Go Lean…Caribbean

Go Lean Commentary

There are “high-risk, high-return” industries and then there are “low-risk, low-return” industries.

There is much for the Caribbean to learn about hedging and mitigating risks from the high-risk industries. The lessons learned should be considered for forging the best-practices for gleaning those high-returns. In this case, we have the opportunity to reach back in the annals of time and learn-apply lessons from the history of the commercial whaling industry – see History of Whaling in the Appendix.

The high-risks in these enterprises were the whales – intelligent mammals of the sea that defied and defended against predators. See this dramatized in the movie “In the Heart of The Sea“; the trailer is embedded in the Appendix VIDEO below. Yet still, the whaling industry was so effective that the “cash crop” (whales) were almost rendered extinct. In this day, however, whaling is considered inhumane. This is an appropriate judgement for this foul practice!

If only … we can learn the best-practices of risk management from this industry and apply it in other humane industries and endeavors to derive high-returns. This is the point of the article here from this “Fin-Tech” column in the world-renowned Economist Magazine:

Title: The First Venture Capitalists – Before there were tech startups, there was whaling

NEW BEDFORD – Few industries involve as much drama and risk as whaling did. The last voyage of the Essex, which inspired Herman Melville’s classic, “Moby Dick”, and is the subject of a new film, “In the Heart of The Sea”, gives a sense of the horrors involved. The ship left Nantucket in 1819 and sailed for over a year before being destroyed by a whale it was hunting. The 20 crew members survived the sinking, but found themselves adrift in the Pacific in three longboats, with little food and no water. Three opted to stay on a desert island, from which they were rescued three months later, on the verge of starvation. The others sailed on, hoping to reach South America but dying one by one. At first the survivors buried the dead at sea; then they resorted to eating the corpses of their crewmates. When they ran out of bodies, they drew lots to decide whom to shoot and eat. Only five of the 17 were eventually rescued. By then, they were so delirious that they did not understand what was happening.

The only reason that anyone could be induced to take part in such a dangerous business was the fabulous profit that could be made. Gideon Allen & Sons, a whaling syndicate based in New Bedford, Massachusetts, made returns of 60% a year during much of the 19^th century by financing whaling voyages—perhaps the best performance of any firm in American history. It was the most successful of a very successful bunch. Overall returns in the whaling business in New Bedford between 1817 and 1892 averaged 14% a year—an impressive record by any standard.

New Bedford was not the only whaling port in America; nor was America the only whaling nation. Yet according to a study published in 1859, of the 900-odd active whaling ships around the world in 1850, 700 were American, and 70% of those came from New Bedford. The town’s whalers came to dominate the industry, and reap immense profits, thanks to a novel technology that remains relevant to this day. They did not invent a new type of ship, or a new means of tracking whales; instead, they developed a new business model that was extremely effective at marshalling capital and skilled workers despite the immense risks involved for both. Whaling all but disappeared as an industry after mineral oil supplanted whale oil as a fuel. But the business structures pioneered in New Bedford remain as relevant as they ever were. Without them, the tech booms of the 1990s and today would not have been possible.

Most historians trace the origins of the modern company back to outfits like the Dutch East India Company and its British equivalent. These were given national monopolies on trade in certain goods or with certain places. This legally buttressed status allowed them to fund themselves by selling shares to the public, helping to get stock markets off the ground. The managers of these multinational enterprises were professionals with only small ownership stakes. Lower-level employees generally had no shareholding at all.

By eliminating dependence on individual owners or managers, these entities became self-perpetuating. But their monopolies also embroiled them in politics and led inevitably to corruption. Both the British and Dutch versions ended up requiring government bail-outs—a habit giant firms have not yet kicked.

The whaling industry involved a radically different approach. It was one of the first to grapple with the difficulty of aligning incentives among owners, managers and employees, according to Tom Nicholas and Jonas Peter Akins of Harvard Business School. In this model, there was no state backing. Managers held big stakes in the business, giving them every reason to attend to the interests of the handful of outside investors. Their stakes were held through carefully constructed syndicates and rarely traded; everyone was, financially at least, on board for the entire voyage. Payment for the crew came from a cut of the profits, giving them a pressing interest in the success of the voyage as well. As a consequence, decision-making could be delegated down to the point where it really mattered, to the captain and crew in the throes of the hunt, when risk and return were palpable.

