Our business model is outside WACC

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The profit motive, which has driven private enterprise since the emergence of prototypes of multinationals over 500 years ago, such as Portugal India House or the British East India Company, is arguably a successful, albeit controversial, facet of business. Indeed, nothing has lifted people more out of poverty than private enterprise, despite the irony that severe income inequality is one of the biggest threats globally, along with climate change, pandemics and globalization. erosion of institutional trust. A singular focus on profits (and self-promotion) invariably perpetuates this income disparity. Yet the greed and financial myopia that it engenders cause problems in themselves. On the one hand, far too many companies are trapped in a zero-sum game where whoever has the lowest Weighted Average Cost of Capital (WACC) wins, in the broad sense of course.

This “victory” is symbolic, unsustainable and hardly translates into a lasting competitive advantage. Indeed, entire industries, such as banking, insurance and investing, limp around two crutches – one being anemic interest rate environments and the other being low costs of switching clients. . Added value based on economic costs alone is an oxymoron. Both challenges oppose a growing wave of corporate mistrust over our worst fears about the greed and mischief that thrive in opaque corporate structures, such as the massive Wells Fargo account-rigging scandal, ne are not only proven, they are proven too often. Indeed, expense ratios in many industries have stiffened to double-digit highs, making the maintenance of the status quo and general aversion to risk and innovation the norm in many large companies.

A divide built around an organization based purely on the cost of capital will indeed be a shallow divide, making the business model, the people, the customers and the value chains behind it indefensible in the long run. This is especially true as the bitter struggle between short-term profit maximizers and long-term business optimizers continues, with the latter group often leveraging disruptive technologies and radically new structures to their advantage. Short-term, cost-conscious businesses must respond to the quarterly rhythm of Wall Street, rather than the long-term challenges and opportunities that lie ahead. Indeed, for many of these companies, especially banks, insurers and holders of large assets, such as pension funds, they are both too big to fail, too big to hide and too large (or slow) to adapt. This reality contributes to making them particularly vulnerable to the wave of digital disruption to come, thanks to startups, cryptocurrencies, blockchain, as well as the confluence of complex risks that can pose a double threat to their balance sheets.

For many large asset owners, the practice of asset-liability management (ALM) presupposes long-term stability on both the risk and return sides of the balance sheet. So, for example, many insurers will immediately take risks by insuring downtown properties against natural hazards, while owning those same properties in desirable downtown locations to offset the risks with rental income and real estate appreciation. The challenge, however, as we saw in the city of Houston in 2017 when Hurricane Harvey flooded the 4th largest city in the United States, these downtown areas wear a lot of crosshairs on their backs. As a result, asset-liability management is now “stressed” in a way that was now considered (from a statistical point of view) as out of sample. Indeed, at the macro level, the fact that the global economy can be statistically lagged can be one of the most difficult challenges for traditional businesses. If economic and statistical volatility subjects companies to model errors and neither the performance of assets nor liabilities is up to standard, then the traditional economic order is on a wild ride. 2017 may have been just the opening salvo.

Another example of this ALM mismatch, and how cost-conscious are paying a particularly painful slow-boiling toll, is what life insurers and pension systems call longevity risk. Insidiously, these pesky policyholders and pensioners were never supposed to live this long according to outdated actuarial models. Rather, they were meant to die sooner, at least the models would want them to, leaving the products unclaimed as a boon for future liabilities and ROI. Life expectancy in the United States in 1900 was 47.3. In 2000, the average was 79.5, adding 30 years of stress, grievances and mathematical uncertainty to the system.

It’s safe to assume that medical advancements that extend life, as well as lifestyle changes thanks to the embarrassment of wealth held by baby boomers, have not been factored into this asset-liability calculation. . As a result, pension systems around the world, not just in spending economies or corporations, are woefully underfunded. Indeed, since many traditional businesses work with millions of former employees claiming pension obligations, they look more like pension administrators than auto companies, airlines, or manufacturers. The so-called dream of the American, British, European or advanced economy now appears as a fleeting image out of reach with a career ladder that is not only in tatters, but the rungs are far too far apart and appear to be greased. by those who have had the fortune to climb. This reality is not lost on millions of underemployed young people whose career prospects and income mobility seem less secure and as small as the things they own or have access to. In the odd-job economy, food, shelter and water can prove to be just as short-lived.

Those who are cost-conscious, as opposed to those who are value-oriented, are also to blame for the very real risk of job-killing industrial automation, which not only attacks career paths so far. secure, such as law, banking, and many service jobs, it attacks traditional work. It’s not uncommon to see McDonald’s locations with large touch screens, making the employee redundant as the first line of service. Indeed, this same pattern holds true in industry after industry, as cost-conscious people drive people out of virtually all “value chains,” where chatbots, artificial intelligence, and the occasional check deposit. cell phones are now our cashiers, bankers and service providers. It would not be a problem if displaced labor and employees were replaced by alternative productive activities, contrary to the utopian view that automation frees humanity for higher and better purposes. The jury is out, however, and pitiful investments and results along the educational axis of the future will leave many advanced economies behind. Indeed, nationwide mismanagement of assets and liabilities is also taking place in the immigrant country of the United States, facing a talent shortage, while erecting barriers to entry for the best and best. the brightest in the world. Talent, like capital, is fungible and will find the path of least resistance and highest productivity.

This too has insidious long-term effects on the asset-liability equation, as underemployed scammers of the present and the future will enjoy significantly lower purchasing power and savings than generations who came before them, further splitting the very assets and services on which businesses depend. What will happen to the auto insurance industry if fewer people own or even drive a car, with responsibility shifting to the manufacturer or Uber? What will happen to home and mortgage insurers if people feel comfortable living in real hives? The light asset economy led by companies like Uber and Airbnb has done wonders in monetizing stranded assets, but it has also jeopardized traditional employment through massive wage and labor arbitrage. As we near the bottom of the global downward spiral that fueled the highest rate of income inequality in history as well as combustible anti-establishment trends, it begs the question in boards of directors and homes. state, what about our status quo now?

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