Wayne Perg is a synergic scientist and economist. He is has developed a new mechanism for financing a win-win world. The following outline was used for a recent lecture he gave in Arizona. It serves as an introduction to his synergic mechanisms for a new economy.
Wayne F. Perg, Ph.D.
1. What we are experiencing is the product of the structure of our financial and economic system.
1.1. CEO’s can earn more – several times more – in one day than workers earn in a year.
1.2. Of the $150 list price of a pair of high-end Nikes, only about $1.50 goes to the workers who make the shoes.
1.3. Top management receives large bonuses for laying off workers.
1.4. Top management reaps millions from stock sales just before the company tanks, costing workers their jobs and shareholders their investment.
1.5. In this structure risk and rewards are divided – workers (and investors) take the risks and top management receives the rewards.
2. Our financial and economic system produces these results because its structure promotes and supports power-over/dominator/adversarial relationships in business.
2.1. In her seminal work The Chalice and the Blade: Our History, Our Future, Riane Eisler identified the power of the choices that we make regarding relationships to shape the world that we create.
2.1.1. To the extent that we choose power-over/dominator/adversarial relationships, we create Hell.
2.1.2. To the extent that we choose power-with/partnership/cooperative relationships, we create Heaven.
2.2. Power-over/dominator/adversarial relationships in business produce dysergy (1 + 1 = less than 2).
2.3. Dysergy (1 + 1 = less than 2) in business reduces productivity and income.
2.4. Power-over/dominator/adversarial relationships in business concentrate a large proportion of this reduced income in the hands of a small elite.
3. A different finance can create a different structure for business – a structure that promotes and supports power-with/partnership/cooperative relationships.
3.1. Power-with/partnership/cooperative relationships produce synergy (1 + 1 = more than 2).
3.2. Based on the synergy generated by living systems, synergic scientist Dr. Timothy Wilken estimates that synergy can multiply productivity in business by a factor of 10 to 1,000 (see ORTEGRITY at https://synearth.net/trust-2015/index.html).
3.3. Because synergy is a network effect, synergy (and productivity) will increase exponentially as our network of power-with/partnership/cooperative relationships (with each other and all living things) grows.
3.4. Therefore, a different finance can be a key factor in creating a different world – a world in which every person has the opportunity to choose prosperity, joy and personal growth while living in harmony with Mother Earth.
FIGURE 1
A DIFFERENT FINANCE:
The Real-Preferred-Return Financial Structure (RPERS)
LEGAL FORM OF ORGANIZATION
RPERS Corporate
| Limited-Liability-Company | Corporation |
FINANCING FOR BALANCE-SHEET ASSETS
(Working Capital; Plant and Equipment)
RPERS Life of Financing Corporate
| Senior RPR Units | Finite | Debt |
| RPR Units | Permanent | Common Stock |
INSTRUMENTS FOR PROMOTING AND REWARDING HUMAN CONTRIBUTIONS
RPERS Nature of Contribution Corporate
| Subordinated RPR Units | Extraordinary, Long-Lasting | Stock Options, Stock grants |
| Common Equity Units | Day-to-day Operations | Stock Options, Stock grants |
4. The Real-Preferred-Return financial structure (RPERS) utilizes different financial instruments: Senior Real-Preferred-Return (RPR) Units; RPR Units; Subordinated RPR Units; and Common Equity Units.
4.1. RPERS and the different financial instruments were developed by New Market Solutions, LLC (NMS).
4.1.1. NMS is in the business of developing and patenting financial technologies.
4.1.2. One of the co-founders of NMS is an expert in facilitating – and processes for facilitating – cooperative relationships and personal growth.
4.2. These different financial instruments are designed to align the interests of all parties, thus facilitating power-with/partnership/cooperative relationships.
4.2.1. Promised rates of return and payments (for Senior RPR Units, RPR Units, and Subordinated RPR Units) are fixed in real (inflation-adjusted) terms using the Consumer Price Index (CPI).
4.2.1.1. Inflation adjustment makes possible clear agreements about returns and payments by eliminating the impact of unknown future inflation, thus facilitating partnership with investors.
4.2.1.2. Inflation adjustment shares the natural inflation protection generated by business with all investors, thus further facilitating partnership.
4.2.1.2.1. My cost is your revenue and vice versa.
4.2.2.2.2. By this identity, for the economy as a whole, the rate of inflation must equal the rate of increase in the average revenue per unit.
4.2.2. The ordering of preferences of claims on income and assets from first (Senior RPR Units) to last (Common Equity Units) protects the interests of investors regardless of whether or not they are actively participating in the operations of the enterprise.
4.2.2.1. Protecting the interests of passive (not active in the operation of the enterprise) investors makes it possible to raise more capital at a lower cost.
