A comparison of Hitler Youth and the modern education system

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"He alone, who owns the youth, gains the Future!"

By Alex Carr

Education during the Nazi period in Germany displays some similarities to the modern western education system despite having different long term goals. While Germany was trying to create barbaric conformists the modern education system tries to create submissive conformists to serve the purposes of society. Both education systems manage to do this from trying to mould children from a young age to turn them into "human puppets, not independent thinkers" (Kjos, 001). In doing this many people can feel alienated from society at a young age that could have lead to imprisonment or execution within the Germany population where now it can lead to a life of poverty or imprisonment.

Education is the modern method by which a society hands down characteristics of one generation to the next including its knowledge, culture and values while each individual child develops physically, mentally, emotionally, morally, and socially. "Women and men of color, white women, and the working class and underclass have been absent from the center of analysis, research, theory, and the curriculum" (Flick, 000) meaning that the modern curriculum is intended mainly for the white middle class, especially males. With the modern educations standards a similar curriculum is given to children through out the western world resulting in very little flexibility for the individual student. This results in nations of children being educated with the same knowledge, culture and values because the success of a student is often measured by their ability to accept these common qualities because "the more enthusiastic they get, the easier are the exams" (Kjos, 001).

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Education played a very important part in Nazi Germany in trying to cultivate a loyal following for Hitler and the Nazis. "The Nazis were aware that education would create loyal Nazis by the time they reached adulthood" Unknown, 00, Nazi Germany…). The Hitler Youth had been created for after school activities and schools were to play a critical part in developing a loyal following for Hitler with "indoctrination and the use of propaganda were to be a common practice in Nazi schools and the education system" (Unknown, 00, Nazi Germany…). Propaganda and indoctrination being the two foundations of Nazi education is no secret. Hitlers goal was National Socialism, a fascist state that would subdue and rule the world. "Jewish children were banned from the schools." (Unknown, 1, Nazis and…) Since Jewish children were banned from attending school it further isolated them from society and many of them eventually ended up in prison camps or executed.

The Nazi education during World War had completely different motives to those of the current education system. The Nazi regime wanted its youth to continue on the ideologies and beliefs to further its battle for a superior race while the modern education still does the same except the modern society now has different values. The Nazis shaped children's minds to be "brutal, domineering, fearless and cruel" (Hitler, 1) whereas the modern education system teaches the adolescence of today to be materialistic, conforming and submissive. The reason for the differences is the variation in belief of utopia, Nazis believed the key to a superior society was through wiping out so called weaker races while modern society believes the key to a superior society is through wiping out so called weaker ideologies. The dominant ideology in western society closely reflects the values of white, middle class because this is the class that makes up a large percentage of the western world. The common ideology that is enforced today is that a person's success can be measured by comparing themselves to another often comparing the amount of money and power of an individual. "Most advanced industrial societies today are extremely capitalist." (Bottomore, 11)

With Hitler learning his lessons from Soviet revolutionaries, he knew that only "cloaked promises and misleading visions could win the support of the unsuspecting masses and build a compliant army of young radicals" (Kjos, 001). Although modern society's educational and political leaders still stoop to the same low standard but this time it has remained hidden from the general public. In the Nazis establishment fight for what they believed would be a perfect race they used a number of strategies including propaganda, controlling information, creating the Jews as a scapegoat and crushing all the opposition not just physically but mentally. The same methods are still being used today as children at school "are subjected to relentless political propaganda, develop the habit of deferring to government authority and are alienated from the adult world."(Rockwell, 001) Instead of using a race as a scapegoat the education system now uses poverty, refugees and welfare recipients and this is achieved by associating refugees and welfare with poverty and then in turn associating poverty with crime, violence, drugs and depression.

Although the techniques used for discrediting the opposition's beliefs might not be as obvious as it was during the Nazi regime they are still there. During the Nazi period all teachers had to be inspected by local Nazi officials. Any teacher considered disloyal was sacked immediately. All teachers had to be careful about what they said as children were encouraged to inform the authorities if a teacher said something that did not fit in with the Nazis curriculum for schools. Teachers in the modern education system are still told they are not allowed to articulate their personal opinions in a classroom and "opposing the school system's official moral or political stance is almost the only thing a teacher can do to get fired" (Edmonds, 001, Public Educators…). Despite many teachers being able to see the problems with modern education the only option they have is to quit or to conform. "I taught in a government school for 5 years. Ive since asked forgiveness from many friends and neighbors and promise never to do it again" (Perry, 001). Suppressing teachers is the first step in controlling the education of young children because with out teachers support the task of imposing common values to the masses would be almost impossible.

The next step is to be able to turn the students into conformists, once the students have learnt to conform it is easier to enforce certain values and beliefs onto children. There are a number of methods that both the Nazi's and the modern education system have used to encourage children to kowtow. For example both modern schools and Hitler Youth enforced children to wear uniforms to give students not just a feeling of fitting in but belonging to the system. "Encourages identification with the school and promotes school spirit" (Q.D.E, 00, Moranbah…, p8). As well as controlling the clothes worn by children both education systems would restrict different aspects of personal appearance including jewelry, piercing's, presentation and "hair should not be brightly dyed or coloured" (Q.D.E, 00, Moranbah…, p8). The purpose for restricting children's appearance is to enforce the children as conformists instead of giving them the opportunity to be individuals. Another method of turning children into conformists is to threaten them from a young age with punishments for rebelling against authority. The punishments of Nazi Germany would have been very physical compared to those of modern times, the superior members of Hitler Youth were known to bash those that disobeyed orders. If further disobedience occurred that child would be seen as traitor and be sent to juvenile detention centers were regular atrocities would occur. In the modern education system if a child disobeys an authority figure within the education system they are likely to face embarrassment among there peers, detention or if there is regular disobedience a suspension thus excluding and alienating them.

With so many children being forced to attend such a strict education system during both the Nazi period and today there was a large number of children who did not fit in and were eventually turned into the outcasts of society. Once these children have been alienated from society they soon lost all respect for the culture around them and no longer felt compelled to obey the rules or to fit in. In modern times these people often fall out of school and drop into a life of crime, drugs or isolation. While those already alienated from society for example Jewish, Gypsy or handicapped children were often executed "more than 1. million Jewish children, tens of thousands of Gypsy children and thousands of institutionalized handicapped children who were murdered under Nazi rule in Germany and occupied Europe." (Bülow, 00) While the Aryan children alienated from the Nazi education system were lead to a life of crime and gangs. From 18 the authorities became increasingly concerned about the attitudes and activities of gangs of working class youths who were collectively known as Edelweiss Pirates. "Although most Pirates had no explicit political principles, their everyday experience of encounters with National Socialist authority and regimented work and leisure led them into conflict with the Nazis and into anti-Nazi activity" (Selvaggio, 001). They participated in a number of anti-Nazi activities including non-attendance from work and school, graffiti, illegal leaflets, arguing with authority figures, industrial sabotage and physical violence against the Nazi Youth. "With slogans such as 'Down with Hitler', 'The OKW (military high command) is lying', 'medals for murder' and 'Down with Nazi brutality' etc. However often these inscriptions are removed, within a few days new ones appear on the walls again." (Selvaggio, 001). Apart from the instigators the Nazis did not execute large numbers of German youths involved in or sympathetic to the Pirates in the way they executed Jews and Poles. This was partly because the Pirates were "potential workers in armament factories and future soldiers as well as National Socialist ideological concepts such as the healthy stock of German youth is likely to have also played a part in the state's response" (Selvaggio, 001). Although what must be remembered is that these people who failed to fit into the education system are not all criminals or loners. The education system has failed some of the greatest minds in the world for example Albert Einstein and Edgar Allen Poe were both expelled from school and Thomas Edison was the bottom of all his classes. Although for the majority of children the education achieved its goals.

The Nazi and modern education both reproduce model citizens for the different types of society. The main qualities that can be seen in both systems are the inability of students to question what is around them and their ability to just accept their surroundings. The main difference between the children of modern and Nazi education is loyalty, children of today display very little loyalty to their government or community around them while the German children displayed an extreme loyalty not only to its country but to its beliefs and values. "Children were exhorted in school to denounce even their own parents for derogatory remarks about Hitler or Nazi ideology," (Wittenstein, 00) The main reason for the difference in loyalty is that while the Nazis turned their children into passionately patriotic people the modern education system turns their students into cold, aphetic people that have trouble thinking independently. It is not viable to compare the resulting adults from both education systems because of the repute of the Nazi's beliefs and values held in modern society. To truly determine the better education system we would have to ignore the beliefs and values of these children as the merit of an education should not be measured by the beliefs of the children but instead of how well they develop physically, mentally, emotionally, morally and socially.

