In the first and second article, we have shown that redundant reserves are necessary to autonomously absorb shocks or to weather a transition. In this article, we show how burdensome companies without reserves can be to society, including a shocking example. And finally, the view on reserves past and present.
Burdensome zombie companies
Encouraging companies to build up reserves as part of redundancy or shock resistance raises critical questions about so-called zombie companies. A zombie company is one that has no reserves at all and never intended to build them in healthy times. On the contrary, any profit the zombie company makes is immediately funnelled to the exit. International studies have also shown that this type of company is not innovative. Zombie companies do not spend capital on innovation. On the contrary, they suck up capital. So not only are they enterprises that are not redundant, they are also not innovative and, on top of that, they burden our economic fabric.
Booking.com
The Booking.com case is a poignant example to show how socially damaging zombie companies can be. The originally Dutch company was acquired by a US group in 2005. To ensure the employment of the 5,000 or so employees and prevent flagging out, the Dutch government gave massive subsidies. For years, Booking was able to boast a billion-dollar profit, although a good part of that was subsidised. With the COVID-19 outbreak, however, the company was quick to seek government help. Apparently, after making monster profits year after year, sponsored by society's money, Booking had not built up any reserves it could fall back on.
The Dutch government again reached into its pockets to save the company and jobs, but to no avail. Meanwhile, a quarter of the workforce was laid off. In Amsterdam, this affected about a thousand employees. The customer service department was largely outsourced. It becomes even more distressing when it emerged that the three board members pocketed a bonus of some EUR 28 million. Outrageous, immoral, anti-social, reprehensible, vulture behaviour and a sad farce, the House of Representatives said. To calm tempers, Booking refunded 65 million in subsidies.
Too big to fail and nobody dares to let it go over the top, even though Booking is socially hugely burdensome in this way.
What does shock resilience do right?
Redundancy and the whole approach around shock resilience primarily looks at the resilience of an enterprise. To what extent does an enterprise get into trouble when a shock occurs. And, if a shock occurs, it indicates whether a firm needs support to survive or not.
Or, in the case of a transition, which company can finance that transition autonomously or just barely. And the calculation also gives an idea of how fast a transition can be implemented and in a broader context whether it will entail a social cost or not.
Read also: Companies in transition - From investment needs to resilience through social partnerships
Reserves in the past
When our grandparents bought shares, they usually did not do so with the idea of getting rich quick. They did it mainly for the children and grandchildren who inherited the shares they saved together. What used to interest shareholders, and more specifically European shareholders, was therefore the continuity of a company and the gradual development of its fundamental value. That they got a penny out of this via a dividend each year was a nice bonus. Although that was not the essence of the story. The essence was building long-term value. Continuity.
With that mindset, a reserve pot within equity is no problem at all. After all, it increases the chances of continuity and value creation in the longer term.
Reserves now
For the past 20 to 30 years, however, a high-level financial technology has been imported from the United States, where any redundant reserve that is not immediately needed is seen as unprofitable. And it must disappear from the business so that it can pay off elsewhere. In this view, reserves are seen as money that has to pay off on its own and not as a way of promoting entrepreneurship. Entrepreneurship is not really engaged in this way.
Fundamentally, this way, value-added creation has become an end in itself, and the link to people and society has been reduced to zero.