Question

13.1. Preparing for the Harvest
Do you think a business should start operations on day one with the thought that it may one day change hands or change structure? How would this philosophy impact the management of the firm?

PASTE REFERENCES.

Answer 1

My answer is informed by my reading of Nassim Nicholas Taleb's work. IN particular, he introduces the concept of "skin in the game" to describe a general class of situations where there's an asymmetry of liability;

according to Taleb, when making a decision you have no skin in the game when you're benefitted from the positive impacts of your decision (i.e. when it works out) but not harmed by the pitfalls (i.e. when it doesn't). In other words, you're there for the upside but not not for the downside.

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Two significant examples:

i) (Example provided by Taleb)
Institutional fund managers (e.g. for mutual funds) who get paid commissions or bonuses upon making "good" purchases; this incentivizes fund managers to trade more rather than trade better, because they get to keep their commissions even if the investments go bomb an year later.

This is part of the explanation behind the 2009 economic crisis - real estate sector ballooned into an investment "bubble", careless loans were made to players with poor credit history, risky real estate projects were leveraged again and again as the base for more complex derivatives. Fund managers kept riding the wave for profits, driving the price of financial instruments in the real estate sector higher and higher to totally unjustified numbers.

Eventually, a small moment of panic somewhere snowballed into an economy-wide panic wave with previously confident investors rushing to get rid of their involvement with the crashing real estate sector.

Panic in general is contagious and bad; eventually panic regarding the financial market spread to panic about the banking system and economic stability in general. People withdraw cash from banks for peace of mind, creating a scarcity of loanable funds for legit investment projects . . . and so on.

ii) In public administration, parties running for Government (e.g. President in USA, Prime Minister in India) know that they may be in power for only so many years (e.g. term of 5 years).

This means they're more focused on short-run projects with immediately visible results, so that they get re-elected the next term.

With the narrowminded focus on visible results, important public projects often aren't given the necessary push to maturity; because such projects will likely yield fruits after the party's term is over, there is no upside to be gained here.

On the other hand, short-run projects offer opportunity for significant upside (gain points in the public's opinion); on the other hand there's no downside, because even if these projects are hurried through and inevitably mishandled the results may not become obvious until after the first party's first term is over

- the party may or may not have been reelected for the second term, but the fallbacks of their decisions in the first term have no definitive part to play in that because of the lag period after which such fallbacks occur.

e.g. public road and flyover development projects. You can rush through them to have a flyover in an year, but if you don't invest due diligence and only go for appearences then it will collapse sooner than a publicly funded flyover should; search for "Ultadanga flyover collapse" for such an incident.

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Thus, such an outlook towards business - where you can eventually wash your hands from the liability of later consequences, because you know it's the next CEO's or shareholders' problem - is detrimental to society.

It promotes a kind of shortcut-mentality, instead of encouraging labor investment into establishing sustainable processes that create societal Value in the long run.

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References:

Nassim Nicholas Taleb - Skin in the Game
Ultadana flyover case - NDTV news