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Illusion v Reality

Illusion v Reality

What you think you see is sometimes not the reality
Is this real or imagined?

Illusion v Reality

Three things caught my attention this week and got me thinking about how appearance (the illusion) compared with reality.

  • The first was a quote from Joseph Kennedy telling his famous sons:

“It’s not who you are that matters, it’s what people think you are.”

  • Second was a letter from a business provider explaining a corporate divorce. The letter did not explain truthfully what had happened, but dissembled about the outcome.
  • Third was a blog on common illusions about startups.

Generally, two types of illusions were highlighted: one about people, the other about businesses.

Personal illusions

Illusions about people are pretty much the same as illusions about life. As Joni Mitchel said so beautifully:

“I’ve looked at life from both sides now,

From win and lose and still somehow,

It’s life’s illusions I recall

I really don’t know life at all.”

Creating illusions about ones life is common practice. No where is this more so than in the worlds of motion politics, motion pictures, the media and, of course, business. In these walks of life illusion is everything.

Also, those who populate these professions cross over or intermingle so that their activities and identities become indistinguishable. Who was Ronald Reagan? Who is Donald Trump? Are they actors, celebrities, politicians, businessmen, TV personalities or pure illusionists?

More importantly, what sort of people are they? Do they measure up in any way to their preferred image?

Frank Sinatra

The late Frank Sinatra was a prime example of the singer/actor/celebrity who moved seamlessly into politics and (shady) business, while fighting an image problem.

Sinatra spent a fortune on PR, building the illusion of the caring, generous, liberal, family oriented, Mr Nice Guy. In reality, he was foul mouthed, viciously tempered, philandering, disloyal and corrupt. He associated freely with the Mafia, made millions through gambling, cheated repeatedly on all his wives, was disloyal to his friends and switched from being a Democrat to supporting Ronald Reagan (a Republican) when he saw it was in his interest to do so.

Sinatra spent millions polishing his personal brand and it worked very well for him. He achieved America’s highest civilian awards while claiming friendship with Presidents, Ambassadors and Royalty. It is no co-incidence that he was also a friend of Joseph Kennedy and would have thoroughly agreed with what Kennedy said about the importance of illusions.

Business illusion

Turning now to the problem of illusion v reality in the business world.

Illusions are very important for businesspeople. Think Elon Musk, Richard Branson, Jeff Bezos, Mark Zuckerberg and all the other rock star entrepreneurs. Don’t they seem to spend as much time on their personal PR as on their businesses?

However, the business illusion I wish to talk about concerns business entities rather than the fantasies of individuals. This sort of illusion can be put into two broad categories:

  • The illusion that arises from PR and advertising, usually put out by larger, public companies.
  • And the illusion about the wealth, strength and trustfulness of private,  small or medium sized enterprises.

Public company PR

It makes me slightly ill when I see banks and other institutions posturing in their terribly PC and woke advertisements. A litany of virtue signalling and “togetherness” when what they are actually doing is just selling their services.

The illusion is that they are “helping” and “caring”; the reality is that they are trying to make money. We accept the reality – we expect businesses to try to make money. But please, spare me the rest of the flannel!

The small business illusion

Although the big company PR is slightly nauseous, more important is the illusion generated by some small businesses. This illusion has arisen from the concept of company incorporation. Central to incorporation is the idea that a company is a separate legal entity from the people who own or manage it. Associated with this is the idea of limited liability. Both these ideas can trace their birth to South Sea Bubble of the 1720s.

Now for a bit of legal history. Please skip this if it bores you.

Prior to the 1720s when people joined together to trade, they did so as partners. The individuals in the joint venture were known to those who dealt with them and, if the venture failed, the partners were responsible for the losses.

The South Sea Company was such a joint venture. Unfortunately, it collapsed causing huge loses to those involved, including the English Crown. This led to a series of Acts of Parliament addressing how businesses should trade. What follows is a brief summary of these Acts.

The Acts of parliament

  • The Bubble Act 1720, which forbade the formation of all joint-stock companies unless they were authorized by royal charter. (The Crown was effectively preventing business ventures from competing with the South Sea Company, because they had a large stake in it!)
  • Chartered Companies Act 1837, which enabled ventures to trade under “letters patent”. This was an early form of incorporation.
  •  Joint Stock Companies Registration and Regulation Act 1844, which allowed companies to be incorporated. However, the entities were still treated like partnerships, which meant the members (shareholders) did not enjoy limited liability for the company’s debts.
  • Limited Liability Act in 1855, which introduced proper limited liability, restricting shareholders’ liability to the amount unpaid on their shares. That is, shareholders were not responsible for the company’s debts.
  • Joint Stock Companies Act in 1856, which introduced the modern memorandum of association and the articles of association, among other things.