The modern western education system uses similar techniques of those used in the Germany education system during the Nazi period. In both societies the education system has been used to pass down their knowledge, culture and values to the next generation. Using such techniques as propaganda, discrediting opposition, creating scapegoats and turning children into followers has come at the expense of many as thousands of people are eventually alienated from society. Despite using similar techniques the two education systems teach different values and culture to their children and it is these qualities of an education system that make it impossible to determine a superior education. Although in modern times it might be easier to stand up for what you believe in it does not mean that anyone will listen.

Llewellyn H. Rockwell, Jr. (001) Bush's Education Plan, http//www.lewrockwell.com/rockwell/busheducation.html.

Perry, Greg (001) Compulsory Government Education, By What Standard?, http//www.lewrockwell.com/orig/perry4.html.

De Coster, Karen (00) Why We Are Not Free, http//www.lewrockwell.com/decoster/decoster65.html.

Behrendt, Edward (17) Hitler Youth,

http//youth.net/memories/hypermail/0554.html.

Edmonds, Brad (001) Public Schools = Hitler Youth?, http//www.lewrockwell.com/edmonds/edmonds5.html.

Wagner, Christopher (001)The Hitler Youth Movement Resource Page,

http//militaryhistory.about.com/library/blhitleryouth.htm?once=true&.

Edmonds, Brad (001) Public Educators Speak for Themselves,

http//www.lewrockwell.com/orig/edmunds7.html.

Queensland Department of Education (00) Education (General Provisions) Act 18,

http//eleanor.sparks.to/homeschool/eqreview/legislation/qldedact18.pdf.

Selvaggio, Terra (001) Eternal War on Hitler Youth,

http//www.geocities.com/kk_abacus/vbutterfly.html.

Billings, John (18) Modern Society, the Media and Imposed Ideologies,

http//www.billings-ovulation-method.org.au/act/reprod_health/whealth.shtml.

Kjos, Berit (001) The Nazi Model For Outcome-Based Education,

http//www.crossroad.to/text/articles/tnmfobe116.html.

Unknown (00) Nazi Germany and Education,

http//www.historylearningsite.co.uk/Nazis_Education.htm.

'Education, History of,' (15)Microsoft Encarta. CD ROM.

Queensland Department of Education (00) Moranbah State High School, Student Handbook and Diary, Government Printer, Brisbane.

Unknown (1) Nazis and Youth, Church and Opposition,

http//www.ellonacademy.org.uk/history/Standard_Grade_pages/nazis_and_youth.htm

Flick, Deborah (000) Developing and Teaching an Inclusive Curriculum,

http//www.colorado.edu/ftep/diversity/div0.html

Bottomore, Tom (11) Classes in Modern Society,

http//www.socsci.mcmaster.ca/soc/courses/socr/botomore.htm

Bülow, Louis (00) The Holocaust, http//www.auschwitz.dk/docu/Faq.htm

Wittenstein, George J. (00) Memories of the White Rose,

http//news.asmarino.com/RipplesAndRiddlesOfMemmory/Articles/0801_.asp

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Artistic inspiration

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No matter the discipline, artists find inspiration in a variety of ways. An artists imagination and emotional state play a vital role in the creative process. Artists also use their environment and religious influences to inspire new creations. Finally, one may be forcibly inspired by artistic patronage.

An artists imagination makes an impact on their work. New, unknown images, words, and sounds are formed to create unique masterpieces. Similarly, ones emotional and mental state can pay a pivotal role. For example, Pablo Picasso was known to have dramatic mood changes, swinging from extreme highs to extreme lows. This disorder influenced his rose and blue periods.

An artists environment also contributes to their art. For example a musician or painter may write or paint about things that are native to their surroundings such as an event or seasons.

Religious standings often played a major role for artists, especially in medieval times. The church ruled and artists made sacred music and art which would be used in religious services.

Finally, an artists may be inspired because they are paid to. The patronage system was very popular, especially in the Renaissance and Classicism eras. Often the church or a wealthy family would hire a musician or painter to be at their disposal. A well known story of a commissioned artist was that of Leonardo da Vinci. Leonardo was hired to paint a married woman, later identified as the Mona Lisa. After painting her picture it was said that da Vinci loved it so much that he often carried it around with him. Although da Vinci was not personally inspired to paint her picture, it remains one of his most famous pieces of artwork.

Please note that this sample paper on Artistic inspiration is for your review only. In order to eliminate any of the plagiarism issues, it is highly recommended that you do not use it for you own writing purposes. In case you experience difficulties with writing a well structured and accurately composed paper on Artistic inspiration, we are here to assist you. Your cheap custom college paper on Artistic inspiration will be written from scratch, so you do not have to worry about its originality.

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Creating wealth: The Afgri example.

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Executive summary

This article focuses on shareholder wealth creating in companies. This is a very broad focus and is therefore reduced to several key terms with the example of Afgri in an agricultural environment. The business community is more and more focussing on profits. This tendency is been highlighted by Afgri's profits and growing share prices in contrast with Senwes where shareholders are irritable about their company. The King Report on corporate governance has highlighted several aspects in this regard and is it also covered in this article.

This view has opened the debate about shareholder wealth creation and ownership in agri-businesses. The purpose of this article is to set a benchmark for the use of agri-businesses to stay current in an ever changing and highly competitive environment.

0TK (Afgri) was established in 1 as an agricultural co-op and converted into a public company in 16. With a strong balance sheet and large cash reserves Afgri was a sure target for a takeover. A new business vision was employed after Brait and Allen Gray gained majority control in 001/0. The company was shedding no performing noncore assets, like its cotton, meat and egg businesses and also sold its debtors book. The cash freed by the restructuring was pumped into a special dividend of R a share.

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Key terms to be investigated include the following

o Capital structure This article raises the point that the changing capital structure of Afgri has lead to increasing profitability from an equity viewpoint. Although terms like WACC (weighted average cost of capital) has become common language in Afgri the board still seems not working enough towards a targeted capital structure that would result in further shareholder wealth creation. The current debt (long term debt)/equity ratio is 1.85%

o AC1 The accounting standard AC1 is discussed under performance measurement, although it's a standard in performance reporting. The issue of including or excluding several items on the financial statements is currently very controversial. In lining up with GAAP (general accepted accounting practices) and specific AC1, Afgri shows a declining book profit that would be traumatic in the eyes of financial analyst. The focus must still fall on cash flow returns, irrelevant of accounting practices

o EPS versus EVA Afgri follows a dual objective of EPS and EVA. The concern that EPS (earnings per share) will distract Afgri from sustainable wealth creation is expressed. EVA (economic value adding) on the other hand is a measurement working towards increasing profitability in relation to capital on a sustainable basis. Using EVA as an ultimate measure could also be dangerous and should it be used with other objectives

Contents

Executive summary……………………………………………

1. Problem statement…………………………………………. 4

. Industry review……………………………………………… 4

.1 Changes from co-operatives to companies…………………………. 4

. Changes in the economy………………………………………………. 5

. Structural changes……………………………………………………… 5

.4 World wide agricultural tendencies……………….………………….. 5

. Literature review and best practices……………………... 5

.1 Capital structure………………………………………………………… 5

. EVA and EPS…………………………………………………………… 7

. Corporate governance………………………………………………… 8

.4 Market strategies………………………………………………………. 10

.4 Financial performances………………………………………………. 10

4. Evaluating changes over the last years………………… 11

5. Critical evaluation of performance measurements……. 1

5.1 CA1………………………………………………………………… 1

5. EPS versus EVA……………………………………………………… 1

6. Corporate governance…………………………………… 14

7. Solutions for sustainable wealth creation……………… 16

7.1 New strategies………………………………………………………… 16

7. Sustainable wealth creation in corporate governance……………. 17

8. References………………………………………………… 1

. Appendices…………………………………………………

Table 1 EVA……………………………………………………………

Table Financial Statistics Afgri………………………………… 4

Problem statement

Statement 1 Afgri promises to shareholders state that they will maintain grow in earnings per share above inflation (OTKaner, 00). How do this statement comply with the EVA model which is also been promoted by them in the same article? The working paper will discuss the assumption that the management tries to manipulate two conflicting measures to reach their target of shareholder wealth. What was the factors that contributed to their success as been presented in the latest financials?

