CORPORATE PERFORMANCE AND THE INVESTMENT MARKETS.

Towards more responsible investment - a view from the industrial side of the fence

SYNOPSIS

This piece is written from the perspective of industry and commerce - it is an outsider's view of the impact of the investment markets on the well-being of industry.
Over the last two decades, the balance of power between the top managers of commercial/industrial enterprises has swung markedly in favour of investors. Currently there is good evidence to indicate that the investment markets have a marked impact on the nature of corporate strategy, on the appointment and removal of top managers, and on governance and reward.
This Paper examines the effects of these relationships on the performance of larger quoted companies, on executive reward strategies and on the relationships between pay and performance. The last decades have seen the development of a systemic problem - the symbiotic relationships that have grown between a small cadre of top managers and investors - in effect creating a closed system impervious to external interests.
It argues that there is little relationship between pay and performance, and runaway pay is a consequence of a wider loss of perspective about the true roots of high performance. Reward is not the cause of the current crisis - it is a consequence of a wider malaise - deriving from a closed, inward-looking culture, an inappropriate world-view and skewed ethical values. The Paper concludes that there is a strong case to be made for a substantial widening of the definition of 'Responsible Investment' and for marked changes in the behaviour of investors towards quoted enterprises.

THE MANY FACES OF 'GOOD'

Changes in the concept of performance.

Pre- 1980, research by respected business academics such as Jay Lorsch and Gordon Donaldson into the behaviour and values of the top managers of some of the best performing US companies indicated that they were closely bonded with their companies and regarded success as handing on a strong company to their successors. Success in the customer markets and superior financial performance were important elements but, as essential conditions for achieving the super-ordinate goal of long-term survival, rather than ends in themselves. Managers were very cautious about the financial markets, preferring to limit dependence on external institutions. This period also saw the foundation of Berkshire Hathaway, the world's most successful investment company ever, led by Warren Buffett and Charlie Munger.

The late 1980's and subsequently have seen a seismic shift in general understanding of what performance means - deregulation of financial markets in the Anglo-Saxon economies has been a major element in increasing the power of the finance sector and of investment institutions as agents of shareholders. The dominant performance paradigm became 'shareholder value' as defined by the investment markets. As William Smithburg, chairman of Quaker Oats said in 1983: "EVA (economic value added) makes managers act like shareholders. It's the true corporate faith for the 1990's". And the high priests propelling the bandwagon of the new faith were large consultancies, many of them pushing their own proprietary (and often different) versions of value-based management together with associated metrics.

And yet, through this revolution a thread of research, by such as Lorsch, Mintzberg, Porras, Collins, Kotter and many others, has continued to come up with evidence that superior long-term performance derives not from chasing an externally-imposed definition of shareholder value, but from attention to the essentials of stewardship by managers who are more strongly bonded with their companies than aligned with the financial markets. Interestingly, these ideas are also strongly supported by Warren Buffett, now the world's richest man and a towering figure in an investment industry more defined by mediocrity than high performance. Buffett likes his investments to be well-led by people who are committed to their companies and industries, with quality organisations and strong business models and customer franchises. He also sees investment as not time-bound by annual reporting, or pressured by benchmarks or indices, but as a very long-term matter.

THE RISE OF THE FINANCIAL MARKETS AND SHAREHOLDER VALUE AS THE PERFORMANCE 'GOLD STANDARD'

Changes in the nature of investors

There has been a complete change in the make-up of investors over a period of 50 years and this has caused dramatic changes in investor expectations and behaviour.

In 1957, nearly 66% of all UK shares were held by individuals or households. By 2003 this had fallen to under 15%. In the US, the trend has been very similar, with 90% of shares being held by individuals or non-profit organisations in 1950, compared with 36% in 2003.

The impact of this change cannot be overstated. Management of share portfolios is now mainly delegated to professional fund managers who are usually judged and rewarded on the basis of short-term performance. Unlike most individual share-owners, the tendency is for most fund managers to churn their shares extensively, buying and selling on predictions about short-term share price movements - not behaviour approved by Warren Buffett! When it comes to voting, institutional investors dominate smaller shareholders.

This adds to the pressure to deliver short-term performance on companies whose shares are held mainly by institutions, especially on the FTSE 100, as investor preferences are generally towards larger companies, which are extensively 'analysed'.