The “corporate veil”

The result of this legislation was the creation of a business entity which shielded its shareholders. It created what we now call the “corporate veil”, the mask or protection that shareholders have from public view, and, more importantly, from being responsible for company liabilities.

To get at the shareholders you must “lift the corporate veil”. But because the courts have been reluctant to lift the veil. Consequently legislation has been introduced by Parliament over the years to make shareholders, in limited circumstances, liable for company debts. An example is making directors (who in small private companies are often also shareholders) liable for some company debts. However, this has not been effective with public company shareholders and directors.

Companies can hide behind their image created by corporate magicians
The magic of illusion

But what has this got to do with illusion v reality?

Because companies can own other companies and because the owning company can be in a different country (or jurisdiction), there is a corporate veil that can mask ownership as well as the location, size, trustworthiness and wealth of a company. This makes creation of the illusion so much easier, but penetration of it so much harder.

In most developed countries companies must provide information (including financial results) to their regulatory authorities. In the UK this is Companies House. See:

However, this information is usually limited and usually out of date. (How does it help, for example, to know that a company you are enquiring about is owned by another company in the Bahamas?)

The result is that we often don’t know much about many of the private companies we are dealing with, whether we are a customer or as a creditor. This ignorance includes knowing about their ownership and/or their current financial position.

Hiding the facts

It’s relatively easy for a company to hide crucial facts about itself. The use of a fancy website, City grandees as directors, an aristocratic Chairman, a pompous name (as well as fancy corporate literature) will all go a long way to presenting an illusion of trust and solidity. But who and what really sits behind the corporate veil?

[Note the regulation of the governancefinance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance rights.]

The internet & social media

In this age of increasing scrutiny through the press and social media one would think that we should know everything about the businesses we deal with. This is true for many businesses, where things like reviews on forums and discussions on social media can reveal the reality behind the illusion.

But this by no means universal. Many clever businesses have, indeed, utilised the anonymity of the internet and the illusion of an impressive web site to defraud investors and customers. Scammers, of course, utilize these illusions every day.

The illusion of startups

Finally, I want to draw your attention to a very good blog I came across recently. It was called, appropriately, “What are the greatest illusions about startups?” and was written by Tim Berry Founder of Palo Alto Software.

He said there are several illusions about startups. These include the illusions of:

  • “Few businesses have truly new ideas. Apple didn’t; Facebook didn’t; Google didn’t. They took an existing idea and did it better, or differently. Quite often the second or third entrant into a market wins. Furthermore, business ideas have no value. Execution gives them value. At the idea stage, they are just vapor, with no way to tell if they will even work.
  • You would think that all startups go from business plan to pitching to funding to launch. But no. That’s the exception. Out in the real world, the early stages are usually a lot of struggle, work without money, doing things on your own time and after hours. Only a small minority, the best of the best, get other people’s money to spend. And that usually happens after a period of struggle, not at the beginning. Investors fund businesses but not plans, and ideas even less so.
  • Nope. Your customers are your boss. Your employees are your boss. Start a business and you answer to a lot more people than you did as an employee.
  • Persistence only matters if the fundamentals are sound. Otherwise, it’s just digging deeper holes. Successful entrepreneurs often tell crowds of hopefuls how they need to stick to it, but that’s not really fair. Yes, their persistence won in the end, but for every success there are several failures who should have seen the signs sooner and should have given up sooner.
  • Passion is necessary but not sufficient. Yes, being committed, believing in the goals, is a good thing, for sure. You almost have to have it. But passion doesn’t make a bad business good. It doesn’t fix cash flow, overspending, low demand. Lots of failed businesses were fuelled by passion. When startup founders emphasize their passion, potential investors are usually rolling their eyes and waiting for them to get to the real content of their pitch.

Illusion v Reality: Conclusion

So, illusion is with us everywhere in people and in life. It is rife in business, existing in statups and international corporations.  We don’t have to look to hard to find it.

However, you probably think personal illusion is mostly pretty harmless. I would agree. Perhaps, it is just a fact of life that people are often not what they seem to be. And maybe this is actually a positive. Who wants to be known warts and all? And, do you really want to know all the shortcomings of your heroes?

But business illusion is an entirely different matter. It leads to fraud and theft. Moreover, it creates uncertainty, distorts relationships, enhances risk and costs consumers billions every year. I’m not sure who we blame for this, but the South Sea Bubble should take some part of it.

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