But what does coming closer together actually mean?

Intensive scrutiny suggests that national governments are handing over power to the European Council; in a bid to ensure existing political and financial structures remain intact. What we are seeing therefore is the emergence of an unholy alliance between politics and finance that is ensuring current circumstances do not change. Politics is being made subservient to capital and the short-term interests of shareholder capitalism.

My book Bilderberg People investigated the overwhelming influence the transnational elite policy making community wield over politicians, a topic that will be revisited and developed in my newest publication Global Elites.

In the absence of existing and robust pan EU institutions capable of dealing with the current crisis, it seems in the context of the Eurozone crisis we are witness to the power and influence of very particular interests as they position the informal lobbying process to maintain the current model of shareholder capitalism. Not even the most resilient leaders are able to withstand such influence.

Despite many important public figures recognising, in private, that the present situation is highly unsustainable and it is not in our favour to allow capital to continue to behave as it does, in public no one seems able to admit that. Perhaps it comes down to the psychology of not wanting to go against the grain, but the fact remains that our chance to reshape shareholder capitalism into a more social and sustainable model is being eroded. Yet still one overarching opinion remains amongst the powerful: the Euro should not fail.  The current volatility makes so much money for the few.

So the Euro is likely to survive to the detriment of the greater majority and to the advantage of the few very rich.  You may well ask, why do the very rich wish to become even richer at the expense of stability?  Why would anyone wish to continue to amass wealth when there is nowhere to use it?

We must remember that innovation has nothing to do with invention – most innovations are transactional, and a series of progressive steps to ensure better governance and working practices.

A fundamental block on British innovation is a governance issue: boards are delegating too much of the ‘follow-through’ or application of governance to management and in an age of austerity where cost control is king, innovation and Corporate Social Responsibility (CSR) get sidelined.

Good governance requires scrutinizing possible blockages to governance and execution all the way down the company structure, and from my experience, there seem to be three sticking points where governance, and therefore innovation and CSR, get blocked.

These sticking points are:

1. At the level of divisional heads, who are the point of interpretation of the corporate level strategy (or not as the case may be);

2. At the middle management level where cost and sales targets have to be interpreted in terms of what will be fed up to division, and then up to the corporate centre. Bonuses, payments and staff’s ability to keep their jobs all depend on how this level handles their work;

3. At the team level, which should reflect the company’s innovation and CSR policies in practice. There could be a very clear CSR and innovation policy at the top level of the company in terms of training, targets and measurements, but by the time you have gone down five or six levels to the team, they may not know that the policies were ever in place.

These three blocking points all call into question the role of the board, which should set policy, then set discipline follow through and discipline the management team if protocols are not being adhered to. What we are finding is that there is no pattern as to whether or not boards are accepting this responsibility.

Increasing numbers of boards are passing on governance responsibility to the management team – but why then have a board? The purpose of the board is to set governance and discipline, and to enable the management to make things work, and they have a responsibility to mentor and audit at the same time. What I have found is that many boards relish the mentoring aspect of governance, but avoid the discipline aspect of their role, which is of concern.

So what does this mean for the UK? As this recent article in the Independent says, the UK is bottom of the innovation league, which sadly does not surprise me at all.

In a climate of fearing about jobs, hyped up security fears, cost cutting and meeting sales, the energy that is put into CSR and innovation campaigns ends up getting lost.

There is a different approach in Europe – what you find is a philosophy and approach geared towards innovation, and companies who work very hard on this – and in the USA, where some of the most high-performing companies are those who have given credence to the ‘soft’ factors (creating a motivating environment and an enabling atmosphere for CSR and innovation) and have been very honest about where their ‘blocks’ are. A much more sensitive and sensible governance regime has been set up in those countries.

The solution to this would be to focus on the link between innovation and governance and board responsibility, at least at identifying what is happening in our corporate structures and where the blocks to innovation are.

To be more innovative there is actually a greater need for board involvement. For example, one company, which is both innovative and has a very active board, worked with the management team to introduce a policy where any board member could visit any site with no warning and ask to be taken round by the management, despite any criticisms that board member may have about local management. This hands-on approach may not seem the most practical. But is absolutely necessary if the UK is to compete globally.