Statement The changes in the capital structure have most probably contributed very positive on the success of Afgri and did they lower their business risk. This paper will discuss the effect of changes to optimal capital structure, keeping in mind the risk associated with the agricultural environment. The steps to change capital structure will be viewed like buy back of shares, dealing with cash reserves previously held and their ideal debt ratio

Statement Afgri are complying with the accounting standard RE1 (OTKaner, 00) even though uncertainty is been noticed in the dealing with aspects like debtors, assets and stock. The term been problematic is "on or off the balance sheet". This paper will deal with contemporary views on this aspect.

Statement 4 The code on corporate governance puts pressure on company's to act on the best interest of shareholders. Afgri's main shareholder is Allen Grey with 8% interest, which represent institutional shareholders. The pressure by certain shareholders is not always in favour of all shareholders. Aspects to be highlighted in this section will fall on the independency and skills of the board in compliance with the second King report.

Industry review

Changes from co-operatives to companies

The business community in SA is more and more focussed on the profits. Competition will increase in coming years with more words like take over, new alliances and rivalry outside traditional trading areas. Producers of inputs and financial institutions are also entering the field in financing, grain trading and supplying their product to the end user. This was traditionally the terrain of agri-co-operatives.

This threat in competition could lead to the result that traditional agri co-operatives will be left with a client basis loyal to them on grounds of the credit facility's been granted to them. Another conflict lies in the fact that shareholders and clients are the same people. The clients of traditional co-operatives wants good service in contrast with shareholders who would like profits through service to clients who wish to pay for service because of the value it would add to their business.

Most of the agri cooperatives has changed to listed companies and is it now the board's task to see after the well being of their shareholders in contrast with the view of "service" of traditional co-operatives. The terrible performance of companies like Senwes has lead to shareholder activism. This could lead to similar actions in other companies and should board members look into the performance of their companies. New-generation agricultural services companies should be based on sustainable wealth creation and the kind of customer service not previously available to this market segment. (Willemse, 00)

While the old-style co-operative served a vital purpose in meeting farmers needs in a highly regulated environment, agriculture had become far more challenging and competitive, requiring a clear business focus, backed by scientific farming methods. (Ebedes, 00)

Changes in the economy

Globalisations will also lead to several changes in the local economy like the distortion in the macro economy, market liberalisation, structural changes in local businesses and the consequence of innovation on local markets

Structural changes

o The sector composition has changed from a production economy to a service economy.

o The demand for schooled workers has increased.

o Changes in technology has lead to higher capital requirements per worker and increased productivity per worker

World wide agricultural tendencies

One of the important qualities of globalisation is the change in business activities and focus from local commitment to international involvement. The lowering of import tariffs has left farmers and agri-companies to the unfriendly environment of international competition

A characteristic of globalisation is that the production focus has shift to a consumer focus. Consumers choices is far more reaching in an open economy and are they also far more fastidiousness.

Another paradox of globalisation is the establishment of powerful trading blocks. This, together with government subsidies to protect local business in most of the western world makes the marketplace very unfair. These subsidies distort open trading relationships and do they penalize developing economies.

Literature review and best practices

Capital structure

Williamson and Francis (001) asked the question why optimal capital structure matters. The short answer is that companies failing to maximize shareholder value for years by being under-leveraged and then, in a frenzy of activity designed to address the lazy balance sheet, rapidly became over-leveraged and so destroyed even more value.

They set some rules for firms in keeping the optimal capital structure

o Minimizes the average cost of capital (inclusive of hedging activities).

o Maintains adequate liquidity at all times (not only in reality but also in the perception of major investors and the broader stakeholder community).

o Ensures adequate flexibility to finance value-enhancing investments required by the corporate strategy. These are principally acquisitions and other large capital expenditures.

The overall effect of financing and risk management activities is to create an equity risk that is trading in a manner consistent with the corporate strategy or equity story communicated by management.

It is well known that companies must operate in an optimum capital structure. Most companies reach their optimal capital structure through the use of target debt ratios (Graham & Harvey. 00). In setting target debt ratios companies tend to range from flexible targets to rather set targets. Larger companies are likely to have target ratios. The target level of debt ratios is influenced by the ability of companies to cover interest cost as well as the desire to maintain credit ratings and provide adequate reserve for future financing.

The most important consideration in corporate debt policy is financial flexibility or unused debt capacity.

o Finance future expansion

o Earnings and cash flow volatility

o Using corporate tax advantages

Graham and Harvey also find that earnings per share dilution is the most important factor influencing the issuance of equity, while EPS should not be diluted if the company earns the required return on the new equity. It is interesting to know that CEO's with a MBA find EPS dilution less important.

Another way of looking at capital structure is the equity for debt swap and convertible debt. In investing in new projects the equity for debt swap can increase profitability when payoffs with a positive NPV adds to shareholder and creditor value. Equity for debt swaps precedes management's investment decision. Convertible debt on the other hand is the process of changing the capital structure after the initial investment according to the firm's investment strategy like the conversion of debt into common shares. Isagawa (00) uses this theory in explaining the situation where a manager is prevented from investing in a project causing financial distress and to resolve the over- or under investment tendency. Isagawa argue that managers would not undertake unprofitable projects, as without conversion the cost of straight debt will prevent management from undertaking unprofitable projects. This study lacks in the sense that it did not explain the cost of equity and debt in relation with each other.

A major finding of a study (Mankin & Chakrabarti. 00) states that companies with more conservative capital structures incorporating lower amounts of debt should have a larger cushion to survive in periods of economic suffering although no clear reason exist to suppose that conservative capital structures would correlate with better financial performance. Traditional theories of optimal capital structures take cost of capital, tax advantages of debt financing, volatility, risk and financial distress in account

EVA and EPS

Economic value added (EVA) and market value added (MVA) are measures of company performance that are designed to encourage managers to focus on shareholder wealth creation. Eva is a trademark of Stern Steward Consulting Group, but is the application of the idea not new. GE used the idea called "residual income" in 155, which is operating income less a capital charge (Chew, 00116)

The formula of Eva is

EVA = NOPAT (C total capital)

Nopat and total capital employed must be adjusted to more accurately reflect the cash return earned and the true capital base from which return was generated.

C (cost of capital) represents the minimum rate of return that a company must earn to avoid reduction in capital charge.

Firms with a positive EVA should also experience a growing MVA as MVA represents current market value less its book value

Like all financial measure's EVA has its limitations. By implementing EVA firms must use it as a integrated tool with other financial an non-financial measures to commit top management as well as employees to value creation. Further, EVA holds managers accountable for their investments wherever a company calculates its profit and loss (Woods. 16) (see appendices for benefits and problems regarding EVA)

According Ehrbar (18) the first thing a company should do in pursuit of a higher MVA (Market Value Added) is to abandon the cult for EPS (earnings per share)

Ehrbar claims that investors are beyond the point of caring just about the last quarterly earnings releases. The presumption that companies can manipulate their stock prices by manufacturing earnings numbers is hubris at best and leads to dishonesty.

Those who manage for higher earnings per share are relying on what is known as the "accounting" model of stock valuation. Prophets of the EVA system argument as follow (Ehrbar. 18)

o EPS can be manipulated by accounting practices. EPS does not provide a clear understanding of variables that drive value, such as operating margins, cost of capital and competitive advantage period.

o The EVA methodology addresses business and financial risk and allow the investor to gauge the magnitude and sustainability of returns. EVA also examines the three fundamental principals of value creation cash flow, risk and sustainability of returns.

Corporate governance

King Report on Corporate Governance

The King Report on Corporate Governance for SA 00 (second King report) emphasise that certain measure must be in place to ensure sound corporate governance and that such measure must be self regulatory. The report also emphasises that the most important part in the corporate system are shareholders represented by institutional managers who are stewards of the public, whose funds are invested.