At the top of the New Bedford hierarchy was an agent or firm of agents like Gideon Allen, responsible for the purchase and outfitting of the ship, the hiring of the crew and the sale of the catch. To give them an incentive to cut the best deals possible, the agents put up a big share of the investment. Those with the best reputation received better terms from the other investors. Captains, who ran the show while the ship was at sea, often put up capital as well. A similar system of incentives is used in the riskier reaches of the investment-management business today, notes Mr Nicholas.

Investors received half to two-thirds of the profits. The rest was divided among the crew in what was known as the “lay” system. A captain might get a 12^th lay (one-twelfth of the remaining profit). In Melville’s novel, Ishmael, who was new to the business, was originally offered a 777^th lay but managed to haggle a 300^th. Although that would probably have proved a paltry amount, it was a stake nonetheless, and set a benchmark for future pay. Ishmael’s friend Queequeg, a cannibal from the South Sea islands, got a 90^th lay because he had experience with a harpoon. Demand for experienced crewmembers was so high that the Essex’s ill-fated captain, George Pollard, was immediately given a second command on the ship that rescued him (which sank as well).

Every participant wanted to bring in returns quickly, but there were no artificial deadlines—nothing resembling what is now called “quarterly capitalism”. When whales became rare in accessible places, the crews from New Bedford extended their search to every corner of every ocean, however many years that took.

Safety in numbers
To ensure that they were not ruined by a few disastrous voyages, the whaling firms invested in multiple expeditions at the same time, much as the venture capitalists of today “spray and pray”. A study published in 1997 concluded that, of the 787 boats launched from New Bedford during the 18^th century, 272 sank or were destroyed. The firm that belonged to George Howland was not atypical: of its 15 ships, between four and nine were at sea at any given moment. One was sunk by a whale, three lost at sea, two burned by their crews, one destroyed by a Confederate gunboat during America’s civil war and five abandoned in Arctic ice. Yet Howland died a millionaire in 1852.

It helped that most of the whalers of New Bedford were strict Quakers, who prized frugality and shunned ostentation. This helped them not only husband their own capital, which was needed to finance voyages, but also to win over other investors. Hetty Howland Green, one of the richest agents, was said to have made her own shoes and to have owned only one dress.

It also helped that they were open-minded: they readily employed anyone who could contribute to their ventures. Perhaps the single most important technological innovation used by New Bedford’s whaling fleet was the “Temple Toggle”, a harpoon tip devised by Lewis Temple, a former slave from Virginia.

But the whalers’ main asset was their business model. In the 1830s, the legislatures of six American states approved charters for whaling corporations giving them the right to raise capital by selling shares to the public—much the same corporate structure as the Dutch and British East India Companies. None of the six survived the 1840s. “The diffuse ownership structure of the corporations, and the reduced stakes held by their managers, likely diminished the incentives for the managers to perform their role diligently,” concludes Eric Hilt of Wellesley College. Given the expense of buying, outfitting and launching a boat into the perilous ocean, the link between risk and reward needed, it seems, to be tighter.

The lay system could work to the crew’s disadvantage, however. In an effort to reduce claims on the crew’s share of the profits, ruthless captains were said to abandon men on the trip home. (Similar shedding of employees is not unheard of at contemporary tech startups before a big payout.) Other schemes existed to cheat crew members, such as forcing them to buy clothing at inflated prices or to pay usurious interest on advances on their pay. And open-mindedness went only so far: although black sailors were not discriminated against in terms of pay, they were treated less well in other respects, receiving less food and worse quarters.

Yet the New Bedford system was undeniably effective. It soon emptied the oceans of whales, even as other lucrative opportunities emerged for daredevils determined to strike it rich, such as the California gold rush. “The same industrial growth that initially supplied markets and profits for whaling activity ultimately yielded opportunities more attractive than whaling to local capital,” wrote David Moment, a student at Harvard Business School, in 1957. In short, with returns dwindling, the crews and the capitalists turned to other ventures. But the business practices they developed are used in high-risk, high-return industries to this day.

