Seeing the erred ways of my thinking... (3)

I was completely brainwashed in the last 10 years of my 40-year career in banking. During the first 30 years, I was involved with more of the "high finance": balance sheets, balance sheet structures, balance sheet optimizations, maximizations of REO, reallocations of assets, EBITDAs, EBITDA multiples, etc. etc. A company was a balance sheet. When the banker visited the company, he discussed with management how new financial gimmicks might improve his bottom line. The CFO would not walk the banker proudly through the production lines (which he might not even know) and the banker would not be interested in that.

During the last 10 years of my career, the time of brainwashing, I was involved with middle-market entrepreneurs (as opposed to large, publicly-traded anonymous corporations) in Austria and Southern Germany. The companies were not small. Some of them had sales of several billion Euros. But they were privately held; typically family-owned.

Such entrepreneurs do not think of their companies in terms of balance sheets or return on equity. They do not think of cash flows in terms of how much they can take out of the company. They do not feel responsible to shareholders, tax payers or whatever. They feel responsible to their companies, to their employees and to themselves and their families. They are interested in what makes their business grow. They are not proud of reducing staff when business is slow. They are proud of finding new areas of business to employ the staff which would otherwise not be necessary.

One such entrepreneur once told me: “My job is not to reduce staff levels if business is slow. My bookkeeper could do that. My job is to find ways how to profitably employ the staff we have and, hopefully, hire additional staff”. Interestingly, such companies typically showed greater ROEs over time than many publicly-traded anonymous corporations. However, the ROE was not their objective; instead, it was the result of doing the right things.

Take a hundred or so of such entrepreneurs from all EZ-countries. Lock them up in a beautiful resort for a long weekend and mandate them to come up with solutions how the economies in EZ-countries could be brought back into balance in a way that the sum of combined efforts is greater than the sum of individual efforts. You would get practical solutions; solutions which could be implemented and which would work. They would not include items like debt mutualization funds, Eurobonds and so forth. There would be no discussion about abstract financial structures and instruments.

There would be a lot of discussion about market opportunities; about suppliers’ capabilities; about potential new areas for growth; about new technological trends; about competitive advantages; in short: about ways how to create real value. There would also be a lot of discussion about how people, the primary resource of all economic effort, could be employed to the fullest extent and how their talents could be optimally developed.

Specifically as regards Greece, they would not have spent their time listing all of the things which are deficient in the Greek economy. Instead, they would have spent their time listing all the things for which the Greek economy would have potential, how that could be optimally taken advantage of and what structural changes could be required on the part of the government to make this possible. Their focus would have been: "How can we increase economic activity which will be for the benefit of all of us?". It would not have been: "How can you balance your budget?"

Moral of the story

I would have thought that EU-elites would be capable of thinking the same way as such entrepreneurs would think. And, unfortunately, I was wrong!

The final question

Is there still a chance to move into the right direction? Quite unlikely but, as they say, hope dies last.


PS: previous posts in this series: P1, P2.