In Ethics and Business – ‘Eastern Europe’ after the Revolutions I described the moral vacuum that prevailed, at least in the public domain, as Eastern European socialism collapsed at the end of the 1980s.
It was in this jungle that I started my own business in 1992 in Prague. I came to it, of course, with a very different set of business principles from those of the ruthless pragmatists, often former socialist party functionaries, who found themselves enviably well placed to take over, or steal, the public assets of the former regime. My parents had instilled in me the ideas of decency, honour and social responsibility, but these would have meant nothing to these new capitalists on the make.
What was ‘business’ to them?
They would probably think of business in the crudest terms – businesses make money for their owners. Conventionally, of course, money comes from profit, but loans from banks, tax credits from the Government, EU funds, all these can do the trick too. The problem, if you’re an entrepreneur is always that there are others who want the money too, or want to take it away from you. For example, your partners, your competitors, your employees, your suppliers, the taxman, your lenders, the European Union, even do-gooders who want to spend your money on orphans, the hungry and the sick, they all want your money.
How can you stop them from getting it?
Partners and Shareholders.
Well, best not to be sentimental. Partners and shareholders are useful at the beginning, when you need their money, ideas or connections, but if you don’t need them anymore and you want to get rid of them, you can simply ‘tunnel’ them to reduce their shareholding and thereby reduce the dividends you must pay them and the value of their shareholding. You can do this in at least two ways.
If you have a sufficient majority in the company, and if your shareholders’ agreement permits the move, you can call for a capital increase which you know your partners can’t afford or won’t risk. Thereby, their own shareholding is diluted and more of your company and your profits are yours.
For example, a friend of mine was involved a few years ago in the purchase and re-launch of a dance club in Prague. He had the idea and the experience, and another man had the money. My friend became a substantial minority shareholder. Sadly he was more optimistic than he should have been when he signed the shareholders’ agreement. Once the club became successful, financed by a loan from the majority shareholder, a capital increase was announced. The majority owner converted his loan into equity. My friend couldn’t match his investment, with the result that his own shares were diluted to insignificance.
Another way, if you have legal responsibility for a company (there must usually be a legally appointed managing director for a limited liability company), you can empty out the business by selling everything, lock, stock and barrel, at a knock-down price to another company you’ve set up that you own in its entirety.
There are other even more unsavoury ways. If you’re so minded, you might threaten your partners with violence, and persuade them to sell you their shares for a pittance under duress. You could also bribe a judge or two to rule that your partners’ shares are invalid. One thinks of Russia.
There are no rules when it comes to competition. Rumours, spying, sabotage, all are useful tools for the Eastern European businessman. Fair play and amicable competition, an agreement to differ, all are alien concepts to many of the new businessmen of Eastern Europe. In Britain, amicable, respectful disagreement is part of life and business. Even when emotions run high in the House of Commons, it’s entirely imaginable that ideological adversaries (take Tony Benn and Enoch Powell, for example) can find common, human, ground. In the Parliaments of Eastern Europe, as between businessmen, fights are not uncommon. Competitors are enemies, and there are no conventions and rules to limit the damage they might attempt to do to each other. And then, of course, in extremis, you can kill them.
But if you can’t beat them or kill them, then join them. Collusion is the next best ruse. That way, everyone might get his piece of the pie. Public tenders are often approached in this way with prices engineered in advance so that each company wins the right component of the deal.
If you still can’t neutralise the competition, you must bribe those who might decide in your favour. Public tenders are the most amenable. In the early years, you simply bribed the decision-making body, but tender methods soon became more sophisticated. Sometimes a random element was introduced to reduce the field from, say, twenty, to five. But there’s a famous YouTube video that does the rounds in the Czech Republic that shows someone quite obviously ‘feeling’ for the right slips of paper in a bucketful of applicants (https://www.youtube.com/watch?v=f0-SY70ZR08).
There’s a lot of fun to be had with balls, too. When numbered billiard balls must be selected manually from a bowl, you simply put the ‘right’ balls in a freezer for a couple of hours so that whoever is making the selection will know which ones to choose. After an hour or two the evidence of malpractice has reached room temperature.
The awful thing about employing people is that you must pay them. But why give them any more than they need? Treat them as inhuman resources if you can. After all, the business is yours, and your employees are merely instruments at your disposal. Take all possible advantage of them if you can. Delegate all the dodgy, semi-legal stuff you do, to them and keep your own hands clean.
You might also pay them in cash, or partially in cash, if you can, to avoid the tax and social insurance payments the state demands. Never mind that this might curtail their pension rights.
The idea that a company is a joint endeavour, even if you’re the owner of its shares, has only very gradually emerged. In the early years of Eastern European capitalism, many businesses felt no great responsibility towards their staff. Promises weren’t honoured, legally binding contracts were ignored. No wonder that employees would also cheat their employers whenever the opportunity arose.
For some of us, these approaches to business were, and are, anathema. They were common in Eastern Europe. But, sadly, there’s much more to come in my next post on the subject. Opportunities for exploitation are almost unlimited.