The Truth That Dare Not Speak Its Name
What is harming British productivity, innovation, industrial investment and other areas where the UK lags behind many competitor countries? According to a new book it is the destructive behaviour of many top managers and City investors, who are more concerned with their own gains than investing in and supporting successful companies.
In many ways the British economy is doing well. Employment levels are high, growth (recently driven by consumer spending and the housing market), is satisfactory by comparison with many developed comparator nations and the economy is relatively stable at the macro-economic level.
Yet, behind this apparently benign picture, there are niggles that will not go away. Let's look at some of the evidence. Chancellor Gordon Brown has convened "an international meeting of minds to boost UK entrepreneurialism and productivity" says the Sunday Times of January 11, 2004. The same chancellor had addressed trades unionists at the TUC conference in 2003, promising better times ahead for a stricken manufacturing sector, based on the cheerful assumption that favourable exchange rates would boost export demand.
The CBI continues to grumble loudly about the near-crippling burdens of regulation, bureaucracy, red tape and excessive taxes that are severely damaging the competitiveness of British companies.
The Cabinet Office Strategy unit recently produced a fascinating range of facts and figures about the British economy. Surveying the best available data, they revealed that the UK trails other large industrialised countries on R&D and patents and is the only developed country in which corporate R&D spend has actually decreased in the last ten years. Warming to their theme, they then expose the fact that Britain is also a serious laggard when it comes to generating revenues from new manufactured products and that capital expenditure of British owned companies generally trails those of most other developed nations. The researchers continue and wind themselves up to state that UK levels of productivity are well below those of most advanced economies, that UK GDP per head stands 17th internationally, just above that of Portugal and that we seem to excel when it comes to pay inequality, only being beaten by the US! Finally, the researchers reveal from survey data that the public rates 'people who run large companies' on a par with estate agents and red-top journalists when it comes to esteem and trust.
The Council for Excellence in Management reported in 2002 that the levels of leadership and management skills in Britain were in short supply from top to bottom.
Last, but by no means least, the think-tank To-morrow's Company has been conducting a review of the habits and behaviour of the investment industry, chaired by Sir Richard Sykes and entitled '21st Century Investment'. Despite the fact that the enquiry team seems to consist of a range of the 'great and good' of industry and the financial services sector, there are signs that even this group are becoming concerned. Addressing a conference of industrialists and financiers, Sir Richard is quoted as saying, "Our challenge is this. How are we, together, going to recover trust and strengthen the system before the remedies are taken out of our hands, as a result of political pressure, regulatory action, or before an even more serious erosion of trust".
So, what is Sir Richard talking about? In the public mind, he might be alluding to the plethora of scandals and disasters that have liberally covered the business and sometimes the front pages of newspapers worldwide. In the US, the names Enron, Tyco and Worldcom have become synonymous with greed and corruption. In the financial markets, huge investment banks stand accused of misleading, exploiting and ripping off their unfortunate customers. In this country, the spectacular collapses of companies such as Marconi, Iceland Foods and Invensys have attracted muted outrage. In the City, there has been a ceaseless flow of scandals, from personal pensions mis-selling, through endowment mortgages to 'precipice bonds' and many other mysterious financial derivatives and devices that purport to enrich the lucky punter, but which have often had the opposite result.
Then, we are regaled in the press by reports that thousands of call centre and potentially even more routine financial services jobs are being 'off-shored' and that periodically top managers get fired because they have aroused the ire of 'shareholders'. Michael Green and Sir Philip Watts of Shell are current examples of execution and demands for heads on a plate.
Is this what all the fuss is about? Yes, probably in the eyes of the press, the City and (possibly) Sir Richard Sykes. Yes, but only the tiny tip of a massive iceberg, according to Don Young and Pat Scott, authors of a new book, entitled Having Their Cake, published by Kogan Page in January 2004.
According to the authors' experience and research, there is something much more corrosive and serious going on under the tip of the British industry iceberg than high profile events and scandals, which are here today and gone tomorrow.
Consider the following:
In mid-2002, the FTSE 100 contained no companies in the information technology hardware, engineering and machinery, electrical engineering and industrial manufacturing sectors. Also, there are no large British integrated investment banks.