Fundamental changes in the balance of power

Until the late 1970's, the managers of large enterprises were able, except in extreme circumstances, to keep external forces at bay. The UK investment markets were dominated by 'gentlemen', to quote Philip Augar in 'The Death of Gentlemanly Capitalism'. In those days, government was perceived to be a much larger influence, if not threat, to managerial autonomy. The deregulation of the financial markets saw major changes in the UK, US and Australia - changes not replicated to anything like the same degree in Japan, South East Asia, Germany, France and the Scandinavian countries, where combinations of cross-shareholdings, banking investment and state involvement has kept the investment markets at more of a distance.

The importance of the capital markets is an Anglo-Saxon phenomenon. In 2002, the value of Stock Market capitalisation as a proportion of GDP was 105% in the US, 111% in the UK, 31% in Germany, 49% in Japan and 62% in France. In the UK, once-dominant top managers now universally accept the power of the markets and that their well-being is strongly related to an externally imposed definition of performance as being what the markets want. In parallel, the role of governments as regulators of corporate behaviour has markedly decreased, to be replaced by an elaborate framework of corporate governance provisions, 'policed' by the representatives of the investment community. Agency Theory, the idea that managers must align their interests and actions with what the 'owners' (in reality investment institutions) want, has become the dominant idea and is enshrined in the compendious Combined Code on Corporate Governance.

What are the implications for 'Performance'

Once the long-term survival of the enterprise was the overriding goal and superior customer market and financial performance were the main drivers towards it. Now the domain of performance has, for publicly quoted companies, become massively more complex. This, as will be seen later, also feeds through into reward strategies and the design of executive compensation systems.

Some fundamentals:

2 This was clearly demonstrated by interviewees responses for PARC report, "The role of the board in creating a high performance organisation"

Example

The Lex column in the 'Financial Times' made the point about conflicting investor motives and messages after hedge funds and US Mutuals had taken a leading role in stopping the Deutsche Borse bid for the London Stock Exchange:

"Pity the poor executive. Creating shareholder value is one thing, but it is increasingly difficult to determine who these shareholders are and what they want".

The mutuals and hedge funds had made common cause around the demand that Deutsche Borse should return cash to shareholders rather than spend it on acquiring LSE. This implied that these shareholders either had a short-term horizon and a strong preference for cash quickly or had made a judgment that a merger to create a major European stock exchange with a dominant market position would not create value for its shareholders in the longer term because national regulators would in some way spoil its profitability. The hedge funds had another possible motive: they had shorted LSE shares and stood to gain massively from a fall in price that would inevitably follow the withdrawal of the Deutsche Borse offer. LSE shares had risen sharply on the assumption that both the French and German exchanges would wish to bid for LSE and its shares could be expected to drop sharply if one of the two suitors withdrew. The mutual funds stood to lose from the drop in share price, but gain fulsomely from the fees they charged hedge funds to 'borrow' their LSE shares for shorting.

In this kind of context, 'shareholder value' denotes that everybody understands what shareholders want - certainly it had little or nothing to do with the performance of the LSE, the merits of its management or the strategic sense of the bid!

So whatever happened to Shareholder Value?

The big idea of the 1990's was the concept of shareholder value as the vital link between the interests of 'owners' and managers. A strong narrative was developed justifying this assertion: If owners were being enriched so everybody would benefit - savers, pension-holders, even employees - because if companies did well, as measured by their share prices, then the benefits would trickle down in the form of better pay and employment prospects. But the crucial linkage was between 'owners' and managers. Link managers' rewards and well-being to creating shareholder value and the agency problem would be solved.

Vital flaws soon appeared in the fabric of this apparently simple and attractive notion. First to emerge was the fact, already referred to, that the links between share prices and company performances were imperfect, even tenuous. Extraneous factors such as general economic conditions, excitable investor sentiment and wild theories, such as those that drove the dot com bubble seemed to affect the state of the markets far more than the performances of individual companies.

Then, it soon became apparent that the very concept of value creation was rather unclear. It appeared that the simple notion of comparing opening share price with closing share price over a period, including the value of dividends assumed to have been re-invested, was subject to wild distortions, and so a whole industry of consultants was willing to step in and help. Value-based management (VBM) became the new management craze. Led by such specialists as Stern Stewart and followed by every large consultancy, a huge market developed in VBM consulting. This in itself created confusion, because every consultant strove to create their own VBM brand. So a host of competing metrics emerged: EVA, MVA, SVA, CFROI, TSR and SVA. All were subtly or even markedly different in what they purported to measure.