Some aspects of the report are

Triple bottom line

Companies should over and above the traditional financial reporting also be reporting on their social, economic and environmental practices.

Firms like Sasol and Eskom have already issued separate reports on non-financial issues.

The JSE is also working on a new index to be used as a benchmark for investors to measure a firms performance on a corporate social responsibility level. The move is in line with recommendations in the King report.

According to Mervyn King institutional investors want measurements that will enable them to draw their own conclusions about sustainability. He said that sustainability could be measured then non-financial aspects such as human resources, your technology today, e-commerce, the environment in which youre operating are been assessed. (Mervyn King interview, Africa News Service, 00)

Accounting policies of companies and financial reporting standards

Mervyn King also stated that reporting, through accounting principals, as it's been known today really failed to communicate essential information to the various stakeholders. What's been develop is called value accounting where a company actually report on important matters like strategy, the organisation of the company, technology, environmental factors and measurements such as debt/equity ratios. Legislation is pending to give legal backing to accounting standards. This will enable the Financial Services Board to act against firms whose financial statements do not meet standards. The JSE recently formed a panel to assess complaints about whether financial statements are in compliance with standards. The bourse is expected to require listed companies to use international accounting standards by 005 instead of SA standards. A white paper was recently published proposing that public sector enterprises must also comply with the King code.

The role of directors

The king report is aimed at aligning the interests of directors with shareholders to ensure that care and skill is applied in doing their duties. The corporate governance code recommends that companies should disclose their director's remuneration and is it already a requirement for all listed companies. The aligning of remuneration should be more in line with corporate performance than the sensational reporting of it in the media.

The code also seeks to do away with the old boys club of directorships". (Mabanga, Africa News Service, 00) The code calls for establishment of a board charter, setting out minimum acceptable levels of attendance and delegation of powers, as well as issues like retirement age, if the board wishes. The code also demands a full disclosure of directors attendance and a rigorous appraisal of the board, its chairperson, and the CEO and Company secretary with outside help where necessary. The code recommends that boards should include executive and non-executive directors, as in the past, but should also have independent non-executive directors. The independent directors should have no direct or indirect financial interest in the business, no association with the companys main suppliers or customers and should not have been employed by the company in the previous three years. (Africa News Service, 00)

The compliance of SA businesses

The recommendations of the King report on corporate governance have been endorsed by the findings of a private survey of SA-listed companies. Corporate Footprint conducted the survey; a research company established by Frater Asset Management, which had a 45% response to a questionnaire sent to 54 SA-listed firms.

Findings of the research are summarised as follow.

· Many firms are taking steps to improve their corporate citizenship, but have a considerable way to go to improving disclosure and realising the gains be made by addressing investor concerns

· The areas that scored lowest in the survey are those related to directorships, remuneration practices and related party transactions and broadly correspond with the revised focus of the report

· A number of respondents expressed concern over the disclosure of information, and many only agreed to participate if the full rankings were not publicised

· Several high-profile companies state they do not seek shareholder approval before implementing share option schemes for non-executive directors

· Most companies would not consider restraining director earnings in the face of company wide retrenchments. Most companies do, however, state that it is policy to limit director earnings when their bottom lines are under pressure

· Just 10% of the respondents had policies limiting the number of external directorships taken on by executive board members, and none required its directors to write the exams offered by the Institute of Directors

· The company with the top score overall including corporate governance practices, social responsibility and environmental management was SA Breweries with 86%, followed by Stanbic and Old Mutual. The average score was 68% and the lowest 4%.

· Governance scored the highest among the respondents on average, with board and committee structures, stated compliance with codes, internal ethical practices and risk management receiving most attention

· Environmental management was accorded the least emphasis of

the three main areas of corporate citizenship, with an average performance of slightly more than 0%, the survey showed there was a high degree of social awareness, with employment equity and empowerment issues a priority with most companies.

· All respondents were addressing the HIV/AIDS issue among employees by interventions like awareness programmes.

(Marrs D, 00)

Market strategies

A study been done by Nienaber, Cant and Strydom (000) found that similar firms, faced with a similar situation and seemingly applying similar market strategies may achieve very different degrees of success. The study found that the market strategy applied by the firms in question complied with the principles of market strategy, to varying degrees. The firms that adhered to these principles to a greater degree appear to have been more successful than others. It appears that the less successful firms neglected the principle of 'sustainable competitive advantage'. It was concluded that adherence to the principles of a sound market strategy could lead to improved performance.

Although the study was been done on poultry firms some interesting finding was concluded

o Change in management returned improved results

o Restructure, move head office - improved earnings

o Restructure, sell loss making subsidiaries improved results

Financial performances

A study was done on the top 100 co-operatives in the USA by David Chesnick (1) who found that financial performances declined because of lower agricultural product prices. South Africa is currently in the same position regarding product prices after declining exchange rates affecting grain and meat prices. The reasons for declining performances and solutions to gain competitiveness is presented shortly

o Operating expenses increased more than gross margins (especially labour expenses)

o Lower interest made debt financing more attractive and did debt levels increase.

o Companies with diversified income was in some cases profitable owing to unconsolidated subsidiaries

o Equity has climb, but is overshadowed by dept

o Activity ratios points to decreasing efficiency in the use of assets to generate profits

o Since traditional equity finance relies on net margins co-operatives are increasingly turning to outside capital to fund their operations

o Without outside capital it will be difficult for agri companies to fund expansion

o With no expansion it will be difficult to increase efficiencies in their operations and thus cut into future net margins

o Co-operatives must balance their need for capital with the need for investment

o Mergers, consolidations and joint ventures are other ways co-operatives is trying to streamline operations

Evaluating changes over the last years

Considerable progress was made in extending the groups footprint into new markets and territories. The name of the company was changed from OTK Holdings to AFGRI. The new name, and new corporate identity, reflects Afgris ongoing transformation from a regional agricultural co-operative to a global, world-class agricultural services business. Notwithstanding that lower agri-commodity prices, mainly as a result of the stronger rand, will have an adverse effect on certain areas of its business, the groups diversification, recent acquisitions and geographical expansion, together with further improved operational and procurement efficiencies should ensure that it achieves its financial targets for the year ahead. Several changes to the structure in Afgri were made since the new management took control.

Balance sheet

o Selling of interest bearing debtors to Landbank, but did they keep the management over the debtors book

o Selling of hire-purchase book to Wesbank but did they keep management over the book

o Agreement with ABSA and RMB to purchase stock and to store and market the stock

o Cash obtained from selling debtors was used to pay a special dividend of R.45

Selling of non-profitable non-core business

o OTK Food Division to Pride Milling

o Eggbert Eggs

o OTK Red Meat Division

o Un used properties

Out contracting of internal services

o Computer services to AST

o Personnel administration to Logical Options

o Internal audit to PWC

Personnel

o Attracting top qualified people

o Bonuses based on EVA

Shifting of head office from Bethal to Bryanston

Name change from OTK to Afgri

(Goosen. D. 00)

In evaluating the changes in the capital structure of Afgri it is clear that the change from 0.4% debt to total capital to 1.81% debt to total capital has had a substantial effect on the return of shareholders funds. The capital structure is still totally under geared in comparison with a company like Tiger Brands with a debt/equity ratio of 50%. The company wants to achieve a debt/equity ratio of 0%. In a discussion with the financial director, he points out that it must be kept in mind that the debt ratio (total debt/total assets) is 8%. In changing the capital structure the company do not want a total debt ratio above 60%. The following means will be used to change the capital structure over time.

o Some short term debt will be financed over a longer term

o New acquisitions will be financed with debt

(Goosen, D. 00)

The change in cash reserves is very prominent, when observing the net interest paid from 1 to 00. The operating margin is relatively constant over the period under review, but show profitability in terms of shareholder funds an upward trend.

Critical evaluation of performance measurements

CA1

The JSE Securities Exchange has approved substantial amendments to its listing rules that will require all companies listed on the exchange to comply with International Financial Reporting Standards (IFRS) for years commencing on or after 1 January 005. Previously, a company whose primary listing is on the JSE could elect to comply with either South African Statements of Generally Accepted Accounting Practices (SA GAAP) or IFRS.