4.2.2.2. Investors who are active in the operations of the enterprise receive Common Equity Units (ownership interests) for their work, not their investment – passive investors receive no Common Equity Units and are not owners.
4.2.3. Covenants for the Senior RPR Units, RPR Units and Subordinated RPR Units build on the shared interest of all parties in the success of the enterprise, thus facilitating partnership with investors.
4.2.4. The risk of costly, lose-lose bankruptcy proceedings is virtually eliminated by win-win processes for handling defaults and renegotiating agreements.
4.3. Senior RPR Units can be used for financing without adopting the complete RPERS financial structure.
4.3.1. By themselves, Senior RPR Units can increase returns and reduce risk for both investors and the enterprise.
4.3.2. The initial contracts signed by NMS are for Senior RPR financing only.
5. The RPERS financial structure uses the Limited Liability Company (LLC) legal structure.
5.1. The legal structure of a corporation promotes and supports power-over/dominator/ adversarial relationships.
5.2. The legal structure of an LLC gives an enterprise great freedom in drafting its Operating Agreement.
5.2.1. The Operating Agreement can be drafted to include the agreements, processes and different financial instruments that characterize the RPERS financial structure.
5.2.2. The result is a legal structure that promotes and supports power-with/ partnership/cooperative relationships.
5.3. The LLC legal structure eliminates double taxation, increasing tax efficiency and eliminating any tax penalty for the full payout of earnings.
5.3.1. Full payout gives investors the choice of how much to reinvest, reduces their risk and increases their expected return.
5.3.2. Full payout improves the allocation of resources in the economy, thus increasing economic efficiency.
6. RPERS separates ownership (represented by Common Equity Units) from the investment of money (Senior RPR Units and RPR Units) and the investment of extraordinary human contributions (Subordinated RPR Units).
6.1. Separation of ownership and investment means that Common Equity Units are not sold for money because they are ownership units, not investment securities.
6.2. Because Common Equity Units are not purchased, they may not be sold, gifted or bequeathed – they must be returned to the enterprise when active participation in the operations of the enterprise ceases.
6.3. Common Equity Units (ownership interests) are distributed to stakeholders in return for their active participation in the operation of the enterprise.
6.3.1. All current employees receive Common Equity Units and hold them for the duration of their active participation in the operations of the enterprise.
6.3.2. Investors may or may not be employees and vice versa.
6.3.3. Other stakeholders (e.g., customers, suppliers and the community) may receive and hold Common Equity Units in return for active participation in the operations of the enterprise.
6.4. The holders of the Common Equity Units (primarily the workers) own the enterprise and divide the profits that remain after payment of the promised returns to investors.
6.5. The nature of Common Equity Units makes them unsuitable for rewarding the special efforts of founders or others who make extraordinary, long-lasting contributions to the enterprise.
6.5.1. Founders and others who make extraordinary, long-lasting contributions receive Subordinated RPR Units.
6.5.2. Subordinated RPR Units have a claim on income and assets that is prior to Common Equity Units but junior to the claims those who invest money (holders of Senior RPR Units and RPR Units).
6.5.3. Ownership of Subordinated RPR Units is independent of current active participation in the operations of the enterprise and they may be sold, gifted or bequeathed.
6.6. The RPERS financial structure is designed to meet the needs of what Dee Hock, Founder and CEO Emeritus of VISA, calls chaordic enterprises.
6.6.1. Chaordic (chaos and order) enterprises are united by a shared purpose and principles rather than ruled by authority.
6.6.2. “Given the right circumstances, from no more than dreams, determination and the liberty to try, quite ordinary people consistently do extraordinary things” (Dee Hock, Birth of the Chaordic Age, Barrett-Koehler Publishers
Inc., 1999, p. 192).
7. RPERS reduces risk and increases returns for investors.
7.1. The risk of an investment has two components:
7.1.1. The stand-alone risk of the investment; and,
7.1.2. Its impact on the risk of the investor’s total portfolio of investments.
7.2. Investment in Senior RPR and RPR Units acts to reduce the risk of the investor’s total portfolio of investments.
7.2.1. Senior RPR Units and RPR Units are, together with Treasury Inflation Protected Securities (TIPS), members of an additional asset class for investors’ portfolios.
7.2.2. The fixed real (net of inflation) returns of investments in this additional asset class are uncorrelated with the real returns of investments in other asset classes.
7.2.3. This lack of correlation means that adding this asset class to an investment portfolio reduces the variability of its returns and , therefore, its risk.
7.3. The stand-alone risk of Senior RPR Units is much lower than the stand-alone risk of their alternative – bonds.
7.3.1. Inflation and interest-rate risk are the largest components of stand-alone risk for most bond investments.
7.3.2. Over the 76 year period 1926 – 2001, inflation and interest-rate risk caused the real (net of inflation) return on intermediate and long-term government bonds to be more than 1/4 less than the generally accepted estimate of the “risk-free” real return of 3%.