When looking at board structure and hiring new members, it is important to identify what the role of board members should be and how the new addition will fulfil this role, rather than getting someone who ‘fits in well’ with the rest of the board.

Innovation should be key, and embedded within working practices, and Britain is not there yet.

]]> http://www.kakabadse.com/2011/11/innovation-is-not-invention/feed/ 0 http://www.kakabadse.com/2011/11/innovation-is-not-invention/ http://feedproxy.google.com/~r/kakabadse/~3/by0M4cG4uBY/ http://www.kakabadse.com/2011/11/europe-%e2%80%98no-choice%e2%80%99-but-to-unite/#comments Thu, 17 Nov 2011 14:24:17 +0000 Andrew Kakabadse http://www.kakabadse.com/?p=765 The debate about the Eurozone crisis has moved onto issues of political accountability and responsibility.

We have the governments of two historically important countries – Greece and Italy – in the hands of technocrats rather elected politicians, and many, including Aditya Chakrabortty in the Guardian, are asking: is this right?

In many senses, it isn’t. No public mandate exists for technocrats to lead a democratic, nation state.

But at this moment of crisis, the operating principle is ‘needs must’, and the real question is whether or not sufficient expertise can be brought together to allow the European project to do its job in investing in, and providing for, its citizens.

Technocratic skills are vital if Europe is to be able to effectively target and move money to address social and economic needs. But the problems that Europe is currently facing are not technocratic problems. Rather, the root problem we all face is the need to solve the European debt problem and create a long-term environment in which investment in infrastructure (in all its senses) can be created to solve the intractable disparities of wealth, health and opportunity that pervade the continent. In other words, Europe currently needs a different identity, not just different financial structure.

This problem can’t be solved by the institutions and instruments that Europe currently has to hand. We need politicians who can unite nations, and it might just be that a Greek banker might be more capable in providing unity than a politician such as Berlusconi.

So, it is no wonder that Merkel and a number of other politicians are beginning to think about how to build a more coherent and resilient European ‘body politic’ for the future – not just to prevent future, similar crises but to deal with the fundamental issues of global competitiveness.

There are echoes of the American War of Independence when ‘revolutionaries’ struggled with the lack of political instruments and precedence to deal with the growing discord between ‘mother country’ and local rights. The Founding Fathers had no choice but to ‘feel their way forward’. The same is true now for potential ‘unifiers’ – they feel that they have no choice if they are to avoid disaster.

Equally, the ultimate lesson from geopolitics is clear: a Europe of nations states can’t compete with the big regional blocs – China, USA, India – that are capable of delivering both wealth and innovation.

In my view, this recognition is why we are seeing signs that Germany under Merkel is beginning to build a consensus and a coalition behind the creation of a new European infrastructure and idea of a closer, united European union – if, perhaps, only for a smaller European grouping.

We need a more unified European Union, and a more unified financial structure to go with it, yet this is the one possibility that isn’t really being addressed. In my opinion, unification is the only way forward for Europe.

Will this ever happen? Probably not in the short to medium term. Politics will get in the way, although the chance of a Europe built around Germany, with the Scandinavian countries forming their own entity, is more likely now than ever. And that may be no bad thing, even if we need the help of unelected technocrats to get there.

What the country really needs is to unlock this capital against long-term strategic investments. In order to make this happen, there is a need for an independent report on what the infrastructure concerns within the UK are, which would have to be a broad, systematic review of where we have deficiencies in our society. This would have to call upon the Office of National Statistics (ONS) to bring to the surface the levels of poverty, vulnerability and deprivation that we have in our society – particularly for the elderly and children.

The efforts of chancellor Osborne to persuade the private sector to invest is ‘too little, over too short a term’. But this reflects the fundamental problem that there is no political mandate to back an ‘infrastructure’, or social model of capital (as currently exemplified by Germany and China, who are far more innovative than the UK) rather than the alternative model which we currently use of shareholder capital.

We need a major capital investment that would not just put money into schools or try to create employment, but rather a systematic approach to family welfare, educational improvement and employment improvement to tackle pockets of deprivation.

