The company as a cult…

One could argue that the first significant example of the company as a cult phenomenon was in the early 18th Century, when the South Sea Company (while fraudulent) managed to transfix a population; destabilize government; and set back the progress of legal reform of corporate structures for many decades.

Since then, the phenomenon has appeared periodically, often at times of financial and economic change and disruption, almost as if investors and others are seeking for some form of confirmation of belief that “X” company is going to change the world.

While corporations are legally “persons” in most jurisdictions, that “personality” is abstract and dispersed, meaning that it often comes to be represented by one or more human beings- often a charismatic individual who created and built the business- or creates a culture that is designed to foster what one might call a cult mentality. So-called Multi-level Marketing companies (MLMs) such as Herbalife and Amway are examples of the latter form.

Of course, bankers, analysts and institutional investors tend to pride themselves on being cynical and clear-eyed. However, they are also (so far) human. This means that they can be lured into behaving as if members of a cult of “true-believers”, either by suspending judgement or by being manipulated into ignoring harsh realities.

Often this is not intentional, but the result of “herd behaviour”, in which it becomes awkward to take a contrary view.

Nevertheless, not all “corporate cults” are malign or fraudulent. While the early Ford Motor Corporation under Henry Ford; The House of Morgan under JP Morgan; or General Motors under Arthur Sloan were demonstrably inseparable from the characters of their founders, none could properly be regarded as deliberately “cult like”, although the way in which Sloan built GM arguably led to the modern cult of “management” as an end in itself. Even Standard Oil under John D. Rockefeller, ruthless as he was, essentially enabled much of the United States’ economic power.

More recently, the growth of the “technological age” has been led by a number of businesses which clearly achieved cult status at their peak- for example, Microsoft as lead by Bill Gates (who has managed to transition to the philanthropist role without too much opprobrium), or Apple under the late and legendary Steve Jobs. Both companies, while still powerful, no longer attract the same status.

At present, we would suggest that, in the US at least, two companies, Amazon and Tesla, have the makings of a “cult” (and compare Alibaba in the PRC under Jack Ma), while Google and Facebook, although powerful, simply do not attract the same perception.

There is little doubt that Jeff Bezos is a brilliant business man, nor that the company he created is inextricably identified with and gets the benefit of the doubt when its strategy or performance are opaque. Similarly, Tesla is inseparable from Elon Musk, who has demonstrably achieved cult status, because any other company which persistently underperformed both expectations and promises made would have been already consigned the remaindered section of history. This does not mean that Tesla will not ultimately succeed; simply that its CEO is able to persuade most investors and potential sources of funding that there will, most certainly, be “jam tomorrow”.

And if one wishes to observe perhaps that most enduring corporate cult, one only has to think of Berkshire Hathaway and the “Sage of Omaha”. The epithet says it all!

At Awbury, while we believe that a strong corporate culture is generally a good thing, and that a charismatic leader may also help, being of a naturally skeptical nature, and having been around for a sufficiently long time to have seen the consequences of the suspension of critical faculties in many areas, we take the view that a corporation’s actual performance, competitive position, financial capacity and liquidity are what really matter. We are very wary of unsubstantiated charisma.

The Awbury Team

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Energy or Entropy…

There is, of course, much debate at present about the rate at which energy generation will switch from using hydrocarbon-based to other “alternative” forms, such as solar, wind and tidal- a so-called energy transition.

As a result, the work of a Manitoba-based Czech academic, Vaclav Smil, is gaining increasing attention; being already quietly influential amongst policy-makers. To paraphrase, Smil’s basic thesis, there have been three major energy transitions during the time of Humanity’s existence. First came mastery of fire (using energy from the sun stored in plants); second, farming (which converted solar energy into food); and, third, industrialization, which cycled through coal, then oil, then natural gas to power machines.

Now, according to Smil, we are struggling with the fourth transition, towards using energy sources that use the sun’s direct energy flows, rather than those trapped in hydrocarbon deposits, and do not emit carbon dioxide.

Ironically, whereas previously transitions have involved attempts to move towards use of more energy-dense materials- using Smil’s term- the current transition entails moving back down the power density spectrum. He considers nuclear power a “successful failure”, as it has become (with a few exceptions such as in the PRC) stalled by cost and safety concerns.

As Smil points out, it is all very well deciding to replace hydrocarbons with other sources, but generating the equivalent levels of energy to maintain current economic output could entail using 100 and perhaps a 1,000 times more land area to do so, which will create its own concerns and negative economic and political consequences.

So, predicting the rate and scale of the fourth transition is much more difficult than many forecasts (even those with a range of outcomes) assume, because the core hydrocarbons (coal, oil, natural gas) still supply 90% of primary energy, a level which is actually higher than in 2000, when nuclear energy and hydro-power were more important contributors than they are now. In other words, assumptions that hydrocarbon dependency can rapidly decrease are simply wrong, with generations rather than decades the more likely timeframe for a significant change to occur.

Naturally, such issues cannot be divorced from those of climate change and the impact upon it of a relentless desire for growth, which underpins all modern, fossil-fueled economies. More growth requires more use of hydrocarbons, as well as of fertilizers, particularly as developing economies move up the energy use spectrum, while at the same time demanding more resource intensive foodstuffs, such as meat. These factors mean that, in the absence of what one might term a fundamental change in approach, the chances of any material near-term reduction in global hydrocarbon use actually occurring are quite remote. Some fresh breakthrough in energy technologies such as cheap and reliable energy storage would be required to shift the transition.

In reality, all predictions and models of the future energy sources and uses are inherently unstable, and better seen as no more than indicative of likely trends. Requiring or expecting certainty is simply foolish.

At Awbury, we are constantly updating our own view of over-arching trends that can have wide impact, recognizing that one has to build uncertainty and redundancy into any risk model if one is to avoid being “mentally captured” by a particularly plausible and overly neat paradigm. In other words, we have learnt to deal with entropy.

The Awbury Team

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