But the key factor was that they did little to clarify what a good performance was in any coherent manner. This confusion was used by compensation consultants and some managers to advantage in designing compensation programmes of Byzantine complexity.

Attempts to overcome the windfall nature of share prices by constructing value creation league tables also ran into problems when it became apparent that many comparator lists consisted of companies that were only similar because the Stock Market classified them in particular groupings. Bizarre outcomes included the classification of Thorn EMI as an electronics company in the 1980's, when most of its major businesses were in retailing, domestic appliances and entertainment. Using the whole market as a comparator list was exposed to the difficulty of variances in investor sentiment regarding particular industry segments, causing differential share valuations depending on, for example, 'new' or 'old' economy companies were fancied. The growth of Index-following investors also distorted share prices, as investors sought to match their portfolios to the profile of the market. This caused them to buy and sell shares to balance their portfolios, affecting individual share prices in ways that had little to do with performance.

Last sample from this multitude of problems is the phenomenon of rewards for corporate demise. As will be described in Section B, the rate of corporate demise amongst FTSE 100 companies has been massive - over 80% of incumbents have disappeared since 1983. Without discussing the rights or wrongs of the matter, change of ownership has massively benefited some top executives, the value of whose options or share holdings, triggered by change of ownership, were greatly enhanced by a hostile bid (naturally strenuously defended against in order to enhance buying prices and 'shareholder value'). This factor, plus the massive impacts of the bull markets of the last twenty years, has made a major impact on levels of top executive reward - much of which appears to have had little to do with the merits of individuals or of companies.

PERFORMANCE THROUGH MANY DIFFERENT LENSES

The paucity of rigorous research evidence

A review of the literature about high performing organisations reveals a massive amount of material from many sources. It seems that every consulting company and business school is competing to sell expertise on the topic. The bookshelves are full of inspirational literature on the secrets of high performance - for example, there are over 50 books purporting to reveal the secrets of success of GE and Jack Welch, its legendary CEO. Such was Welsh's potency, it has been reported that people were appointed to senior jobs in other corporations simply because they "worked for Jack Welsh". As Prof Rakesh Khurana reported in his article "The Curse of the Superstar CEO", (Harvard Business Review, 2002) the whole field of leadership and high performance has acquired a quasi-religious, even superstitious quality as people strive to understand and copy the "7 habits of successful leaders" and the like. A closer look at the field soon reveals that most 'research' consists of anecdotes, vignettes and stories that have little empirical validity.

A comprehensive study of the field of contemporary research by Prof Andre de Waal of the Maastricht School of Management casts doubt on most studies of high performance as lacking stringency and validity. However, from a world-wide sample of over 90 studies, he identifies 36 that meet reasonable standards of thoroughness. His findings will be reported later.

Different perspectives on performance

A review of the field indicates that there are many 'lenses' through which performance may be viewed. Examining some of these differences is a useful starting point to a study of the roots of high performance.

A. The Investment Industry

We have already identified the importance of the financial markets in setting the agendas for quoted companies. So what do investors regard as good performance? Alas, in the contemporary world, there are so many conflicting views amongst investors that one FTSE 100 CEO said: "One shareholder could be keen to have cash refunded and another will object, seeing it as a sign of failure. If you take that one example and multiply it by every aspect of the business, the result is a cacophony of different views - a situation which is near-impossible for non-executives or executives to synthesise". (PARC study, 2005)1

Another commented: "Fund Managers don't have any experience (of running a business) and are more concerned about building their financial models - but feel they have a remit to interfere in the management of the business, even indirectly through corporate governance". (PARC 2005) 1

It is, however, possible to detect some threads of logic about the views and needs of the mainstream investment industry from a couple of sources. (The burgeoning Hedge Fund industry and the growing field of arbitrage generally are more interested in speculating for short-term gain or loss in share prices than in corporate performance).

Hermes Fund Managers are a respected London-based investment institution with a strong ethical reputation. They have published an influential document, titled 'The Hermes Principles'. It is possible to gain an insight into the mindsets of more ethical institutional investors through this document.

"Preamble
  • It is axiomatic that the Primary Goal of a UK-listed company is to be run in the long-term interests of its shareholders......Central to this goal is the need to create a financial surplus.
  • A financial surplus is achieved by having a competitive advantage.
  • Companies should behave ethically"

Also behind these Principles is some recognition of the fact that all is not necessarily well in the world of 'shareholders'. They state, somewhat uneasily, under the heading 'Capital Market Behaviour', that "Some participants in the market seek to bet on performance over a short time period. This should not distract company managers from their long term goals".