Under the amended JSE rules, a JSE GAAP Monitoring Panel will have the authority to sanction listed companies for non-compliance with either SA GAAP or IFRS

The accounting standard with the most dramatic impact on Afgri is AC1. This accounting standard deals with the methods on the valuation of financial instruments. The implication of AC1 is the question of whether certain items must be included in the balance sheet or not. (On or Off the Balance Statement)

In the case of Afgri the previous year's profits has been over stated by R111milion. (Goosen, D. 00) The accounting standard rules that no adjustment can be done to previous profits and must they now adjust accumulated profit (equity). As disclosed in the announcement to shareholders dated 18 September 00, Afgri restated its figures for the interim period to 1 August 00 to reflect the changes made to account for the impact of AC1 and AC11 (dealing with the reclassification of foreign subsidiaries). EPS and HEPS figures for this period were restated at 16,c (previously reported 7,4c) and net tangible asset value per share at 40,7c (previously reported 44,c). This restatement also took into account the impact of the losses incurred by the groups Trading Division during this period. (www.otk.co.za. 00)

The two factors that designate whether a company can release certain items from their balance sheet are risk and reward. Afgri has sold their debtors book, but do they carry some of the risk concerning these debtors. In an attempt to solve this problem Afgri has agree on an administration and management contract with the Landbank to administrate the debtors for a fee of 1.5% (prime rate). Another solution would be the inclusion of the amount in the balance statement in relation to the risk or reward factor.

EPS versus EVA

In an question put to Jeff Wright (00) (Deputy Managing Director Afgri) that the EPS measurement should be dumped, as this measurement is in conflict with EVA, he states that this is not the only measure in Afgri and that every person is been rewarded on the EVA system.

According several news clips Agri's Graham Ebedes and Jeff Wright are firm believers in the principle of EVA and sustainable wealth creation for shareholders. One of the first things on Ebedes and Wrights agenda when they joined the company was to strip out under performing businesses OTKs maize milling, red meat and egg businesses were sold. The business model was changed and the debtor's book was sold to the Land Bank. An R.45c special dividend was repaid to shareholders in 001. (Ryan, E. 00)

In contrast with EVA, Afrgri also sets an EPS. objective of delivering a 15 to 0% growth in earnings per share. In an article by Ciarian Ryan (00) the consequences of an EPS methodology are exposed. EPS remains the performance measure most readily accepted by analysts, notwithstanding its capacity to obscure true operating performance. "Many are now challenging the primacy of the earnings approach. Not only do EPS distort reality, but the calculation is also easily manipulated by senior executives whose bonuses may be tied to earnings improvement, say Joel Stern and John Shiely in their book The EVA Challenge. After the collapse of Enron, WorldCom and other Wall Street icons, the accounting profession is in the dock. Shareholders want the true picture of financial performance, not artistic renditions."

In the same article (Ryan, C. 00) the benefits of the EVA model is given and do it also mention Afgri's efforts to apply EVA

o One of the most commonly cited examples of excellent working-capital management is Pick n Pay, which for the year to February 00 generated sales of R6bn, with stock of about R1,5bn. This means it turns its stock over 17,4 times/year.

o There is a surprisingly strong correlation between EVA creation and share-price performance. Companies that fail to earn above this weighted average cost of capital destroy value for shareholders. EVA imposes tight disciplines on business operators by forcing them to fix or exit those businesses that destroy value.

o Afgri employed the EVA methodology. The group had transformed from an agricultural co-operative to an agricultural-services firm. New management found considerable waste

o Afgris results over three years show debtors have dropped to R00m in the year to February 00 from R1,7bn in 001, while net cash has grown to R46m from Rm two years ago

It is important to bear in mind that EVA, like all financial measures, has its limitations. On its own, it is not a complete performance measure and will not prevent managers from engaging in dysfunctional behaviour. However, steps can be taken to minimise these shortcomings by supplementing EVA with other measures, typically non-financial, and by tying incentive pay to group performance. In addition, companies considering implementing EVA must also realise that it is not a cheap, short-term initiative, but one that requires total commitment from top management and a willingness on their part to empower lower level managers and employees. (Woods. 16)

Corporate governance

Brait has identified OTK (Afgri) as a proposition and did they target the company through a hostile take over. The two institutions Brait and Allan Grey's intervention in September 000 resulted in a board reshuffle to include their own representatives, and the appointment of a new MD and deputy MD.

It is seldom SA investor companies reshuffle boardrooms, unlike the US model where investors play a greater role in appointing the company executives. The new constitution of the company has lead to restructuring and was followed by a special dividend (R4.80) share price after the debtor book was sold to Landbank.

The current board is representative of Afgri's institutional shareholders and include Francois van der Merwe of Allen Gray and till lately Mervyn King of Brait who is also known for the King report on Corporate Governance.

On questioning Graham Ebedes (00) the MD of Afgri on the independence of board members, he denied the existence of pressure from institutional shareholders, but admit that board members could not be totally independent and did he include farmers who is still part of Afgri's board. The largest shareholder, Allen Gray is a value investor with no intention to invest in companies with short-term results. Ebedes also states that an open line of communication exist between the board and main investors in the company.

Afgri is one of the 1 finalists in the Board Effectiveness category of the Deloitte & Touch Corporate Governance Awards. Added to that, Allan Gray's Simon Marais recommends that investors put their money into the stock, which he believes will provide "safe, stable income, a high income yield, and clean accounts, good cash flow." The "new look" Afgri emerged from what the chairman of Afgri, Pietman Erasmus terms as a hostile takeover by Brait. He said that immediately after the takeover, there was some negative sentiment towards the Brait directors who joined the board, but they realised that they (Brait) are very good businessmen and that they are not going to break down the company by stripping the assets." Looking back, Erasmus adds that "shareholders have reason to be very satisfied with what happened in OTK." (Kemp. S. 00)

Positive aspects in Corporate Governance

o The board supported transformation of the company as it recognised the value of the customers and shareholders. Four "farmer directors" on the board shows the commitment to the client base and minority shareholding

o Of those on the board, three are executives and ten are non-executives, falling in line with King II's recommendations for a larger portion of non-executive directors.

o Till lately one of the group's board members was chairman of the South African Corporate Governance committee, Mervyn King.

o Normal board meetings are held once a quarter, and special board meetings are held when necessary - usually "up to about six in a year," Interaction with other members of the board is regular, (Kemp.S 00)

o Disclosure is on a high standard. The annual report, over and above the traditional financial reporting also reports on their social, economic and environmental practices. The accounting standard, AC1 is also incorporated into the system to reflect a more accurate view on the companies position

Negative aspects in Corporate Governance

o The main shareholding represent institutional shareholders. Substantial danger could arise when a majority shareholder strips a company from assets like cash reserves to maximise earnings on a short term.

o Minority shareholding combined with other shareholding can put similar thinking parties in control to change the composition of the board and direction of the company's strategy to comply with their own needs.

o The composition of the board and management is not representative in terms of the employment equity act and could this aspect lead to future costs

Solutions for sustainable wealth creation

New strategies

Jim Budzynski (000) makes the assumption that value has shifts in food and agriculture. He set three questions to achieve profitability in the ongoing revolution of business in the new world

1. Who is the real customer?

Part of the challenge the agri-food industry is facing is that the lines between these formerly distinct entities are rapidly disintegrating. In the value chain of Afgri consumers at both ends of the value chain will determine the survival of the company. This means that they must value their consumers on the production side as well as on the end user side and balance the needs of both. Afgri has declared their core business to be in agriculture (Wright. 00). The role of this declaration is however blurring as value adding activities reach beyond pure agriculture and includes services like credit granting to attract customers. With fears competition from other companies like input providers and commercial banks, customers are not set and will they either be customers on grounds of cost or differentiation advantage.

. What are consumers needs and how are they changing?

Consumers preferences will dictate what the industry can accomplish. This reasoning is clearly visible in the GMO debate as consumers dictate the market. A good example from the GMO debate is Monsanto who has put millions into genetic manipulated products, without the knowledge of consumer preferences.

Afgri has achieved competitive advantage over financial institutions in their financial services division regarding customer relationship, but will they lose it with centralisation like they do now.

. How can I create sustainable value when meeting customer needs?

