One Company's Ceiling is Another Company's Floor

The arguments and counter-arguments regarding Aer Lingus’s decision to abandon Shannon continue unabated. But one claim is particularly intriguing: that ‘it’s a commercial decision’. In one sense this argument doesn’t really tell us a whole lot – or as Homer Simpson might opine: ‘Well, d’uh’. But in another sense it is an aggressively political argument for, at root, those who trot this line out are actually telling us to ‘shut-up and sit down’. It goes something like this:

A company makes a decision to take a particular course of action. To interfere with that decision is to distort the efficient operation of ‘the market’. Even to question it is to reveal one’s profound ignorance and incorrigible disrespect of ‘the market’. There is only one way for a ‘company’ to make decisions – and that is on commercial grounds. And once a commercial decision is taken, well that’s that.

Let’s do some deconstructing. First, the company – Aer Lingus – as a 'company' did not make the decision to abandon Shannon. The shareholders did not make the decision. Even the Board of Directors did not make the decision. Mr. Dermot Mannion informs us that it was a handful of employees who made the decision – ‘an executive management decision.’ So secret was this decision that not even the owners and directors were involved. My Marxist friends are going to have re-write their arguments: modern capitalism doesn’t just alienate the workers from the means of production, it seems to alienate the owners and directors as well (so should the neo-liberals, if they were being honest: for now companies apparently are not beholden to their shareholders, only their management).

To question a ‘commercial decision’ is, in effect, to question the natural order. This is not an economic or even a commercial argument; it is ultimately a religious one. How many people were lit up in the Auto-de-Fes because they were profoundly ignorant and incorrigibly disrespectful of the natural order as enunciated by the ecclesiastical class? Not only must the argument of ‘commercial decision’ be taken on faith, this faith must be distilled for us by a priestly class of commentators and analysts. Of course we don’t burn the stupid and messers anymore. We subject them to lectures from Irish Times’ editorials.

The evangelicals of commercial decision-making tend to ignore how the real world works. First, it assumes decision-makers have access to all the relevant information– symmetry of information as it is called in the neo-liberal bible. However, this is, by sheer dint of volume, impossible. Information is always and everywhere asymmetrical to a greater or lesser degree. Commercial decisions are, therefore, both relatively informed and uninformed at the same time. Given that the makers of ‘commercial decisions’ are limited in their knowledge of the future only makes the whole exercise a bit of a gamble as this extremely short list of commercial follies indicates:

• The Premier smokeless cigarette that needed special instructions on how to light
• New Coke and its lesser known disaster, OK Cola
• Crystal Pepsi
• The Sony Betamax
• The iconic Edsel
• Pets.com – famous for its sock puppets

My favourite is Atari’s video game ‘E.T.’, nominally based on the movie, but actually based on players finding faith in the Lord Jesus Christ in time for E.T. to be raptured before the Apocalypse. It sold 12 copies with the remainder of the output being buried in a landfill in New Mexico.

What formed the basis for all these product launches? ‘Commercial decisions’. And most of these companies had more experts, more analysts, more market researchers than Aer Lingus will ever have.

The second laughable assumption is that those who make ‘commercial decisions’ are all a bunch of Vulcans – highly logical, emotionally-challenged beings who can assess the odds of a successful away mission to the fifth decimal point. The reality is thankfully different. People approach decisions with pre-conceived notions, a bit of arrogance, a little wistful thinking, and sometimes a tad hung-over. Business organisation theorists cite two examples (among a multitude) of real-life business people’s behaviour:

• Decision involvement inertia: managers stay committed to a particular course of action, despite the overwhelming negative repercussions, because they don’t want to ‘lose face’.
• Decision involvement distortion: managers distort new ‘market’ information so as to fit in with his/her initial decision.

Remember that when you hear the stories circulating about how Aer Lingus management are determined to ditch Shannon come hell or high water because they always resented being there due to the ‘commercial decisions’ of its former single shareholder; how they want to aggressively announce their newly found ‘commercial autonomy’ with authority regardless of the commercial or social consequences; how they want to shred collective labour agreements and toss them to the Northern winds. These are human, not Vulcan reactions.

So, limited information and subjective lines of reasoning: the fact is that Aer Lingus didn’t just make a ‘commercial decision’ for themselves, they made it for a number of other businesses in the region. Indeed, they imposed it ruthlessly. This imposition is such that we are witnessing an interesting alliance coming together – multi-nationals, B&B owners, trade unionists, Ryanair, public agencies – all with their own ‘commercial interests’ (I won’t bother mentioning that many of these interests supported the privatisation of Aer Lingus; that I-told-you-so argument is for another day).