They then nod briefly to acknowledge the fact that they are not actually the real shareholders; "(Throughout this document reference to Hermes as the shareholder is in recognition of Hermes as the agent for the owners)".
This is honest; most investment institutions behave as though they really owned the shares.

"The Ten Hermes Principles.
  1. Principle 1: "Companies should seek an honest, open dialogue with shareholders. They should clearly communicate the plans they are pursuing and the likely financial and wider consequences of those plans. Ideally, goals, plans and progress should be discussed in the annual report and accounts".
  2. Principle 2: "Companies should have appropriate measures and systems in place to ensure that they know which activities and competencies contribute most to maximising shareholder value".
  3. Principle 3: "Companies should ensure all investment plans have been honestly and critically tested in terms of their ability to deliver long term shareholder value".
  4. Principle 4: "Companies should allocate capital for investment by seeking fully and creatively to explore opportunities for growth within their core businesses rather than seeking unrelated diversification. This is particularly true when considering acquisitive growth".
  5. Principle 5: "Companies should have performance evaluation and incentive systems designed cost-effectively to incentivise managers to deliver long-term shareholder value".
  6. Principle 6: "Companies should have an efficient capital structure which will minimise the long-term cost of capital".
  7. Principle 7: "Companies should have and should continue to develop coherent strategies for each business unit. These should ideally be expressed in terms of market prospects and of the competitive advantage the business has in terms of exploring these prospects. The company should understand the factors which drive market growth and the particular strengths which underpin its competitive position".
  8. Principle 8: "Companies should be able to explain why they are the 'best parent' of the businesses they run. Where they are not the best parent they should be developing plans to resolve the issue".
  9. Principle 9: "Companies should manage effectively relationships with their employees, suppliers and customers and with others who have a legitimate interest in the companies' activities. Companies should behave ethically and have regard for the environment and society as a whole".
  10. Principle 10: "Companies should support voluntary and statutory measures which minimise the externalisation of costs to the detriment of society at large".

The City 'mainstream' investor view

Tony Golding, an ex-investment banker, wrote a seminal book about the investment industry (The City, 2001). In it, he reflected on his research and experience of what investors want out of companies. His analysis indicates that there are considerable differences between the investment mainstream and ethical investors - and as we will see, even greater differences between them and long-term 'value' investors like Warren Buffett.

Golding suggests that mainstream institutional investors want:

Warren Buffett

The contrast of these values with the investment philosophies of Warren Buffet, the durable guru of Berkshire Hathaway could not be starker. Here are some of Buffet's investment tenets:

Private Equity

It is conventional wisdom that the approach of private equity investors is superior to that of the public equity markets. The 'Economist' magazine described private equity as "a superior form of capitalism". Oft-quoted reasons for this superiority are:

The facts are more complex. First, private equity investors aim to purchase companies and realise their gains typically within a four to five year period. This may be regarded as long-term in the Anglo-Saxon economies, but is actually rather short-term with regard to making extensive change (the supposed raison d'etre of private equity) sustainable. Warren Buffett would agree that four to five years is a very short term horizon.

Secondly, the private equity 'model' is typically to limit equity holdings to a small number of investors and highly-incentivised managers and to convert as much equity as possible into borrowings - lenders having inferior rights to the equity holders. Most companies held by private equity are thus very debt-laden - maybe viable in times of cheap money, but much less so when borrowing costs rise.

Third, private equity holders aim to extract as much cash as possible, through cost reduction and sale/leaseback arrangements for property assets.

Assessment of private equity

There has been much debate about the viability of private equity. There is no doubt that the investment managers and the highly incentivised executives placed in companies have reaped high rewards. What is much less certain is whether staff, customers and lenders actually benefit in the longer term. Also, there is no clear evidence that companies perform well after being returned to the public markets or after trade sale. The latter is almost impossible to confirm, and the performance of such companies as the AA and Debenhams has hardly been encouraging.