There is one company each in electronics, auto components (none in vehicle manufacturing), software and computer services and metals manufacturing. There are two companies in aerospace and defence (although the management of one, British Aerospace, have been trying to find a 'merger' partner in the US), three companies in pharmaceuticals and two in chemicals.
Thus, only about 11% of the FTSE 100 comprises companies in the physics and chemistry based sectors, once a bastion of British industrial strength and which are cradles of R&D, innovation, and, incidentally, highly skilled and well-paid knowledge employees. This percentage needs to be compared with over 50% in Japan, France and Germany and some 30% in the United States.
Britain has been the welcoming recipient of high levels of inward investment in recent years. This is just as well, as nearly 50% of Britain's manufactured exports are now made by foreign-owned companies. Just as well too, as the productivity of US-owned manufacturers in Britain is nearly double that of indigenously owned manufacturers, and that of French, German and Japanese owned companies is considerably in excess of their Britishowned counterparts. Why? Because their levels of productivity-enhancing Capex vastly exceeds indigenous levels and their management practices are generally vastly superior, according to most authorities.
The rate of churn, failure, takeover and mergers of companies in the FTSE 250, and particularly the FTSE 100 has been massive. Of the top 115 companies of 1987, only 26 remain broadly intact and in the same business. The remaining 89 have merged, been taken over, de-merged or gone private. Very good, say some; keeps industry on its toes! Not so, say the facts. The majority of the changes have been fuelled by the drive to make acquisitions or merge (or the effects of the same). Much M&A activity has been comprehensively shown to destroy value and companies. In fact, in the US, M&A activity has been shown to have destroyed more value than the whole dot.com madness!
The turnover of CEOs of FTSE 250 companies has increased vastly. In 1999, the average tenure of a CEO was just over four years. It is now reported to be even less. This contrasts with over nine years in the unquoted sector.
Thus, the biggest companies are becoming increasingly dominated by hugely rewarded, short tenure and often externally appointed 'superstars'. There is much research to show that the cult of the star and the massive, often enforced, churn of CEOs does no good, unless the circumstances are dire. Even then there are problems, as superstars are hired to rectify the damage done by the previous short tenure corporate 'hero'!
There are many more interesting manifestations and happenings than space allows - just consider pay differentials, fat cats, growing employee insecurity and disillusion (in a workforce that manifestly likes to work hard), the proliferation of great cock-ups and disasters in manufacturing and service industries, customer rip-off's etc, etc.
Is there anything that connects all these manifestations together? Reading the financial press yields few clues - there is a marked tendency on the part of reporters to cover many manifestations as though they are separate events and not results of some kind of 'system' of interconnected interests. In fact, many elements of the press are so besotted with reporting industry as some kind of soap opera, dominated by high profile individual heroes or villains, and as a series of dramatic events, that it seems they have no memory or sense of process.
It also seems that top managers and the City are not owning up to anything being amiss, even with the stimulus of the 21st Century Investment enquiry to spur them!
But closer examination will reveal that at the centre of our industrial drama lie two big 'players', who are closely interconnected by a complex and subtle web of symbiotic relationships. The players in question are the top managers of larger companies and the investment institutions, brokers and investment banks, which have exercised increasing influence over managers.
Is this last fact true? Absolutely, say the authors from their researches and personal experience as top managers in large companies. The strongest influences on the appointment, success, wealth and careers of top managers now lie (with a very few exceptions like defence contractors) in the City, with investment institutions, analysts, financial press and, to a lesser degree, brokers and investment bankers. The authors' research confirms this, as does a 1999 survey of CEOs of the top 350 companies, 'The Life and Times of the CEO', conducted by Cranfield University, together with 3i and others. This comprehensive sample of CEOs was convinced that the keys to success and tenure lay with the City and financial press.
This being the case, what is it that the City wants out of managers?
Tony Golding, author of an excellent book, entitled The City puts it this way (which accords closely with the authors' research), "The institutional investor's Valhalla is a world where every stock in the portfolio outperforms by, say, 10 per cent every quarter ad infinitum".