Ultimately, we suffer from economic analysis that likens a business to some farm in the Australian outback, tending its flock and shooting its rabbits, hundreds of miles away from its nearest neighbour. The reality is that businesses share the same apartment, exist next door to, upstairs and downstairs from, each other - sharing the basement laundry room and the roof-top garden. That they also share this location with employees, consumers, people generally only shows how complex and inter-dependent we all are in complex market societies.

This ‘tending flock, shooting rabbits’ analysis leads to some bizarre statements. As always, Stephen Collins churns out one of the best:

'. . . it would be very hard to justify Government interference even though it is still a major shareholder in the company.’

So, now, even ‘major shareholders’ shouldn’t interfere with the decisions of the company they own and live with in the same room.

Others will will outline the pros and cons of various strategies that shareholders and stakeholders can employ to reverse the Aer Lingus decisions (those strategies are ‘commercial decisions’ too). But the Left and the trade union movement now have an open-goal opportunity. Labour could lead the charge, initiate demands for the recall of the Dail, and table a motion calling for Government to create an alliance with other Aer Lingus shareholders to prevent the abandonment of Shannon (which is not the same as nixing the Belfast move). This could energise its ‘Western’ presence which in most areas is practically non-existent while at the same time show up Fine Gael’s hypocritical crocodile tears (they supported privatisation, they support ‘commercial decisions’). It would also pin those Fianna Fail TDs and Ministers to the collar – put your vote where your mouth is.

Labour and the Left could work with trade unions that have shown a far sighted approach to building alliances as SIPTU’s Joe Cunningham spelt out:

‘The chances of me standing up and defending Michael O’Leary are nil. But on this occasion let me be clear. If at the end of the day as a result of an emergency general meeting we can get this decision reversed, well then whosoever supports it, so be it, we are quite happy with that.’

This is where the Left should be now: In support of regional policy, economic growth, infrastructural development, and companies with all their stakeholders. At the end of the day, to say that something is a ‘commercial decision’ begs the question – is it a ‘good commercial decision’ or a ‘bad commercial decision’.

And, if in the process we can teach people the simple fact of modern life - that one person’s (or business’s) ceiling is another person’s floor – then it will have been a good day’s work.

Comments

[david]

Hi Michael. Without the standard neoclassical assumptions of profit-maximising agents with symmetrical information, the market may be viewed as a "discovery procedure":

http://www.cato.org/pubs/pas/pa018.html

I believe this is a very good framework in which to view busines failure.

[Niall]

"Given that the makers of ‘commercial decisions’ are limited in their knowledge of the future only makes the whole exercise a bit of a gamble"

As Homer might say: 'D'uh.' It's called reality, Michael. The same is true for govt + local authority decisions and what type of curtains will look nice on your wall.

"So, limited information and subjective lines of reasoning: the fact is that Aer Lingus didn’t just make a ‘commercial decision’ for themselves, they made it for a number of other businesses in the region."

No, they made it for themselves. Once the company was privatised its obligation to do anything other than make money for its shareholders was removed. It has no obligation to the Shannon region - that's the State's job - which a lot of people seem to have forgotten.

"At the end of the day, to say that something is a ‘commercial decision’ begs the question – is it a ‘good commercial decision’ or a ‘bad commercial decision’."

It does beg those questions, and I doubt if the decision makers would have made it if they thought it was a bad decision. Should every owner of a private company be expected to court public opinion whenever a business decision has to be made?

Fintan O'Toole wrote a sensible article in yesterday's Irish Times. It's worth checking out.

[Michael]

Thanks, Niall, for your comments. In reference to 'The same is true for govt + local authority decisions and what type of curtains will look nice on your wall': I accept that. Which is why it is all the more important that thorough-going consultation (a form of information gathering or enhancing the information symetry) take place on such far-reaching decision. My argument is simply that Aer Lingus executive management didn't even do this in their own company. The shareholders and directors were intentionally excluded. Indeed, there seems to be a problem with Aer Lingus executive management if the consultant's report quoted in today's Irish Times is correct - that executive management didn't even consult the line managers on changes in work practices. This is not a management style that one can have much confidence in.

