Part 1: The oblique world

3. The profit-seeking paradox

George Merck and Robert Johnson created great businesses which, in consequence, made remarkable amounts of money for their shareholders. ICI and Boeing were more successful as profit-making companies when they ‘served customer’s internationally through the responsible application of chemistry’ or ‘ate, breathed and slept the world of aeronautics’ than when they tried to ‘maximise value for our shareholders’ or ‘go into a value based environment’.

Leslie Hannah, an eminent business historian, has shown how the ‘rationalisation’ of industry, which was favoured by the British Government (represented by the Bank of England), set the stage for the new ‘corporate economy’ which would characterise Britain for decades. The 1920s saw the creation by merger of ICI (chemicals), the Distillers Company (Scotch whisky) and Unilever (soap and margarine). A similar wave of mergers in Germany established IG Farben and Vereinigte Stahlwerke as the dominant chemical and steel producers respectively. (Both these companies were dissolved by the victorious Allies in 1945.)

A new management team and its advisers devised an all too common 1990s business strategy: to sell off boring bits to fund exciting acquisitions. But, like other companies, ICI found it easier to overpay for new businesses than to make rewarding disposals of old ones. Burdened with debt and finding growth elusive, the stock price was only a fraction of what it had been a decade earlier. What remained of Britain’s leading industrial company of the twentieth century was acquired in 2007 by the Dutch company AkzoNobel. Blair resigned the premiership in the same year.

If you had invested in these household names in the 1990s era of shareholder value, you would have lost all your money in GEC and Sears and most of it in the others. Your least bad bet would have been on ICI, whose shares were acquired in 2007 for about one-third of their price a decade earlier. Both GE and Marks and Spencer subsequently lost more than 80 per cent of their peak value. Almost all financial advisers would have agreed in 1995 that a portfolio that consisted of these stocks was a safe and conservative, if unexciting, choice. And that advice would have been spectacularly wrong.

In every case, the activities that analysts and investment bankers applauded diverted attention from the central issues facing the operating businesses, and this diversion was the source of the long-term decline of the corporation. All of these companies cut costs and raised prices in ways that reduced the long-term attractiveness of the business, as exemplified by Marks & Spencer. They engaged in earnings management, effectively borrowing money from the future to enhance reported profits now. As in GE’s financial services businesses. They adopted accounting practices that accelerated the recognition of profits that might be earned in the future but often were not. As at Enron. They were enthusiastic dealmakers, engaging in activities that excited the investment community but which rarely created value and frequently destroyed it. As exemplified by GE. In each case, the short-term boost to the share price was followed by a lengthy – or, in the case of GEC, abrupt – decline. The leaks from the pipes became a flood. Some companies were able to resist the demands of share-holder value. Notable among these stand-outs were some of the leading producers of fast-moving consumer goods (FMCG): corporations such as Proctor and Gamble, Colgate–Palmolive, Coca-Cola, Unilever and Nestlé. The culture of these businesses was and still is dominated by marketing people, for whom responsiveness to the needs of customers is a preoccupation. And that responsiveness is the key to the durability of these companies.

In the early day of the post-war corporation, the question of purpose hardly arose. Companies like DuPont had been given an obvious reason to invest in the production of smokeless gunpowder by the Second World War, and at its end they found themselves in possession of a lot of capital equipment and chemical know-how. They went out looking for new things to do with cellulose and petrochemicals because it would have been strange not to. As they grew more complicated, they had to reorganise their corporate forms and management structures; academic writing in management was really just catching up with the things that engineers and accountants were inventing out of necessity.