OTHER PERSPECTIVES ON PERFORMANCE - Companies with different forms of ownership

A number of studies have identified that companies with a significant family interest seem to generally out-perform 'pure' quoted companies, with multiple, diffuse shareholdings. In Europe this out-performance has exceeded 8% since 1996 and the same applies in the US. In fact, some of the world's best-known companies have a mix of stock market holding, but sufficient family involvement to counter pressures from the markets 10

Investment Bank Credit Suisse is one of a number of organisations that have studied the performances and characteristics of family-influenced companies. Google: Credit Suisse Families Index

'Family-influenced' means that family owners have a sufficient stake to override or block the wishes of other shareholders should they feel they are not in the interests of the business. Well known family companies include LG Group, Hyundai, Samsung, Toyota, Carrefour, Michelin, BMW, Fiat, Ford, Cargill and Motorola.

All studies indicate that companies with a consistent, long term involvement of a family interest seem to perform in aggregate between 8% and 10% better on all major financial criteria than 'pure' quoted companies.

They were so impressed by what they found that they decided to set up a new investment market, called the Families Index. The Credit Suisse findings are typical of investigations into the field. The bank concluded that the main characteristics that were behind higher performance and that differentiated family companies from the market mainstream of quoted companies are:

The results are further substantiated by international studies. Prof. Akiro Suehiro of the Japanese ADB institute discovered that the best performing Thai companies included family owned enterprises and the worst performers were public companies that followed traditional free-market governance practices imposed by the World Bank.

This resonates with my own more limited investigations into how large family companies manage themselves. From several interviews with chairs and directors of family companies that have had an average life of over 50 years (impressive in itself), it appears that the factors discovered by Credit Suisse are valid.

But there is one more, probably crucial, factor that emerged from my interviews and is substantiated by research by Prof. Onora O'Neill, 2002 Reith lecturer and explored in a book by Marek Kohn 12 :

Impact of Trust

There is growing evidence that levels of trust and confidence in leaders is decreasing. 13

Professor O'Neill's research seems to indicate that organisations with high levels of trust between leaders and led need to expend less effort on developing and maintaining formal systems of direction and control. There is an underlying efficiency in exercising trust because it considerably reduces human transaction costs and allows swifter decisions and action. So, it is much easier to align employees behind programmes, projects and general efforts to further the interests of organisations if trust levels are high. In contrast, significant levels of control through measurement and finite goals tend to reduce levels of trust and to increase transaction costs.

Against this background, it is interesting to reflect on the views of director interviewees in the 2005 PARC study that corporate governance pressures were undermining the bonds of trust between executive and non-executive directors, replacing them with formal systems of control. As the corporate governance movement is based on Agency Theory, which holds that managers cannot be trusted to fulfil 'owners' wishes without elaborate systems of reward and sanction; it might be asserted that much of the pressure for ever-tighter governance represents institutionalised distrust!

A review of research into the roots of high performance seems to indicate that high performing companies exhibit high-trust relationships between leaders and other employees. The influence of trust as a performance-enhancing factor merits further investigation.

Other forms of non-quoted companies

John Lewis Partnership and the Co-Op - Purposes and performance

Two of Britain's better performing enterprises are the John Lewis Partnership and the Co-operative Group. Both have significantly out-performed competitors in the retailing sector in terms of growth and market shares. Both distribute profits to partners or members. John Lewis owns and operates department stores and Waitrose, a food retailer. The John Lewis organisation is nearly 100 years old, and its primary object is to foster the happiness of its members, who share fully in the rewards of its performance. It has an extensive constitution, enabling partners to share in strategic decision-taking.
A fuller description of the philosophy and constitution of the John Lewis Partnership can be seen on their website, www.johnlewispartnership.co.uk.

The Co-operative Group is a consumer-member owned business - the largest of its kind in the world.

The performance of Co-op food retailing has been strong, making it the largest neighbourhood supplier. It is also a robust performer in retail banking and insurance, travel, farming and funeral services.

SUMMARY

There are massive differences between the perspectives of the investment markets and those of other forms of owners. Even more confusing, there are massive differences within the institutional investment community, ranging from long-term commitment to daily speculation. It appears that the huge supply of 'hot' money has vastly increased the influence of the speculators.

There is strong evidence that financial ownership of companies through the public equity markets, especially in the Anglo-Saxon economies, has a potentially detrimental effect on performance. More focused, longer-term forms of investment, such as evidenced by some family and employee owners and a small minority of financial investors like Warren Buffett's Berkshire Hathaway organisation seem to have much more positive impact on performance.