I do not think we will see this happening – rather, we will have little incremental changes (attracting perhaps £60-80 billion) which, whilst positive, are not enough to get the UK back on track, seeing as there is nearly £700 billion worth of private capital that is essentially sitting there not being used.

The UK is actually very cash rich; it’s just that the richness is unequally divided. We face a political issue where the UK is missing a coherent financial philosophy, and this is the fundamental shift that is gong to have to take place if things are going to change.

Is there now going to be Government pressure that will force the banks to distribute funds, particularly to small business, to revitalise the economy and increase employment? I suspect not! Will the government split retail banks from investment banks, so that the investment banks can take risk but without affecting everyone else and the retail banks provide the slow and steady platform that is needed? I don’t think this will happen either.

The major funds are essentially looking for short-term return on investments, a return over three to five years. The need within society, however, is a 30 – 40 year investment pattern, covering everything from health care to infrastructure, to introducing new forms of energy. All of these challenges are technologically capable of being handled, but it’s their financing that prevents major infrastructure investment from being pursued.

Are the banks risk averse? – If they were, they would put their money into longer-term bonds that would support major capital projects guaranteed by the state concerning returns on investment.  More concerning is the culture in the City and Wall Street typified by fund-manager’s bonuses based on short-term transactions. Business is on a quarterly cycle – and every organisation is fundamentally judged this way.

With this new round of quantitative easing, it seems that all that will happen is the creation of paper, which guarantees inflation. What we will end up with is more of what we already have in the UK –inflation but with the average wage going up only around 1.7 per cent. As I wrote in a previous blog post, we are simply going to see more protests.

People question whether these trends are understood by government.  They are, and explicitly. The problem is that our governments do not have the courage to tackle the City or Wall Street, so we are back to the issue of who can handle the funds and the banks? Two types of population– the press, and the citizens who are fed up with the hardships they are facing and are taking to the streets.

So, how to change a whole system? When a whole system attracts people who hold a short-term view they are easy to label as selfish, but I think these same individuals are acutely aware of the vulnerabilities and lack of sustainability of shareholder capitalism as it is being exercised today. So the very individuals who are running the system are conscious that this cannot continue forever. But they don’t know what to do, nor how to change it?

It is important to define the nature of the problem. This is not a problem of finance; it is not one of return on capital over the short or long term. The problem is a political one, which asks ‘How do we change a fundamental aspect of the structure of our society to something different?’

It is perhaps worth noting that through history, some of the most successful revolutions have occurred at relatively high levels of national wealth. So we have to look at where wealth is concentrated and who is reaping the benefits from a distribution that is unequal. If we look at this distribution, we might be able to determine if we have a political issue or not.  In my view our challenges and problems are political, and this is where the problem lies.

Those who have the political will to do something are being marginalised. The political representatives on the various committees in Parliament are really trying to help the nation by drawing to the government’s attention the nature of the country’s concerns.  Government is criticised but in a constructive way through reports, analysis and the interrogating of witnesses, but they are getting nowhere.

Just as the will in Parliament to deal with the issue of an over-concentration of capital is forced onto the back benches, the will in the community is being forced into the streets. The lesson from history is that where there is a will, it meets with resistance. Capital does not want to share its benefits and will fiercely protect its assets for as long as it can.

We are in a situation of assets being slowly controlled by fewer and fewer hands. More and more companies are interlinked through shared ownership structures, and are plagued with the bureaucracy of governance which is emerging more as protecting directors from prosecutions than actually following through on whether governance is really adding value.

Issues such as risk, vulnerability, bribery and corruption that occur outside the usual Anglo-American governance regimes is a major problem. All our studies indicate that 80 percent of business transactions outside European or American boundaries involve more than one bribe, or a substantial amount of bribery, either to penetrate the market or to maintain presence in that market.

What is happening is that ever-increasing volume of procedures in organisations are inhibiting the organisation from being innovative, but are protecting it from prosecution, risk and loss of reputation. There does seem to be an unhealthy relationship between government and big business – in fact, some organisations are so expert at handling government that they have lobbying and public affairs departments that can be 100-strong plus. There companies are often those called on to advise government because of the quality and strength of relationship, and inevitably the advice given – and the way legislation is then shaped – favours the larger corporations at the expense of the small to medium size businesses (which tend to be far more entrepreneurial).