'No, they made it (commercial decision) for themselves.' True, but that wasn't my point. Their decision imposed other decisions on other firms. For instance, a company that set up in Shannon some time ago on the understanding of an air link with Heathrow, now has to rethink their location - in other words, revisit their original commercial decision by way of making a new one because of the Aer Lingus commercial decision. We live in a very crowded world. You can't swing a cat without hitting someone.

You rightly state that currently companies only owe an obligation to their shareholders. It's arguable that Aer Lingus executive management has failed in that obligation by ignoring and, thus, disregarding the views of the shareholders. And Mr. Mannion sounds a bit arrogant when he says his decision won't be changed. He might be more credible if he had said, 'The decision won't be changed unless the shareholders want it to.'

Of course, Aer Lingus executive management think they have made a good commeercial decision. If the shareholders overturn that decision, they will do so because they think it is better commercially. See, even in a single company, the major players don't always agree with what constitutes a 'good commercial decision.'

At the end of the day, a modern economy can't exist on the basis of cowboy management style. And a modern economy will only prosper well into the 21st century when people begin to understand that major companies are just as much social assets - owing their existance, their profits, their survival to the very social fabric that sustains them.

[Michael]

David, thanks for your comment. The Cato reference is very in-depth but I don't think it quite touches upon what I was doing. It seems to be an argument regarding regulation and the unintended consequences of such interventions. I'll have another go at it but keep the Cato reference warm - I hope to do a piece on regulation; about how regulation helps business and the lack of regulation hinders.

[Niall]

"Their decision imposed other decisions on other firms."

I understood your original distinction but its facetious. This kind of thing happens in business every day. Any private company would be negligent in their duties to their shareholders if worrying about what effects their decisions would have on other private companies affected their decision making.

Of course even within a company there will be disagreement about what is the best commercial decision, but executive managers are given power by shareholders to make those decisions. If an EGM had to be called for every business decision that was made a company would go out of business very quickly. Shareholders invest management with the power to act on their behalf without having to seek their approval at every step.

[Michael]

Just one question, Niall, and I'll give you the last word on it: do shareholders have the right to overturn the decisions of their executive management if they feel it is not a good commercial decision?

[Niall M]

I have added an M to distinguish myself from the other contrributor.

The most interesting issue around the Aer Lingus move to Belfast, is the challenge it makes to permanent pensionable jobs within the unionised Public Sector. As their is an international shortage of pilots, we can presume that Aer Lingus cannot undercut the International norms or the pilots will walk away and go to Easyjet or someone else, though generally no one goes to Ryanair unless they have no choice. (Also Ryanair fly different aircraft to most of their rivals.)

We are left with the likely scenario that these glorified bus drivers employed under existing Aer Lingus contracts are earning substantially above the norm. As the normal salary is west of €100,000 one can see the position of Aer Lingus management in an open market.

But in some ways the position of IMPACT is far more interesting. The pilots are of course members of IMPACT. This union has lost a fortune out in the airport in its capturing of the SIPTU crew members and has staked a lot of money and to a degree its future on what is happenning out there.

Also the core of IMPACT members' are in areas of the Public Sector wide open to contracting out. They are in admin roles in the Local Authorities and Health Service, not of course to forget their binmen members. Their role within the Civil Service is now restricted to a very small number of prof. grades, who would be happy to leave and join a union more closely aligned to their interests.

This is a very important fight for IMPACT, however I feel a slight smile breaking out on my face as that most FF of unions will be carved apart by their erstwhile friends.

[Niall]

"do shareholders have the right to overturn the decisions of their executive management if they feel it is not a good commercial decision?"

The problem is assuming that all shareholders share the same viewpoint. I am sure there are plenty of Aer Lingus shareholders who are in favour of the Belfast move because they believe it will increase their share price. That is why they bought shares and entrusted management to act on their behalf in the first place.

Ordinarily people buy shares in a private company under the assumption that management will work to maximise profit. The problem in the current situation is that the Govt and Ryanair have bigger agendas than your ordinary shareholder, so there is unlikely to be consensus on what is the best commercial decision in this regard.

A commentor on Dublin Opinion's post on this topic made the astute argument that it may well be illegal for some shareholders, even a majority, to attempt to overturn a decision for political reasons if it was widely known this would affect the shareprice. If Ryanair and the Govt worked to reverse the decision it could leave them and Aer Lingus liable for the lost earnings of other shareholders.

One thing that has been clarified from all this is the futility of the State trying to retain some influence over a private company by buying shares in it.