The value of the people who create value
- Johann Redelinghuys
- 08 Oct 2012 05:38 (South Africa)
In a world straining to manage large scale protests against austerity and employees are being forced to live on less, it is compelling to see how the fortunate people fare at the other end.
In the mining industry the value assigned to employees and to the work they do cause some curious paradoxes. On the one hand, we have the spreading discontent of miners who have had to go through the pain of Marikana to get the attention of mining bosses and the media to make known their pitiful wages. Right at the other end we have people like South African Ivan Glasenberg, CEO of commodity trader Glencore, who has built a personal fortune in excess of a $6-billion. Glencore, listed on the London and Hong Kong exchanges, trades and produces commodities like coal, oil and copper, employing 58,000 people in 33 countries.
Glasenberg and his company have been in the news lately because of their bid to take over Xstrata one of the world’s biggest mining and metals companies, headed by another South African, Mick Davies. Xstrata operates in 20 countries and employs more than 70,000 people. Both companies are valued in the region of $53-billion
Much of the publicity surrounding this deal, which is still not finally consummated, concerns the value of the Xstrata business and the potential retention bonuses totalling $274-million the board wanted to pay Davis and his team to stay on after the deal is done. Davis alone would have received a retention payment of $46-million.
Woven through these gob smacking numbers, referred to by the fund manager Fidelity as “provocative and insensitive” and by The Wall Street Journal as “unacceptable and depressing”, there are also some powerful boardroom battles. Going back a bit, it was said that when Davis made a bid for Anglo American some time ago, the deal collapsed because Anglo’s CEO, Cynthia Carroll, did not want to end up playing second fiddle to Davis. Now, the revised offer from Glencore leaves Davis out in the cold and proposes Glasenberg as the CEO of the merged entity. There is much media speculation about the options that would be open to Davis once out of Xstrata.
Forget for a moment about all the dust that is kicked up in this saga, and focus on the fact that two boys who grew up right here and were educated in local schools before becoming CAs and launching their impressive careers have accumulated immense wealth through their own skill and expertise. In addition to all the money made from salaries and bonuses, they have built significant stakes in the companies they have grown to massive value. In this process they have also created employment for many thousands of people.
Their fortunes are a testimony to the value society and the markets place on people who create value. The outraged critics in the Financial Times, The Wall Street Journal and others like Barack Obama, who was quoted in The Washington Post referring to executive compensation and bonuses on Wall Street as “obscene”, can give up their mission to convert the world. Making money, and plenty of it, is a key driver for the ambitious entrepreneur. No amount of protest from fairness-burdened bureaucrats or the chattering gate-keeper class in the media will make any difference to the drive and enterprise of the ambitious achiever.
The real wealth made by these people does not come from their annual salaries or bonuses, but from the stakes they have built up in the businesses they created. Glasenberg for example has a salary of a mere $1.5 million and could earn a further $7.6 in stock via the firm’s incentive plan. His 16% stake in Glencore, a company valued at $53 billion, however, is where the real kicker lies. And then he does a deal like that of Xstrata, and his percentage nets him about $10 billion. In the process of creating massive wealth for his shareholders he has done the same for himself. Nothing wrong with that.
The rest of us can only gasp in admiration.
While we are on the subject of wealth being created, it is interesting to note that the Republican nominee to be president of the United States, Mitt Romney, is described as “very rich” with assets in excess of $250 million. Much of this was made, it is said, when he was a co-founder of private equity firm Bain Capital. But there is an element of snide criticism that hangs over him.
Private equity sounds too aggressively capitalist and is seen as exploiting companies to reduce jobs and increase profits. At a time when every spot and freckle of a presidential candidate is pulled through the ringer of merciless scrutiny by the American electorate, it may seem impolite to be too rich. It’s not politically correct. When he then put his foot in it by describing 47% of Americans as being “victims” and relying on hand-outs, he almost took himself out of the race.
It’s interesting that in America, like here, we want our heroes to do well enough, but not too well. We admire those who create value, but become suspicious when there is too much of it. Somehow we seem to believe that there must be some kind of wrongdoing going on. We enjoy the consumption and the benefits of capitalism. Just look around. But like China now, we have difficulty letting go of the nobler credentials of socialism.
Let’s not get into an argument about the rights and wrongs of capitalism, or any of that stuff about who should own the means of production. But let’s acknowledge that the greatest achievements of mankind over the past few centuries have occurred in capitalist societies where the accumulation of wealth has been the dominant driver. Ask Bill Gates, Jeff Bezos, Steve Jobs and the rest of them.
In South Africa, forget about the dark side of the founders of empires like Anglo American, Rembrandt, Liberty Life, Pick n Pay and, in our own time, Bidvest, Discovery, Shoprite and RMB. These are people who created value on a grand scale and the wealth they build for themselves and for their shareholders is their good and proper due. DM