Review by Bob Lefroy in Business Money, February 2004

'Having their Cake.......
How the City and big bosses are consuming UK business.'

If the 1980s and the 1990s will be remembered for anything it will be the collapse of the notion that communism, or indeed the more extreme examples of socialist philosophy, could ever work to the ultimate benefit of a people. The acceptance that capitalism and the free market bring the greatest economic benefits is accepted by all but the most dogmatic, as is an acceptance that the best manner in which to fund extensive social and welfare programmes is by taxing its fruits.

The problem with those of a naturally socialist leaning, or those unfortunate souls who suffered an excess of tuition in the humanities without ever developing the common sense to distinguish between the hopelessly idealistic and the sensibly compassionate, is that whilst they have, albeit with huge reluctance, accepted the triumph of capitalism in the betterment of mankind, they still want to fetter it.

I started this book with some reluctance believing it to be another "let us change the world for my dream of what is better" tome. I warmed through the central 80% of Having their Cake because the research and the analysis in support of the proposition that a conspiracy of investment bankers, stock brokers, high profile CEOs, journalists and remuneration consultants is wrecking British industry, is truly first class.

There is also abundant evidence that, in an effort to present an even handed approach, every avenue of debate, and I do mean every avenue, is exhaustively trodden, with committees of the great and the good to ensure the presentation of a balanced view. The problem with too much balance is that you might never tip one way or the other, especially so with an academic proposition which many might claim to be flawed in its conception.

It is, however, in the propositions for change that this work falls away. The ideas for changing systems of investment and for "guiding" the long term future of companies carry idealism so far beyond the realms of the real world. Whilst I would like to see more R & D in Britain and have some concern that our present prosperity is consumer driven on the back of increasing debt levels, the book is far too dismissive of the huge earning potential of our financial service expertise and the role of the City. Yes the City harbours all that the authors proclaim to be undesirable but to ignore its ability to draw huge levels of business from all over the world because of the multi-faceted talents to be found there in abundance is to return to the old trade union leaders' beliefs that if some thing tangible was not produced, then no value could attach it. There are a few more concepts that would not look out of place on a TUC agenda as well.

I do not for a moment subscribe to the excessive - the word obscene is so overused and out of context today, Having Their Cake, is a prime example - remuneration packages afforded to senior executives of some major companies but believe that the market will trim them. The process is under way. Rolling one year contracts are replacing the three year variety for a start though whether they will ever foster long term thinking is doubtful.

The failure to mention Gordon Brown's robbing pension funds of £5 billion a year with ACT changes when complaining that companies are not topping them up too well is a somewhat telling omission.

The persistent thread through the narrative that the only good companies grow their management from within, maturing them with a deep understanding of the philosophy and welfare of the company fails when the likes of Marks and Spencer has its fall from grace highlighted. It lost touch with the real world.

Similarly the accusation that mergers have "destroyed" £billions of value is open to lengthy debate. Given the thorough approach to everything else, surely a detailed breakdown to demonstrate the contention would have been appropriate.

Value in a company is largely driven by the immutable laws of supply and demand and the capacity of that company to meet the demand in the most efficient, and profitable manner possible. If one company fails to do this, the demand, or maybe a changed taste, is satisfied by other companies. The former loses value, the latter gain it so value is not lost, just redistributed. The hidden value of taking out a competitor is not discussed, nor are the effects of goodwill write-down under SSAPs or hidden value in brands.

Sure it is tough on the shareholders of the company losing value but that is the bedrock of the free market. Companies which have been through mergers or companies which just atrophy, they are all the same. The example of Redland plc receives much attention and one is left with the suspicion that not only did Redland deserve to fall to predators but also that this experience scarred the authors for life.

After all, the period during which all of the alleged corporate rape was going on was the most successful period of sustained economic growth in Britain for decades. The country has prospered mightily and the carnage wrought upon our middle management layers by the IT revolution has resulted in a vibrant and successful SME sector. There is more to an economy than big industries. Artificially sustaining jobs just creates a quagmire, a lack of self respect in those being artificially maintained. The deep and rapid knife of redundancy seems initially cruel but high numbers who have been through the process thank their lucky stars for the chance to break away from the rut and to find a rewarding new challenge. A few of those SMEs will become huge in time.