Technology (Product) Leadership (TL- Innovation)

Customer Intimacy (CI -- Service)

Operational Excellence (OE -- Value)

It might be expected that companies in commodity segments such as grain handling and fertilizer tended to focus on OE (operational excellence) as the driving value discipline. Retailers tended to focus on CI (customer intimacy); and basic chemical, seed or equipment companies tended to focus on TL (technology leadership).

Afgri is involved in a differentiated spectrum of activities and need to excel at all three value disciplines in order to prosper, which is far more difficult than excelling at only one. It's apparent that a fourth value discipline is emerging that in some ways was making the first three less and less relevant.

THE FOURTH VALUE DISCIPLINE

The fourth value discipline increasingly critical to success is business design. Business design involves the ability to rapidly configure (and reconfigure) combinations of the other value disciplines in response to the rapidly changing needs of defined customers. This has turned the traditional value chain upside down, as companies start first with customers and then build channels, offerings, and competencies to meet those targeted customer needs. In a question put to Jeff Wright deputy managing director of Afgri (00) he foreseen a flatter business design enabling down stream value adding.

Yuill and Makin (001) said that to sustain success in a hyper competitive environment, companies must be willing to take risks. They claimed that businesses must reject previous business models that focused on issues such as culture, human resources, structure, objectives and strategy and also concepts such as strategic fit and strategic planning, which focus on sustaining advantages and slowing down the escalation of competition - and focusing on the following areas that provide a vision for creating the next market disruption

o Stakeholder satisfaction Afgri shares their customers with several competitors like other agri-food companies and also financial institutions and must they generate "new processes, methods and products" for serving the customer.

o Strategic soothsaying Afgri must constantly seek new knowledge in order to predict what customers will want in the future.

o Speed Taking advantage of opportunities and to respond to counterattacks by competitors.(Competitors include other agri-food companies and financial institutions)

o Surprise Building position and markets before the opposition can counter back. Afgri is involved in geographical diversification to introduce current strengths into new markets.

o Signals Announcements of strategic intent to dominate a market, and which can be used to manipulate the future moves of competitors.

o Shifting the rules which can create tremendous disruption for competitors.

o Simultaneous or sequential strategic thrusts Using several moves to mislead or confuse a competitor. Such moves could include a series of simultaneous product announcements or geographic market entries conducted in concert.

Sustainable wealth creation in corporate governance

Two major statements about wealth creation were published in October 001 in the UK; this paper uses the document of Hermes Pensions Management (Hermes) in an effort to propose solutions for Afgri. Some of these principals will be used as described by Herbert Smith (Mondaq Business Briefing. 00)

Principle 1 Communication

Companies should seek an honest, open and ongoing dialogue with shareholders. They should clearly communicate the plans they are pursuing and the likely financial and wider consequences of those plans. Ideally goals, plans and progress should be discussed in the annual report and accounts.

The King report and the JSE has proposals on including non-financial items in company's statements. It seems Afgri has done fairly well regarding this aspect and do their annual report include most of the necessary compliments. The CEO, Graham Ebedes are driving communication with stakeholders.

Principle - Measuring returns

Companies should have appropriate measures and systems in place to ensure that they know which activities and competencies contribute most to maximising shareholder value.

The worldwide trend to focus more on long-term wealth is also been introduced in SA. Long-term shareholder value is to measure performance in terms of cash flow returns. It emphasises the importance of the Weighted Average Cost of Capital (WACC) to corporate decision-making. GAAP would probably transform as contentious areas of accounting is likely to receive a large amount of publicity in the future and also to be in line with the International Accounting Standards Board (IASB). Evidence that Afgri wants to comply with accounting practices like AC 1 is visible, but do they have to do more in targeting cash flow returns looking beyond the fact whether certain items are shown on their financial statements or not. Afgri has gone far in restructuring their capital base and are results clearly visible.

Principle - Returns and growth

Companies should ensure that all investment plans have been honestly and critically tested in terms of their ability to deliver long-term shareholder value.

A definite problem of some South African companies are the attention given to short-term performance measures that may distract company managers from the goal of creating long-term shareholder value. They should understand that much of the questioning they receive from brokers and fund managers is to help them make decisions about short-term buying and selling of the companys shares; they should not let it influence the basis on which the company is run. A very good example of this issue is a measure like EPS conducted on a quarterly basis versus a measure like EVA conducted over a few years. The use of the EPS measure in Afgri is unnecessary, but must Afgri also take into account the shortcomings of a measure like EVA. This is especially true in an environment like agriculture where seasonal disruption can influence the outcome of EVA. The use of measurements must be included in a balancing score cart

Principle 4 - Growth and risk

Companies should allocate capital for investment by seeking fully and creatively to exploit opportunities for growth within their core businesses rather than seeking unrelated diversification. This is particularly true when considering acquisitive growth.

This statement of Hermes could be controversial as it's debatable whether a strategy of core business or core competencies should be followed. Risk assessment should be done when a company diversify in contrast with balancing risk by diversification. Afgri's strategy is to diversify geographical in contrast with diversification in product groups (Wright. 00). The rationale is to do business in profitable divisions with wider markets to eliminate risk in terms of local agricultural instability. The strategy concerning hedging involves acquisitions in countries with a long-term currency strongness in comparison with the rand. The rand is currently relatively strong against other currencies and would a short-term no-hedging policy be in order.

Principle 5 - Incentivising long-term performance

Companies should have performance evaluation and incentive systems designed cost-effectively to incentives managers to deliver long-term shareholder value.

The code on corporate governance states that it is more important how senior executives are compensated than how much. It is justifiable to compensate managers on the value that has been created. A measurement like EVA currently in work at Afgri would be suited for this purpose. Given the large amount of South African companies who pay their executives on an EVA system, it is likely that such measurements will gain increasing importance.

Principle 6 - Lowering the cost of capital

Companies should have an efficient capital structure which will minimise the long-term cost of capital.

Companies with large cash balances or under geared balance sheets may not be suited to maximise shareholder value. On the contrary, there are companies that has been over geared. There was no definite impression found that the board discuss targeted capital structure in an attempt to reach maximum shareholder wealth. The current capital structure gives Afgri fantastic financial flexibility, with the potential to expand in favour of shareholders. Capital structure adjustments must be constantly reviewed to put Afgri in line with the industry.

Principle 7 - Strategic expectations - Business unit strategy

Companies should have and continue to develop coherent strategies for each business unit. These should ideally be expressed in terms of market prospects and of the competitive advantage the business has in exploiting these prospects. The company should understand the factors which drive market growth, and the particular strengths which underpin its competitive position.

Investors must be able to understand the companys business strategy, as well as look at its balance sheet, in order to judge whether it will be able to deliver long-term shareholder value. Management must therefore be able to describe a coherent strategy for each of the businesses they are in.

Principle 8 - Strategic expectations - Corporate strategy

Companies should be able to explain why they are the best parent of the

businesses they run. Where they are not best parent they should be developing plans to resolve the issue.

If the company cannot justify its continuing ownership of a particular business unit in terms of its contribution to long-term shareholder value, it should be making plans to divest it. An example of restructuring business units could be seen at Afgri with a policy of "if it can't turn around, sell it.

References

Africa News Service. 00. Mervyn King Chairman, King Commission. March 7. p1008086u7606

Africa News Service. 00. The King II Report Threatens Directors Old Boys Clubs. July 5. 1008186u5747.

Africa News Service. 00. Proposals in King Report Will Not Become Law. April

5.p1008115u8

Budzynski, J. 000. WHAT HAPPENED TO PROFITS? Agri Marketing, Nov 000 v8 i10 p0.

Chesnick, D. 1. Financial performance declines for largest ag cooperatives in , Rural Cooperatives, Jan/Feb001, Vol. 68 Issue 1, p0

Chew D. H. 001 Corporate finance where theory meets practice. New York McGraw-Hill

Ebedes, G. 00. Discussion Forums - Have your say about (http//www.landbou.com/News4/Finance/Companies/0,,-8-4 1056,00html)

Ebedes, G. 00. MD, Afgri. Personal interview. 17 September. Delmas.

Ehrbar A.L. 18. Eva The real key to creating wealth. Canada John Wiley & Son, Inc

Goosen, D. 00. Financial Director, Afgri. Telephone interview. 1 September.