It seems that problems are caused by the dominance of investors' needs over the strategies of companies and the high risk of misalignment between the interests of the enterprise and financial 'owners', causing potential damage to the fabric of the organisation and the interests of employees and customers. The longer the timescales the more are the risks of serious misalignments of interest.
It is probable that the relatively poor performances and high rate of attrition of FTSE 100 companies is in significant part caused by these factors.

There is at least circumstantial evidence that organisations with different forms of ownership to the 'pure' public holding are not similarly disadvantaged. Some of the world's largest and best-known businesses have significant family interests. Partnership and mutual forms of ownership can also work well, not only in the industrial/ commercial sectors, but also in such industries as legal services. Outside the scope of this study, the social enterprise sector is the fastest growing sector of the UK economy.

STUDIES OF THE CHARACTERISTICS OF HIGH PERFORMING ORGANISATIONS - RESEARCH META- STUDY.

As previously observed, much of the research into corporate performance is extremely suspect because it is skimpy, relying on anecdote and vignettes, or open to suspicion because it is being pushed in the form of recipes by consultants and some academics. Often proponents of 'recipes' for high performance will simply change the recipe if their previous champions fail. These tendencies are exacerbated by naïve practitioners, hungry for simple and copy-able examples of best practice.

There is one international study into the characteristics of high-performing organisations that is conducted with some stringency. Prof Andre de Waal of the Maastricht School of Management conducted a search of all research findings on high performing organisations conducted between 1990 and 2007.

He categorised 91 studies (which covers work by most legitimate researchers) and selected 36 as meeting three tests: sufficiently large research sample, rigorous methodology and contemporary - conducted since 1991. The remaining studies he used as secondary verification of the findings in the 36 main studies. He made no distinctions for industry or country of origin, so the study is very international.

A Health Warning

Before regarding de Waal's findings as a recipe for success, his own reservations should be observed:

De Waal's findings

First, he scanned the research and compiled a composite description of a high performing organisation:

A High Performance Organisation is one that achieves financial results that are better than its peer group over a longer period of time, by being able to adapt well to changes and react to these quickly, by managing for the long term, by setting up an integrated and aligned management structure, by continuously improving its core capabilities and by genuinely treating its employees as its main asset.

Then, he grouped the characteristics of high performing organisations into eight clusters of characteristics:

Summary

De Waal's investigation highlights that high performance is very contingent and must be tailored to particular organisations at particular times. However, it is interesting that the vast bulk of research into high performance finds that the most important factors relate to customer and partner relationships, leadership, culture, organisational design and quality, learning, process design and environmental awareness. Corporate governance, shareholder value creation or externally imposed financial disciplines do not feature as significant drivers of high performance.

PERFORMANCE - SYNTHESIS

What is the meaning of the evidence about performance?

  1. There is strong evidence that a highly diversified shareholder base, such as found in most large quoted companies, tends to detract from rather than enhance long-term sustainable performance. The data from the FTSE 100 is very strong in this regard. The balance of evidence indicates that a key factor creating the potential for high performance is a stable, long-term alignment of interests between owners, managers, employees in general; and customers. In the investment industry, Warren Buffett has been an example of long-term committed investor and his company, Berkshire Hathaway, has produced long-term results far exceeding the average of the investment industry in general. So it appears that long-term commitment by investors and top managers to companies can produce superior corporate performance and superior investment returns.
  2. The real roots of high performance seem to lie in a combination of leadership, organisational, cultural and process factors, combined with an active appreciation of the customer, competitor and wider external environment. A high commitment to creating a safe learning environment free of punitive practices also seems to be important.
  3. Financial inducements and rewards closely geared to meeting precise targets do not seem to be an important stimulant of sustainable high performance. Far more important seems to achieving an equitable balance between the pay of top managers and other employees and the creation of a culture rich in intrinsic rewards for learning, belonging and collaboration.
  4. Trust between people in organisations seems to be a more important factor in creating a high performance environment than often realised. Highly trusting working environments make leadership easier and remove the needs for elaborate systems of measurement and control and highly contractual relationships. 'High-trust' organisations are likely to be better at sharing of knowledge and learning and to be able to respond rapidly to environmental and market information.
  5. The era of strong corporate governance and alignment of the interests of managers and investors does not seem to have stimulated high performance, nor has there been a satisfactory relationship between performance and pay. The increasing complexity and turbulence of the investment markets and the growth of highly speculative forms of investment is unlikely to make matters better.

Summary

The best available research evidence shows that the roots of high performance lie in two main factors:

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