The Corporation in the 21st Century- John Kay

PART 1: The Background

1: Love the Product, Hate the Producer

“Some of these billionaire executives are no superstars: individuals such as Philip Green, who extracted nine-figure sums from retailer BHS before selling the company to multiple bankrupt Dominic Chappell for £1, Mike Ashley, the domineering boss of the retailer Sports Direct, and Eddie Lampert, who inflicted similar destruction on Sears, for a century America’s leading store chain. The lifestyle of these executives contrasts with the fate of their businesses. The 90-metre yachts of Green and Lampert make good newspaper pictures. Green’s is moored in the harbour of the tax haven of Monaco, where he is resident, while Lampert’s is named Fountainhead, after Ayn Rand’s turgid paean to individualism.

The reconstruction of Barings after the 1890 debacle involved incorporation as a limited company, although most other London and New York investment banks remained as partnerships for another century. So when Barings failed once more in 1995 (as a result of fraud by ‘rogue trader’ Nick Leeson), the shareholders lost their investment, but the elegant

Georgian Baroque-style mansion in Oxfordshire owned by a later generation of Barings rests in the family still. Across the twentieth century, the notion of personal accountability for failures of financial management became eroded. Dick Fuld, CEO of Lehman, whose failure provoked the 2008 global financial crisis, opened his fresh advisory business less than a year later, its reception adorned with the text ‘That was then, this is now.’ But some may prefer the maxim attributed to legendary investor Sir John Templeton: ‘the four most expensive words in investing are “This time it’s different”.

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.)

With Britain’s ICI and Germany’s IG Farben, DuPont straddled the world market for chemical products. But subsequent events would demonstrate that Chandler was describing the past, not anticipating the future. After decades of indifferent performance and an unsuccessful acquisition of Conoco, another of the successor companies to Standard Oil, in 2015 DuPont merged with Dow, the other leading US chemical producer. The business was then divided into three separate units, one of which retains the DuPont name.

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.