Graham. J, Harvey. C. 00. Study Reveals How Companies Decide on Capital

Kemp. S. 00. Moneyweb. http//m1.mny.co.za/C56A8C00448C6B/0/C56A8C00448C6B456C0100A8F?Open&Highlight=,afgri

Structure Mix. Financial Analysis, Planning & Reporting, Feb00, Vol. Issue , p1, 4p; (AN07787)

Mankin. E, Chakrabarti. P. 00. Valuing adaptability Markers for Managing Financial Volatility. Perspective on Business Innovation. Issue The Adaptive Imperative.

Marrs D. 00. Survey Backs Up Findings of King Report On Firms Governance in SA Africa News Service. News Provided by Comtex. Apr 5.pNA

OTKaner 00. Afgri behaal verdienstegroei van 5% (vol 47-, May/June 00)

OTK. 00. Afgri has revised its forecast earnings per share

http//www.otk.co.za/services/nas_showarticle.asp?aid=4. 18 September 00

Ryan, C. 00. EPS CAN OBSCURE TRUE OPERATING PERFORMANCE.

http//free.financialmail.co.za/report/workcap0/cworkcap.htm

Ryan, E. 00. Sustainable wealth creation for shareholders.

http//www.suntimes.co.za/00/11/0/business/surveys/survey4.asp

Smith, H. 00. Institutional Shareholder Activism A Sea Change?, Mondaq Business

Briefing, Nov , 00 pNA.

Willemse, J. 00. Is agribesighede op n nuwe pad? . Landbouweekblad 6 August 00, pNa

Williamson, M & Francis, S. 001 The importance of optimal capital structure Euromoney, Nov 001 pS().

Woods N.A.16 Economic value added (EVA) Uses, benefits and limitations - a South African perspective Southern African Business Review 4(1)46-5

Wright, J. 00. MD, Afgri. Personal interview. 17 September. Delmas

Yuill. M, Makin. V. 001. From Bricks and Mortar to the Virtual A critical review on how the New Sciences offer solutions to problems of discontinuity in the New Economy. Article submitted to Management Dynamics Business Management Stellenbosch University July 001

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Table of Contents

1. Summary of Key Facts……………………………………………

. Statement of the Problem…………………………………………

. Causes of the Problem…………………………………………….4

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4. Solutions, Implementations and Justifications…………………..6

a. Needs Theories……………………………………………..6

b. Individual Difference………………………………………7

c. Cognitive……………………………………………………8

d. Situational…………………………………………………..8

5. Conclusion…………………………………………………………..

6. References………………………………………………………….11

1. Summary of Key Facts

Company XYZ (XYZ) is a venture capital group established to invest in high risk - high reward ventures. These start-up companies develop technologies and products such as therapeutics, that are subsequently commercialised through partnerships within the US and European pharmaceutical and biotechnology industries.

A "Greenfield" operation, XYZ was set up as a wholly owned subsidiary of a government corporation XXX. Funds of 100 million were made available from the State Government. As such, political pressure from the state government placed enormous expectation on the performance of those who initially joined XYZ.

As the CEO, I was the first person to start at XYZ and was responsible for recruiting a suitable team of six to manage the fund. A pre-conceived incentive plan had been proposed by XXX that outlined profit (carried interest) sharing arrangements between the State Government (80%), XXX (15%) and members of the XYZ team (5%). As members joined the group they were initially motivated by the new opportunity at hand, but the motivation flagged, along with performance, as they began to realise the details of the incentive scheme. They considered the split between XYZ and XXX inequitable and proposed it be changed in favour of the XYZ team who actively managed the fund.

. Statement of the Problem

The team identified a number of specific problems surrounding the incentive scheme

• The scheme was developed without input from the XYZ team

• XYZ's annual performance bonus pool was to be drawn from capital from the long-term incentive scheme which may not be realised before seven years.

• The incentive scheme was not considered equitable with other incentive schemes within the venture capital sectors, where most of the carried interest goes to the staff managing the fund.

I also identified three major problems within the XYZ team that may, or may not, have been caused by the incentive scheme problems

• Firstly, there was a general lack of motivation, satisfaction and performance amongst group members. One individual threatened to leave the company if the incentive inequities between XXX and XYZ and indeed the rest of the industry sector were not addressed.

• Secondly, there were difficulties associated with leading the XYZ team. One employee retaliated against the CEO, as well as retaliating against the organisation by breaching confidentiality and complaining publicly about XYZ and XXX.

• Thirdly, there were diminished organisational citizenship behaviours, in that some of the employees refused to engage in any activities that helped others within the team.

. Causes of the problem

According to Hughes et al. 00 there is a close relationship between motivation, performance, satisfaction and leadership.

Kanfer (10) defines motivation as anything that provides direction, intensity, and persistence to behaviour. In these respects the incentive scheme is deficient. There are no specific KPA's, that directs the employees towards achievement of the high-performance required to achieve significant carried interest. The relative amounts of carried interest apportioned to XXX versus XYZ may impact on the intensity of motivation. Finally, persistence of positive behaviours is unlikely given that the incentive is so far out into the future (7 years), that the maintenance of even short- to mid- term motivation is unlikely.

Performance is concerned with those behaviours directed towards the organisations mission and goals. An adequate level of motivation may be a necessary but insufficient condition of effective performance (Hughes et al. 00). Higher motivation will usually only effect performance if other factors are present. Intelligence, skill, and the availability of key resources can affect an employee's behaviour in accomplishing organisational goals, yet they are independent of the person's level of motivation.

The problem with performance was not only related to lack of motivation due to the inappropriateness of the individual performance bonus and team incentive programs, but may have also related back to the fact that the vision, values and mission had not yet been established. The vision, values and mission and associated key performance areas were to be developed once the XYZ team, in its entirety, had been recruited. Without this clear direction and availability of the relevant allocated resources the employee's effectiveness in accomplishing organisational goals was likely to be diminished, regardless of motivational level.

A related problem may have involved the skill and experience base of individual team members. Individuals from the more mature mining industry had been recruited for their commercial acumen and legal qualifications to balance out the PhD/MBA members of the team from the biotechnology and pharmaceutical industry. This meant that the mining individuals, although extremely valuable in the commercial arena, would need careful coaching in order to develop the appropriate skills associated with the biotechnology and pharmaceutical arenas. Without these skills it was likely that diminished motivation may have had some impact on the poor level of performance.

Job satisfaction involves the attitudes or feelings about the job itself, pay, promotion, or educational opportunities, supervision, co-workers and workload (Saal & Knight, 188). The implicit link between satisfaction and motivation is that satisfaction increases when employees are able to accomplish a task, especially when the task is challenging. Again without the appropriate skill base some of the employees could not be delegated the more challenging activities which would have normally led to a high degree of satisfaction.

Although performance and job satisfaction are related, it is not logically true that performance must be higher among more satisfied workers (Podsakoff & Williams, 186). There is considerable debate as to whether satisfaction causes performance, performance causes satisfaction and/or rewards cause both performance and satisfaction (Greene, 185; Iaffaldano & Muchinsky 185; Lorenzi, 178). The most compelling argument is that the correct allocation of rewards do positively influence both performance and satisfaction. Performance contingent reward or incentive is most likely to influence performance in a positive way. Satisfaction and performance should be considered as two separate but interrelated work results that are affected by the allocation of rewards (Wood et al., 001).

Research has shown that people that are more satisfied with their jobs will also willingly engage in organisational citizenship behaviours. These are behaviours not directly related to one's job that are helpful to others at work and therefore supportive of the workplace (Bettercourt, Gwinner & Meuter, 001). The growing level of dissatisfaction meant that team members began to work more autonomously, taking total control of specific areas, not interested in other team members input and failed to leverage their own skills and experiences across the projects within the team.

Various leadership behaviours can often result in more satisfied employees. Leaders must be in a position where they can effectively solve problems and implement the necessary motivational techniques. The ability to motivate is vitally important to morale and performance. Additionally team members need to be appropriately selected, power and influence tactics need to be used correctly, the leader must be seen as being ethical and credible, provide the necessary resources, develop employee skills and remove barriers to allow the group to accomplish it's goals. If employees do not have the appropriate skills or resources to accomplish a group task then trying to continually increase their motivation may diminish their performance and frustrate them (Campbell, 188).

