Friday, November 1, 2013
A New Choice. A New Narrative.
Philip is in New York doing anthropological research on how the capital markets work at an interpersonal level. Fascinating, and very timely.
We met for a visit and some lunch at Douro, in Greenwich CT, with my colleagues at the Capital Institute. Philip wanted to know more about the Evergreen hypothesis as an interesting variation on the main theme of his research, which focuses on current standard practices in securities trading.
Among the many excellent topics Philip raised was a question about why an enterprise would choose evergreen over the usual corporate finance solution. The answer comes in the form of a choice about who the enterprise wants to be accountable to, and what it wants to be accountable for, when it accepts other people's money as equity capital.
In the default choice of corporate finance, the enterprise becomes accountable to the securities trading markets for constantly increasing the price of financialized fractional shares. This gets phrased as growth and it provides the liquidity that is the primary value proposition that securities trading offers to investors: instant liquidity, at an uncertain price. Growth provides the expectation that the selling price, although uncertain, will usually be higher than the purchase price, especially over time.
In the new choice of pension finance, the enterprise becomes accountable to the stewards of the pension trust for passing agreed equity payback milestones that are established through negotiation. As those milestones are passed, equity payback is achieved, and accountability to the providers of that equity diminishes. It never goes away entirely, because the equity is evergreen, but as payback milestones are passed, and sharing formulas get reset, enterprise leaders earn back both a higher share in the profits they are generating, and more autonomy in running the enterprise going forward.
Its a path to ownership earnback.
In the default standard corporate finance option, Management never earns back ownership. It always works for the stock market and always has to be "maximizing shareholder value" in a perpetual present.
In the new evergreen pension finance option, leadership does earn back ownership, and always works to optimize competitiveness under changing competitive conditions.
It's a new choice, that requires a new narrative to understand.
Which do you choose? Let's discuss.