Source: The Economist Magazine – posted Dec 30, 2015; retrieved November 1, 2017 from: https://www.economist.com/news/finance-and-economics/21684805-there-were-tech-startups-there-was-whaling-fin-tech

A key lesson from the history in this foregoing article is to arrange expeditions – one time ventures:

… a “business model that was extremely effective at marshalling capital and skilled workers despite the immense risks involved for both. Whaling all but disappeared as an industry after mineral oil supplanted whale oil as a fuel. But the business structures pioneered in New Bedford remain as relevant as they ever were.”

The movement behind the book Go Lean … Caribbean asserts that the region can enjoy high-risk returns from the industry of Shipbuilding and Ship-breaking. These industries are among the best for fostering new labor intensive jobs. There is no, to little,  industrial developments for these industries in the Caribbean now. It is the proposition here for the Caribbean member-states to engage in some high-risk investments and to incubate a Shipbuilding and Ship-breaking industry.

Shipbuilding?!

A classic form of maritime commerce. Imagine each ship – to be built/assembled – as a one-time venture, an expedition.

Ship-breaking?!

Disassembling ships for scrap metal and recycling. This, too, is a form of maritime commerce.
Imagine each ship – to be dismantled “cleanly” – as a one-time venture, an expedition.

These truly reflect the Industrial Reboot that the Caribbean region needs.

Shipbuilding and Ship-breaking have been a familiar theme for this Go Lean movement. We have detailed the historicity and economic prospects of these industry in these previous blog-commentaries:

As related in these commentaries, “all Caribbean members are islands or coastal territories – they can all be candidates for shipbuilding and ship-breaking. There is a need to reform maritime commerce for the Caribbean region; we can get more economic activity from this sector; the Go Lean book projects 15,000 new direct jobs in the shipbuilding and/or ship-breaking activities. The possibility of these new jobs is hope-inspiring. At last we can arrest the societal abandonment where men and women leave the community looking for any kind of work.”

The book Go Lean…Caribbean – available to download for free – serves as a roadmap for the introduction and implementation of the technocratic Caribbean Union Trade Federation (CU), for the elevation of Caribbean society – for all member-states. This CU/Go Lean roadmap has these 3 prime directives:

• Optimization of the economic engines in order to grow the regional economy to $800 Billion and create 2.2 million new jobs; this would include entrepreneurial ventures and Industrial Reboots. In addition to direct job creation, there is the factor of indirect job-multipliers, in this case a 3.75 multiplier rate.
• Establishment of a security apparatus to ensure public safety and protect the resultant economic engines.
• Improve Caribbean governance to support these engines, including a separation-of-powers between the member-states and CU federal agencies.

The book stresses that reforming and transforming the Caribbean societal engines must be a regional pursuit. This was an early motivation for the roadmap, as pronounced in the opening Declaration of Interdependence (Pages 12 – 13):

xi. Whereas all men are entitled to the benefits of good governance in a free society, “new guards” must be enacted to dissuade the emergence of incompetence, corruption, nepotism and cronyism at the peril of the people’s best interest. The Federation must guarantee the executions of a social contract between government and the governed.

xvi. Whereas security of our homeland is inextricably linked to prosperity of the homeland, the economic and security interest of the region needs to be aligned under the same governance. Since economic crimes … can imperil the functioning of the wheels of commerce for all the citizenry, the accedence of this Federation must equip the security apparatus with the tools and techniques for predictive and proactive interdictions.

xxiv. Whereas a free market economy can be induced and spurred for continuous progress, the Federation must install the controls to better manage aspects of the economy: jobs, inflation, savings rate, investments and other economic principles. Thereby attracting direct foreign investment because of the stability and vibrancy of our economy.

The Go Lean book provides 370-pages of turn-by-turn instructions on “how” to adopt new community ethos, plus the strategies, tactics, implementations and advocacies to execute so as to reboot, reform and transform maritime commerce to benefit Caribbean society.

Tourism – and the current economic landscape – is not enough!