4. Solutions, Implementations and Justifications

This section uncovers possible solutions and implementations through a discussion of the key aspects of 10 different approaches to motivation in the context of performance, satisfaction and leadership. The approaches are organised into four categories comprising need theories, individual-difference approaches, cognitive theories, and situational approaches.

a. Need Theories

In order to get the XYZ employees to engage and persist with the behaviours needed to accomplish group goals, an appeal to their needs may be made. The three major needs theories include Maslow's (154) hierarchy of needs, Alderfer's (16) existence-relatedness-growth (ERG) theory, and Herzberg's (164, 166) two-factor theory. All three theories are similar in that they assume that people are motivated to satisfy a universal set of needs, but differ primarily in the types of needs that supposedly underlie or drive people's behaviour.

From Maslow's perspective the best solution may involve taking account of the employees position on the needs hierarchy and ensure all lower-order needs are satisfied before appealing to employees self-esteem or self-actualisation needs. Physiological and security needs are very well catered for at XYZ, but one way the teams belongingness needs may be improved could be to allow them to present their specific projects to the board each month as part of the regular board meetings.

Alderfer's perspective that multiple needs can be satisfied simultaneously, may indicate that if we are simultaneously able to supply tools for development of skill gaps within the group (for example the biotechnology skills) we may also be able to help satisfy growth needs that motivate individuals to achieve greater personal and organisational challenges.

Hertzberg suggests absence of hygiene factors such as supervision, working conditions, co-workers, pay, policies/procedures and job security result in dissatisfaction, while motivators related to achievement, recognition, the work itself responsibility, advancement and growth result in satisfaction. Focusing on Hertzberg's motivators it may be possible to establish second and third funds that allow current employees to achieve and be recognised within the primary fund, and take on the responsibility of a second or third fund in the future.b. Individual Difference

Unlike the needs theories that assume people share some fundamental needs the individual difference approach assumes individual differences and emphasises a person's intrinsic motivation to perform and achieve a particular task. To improve group performance it will be important to select only those employees who possess both the right skills and have a higher level of achievement orientation or find work to be intrinsically motivating (Atkinson, 157; McClelland 185). One solution may be to set up the group as a functional-project matrix allowing individuals to leverage their specialist skills across all of the projects while the most achievement oriented individuals act as leaders to drive projects across the various functional specialties.

c. Cognitive

The next set of theories, goals setting, ProMES and expectancy theory, examine motivation from a cognitive perspective. These theories assume that individuals make rational conscious choices about the direction, intensity and persistence of their behaviours and generally engage in behaviours that maximize payoffs and minimize costs.

For example in alignment with goal setting theory firstly the employees need to be shown that the goals are both specific and difficult, to result in consistently high effort and performance (Locke and Latham, 10). Secondly, in order to get critical goal commitment the goals need to be set through participation with employees. Thirdly, goals would be accompanied by feedback. This could be accomplished by holding an off-site meeting where XYZ team members could co-develop the vision, values, mission and associated goals.

Complementary to goal setting, the expectancy theory would involve motivation of employees by clarifying links between behaviours, performance and rewards (Vroom, 164). Further to this ProMES theory involves motivating others by clarifying links between behaviours, performance, evaluations, rewards, and personal needs. The mission and associated goals could be used as a guide to develop key performance areas, where each individual is clear about the short-term and long-term, individual and team rewards associated with achieving specific responsibilities, while feedback is measured via known measurement criteria.

d. Situational

The job characteristic and operant approach, examine motivation from a situational perspective. Leaders will likely be more effective if they learn to recognise situations where various approaches, or the insights particular to them, may be differentially useful. For example particular members of the team may find great motivation in taking positions on the board of directors of the companies for post-deal governance activities, contingent on successfully completing investment decision making recommendations, following through due diligence and adopting appropriate behaviours with the investee companies during deal negotiation and closing.

In summary the following activities are to be implemented as a result of the chosen solutions described above

• 60 degree interview to ensure other leadership or team issues are identified

• Team advance (off-site meeting) to co-establish vision, values, mission, goals, key performance areas, specific responsibilities and measurement criteria that would constitute our annual performance review process.

• Implement the functional-project matrix and delegate specific responsibilities and accountabilities.

• Rectification of the extrinsic reward system (performance bonus scheme and team profit-share incentive) to provide both short-term and long-term incentives on both an individual and team basis.

• GAPS analysis of skills and resources and appropriate coaching and development plans for identified team members.

• Opportunities to present to the XYZ board and participate as directors on the boards of investee companies.

5. Conclusion

Management continuity and commitment is critical for optimal fund performance. The need to encourage retention and alignment by providing the team with both short-term and long-term incentives, with consideration of both individual and team performance and comprising both financial and personal development incentives has been shown to be essential.

The optimal solutions chosen addressed the underlying causes of these issues including motivation, performance, satisfaction and leadership. Motivation was shown to impact directly or indirectly on performance, satisfaction and leadership and the solutions subsequently chosen and implemented addressed these rather than simply correcting the monetary rewards associated with the performance bonus and incentive scheme.

6. References (as they appear in the text)

Roach, C.F., and Behling, O. (184) Functionalism Basis for an Alternate Approach to the Study of Leadership. In Leader and managers International Perspectives on Managerial Behaviour and Leadership. Ed. J.G., Hunt, D.M., Hosking, C.A, Schriesheim, and R., Stewar. Elmsford, NY Pergamon, 184.

Hughes, Ginnet & Curry (1) Leadership (rd edition) Irwin McGraw Hill

Kanfer, R. "Motivation Theory in Industrial and Organisational Psychology." In Handbook of Industrial and Organizational Psychology. Vol. 1. Ed. M.D. Dunnette and L.M. Hough. Palo Alto, CA Consulting Psychologists Press, 10, pp. 75-170.

Saal, F.E., and P.A. Knight. Industrial Organisational Psychology Science and Practice. Belmont, CA Brooks/Cole, 188.

Bettencourt, L. A., K. P. Gwinner and M. L. Meuter "A Comparison of Attitude, Personality, and Knowledge Predictors of Service-Oriented Organisational Citizenship Behaviours." Journal of Applied Psychology, 86, no. 1 (001), pp. -41.

Campbell, J.P. "Training Design for Performance Improvement." In Productivity in Organisations New Perspectives from Industrial and Organisational Psychology. Ed. Campbell, J. P., Campbell R. J. and associates. San Francisco Jossey-Bass, 188, pp. 177-16.

Podsakoff, P.M. and Williams L.J. "The Relationship Between Job Performance and Job Satisfaction." In Generalising from Laboratory to Field Setting. Ed. E.A. Locke. Lexington, MA Lexington, 186.

Greene, C.N. 'The Satisfaction-Performance Controversy', Business Horizons, Vol. 15 (17), p.1.

Iaffaldano, M.T. and Muchinsky, P.M. 'Job Satisfaction and Job Performance A Meta-Analysis', Psychological Bulletin, Vol. 7 (185), pp. 51-7.

Lorenzi, P. 'A comment on Organ's Reappraisal of the Satisfaction-Causes-Performance Hypothesis', Academy of Management Review, Vol. (178), pp. 80-.

Wood, J., Wallace, J., Zeffane, R.M., Schermerhorn, J.R., Hunt, J.G., & Osborn, R.N. (001) Organisational Behaviour Global Perspective, nd edn., Brisbane John Wiley & Sons.

Atkinson, J.W. "Motivational Determinants of Risk Taking Behaviour." Psychological Review 64 (157), pp. 5-7.

McClelland, D.C. Human motivation. Glenview, IL Scott Foresman, 185.

Maslow, A.H. Motivation and Personality. New York Harper &Row, 154.

Alderfer, C.P. "An empirical Test of a New Theory of Human Needs." Organisational Behaviour and Human Performance 4 (16), pp. 14-75.

Hertzberg, F. The Motivation-Hygiene Concept and Problems of Manpower." Personnel Administrator 7 (164), pp.-7.

Hertzberg, F. Work and the Nature of Man. Cleveland, OH World publishing 166.

Locke, E.A., and Latham, G.P. "Work Motivation and Satisfaction Light at the End of the Tunnel." Psychological Science 1(10), pp.40-46.

Vroom, V.H. Work and Motivation. New York John Wiley, 164.

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