Is financial solvency enough in the new millennium?
With the 20th Century now well and truly behind us is it time to rethink the way we look at our business models? One of the most important yardsticks when examining a business is whether it is solvent or insolvent. The repercussions for being insolvent are very dire indeed. A business can be cash flow insolvent or balance sheet insolvent. The upshot is however that it is an offence to trade whilst being insolvent. In current insolvency law the area of interest relates strictly to the ability of a business to repay its’ debts as they fall due. As we push further into the new millennium I would suggest that this might no longer be enough.
If we look at our most recent crisis across the globe it was once again sparked off by large financial institutions which were insolvent long before the penny dropped with regulators and governments. If we look at 1929 and the great crash it was again fuelled by large institutions and wealthy individuals such as JP Morgan, Jesse Livermore, William Crapo Durant etc. Our most recent crisis stemmed from a property bubble whilst the 1929 crash stemmed from a stock market bubble. In both cases the causes and outcomes were pretty much the same as people and institutions bought an asset class they couldn’t afford with money they didn’t own. A relatively small group of wealthy individuals and organisations over egged their positions and let their greed run away with themselves and brought the system to its knees. As always there are winners too. Look at Joe Kennedy as he sat idly by and watched the market crash only to pick up the pieces afterward and make a fortune in the process. The transfer of wealth from ordinary citizens across the globe to another relatively small group of individuals and organisations in recent times has been astounding. So can this type of incident be stopped from happening again or are we doomed to repeat the cycle with the arrival of every new generation as they look set to reinvent their very own wheel.
So here’s a thought. What if we had some new and additional insolvency yardsticks? For example what if a company or business was expected to be morally and ethically solvent? Would it be hard to police, could we come up with a set of parameters for such an initiative. Could we write some code to allow for an impartial measure of business moral solvency?
Perhaps we don’t need to. Perhaps we could just get the thought out there to the consumer and allow them to decide which business they think morally solvent. Moral solvency might be a bit of an abstract concept right now as was the idea of breaking up monopolies in the 1800’s but that’s not to say it might not have some merit. If we had a guide for moral insolvency could any of our bankers run riot for the benefit of their own bonus packages. Investors in the main really don’t count for outside of the individual investor by and large the institutional investors primary goal is maximise return largely regardless of where the funds go.
So as you know if you’ve followed previous blog entries I’m all about diversity, the beauty of independent businesses and especially the diverse nature of an independent high street. If we look at the recent corporation tax issues, especially the highly public reaction to Starbucks in the UK and Apple in Ireland, then we might see an opportunity for small businesses in all of this. I would suggest the small independent high street business has much less opportunity to move funds around when compared to the multinational giants. The small business is also highly invested in its locality as opposed to a multinational which views their store as just another cost or profit centre. So could the small locally vested business be more morally solvent than their larger competitors. Again I would suggest yes. I would trust my local credit union more than my local banks, I would trust my local fashion store rather than the larger chains in my town. Why? Because I know them, I see them dropping their children to school, I see them at local sporting events, I see them shopping when I’m shopping. I see them investing in local sponsorship, reinvesting in their businesses and working hard to survive. I don’t believe they are working towards their next bonus but they are working towards getting revenue in to pay their business rates. Rates that pave our roads and keep the street lights on. I’m not altogether sure if Moral solvency would catch the imagination or could be turned from an abstract concept into a business practice. I am sure however that my local high street independents have it in bucket loads when compared to their larger multinational competitors.
Perhaps there’s a thesis or dissertation in this idea or maybe someone has already completed one, if so I’d love to read it. Thanks for reading.