The question is, why do we have this situation, especially in a financial regime where fewer people are controlling assets, and the corporation is the vehicle for wealth creation? This is a question we are now beginning to see being played out in the streets of America, Britain and Europe with ever-increasing protests against capitalism.  What the protestors may not quite realise is that they are not protesting against capitalism, but against oligopolies and an ever greater restriction of markets.

Placing controls around lobbying is not necessarily the answer, though. If regulations around lobbying are increased, the corporations simply adapt. Regulation could inhibit the spread of interests trying to influence governments, but it doesn’t take much for a major corporation to then start forming links with NGOs and other organisations and contribute to their budgets in a way that turns these organisations into vehicles for big businesses.

Instead, we should be moving towards greater transparency as to who really advises government, how government approaches corporations for specialist input and how the businesses affect the drafting of legislation.

The first point which springs to mind reading this is the ‘anti-capitalist’ nature of the protest. Is it really anti-capitalist, or is it the restricted and centralised control of resources, that is the problem? If we really had capitalism in the sense of free and open markets, I doubt we would have such drastic downtimes, deep unemployment and a demotivated community as more capital would flow freely in the market.

It is unfortunate that the previous estimate I made regarding how much money is available in the city in close-to-liquid form of £450bn seems to be inaccurate, as the estimate currently is about £500bn and in Wall Street it is around $3.7trn of capital that is essentially not circulating. However, it could so easily do so – it is not tied up in buildings, long-term projects or infrastructure investments. It is money just waiting to be invested, but there are few investments taking place as there are not enough short-term transactional deals that will provide a return on capital quickly.

With this going on, I believe that these sorts of protests are going to continue. It is not so much London that is interesting, where discontent has been fairly muted, but New York. The home of capitalism as we know it today, Wall Street, seems to have been occupied by up to 70,000 walking in the streets and reacting against what is going on. It is interesting that this critique of modern capitalism is taking place in America, the place most would think to be the least likely to protest.

Previously, anti-capitalist movements were fringe and were part of the activities of focussed and specialist political movements that have influenced both America and Europe, with the mass of people in between. The situation now, however, has deteriorated to a point where the ordinary citizens that would not usually go on the streets are now the ones who are taking part in protests. This is indicative of the levels of pain people are feeling and the injustice that they are experiencing.

When essentially businessmen are joining protests it means that their business is drying up, and the reason for this is that money isn’t circulating, because the funds and banks don’t fundamentally trust that they can have the rapid returns on investment that they want.  Today’s situation is a need for investment on the very infrastructure and long-term projects that are being neglected.

The electoral process – simply voting at elections for increasingly similar political parties- no longer captures the level of democracy people need, so they take to the streets.

Andrew Marr of the BBC recently interviewed British Foreign Secretary William Hague, and asked his opinion on the protests. Hague’s response? – protest is unhelpful; government controlling debt and deficit is the solution.  If one of our key leaders holds such a perspective, then the situation will only worsen.

The issue is that the debt and deficit referred to is fundamentally placed on the shoulders of the ordinary citizen. Those who have substantial capital are not really subjected to proper scrutiny, otherwise the capital locked up in London and Wall Street would be circulating far more freely.

Our present inequalities and the attempt to have the ordinary citizen pay off the country’s debts will lead to more protests from ordinary men and women and that may lead to increasingly severe police tactics, surveillance and human rights infringements – all rather than dealing with the problem we have, which is ever-increasing vulnerability and poverty.

It became clear to me whilst working with the PASC that up to the present Conservative Government, civil servants have had to display three core competencies. Two of these had been around for a long time. The first of these skills – policy design and policy advice to ministers – has been the big ‘status’ skill that has shaped the current Permanent Secretary role.  The second of these skills has centred on the specialist knowledge for each department, be it education, health, defence or otherwise. But these skills have not been sufficient.