Our overall productivity failings are highlighted yet much of this is down to a lousily slothful public sector and an excess of productivity has its drawbacks.

France and Germany have high productivity as a direct result of their overrestrictive labour laws and the result is 10% unemployment, seemingly immovable at double the UK figure. What does that do for the spirit of those without a job?

Clearly there is room for improvement in our industries but when one of Britain's high-tech engineering successes, the Formula One industry, something which has moved motor engineering forward in a way that our domestic producers cannot, something which employs tens of thousands of people, an industry which earns Britain £5billion a year, is on the verge of shifting lock, stock and barrel to Asia because of the unacceptable encroachment of European labour regulation and laws, then can the blame for our industrial failings be laid at the door of the City?

And whilst we are hammered with the amount of foreign investment in Britain, little or nothing is made of the immense contribution to the economy from British investment overseas

The closing chapters bring the whiff of revolution and Madame Guillotine: their quality falls short of the excellent research and lively, balanced debate which comprises most of Having their Cake.

We find a hackneyed analysis of the English class system - I think this is an attempt to brand all stockbrokers, analysts, CEOs and investment bankers as toffs and oppressors of the people. Many I have listened too would not be out of place with Del Boy's suitcase of dodgy videos in a street market. A thumbnail commentary on the American philosophy on the free market, certainly the most successful economic model of the last century, is little short of pitiful. The proclamations of hating too much bureaucracy and the dismissal of centralised economic planning sound like a protest too many when viewed against the propositions for change.

Everyone in our industry should read it.

But when you have, just remember that we have the fourth largest economy in the world: that our GDP per head matches, or surpasses those of France and Germany where some of the remedies proposed for the UK corporate sector have been practised, with no conspicuous success, for decades. Remember too that the virile economies of the western world are the free ones, the ones where weak commercial entities are cut down to be replaced by vigorous, job and wealth creating new ones.

A good read. If the closing chapters had not left me with the lingering suspicion that the authors, having produced a masterpiece of scholarly research to support a profound debate and had the humility and wisdom to put it to a balanced gathering of great minds and seasoned corporate campaigners, were, after all, a couple of Fabian rednecks, it could have been a great one.

- Mr Lefroy kindly invited a response from the authors.
This is it.

Thank you, Bob Lefroy, for your critique of our book, and thank you for inviting us to respond.

Before we get to the nitty gritty, perhaps we could clear up two personal issues?

Firstly, it was wonderful to be likened to left-inclining liberals - if only one were still young enough to be that naïve!

Secondly, were we scarred for life by the demise of Redland? While it is true that you can't come through something like that totally unscathed, neither of us had been long with the company (Pat under a year). Also, we were both front-line veterans of many deals (Pat once calculated that she had worked on more than 200 deals in a five year period) with previous employers, so corporate activity and its consequences was no new thing to either of us. In fact, it's because we have worked on so many deals, as well as reviewing the wealth of good research that we are sceptical about the value enhancing potential of much of this activity.

We also have experience of the dreadful effects of a 'jobs for life' culture, such as that present in many large French companies, and would deprecate it. But it is a great pity when the destruction of once-vital organisations and their knowledge and competencies happens unnecessarily because of top management incompetence or arrogance, or investors desires to realise short-term gain - and, Boy, have we seen a lot of that over the years in British companies - from the inside!

We absolutely agree with Mr Lefroy that the centralised, statist bureaucracy of Communist Russia was a total disaster.

BUT, so has been the rush to unregulated market forces, without building the institutions and checks and balances needed in a free market economy. So we have seen the destruction of huge swathes of industry, the criminalisation of business and finance, the 'obscene' (the word is valid here) enrichment of a few and impoverishment of the majority. Poor old Russia - moved in one big leap from one disaster to another, the latter being the creation of bankers!

Our own belief system might be described as 'thoughtful pragmatism'. Thoughtful pragmatists try to see things as they really are, not through a prism of dogma, and respond with courses of action that will work. So, we believe in market capitalism, but know that there are many variations on that theme, ranging from the US to Sweden.

Mr Lefroy rightly identifies a 'persistent thread' running through the book about home-grown, dedicated management. This is not just our foible - it is strongly supported by all the respectable research about what makes for sustainable high performance in companies - and being dedicated to running your business superbly does not mean arrogance and losing touch with the 'real world'. In this regard, transactional strategies are an adjunct to running the business well and shareholder value creation an outcome, not the central purpose.

