the comments, on here and on Twitter, to this post. I particularly liked this from Dipper:

I’ve worked with people from a variety of countries and cultures, and my over-riding impression is that Britain has the most creative culture I’ve come across by a long way. If we can’t do better than most of the rest of the world we must be really crap.

And our ancestors managed it 130 years ago so why shouldn’t we?

Like Will Hutton, I found myself making comparisons with the 1880s when I read about McDonald’s pulling out of Rochdale. The town may fear for its future, and with good reason, but this is the place that has just been voted world capital of co-operatives by the international co-operative movement, and which is seen as an inspiration by people setting up similar organisations in Latin America and Eastern Europe. It was the town where, in the grip of poverty, creative new solutions were found. No-one is suggesting it is going to be easy but Rochdale has solved its own problems before. Surely it can do so again.

Which brings me back to where I started this post. My A-level history teacher was from Rochdale. Perhaps that’s why he too thought the long depression of the 1870s and 1880s was so important. Against all the odds, people found new ways of doing things and took control in what seemed like a hopeless situation. That’s the sort of drive and creativity we are going to need again over the next few years.

One person who won’t have been surprised by this week’s economic forecast is CIPD Chief Economist John Philpott. Last year, he predicted public sector job losses of 725,000 contradicting the Office for Budget Responsibility’s official forecast of 400,000. During a typical outbreak of select committee grandstanding, he was insulted by Tory MP Michael Fallon:

A remarkable piece over at A Fistful of Euros puts the Eurozone crisis and, by implication, our own economic woes, into the context of a generalised crisis facing all developed economies. Three things have caused this, says Edward Hugh, high levels of debt, aging populations and the shift in the balance of economic power to the emerging economies.

The point to get is that it isn’t simply the level of debt that is the problem, it is the level of debt in the context of  the implicit liabilities (in terms of health and pensions) which such population ageing represents, and the reduced growth outlook that having declining and ageing populations represents. Europe’s leaders are essentially in denial on the extent of this problem, and are putting all their eggs in the “structural reforms to raise trend growth” basket.

And the reforms haven’t worked. As Newsnight’s Paul Mason said earlier this week, ”expansionary fiscal contraction” has failed:

Yesterday, then, allows us to look at the real structural problems and opportunities that face Britain. We are a country that was not able to enact “expansionary fiscal contraction” – because we had kidded ourselves about our basic economic potential….

Chris Dillow reckons the British economy may have been running out of oomph even before the recession. In 2008, the banking crisis threw one of the few oomphy bits into reverse, taking everyone else with it.

Then, as Paul Krugman says, George Osborne’s attempts to reform the economy drained what little oomph was left:

[H]istory says that a financial crisis reduces long-run growth potential if policymakers don’t limit the short-run damage it does.

The recession and the build up of debt has come just at the point where the developed economies are least able to deal with it. As I said yesterday, the young society of the 1960s could outrun its debt. The aging society of the 2010s may just not have the oomph.

Public sector pensions are being cut and the state retirement age is slowly but surely being pushed towards seventy. Many people are outraged by all this but is it reasonable, now, to expect to retire at 65?

Most of us have grown up with that assumption and, over the past 20 years, early retirement has become more common, as people with good pensions cashed in their chips while they still had some healthy life left.

But now we have a problem. Well, we have three, actually, but they are all related.

Our public debt will pass 100 percent of GDP in 2013, economic growth is projected to be zero-to-low over the next decade and our aging population will add somewhere between 2 and 5 percent of GDP to public spending by 2030. Each of these would be a problem on its own but we’ve got them all at the same time.

We know that, whatever politicians say, governments don’t really pay off debt, they just grow their way out of it, so it becomes smaller as a proportion of GDP. This has always worked in the past. The problem is that we now have a debt level approaching the one we had at the beginning of the 1960s but we are unlikely to get the sort of big growth rates that, fifty years ago, helped us to shrink our relative debt. The OBR does not see the UK achieving growth of 3 percent for any year between now and 2030. Few are optimistic enough to predict the 4 and 5 percent spurts we saw in the 1960s.

This, in turn, means that we will be stuck with a relatively high debt-to-GDP ratio for some time. Even the OBR’s most optimistic projection has debt at 55 percent of GDP by 2030, still well ahead of our pre-recession level.

While all this is going on, the demographic timebomb is ticking. From around 2020, the pressure on the public purse from the aging population becomes severe. Another £20 billion of cuts or tax rises will have to be found to pay for it, according to calculations by PwC.

The chances of economic growth being able to outrun the pressures of debt and demographics are remote. It may even be that the demographic shift is holding back the growth rates. This paper from Oxford Economics concludes:

The period after 2018 is likely to see potential output growth slow further, as the effects of an ageing population progressively reduces the contribution of labour supply.

As Colin Talbot said in a comment on one of my previous posts, an increasingly large segment of the population dependent on depleting pensions will depress demand and “act like a giant sheet anchor on the economy”.

Aging economies with fewer working people don’t grow like younger ones. The society that powered away from debt in the 1960s was a young dynamic one. The Carnaby Street Society could outrun a debt-to-GDP ratio of 100 percent. The Boden Society, with its sedate 2 percent growth rates, just can’t move as fast.

All of which means that, if we are to avoid stagnation, people will have to stay economically active for longer. This is not as frightening as it sounds. People in their 60s are a lot healthier than they were. Look at some of the old film footage of the 1920s factories. Many of the stooped old men and wizened old women coming out of these places were only in their 50s. About the same age as Madonna is now.

An extreme example perhaps, but old people certainly ain’t what they used to be. The factors that are making us live longer are also making us capable of working longer. I’m not suggesting that people should hew coal or dig ditches until they are 70 but there are jobs that people can do later in life without needing the physical strength of a 30-year-old.

Unfortunately, for those of us brought up to assume we would have a long and healthy retirement, a number of things have happened all at once. The demographic pressures would have happened anyway but, on top of that, we got the worst recession in living memory and a massive public debt which leaves us little room for manoeuvre. As is usual when things go catastrophically wrong, the timing is crap.

So is it reasonable to expect a diminishing proportion of the workforce to generate the economic growth to maintain our private pensions and the taxes to pay for our state ones, while servicing high government debts at the same time? I don’t think it is. In twenty years or so when I come to retire (or when I thought I would be retiring) I doubt that there will be much choice. Sixties retirement was for the Boomers. Apart from the privileged few, those in Gen X and beyond can look forward to a much longer working life.