In a little more detail, investors like managers to be totally dedicated to the 'shareholder' cause, to be absolutely reliable and predictable when it comes to results (the 'numbers'), to have a good strategy and 'story' (how to achievecontinuous double digit growth), to be decisive and 'active' (big moves, acquisitions, portfolio management, big cost reductions, firings if problems arise etc), and to present smoothly, with consummate attention to 'the numbers'. Conversely, they are rather averse to complex businesses and organisations, especially those that are exposed to long-term investment risks and technological uncertainty. Generally speaking, busy investment managers with large share portfolios like their companies to be easily described by a headline and a few bullet points.
Investment institutions are enthusiastically backed by the dominant investment bankers, who make their massive fees and wealth from deals and M&A activity, the more the better, by brokers, who need excitement to keep share sales moving, and a large cast of supernumeraries, who feed off all of this corporate activity.
As the City is a vast repository of financial knowledge, it might be expected that what the financial markets want would be good for companies. In fact, the opposite is the case, according to the great bulk of research about what makes for successful companies. The overwhelming evidence is that the best companies place customers and competitiveness at the heart of their concerns, and then 'build' organisational capability to deliver superior customer offerings, investing heavily in innovation, marketing, people and the essential 'tools' to do the job. Their top managers are not transient 'superstars' but well-groomed insiders who know the business and organisation. And they focus on productivity and effectiveness, on value rather than cost, and when it comes to cost reduction, they make it a continuous priority, backed by training and investment, and not a matter of periodic 'blitzes'.
The best companies do not avoid M&A activity, but make it an adjunct to the core strategy of building their business. Last, there is clear evidence that the really good companies strive to avoid having their strategies and agendas driven by the financial markets. Alas, in Britain, it is exceedingly difficult to do this, without being labelled 'boring' or not 'City-friendly', the next thing to the kiss of death!
What emerges from all of this is that the financial markets are both ignorant and uncaring when it comes to any depth of understanding of the arts of managing well - because most good management activity happens invisibly (to them) with employees and customers.
So, we come to the apparent 'Black Hole' at the centre of the debates about innovation, productivity, industrial investment, the future of British industry, fat cat pay and many, many other issues of massive national importance. What is this?
Quite simply, it is the complex and symbiotic 'system' of relationships between top managers and the City that lies at the centre of the failure of many British companies and the under-performance of the British-owned industrial economy. As the book shows, the players in management and the City extract huge rewards from keeping things just as they are. Unfortunately, if current trends continue, so will the decline of larger British-owned companies.
So, why is there not a massive furore about the destructive activities of investors and managers? All our interests are being undermined.
Well, consider. We are dealing with a complex of causes and effects. Some of the causes are invisible to the average citizen, as most of the really important transactions between top managers and the City happen in the shadows.
The press tends to be obsessed by big dramas and works day to day. Most of the damage the authors described can only be understood by looking at longer-term trends and by understanding complex relationships between causes and effects over time.
The 'players' in management and the City are understandably very unforthcoming about what they are up to - they make too much out of the way things are.
Politicians? Well, it can be argued that few really understand the depth and detail of financing and managing. But it is almost certainly the case that senior politicians on both sides of the Atlantic have been well and truly 'recruited' into the 'system' by political donations and the promise of lucrative advisory and director positions. And even if a political party in Britain wished to reform the current system of investing in companies, the resultant furore would be enormous and daunting.
Best to let sleeping dogs lie.
All of this is a great pity, as Britain still generates great science and inventiveness, has a dedicated and well educated workforce (who work wonders for Japanese car companies) and a culture of openness to the wider world. There are still excellent British companies, well managed and capable of sustained high performance, but their number is declining, especially in advanced knowledge industries. The potential for indigenous companies in the knowledge economy should be vast, and not simply left to smaller companies and clever individuals. Let's be absolutely clear about it. It's not excessive regulation and over-taxing that is at the root of the problems (although we do not want too much of either). Neither is it a lack of government support, or a lack of indigenous talent. It's the ignorance, short-termism, lack of real management skills and greed inherent in the management/market 'system' that is the central 'truth that dare not speak its name'.
