John Maynard Keynes once remarked that “when the capital development of a country becomes the by-product of a casino, the job is likely to be ill done”.
Well, it’s happened – the US economy is now so dependent on the fortunes of the stock market that Alan Greenspan at the Federal Reserve has no choice but to run it on what David Hale, chief economist for Zurich Financial Services, dubbed ‘the Dow Jones standard’.
As Hale put it:“The reality is that both the US and the world economy now depend on a robust US equity market to sustain America’s role as the world economy’s spender of last resort.”
This, of course, is the ultimate ‘moral hazard’ so railed against by the Right: by lowering interest rates and putting a bottom under the market, the Fed is saving investors, whether individual or corporate, from the consequences of their own ‘irrational exuberance’. Not only that: by effectively lowering the house odds against failure, it is encouraging the gamblers to have another throw.
At micro level, the distorting consequences of managing companies by and for the stock market are alarmingly plain. During the bubble, companies were cynically ‘built to flip’ – conceived not as businesses but as concepts to sell to a bigger fool. The counterpart in established corporations was massive misallocation of resources into internet ventures combined with financial engineering on a grand scale. In particular, managers took on large amounts of extra debt to buy back their own shares, with the uncoincidental effect of greatly inflating the value of their own stock options. By so doing they were also hitching the corporate chariot even more tightly to the stock market star.
Hence the kneejerk sacking and cost- cutting to appease shareholders which accompany each profit warning, and the increasing willingness of boards to offer up the head of the chief executive in atonement for a weak share price. Sir Iain Vallance at BT and Marks & spencer’s Peter Salsbury are high-profile UK examples.
Yet in the long term, these panic remedies may be worse than the original illness. Jerry Porras is co-author of 1994’s Built to Last, one of the most thoughtful management books of recent years. Now testing his theories on venerable European companies, Porras is pretty sure that the distinctions he observed in the US between the merely good and the exceptional companies that thrive and prosper over 60 years or more are unchanged by the new economy.
The same principles of profitable longevity apply, he says – and companies that violate them risk damage. For Porras, the two primordial ones are leadership that concentrates on building the company rather than personal glory, and a core ideology round which everything the company does revolves. That purpose explicitly transcends share holder value. As Hewlett Packard founder Dave Packard summed up: ‘Profit is not the proper end and aim of management – it is what makes all of the proper ends and means possible.’
In ‘built-to-last’ companies – Johnson & Johnson (born 1886), Merck (1891), GE (1892), 3M (1902), Nordstrom (1901) and a few relative newcomers such as HP (1938) – leadership is correspondingly different from the strutting, headline-grabbing CEOs who promise ‘transformation in 100 days’. It is about institution-building: creating structures and mechanisms that constantly reaffirm the underlying purpose and ensure the institution will survive long after the present leaders have gone.
Unlike BT, M&S probably was a ‘built-to-last’ (BTL) company in the Porras definition. “It had these real, fundamental traditions,” says Porras. ‘Loyal customers, incredible relations with suppliers and a bond with its own workforce.’
So what went wrong? M&S may be the saddest indirect casualty of the casino economy. Unsatisfied with the prospect of steady long-term growth, in pursuit of extra shareholder value it took small but cumulative liberties with its core values.
The continental store closure fiasco suggests that Luc Vandevelde is unlikely to help M&S rediscover its lost bearings. How could he? In the two years he has given himself to produce results, he couldn’t possibly absorb the core values which alone would enable him to distinguish baby from bathwater.
Porras is in no doubt that for a great company to appoint an outsider is ‘a significant violation’ of BTL principles. Remarkably, until 1990 only two of the original 13 ‘built to last’ companies had ever gone outside for a CEO. Says Porras: ‘Outsiders don’t value the core traditions so well, so they produce solutions using the wrong principles.’
Have boards never heard, he asks, of GE and its now legendary CEO Jack Welch? During his tenure, Welch has transformed everything about GE – except its central purpose. Yet Welch is a one-company man: he joined GE at 25. And it’s often forgotten that in his day Welch’s predecessor, Reginald Jones, was also hailed as the world’s greatest manager. Jones, too, was an insider, as were all the company’s top men. GE’s secret – its most precious advantage – may be its ability to turn out managers who can run GE. Welch, like Jones, is a product of GE as much as its creator.
Would M&S have been better off sticking with its principles? Probably. For the most poignant irony in all of this is that over the long term the companies which steer by their own star do far, far better for shareholders than those that navigate by shareholder value. Over 64 years to 1990, an investment in the 13 built-to-last companies would have returned six times more than an investment in equivalent ‘good’ companies and no less than 15 times the market as a whole.
“This above all: to thine own self be true.” The alternative is putting the cart before the horse. As Keynes didn’t, but might well have pointed out, a few people win big in casinos: but a lot more lose everything they have.