The last ten years have witnessed continuous cutbacks and the belief that the corporate sector private market forces philosophy will work in government, which has led to the third core competence which is managing costs. Key to this is outsourcing – namely, the repositioning of resources to specialist suppliers.  The civil servants over the last 10-15 years have been exposed to developing contractual skills. The major question is has this contracting process helped or hindered? Has public-private finance built better schools, or has it just built some schools that are equipped to deal with some of the problems and then bound the community to unwelcome long-term interest repayments? Unfortunately, evidence indicates that it is the latter, and this is the position we are in. Public service activity is too much driven by contract, and the rigidities underlying contracts.

However, since David Cameron came to power, a fourth key competency has emerged and that has not been entirely obvious what it is. Under the heading of ‘Big Society’, namely the transfer of resources from the pubic arena to the citizen, the ability to relate to communities – the ability to facilitate community needs – has emerged as a fourth competence.

These four skills do not sit well together. Giving policy advice means needing to think big. Outsourcing mean dealing with detail all of the time. I wonder how many organisations can pursue these two skills at exactly the same time. Not even oil companies do this. Further, facilitating relationships with communities is akin to being the social worker to society. How can an organisation or civil servant be both social worker and policeman who rigidly enforces a contract at the expense of the citizen at the same time?

One skill that is steadily being lost is the specialist expertise within departments. For example, within children’s services, particularly at local authority level, in order to cope with these new demands officers are being trained in leadership. Although most appreciate the programmes, the overall comment is that they are irrelevant. Children’s Services Officers have gradually become less about protecting child welfare, and more about contracting skills and outsourcing.

What many Children’s Service Officers highlight is that when they go and inspect premises to see if they meet fundamental standards these are not as stringent as vulnerable children need. Certain leave premises (many of which that have seen better days) to the local authorities for childcare and welfare, and make money by essentially cramming children into these homes. This did not happen on a large-scale when government ran children’s services, but is increasing under the private sector.

What PASC is examining is; is Government appropriately structured to deliver on those four competences? The analysis that I provided for the Committee concluded that this is not the case. The alignment across departments is improving, so there may be some sharing of ICT services, human resources, expertise and some cross-departmental work, but the real problem is the relationship between the delivery departments and the heart of Government, i.e. the Cabinet Office and The Treasury.

The question that was being asked in Parliament was; ‘Is it unique that the centre of government is not well aligned with the delivery departments responsible for services?”. My answer was no. A similar situation exists with the large multi-nationals in the private sector.  The relationship between the corporate centre and the delivery departments is not one of simply delivering what the Centre dictates irrespective of the needs of communities or markets. A well-organised centre examines the value proposition, namely, what does it take to make most effective use of an array of resources scattered across departments. At times this may well be being disciplined on costs, but at times this may also mean being consultative and facilitative trying to pull the various departments together so that limited resources can be more aligned.  To be more aligned requires feedback from the delivery departments to the centre so that the centre adjusts its style and approach. Often feedback is not entirely positive and the response to such comment is indicative of the quality of leaders in the centre.

I have seen no indication from the heart of Government that they really want to change. What is evident to me is that we have 19^th century government at the centre of government, and the delivery departments are trying to crawl into the 21^st century, and this is where the tension lies. It will be interesting to see what this Committee will do.  This Committee has exposed how poorly aligned government is and in parliamentary terms, this is a revolution.

“youth seems to have advantages in innovation: everything is possible, knowledge is fresh, obligations are few and reputation is not at risk.”

Innovation can occur in products – we see this clearly in the field of mobile technology, for example – as well as in processes and services. Depending on the impact of innovation on environmental conditions, it can be classified as breakthrough innovation or incremental innovation.

Any environment, business, culture or otherwise will be shaped by innovation that evolves through periods of incremental change, and will be punctuated by innovative breakthroughs that either enhance or destroy the existing competence of firms and the individuals that make them up.

Incremental innovation creates changes through cumulative processes until a major advance that creates discontinuity ruptures the beginning point altogether.

Through incremental innovative improvements in products, for example, the underlying technology is both enhanced and extend, and thus reinforced as an established technical order as well as a socio-political one.

Individuals with a lot of experience are usually the best at carrying out these incremental improvements – we saw this with Steve Jobs as he turned Apple into the market-leading brand it is today.