There is the need to deploy some new business models to accomplish this goal; we need “all hands on deck”: governments, citizens (including skilled labor groups – unions – and individuals), and financial institutions (banks and capital markets). The foregoing article related that whaling expeditions were propelled by creative financing models:

… allowed them to fund themselves by selling shares to the public …

The Go Lean roadmap seeks to optimize capital markets so as to facilitate industrial and entrepreneurial ventures. Consider these excerpts from the book detailing this strategy:

• 10 Ways to Impact Wall Street – Page 200
  # 4 – Adopt Advanced Products
  The regional securities markets will be encouraged to adopt advanced financial products like mutual funds, ETF, REITs, commodities futures and options. These products attract more people to avail themselves of investment opportunities.
• 10 Ways to Develop Ship-Building – Page 209
  # 1 – Lean-in for the Caribbean Single Market & Economy (CSME) Initiative
  The CU will allow for the unification of the region into one market, creating an economy of 30 member-states, 42 million people and 2010 GDP over $800 Billion. All of the member-states are either islands or coastal, therefore there are lots of coastline and harbors. Boats, yachts and ships are therefore plentiful in the region. Consistent with the CU’s mission for globalization, the region cannot just consume these vessels; we must create and build as well. There is a history of boatbuilding in the islands (slopes, schooners, clippers), but what had been missing to forge a formidable industry is the capital and the community “will”. The CU will now fill those gaps. The CU will tap the capital markets to secure long-term funding (stocks/bonds), prepare the labor force for advanced skill-sets, and negotiate treaties with “mature” EU states (i.e. Holland, Ireland) for master-apprentice labor-coaching. …

This commentary is a Lesson from History and also a study in “community ethos”. The Go Lean book defines (Page 20) this as the “fundamental character or spirit of a culture; the underlying sentiment that informs the beliefs, customs, or practices of a group or society; dominant assumptions of a people or period”. There may be good and bad community ethos.

Lessons from History are important to apply in modern society. Can we repeat the good habits that up-build society? Can we avoid the bad habits that tear-down communities?

Yes, we can …

Hunting, killing and harvesting whales were inhumane and reflective of a bad community ethos that man can dominate nature for his own profit.

Expeditions, on the other hand, reflected a good community ethos; “marshalling capital and skilled workers despite the immense risks” where good examples for investing in the future, to positively impact society. We can and should foster this ethos; we should pursue industrial reboots and incubate entrepreneurial endeavors for-and-in our Caribbean communities.

We can do this … and make our homeland a better place to live, work and play. 🙂

Download the free e-Book of Go Lean … Caribbean – now!

Sign the petition to lean-in for this roadmap for the Caribbean Union Trade Federation.

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Appendix: The History of Whaling

This article discusses the history of whaling from prehistoric times up to the commencement of the International Whaling Commission (IWC) moratorium on commercial whaling in 1986.

…

Modern whaling

At first slow whales were caught by men hurling harpoons from small open boats. Early harpoon guns were unsuccessful until Norwegian Svend Foyn invented a new, improved version in 1863 that used a harpoon with a flexible joint between the head and shaft. Norway invented many new techniques and disseminated them worldwide. Cannon-fired harpoons, strong cables, and steam winches were mounted on maneuverable, steam-powered catcher boats. They made possible the targeting of large and fast-swimming whale species that were taken to shore-based stations for processing. Breech-loading cannons were introduced in 1925; pistons were introduced in 1947 to reduce recoil. These highly efficient devices were too successful, for they reduced whale populations to the point where large-scale commercial whaling became unsustainable.

…

Source: Retrieved November 1, 2017 from: https://en.wikipedia.org/wiki/History_of_whaling

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Appendix VIDEO – In the Heart of the Sea – Final Trailer – https://youtu.be/K-H35Mpj4uk

Published on Nov 1, 2015 – Chris Hemsworth stars in Ron Howard’s IN THE HEART OF THE SEA, in theaters December 2015. http://intheheartoftheseamovie.com https://www.facebook.com/IntheHeartof…

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Oscar winner Ron Howard (“A Beautiful Mind”) directs the action adventure “In the Heart of the Sea,” based on Nathaniel Philbrick’s best-selling book about the dramatic true journey of the Essex.

In the winter of 1820, the New England whaling ship Essex was assaulted by something no one could believe: a whale of mammoth size and will, and an almost human sense of vengeance.  The real-life maritime disaster would inspire Herman Melville’s Moby-Dick.  But that told only half the story.

“In the Heart of the Sea” reveals the encounter’s harrowing aftermath, as the ship’s surviving crew is pushed to their limits and forced to do the unthinkable to stay alive.