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.)

The nascent industry did not escape the attention of rationalisers and consolidators. Billy Durant took over the Buick company and used it as a base for acquisitions of many competitors and suppliers. In 1909 alone he added the names of Cadillac, Oldsmobile and Pontiac to his stable of brands. Durant’s talents as salesman and dealmaker exceeded his capacity to run a business, and the banks that had financed his acquisition spree took control of the cash-stretched company and sacked Durant.

The finance curse is the elevation of the achievement of financial metrics over satisfaction of the needs of stakeholders – a priority that has often worked to the long-run detriment of all stakeholders, including shareholders themselves. Neither quarterly earnings management nor merger and acquisition activity is a source of sustainable competitive advantage. And it is sustainable competitive advantage – which all the companies described in this chapter and the preceding one once enjoyed – that is the basis of business success. And the only long-term source of shareholder value.