Generally, younger people are more effective at bringing about breakthrough innovation by creating new technology that disrupts old ways of working and thinking. Major innovations can represent technical advances so significant that no increase in scale, efficiency, or design can make older technologies competitive with new technology whether product, process or service.

Again as an example we can look to Steve Job’s younger self, driving innovation at Pixar and then designing, developing and marketing the now ubiquitous Apple products.

Older, more experienced people may work alongside younger risk-takers in bringing innovation to a company. It is not for one group or the other to stake a claim on innovation – as we have seen, both types of individual are needed to bring about the different kinds of change that happen within a lifecycle of a business.

What is really needed – both in business and in government and beyond – is a culture of innovation. Often vested interests prevent innovation from fully emerging. There are many innovative patterns that are bought into by Western governments, only to be stored away and not implemented. For example, there are alternatives to oil, but due to investments in oil through vested interests many other innovative alternatives that could replace its use are not supported.

This does not have to be the case, as we can clearly see in the case of Japan, which has a culture of improvement of processes, or “change for the better”, captured in the Japanese philosophy of Kaizen. This philosophy teaches people to eliminate waste and to increase productivity, and encourages all – not just CEOs – to implement this and look out for opportunities for amelioration.

It is important to remember too that innovation can come in many forms, not just through business. Spain has a strong culture of innovation when it comes to architectural design, for example the ‘Metropol Parasol’ or ‘The World’s Largest Wooden Structure’ which opened in Seville, which can be seen as part of a long tradition encompassing the surreal modernist buildings of Gaudi and many others. These buildings could be also be compared to Dubai’s ambitious architectural projects, which double are important both in terms of business and in driving the way that people think about planning for the modern city.

If we as a country are going to continue to invest in the short-term transaction instruments, then I think we will see another financial collapse within four to five years. However, if we changed our philosophy and started investing in long term infrastructure projects, socialising the capital that we have, then we would have a situation of full employment, far less poverty and an overall wealthy society. But is there any sign of that happening? I can see none.

The capital we have available is waiting to fall back into its old pattern of behaviour, pursuing transactional gain. I don’t see how we can have improvement. What is unfortunate is that life is are getting worse. And it again has to do with capital. In New York this year, 66 per cent of trades on the stock exchange were based on algorithms, and in the Australian stock exchange, 30-35 per cent were. All an algorithm does is give the likely pattern of behaviour of any share based on the last few trades. So in a sense, the algorithms tell the investor whether to buy or sell without taking any notice of the quality of management in the company, the investment in the company, and so on. In fact in Australia the algorithms are now starting to include ‘soft data’, which takes into account certain words used in the financial reporting of a company and enters this data into the algorithm. When I was in Australia earlier this year, I was speaking to one of the board members of the Australian stock exchange, who told me that the reason the Australians are doing this is to buy and sell quicker than any other algorithm – without even knowing what is going on in the company.

So how do you escape a depression when the very owner of the firm that generates the wealth becomes owner for a nano-second? A whole number of trades may be taking place on supposed improvements all in the space of five minutes.

Under our current circumstances of prolonged depression, it is understandable that there is a lack in consumer confidence. We are unlikely to create the wealth for debts to be repaid.  Yet people have high living standards and commitments that they have to fulfil. We are in a situation that indicates further and further deprivation. It is unlikely that we will improve out circumstances unless we change the way that we position our finances. But instead of addressing this issue, we are going further into even shorter-term transactions that now have almost nothing to do with real life. It is like betting on horses when you don’t know what the horse looks like or how old it is – all you know is how it performed in the last few races.

Perhaps the most concerning thing is that the political institutions are doing absolutely nothing to remedy this. I was told that the Australian government had been warned of the danger of algorithmic trading but that to this day they have not responded or replied in any way. So even in Australia, which has much more of a boom economy than the other Anglo-American economies, there is no attempt by government to try and divert resources from short-term transactions to longer term infrastructure investment that would provide a good living for all.

The City drives Parliament and thus we have a vicious cycle. We need leadership from Parliament, to stand up and say ‘no more’. Such an act would probably see an individual politician’s career over, but at least the debate would be started on how we could use our capital for the greater good.