The most important 'real worlds' are those of the customers and the people who design, develop, make and sell the services or products that create value. Companies that stay closely in touch with their markets and adapt their skills and offerings to maintain competitive advantage are not likely to fail, unless pushed to it by external agencies. Marks and Spencer top management lost touch with its customers, competitors and employees - that is why it faltered and was rightly punished by customers and investors alike.

In the 'real world' company break-up often does not simply mean that assets have been redeployed to a better home, it also means that organisations containing precious skills and experience are broken up and often destroyed - and in the technology-based industries too often the skills and know-how have been snapped up by foreign companies.
We do not believe those who argue that the retreat of British companies in so many sectors was inevitable or even the result of a deliberate strategy - it was often the combination of inept, complacent, even amateur leadership and investors who were more interested in speculating on short term share price movements, rather than investing in the long term prosperity of companies.

Britain is a country with so many strengths and natural advantages, that it seems a shame that we cannot sustain strong positions in those industries that need large and complex organisations to support high R&D, advanced manufacturing and worldwide reach in marketing and customer support.

But, thank the Lord for SME's and foreign companies - so much strength to the elbows of your readers, Mr Lefroy - may they support the growth of another generation of great companies. Let us hope that the FTSE 100 is less of a killing ground by the time that they get there!

Although the British economy is doing well, and has many strengths (Not the least of which is the City), let's just look at one or two facts on the 'could do better' side of the argument:

We wrote 'Having Their Cake' in a spirit of open enquiry, and a real desire that we should have the courage to identify, debate and address the things that prevent us from doing as well as we might, without damaging the parts that already work.

We readily admit that our final chapter does not spell out anything like the answers that would eventually emerge from informed and open debate by all parties. It was a 'first stab', and if anyone can improve on the recommendations, we are only too happy.

But, we would return to the 'Objectives for Change' in the last Chapter of 'Having Their Cake'....

  1. To create a more balanced economy, with equal attention being paid to the development of enterprises requiring consistently high investment in advanced knowledge, science and technology, and innovation, creativity and high added value; as well as in more basic service and leisure based industries.
  2. To encourage higher performance and productivity on the part of indigenously owned enterprises, and higher investment in the processes, systems, capital and IT equipment required to support the development of superior value creation.
  3. To re-create over time management and investment cultures that interact and collaborate to nurture and sustain high performing enterprises.
  4. To foster the development of an ample supply of top managers with deep business and organisation building skills, and a predominantly high knowledge/ high skill, highly rewarded workforce, up to the standards of the most advanced economies.

We feel quite strongly that these are important and balanced aims - if we can agree about that, then there is fertile ground for debate about ways and means.

So, then let's consider the essence (rather than the detail) of our proposals:

  1. The creation of an environment that encourages investors (including fund managers) to focus on the long-term health of the companies receiving investment rather than short-term index related performance. We are sure that both investors and companies would welcome such a change.
    However, we do not believe that it is likely to be brought about by selfregulated pressure as the system itself makes the punishments for different behaviour far outweigh the possible rewards. This is supported by the findings of Tomorrows Companies' 21st Century Investment report. So, an outside 'shove' will be needed
  2. A move towards a system that rewards positive management behaviour, that is, the creation and growth of sustainable enterprises, rather than transactions and other headline grabbing activity. This would go hand in hand with the changes in attitudes in 1) above.
  3. A real transformation of our boards with the introduction of non-executives with the time and motivation to really understand the complex issues being presented to them and therefore able to challenge and support the executive management.
    You think this is already happening? Don't talk to the directors, talk to the next level down, off the record. Then you'll get the real picture about the quality of input of individuals with too many other pressing calls on their time!
  4. A system that makes investment banks and others who earn the big profits from pushing deals more accountable for the outcome of the transaction (without taking away management's responsibility to manage) rather than just making the deal happen
  5. To take some real action about educating a population increasingly responsible for its own long term financial provision into what its all about, so that they are able to make better decisions and not be so vulnerable to financial services providers.

Perhaps we can debate these matters over the coming months. We feel sure that Mr Lefroy will welcome response from his readers.

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