7.3.3. Over the same 76 year period, inflation and interest-rate risk caused the real (net of inflation) return on corporate bonds to be more than 1/3 less than the 4% real that they “should” have earned given a 3% “risk-free” real return.
7.3.3.1. Corporate bonds, unlike government bonds, typically include a “call” option that allows them to be refinanced when interest rates fall.
7.3.3.2. This call option increases their inflation and interest-rate risk, thus explaining their lower performance relative to their “benchmark” real rate of return.
7.3.4. The fixed real (net of inflation) returns and payments of Senior RPR Units eliminate all of their inflation risk and most of their interest rate risk, thus significantly reducing their stand-alone risk.
7.3.5. The fixed real returns and payments also make it possible to structure lower payments for any given amount of financing, reducing default risk and further reducing stand-alone risk.
7.3.6. Finally, stand-alone risk is still further reduced by the virtual elimination of the risk of costly and time consuming bankruptcy proceedings that can overrule the protections contained in the original financing agreement.
7.4. The stand-alone risk of RPR Units is much lower than the stand-alone risk of their
alternative – common stocks.
7.4.1. High price volatility makes investment in common stocks risky.
7.4.2. The price volatility of common stocks is high because uncertainty regarding their future income makes them difficult to value, which leads to market booms and busts.
7.4.3. The fixed (promised) real returns of RPR Units produce relatively stable real (adjusted for inflation) cash flows.
7.4.4. Discounting these relatively stable real cash flows by stable “benchmark” real rates of return produces relatively stable, easy-to-calculate values and, therefore, relatively stable prices.
7.4.5. Relatively stable prices produce relatively low stand-alone risk.
7.4.6. Stand-alone risk is further reduced by the virtual elimination of the risk of costly, lose-lose bankruptcy proceeding.
7.5. Senior RPR Units and RPR Units increase investor returns.
7.5.1. They are priced off benchmark real (net of inflation) rates of return: the 3% “risk-free” real rate; the 7% real long-term rate of return on stocks; the 10% real return expected on smaller, less-liquid equity investments.
7.5.2. Low credit risk Senior RPR Units, priced at 150 basis point (1.5%) over the “risk-free” rate will provide investors with a fixed real (net of inflation) return more than 2/3 higher than the actual real return on corporate bonds over the 1926 – 2001 period, with significantly less risk.
7.5.3. RPR Units will typically be priced to provide the investor a (cash) real return about 1/3 greater than the long-term average real return on the stock market – with significantly less risk.
8. RPERS reduces the cost of capital, decreases risk and increases returns for the enterprise.
8.1. How can RPERS decrease the cost of capital for the enterprise and pay investors higher returns?
8.2. RPERS enables the enterprise to safely use a higher proportion of Senior, lower-cost financing, thus reducing its (weighted average) cost of capital.
8.3. Default risk is a function of the size of the payments relative to real income and the stability of real income – therefore, reducing payments reduces default risk.
8.4. Senior RPR Units significantly reduce the size of the payments relative to the amount of financing, thus allowing a significant increase in the amount of Senior, low-cost financing and a decrease in default risk.
8.4.1. Elimination of inflation risk and a large part of interest-rate risk (through a sharing of the inflation protection inherent in the operation of the enterprise) make it safe for investors to accept longer maturities, thus significantly reducing payments for any given amount of financing.
8.4.2. The fixed real (adjusted for inflation) payments of Senior RPR Units further reduce payments for any given amount of financing and any given maturity.
8.4.3. As a result, the enterprise can increase its proportion of Senior financing, thus reducing its cost of capital, while increasing its coverage ratio and reducing its default risk.
8.5. Reduced default risk means lower risk for the firm.
8.6. The virtual elimination of the risk of costly, lose-lose bankruptcy proceedings
further reduces risk for the enterprise.
8.7. Returns for enterprise are increased by:
8.7.1. The lower cost of capital; and,
8.7.2. The increased productivity produced by shifting from dysergy (1 + 1 = less than 2) to synergy (1 + 1 = more than 2).
8.8. The increased returns will be shared by the workers and other active stakeholders
holding Common Equity Units.
9. Conclusion: RPERS is a different financial structure that promotes and supports the creation of a different world – a world in which every person has the opportunity to choose prosperity, joy and personal growth while living in harmony with Mother Earth.
Copyright 2002 Wayne F. Perg, Ph.D.
Presented at the Rolling Thunder Workshop: July 27, 2002 by:
Wayne F. Perg, Ph.D., wayneperg@earthlink.net
Co-Founder, New Market Solutions, LLC
Council Member, Partnership Way Center of Tucson