WHAT MANAGERS REALLY THINK OF THE CONTEMPORARY SYSTEM OF INVESTMENT AND CORPORATE GOVERNANCE.

Managers have had a pretty bad press in recent years, being characterised as self-interested and greedy 'Fat Cats', willing to sacrifice the companies that they lead for personal wealth.
Some of this may be justified - certainly the burgeoning wealth of top executives has massively outstripped increases for the rest of the workforce - upon which honest managers would freely admit they are dependent if the enterprise is to create long-term wealth.

So we have seen a massive increase in strategies that will enrich managers, which do not need the involvement of the wider organisation. We are talking of acquisitions, mergers, de-mergers, corporate re-structurings, top-down cost reduction blitzes and share buy-backs - all of which can be achieved by a small number of top managers, often acting in concert with fund managers and/or investment bankers. Trouble is, these strategies are not sustainable - and in a relatively short time will lead to decline and often corporate collapse, to the detriment of employees and the real shareholders. Of course by this time, bad managers will have moved on, enriched, and the fund management pack will be chasing the next killing.
Those who think that this is too gloomy a picture or scaremongering need go no further than to consider the huge swathe of UK quoted companies that have fallen apart, plunged from the FTSE 100 to the nether reaches of the stock market or to private equity, have been taken over by foreign competitors because they lacked long-term stamina, destroyed huge swathes of value or simply been broken up.

We hear little of this wanton destruction from the financial markets or from managers - or do we? From time to time, a senior executive will speak out against the prevailing system, usually at the point of retirement. The problem is that these sporadic lone voices do not add up to coherent, sustained pressure for the investment system to be seriously reformed.

A good example of the difficulties faced by well-intentioned reformers has been the Tomorrow's Company examination of the investment system entitled '21^st Century Investment'. This apparently promising initiative seems to have disappeared from public view after a very short spell in the sun. The enquiry was chaired by Sir Richard Sykes, ex-CEO of Glaxo and manned by a galaxy of managerial and City talent. So why did the venture fail to make the kind of splash promised by Sir Richard's opening speech: "A casual observer of the financial scene could be forgiven for thinking that the whole investment system is fatally flawed or irreparably broken. Advisers and fund managers failing to help savers and institutions starving UK industry and commerce of their life blood"

Insiders say that one of the reasons that the enquiry faltered was that Sir Richard's attitude was read as hostile by the financial community - and to quote another, "There is no appetite for reform in the City".

But Sir Richard is not alone. Niall Fitzgerald, retiring chairman of Anglo-Dutch consumer goods company Unilever said, shortly after his retirement: The short-term nature of the way in which investor decisions are made has always been an issue, but I think that it is now much more serious and potentially destructive. More and more, there is the danger that decisions will be taken with a two-year time horizon at most, probably with a three month time horizon.......Decisions need to be made about investment in ideas, in science, in people, in opening up new markets.
For reasons probably connected with discrediting Fitzgerald, commentators felt it necessary to point out that he had left Unilever after 37 years with a £13.9m pension pot, entitling him to an annual retirement income of £780, 000. We cannot for the life of us see what this has to do with Fitzgerald's comments on the investment industry - at least he served Unilever 37 years for his generous pension!

Sir Michael Perry did not have to wait for his retirement as chairman of Centrica to say: A combination of corporate greed, abuse of power, short-termism and erosion of mutuality in industrial relations has dented public confidence.....

Bertrand Collomb, President of Lafarge, SA and a top European businessman with experience stretching from the UK, through France and Germany to the USA, said: You describe very well the pressure exerted by the City on its companies, and on managers who forget that a company's future lies first in its people and operations! ....But everywhere the aims of the financial players are different from what makes a successful and sustainable business....What to do about it is a tough issue. And unfortunately nobody seems to have any interest in dealing with the issue....

On a separate occasion, Bertrand Collomb commented that in most countries, many investors and top managers could find common cause in the long-term success of the enterprise, but that: In the UK chairmen are expected to sell the company any time investors want it.

The financial markets in their current form are highly resistant to external intervention or 'interference' in what is obviously a richly rewarding state of affairs for insiders. Furthermore, the 'system' of institutional investors, analysts and press is well capable of and well-practiced in acting against managers who do not comply with their needs.
So most contemporary managers have the good sense to keep their mouths closed in public - and of course, a significant minority of managers have made fortunes by aligning their actions with what investors want, ignoring the impacts on their companies. However we have always believed that the majority of managers are people of integrity, who are motivated to try their best to serve the interests of the companies that they lead.

So when the author and Dr. John Roberts of Judge Business School, Cambridge were given the opportunity to research the subject 'The Role of the Board in Creating a High performance Company' by the Performance and Reward Centre, we decided to interview a large sample of top managers in depth. The completely anonymous nature of the interviews meant that the 40 or so chairmen, CEO's and directors of large companies we saw were able to speak freely.

Real Quotes from Practicing Managers

Here is a sample of the comments that they made about investors and their pressures for performance and the narrower aspects of governance:

About Institutional Investors

• The difficulty for a company is that you will have different views from different shareholders. They will have their own agenda and their agenda won't be the company's agenda, it will be their agenda. One shareholder could be really keen to get cash refunded to shareholders and another shareholder will say 'I don't want you to do that, I'll see that as a sign of failure'. So if you take that one simple example and multiply that by every aspect of the business then what you've got is a cacophony of different views, which is actually quite difficult either for the executives or the non-executives to synthesize.
• If a board appoints a chairman or non-exec or chief executive then it has to meet the test of what the newspaper headline will be on that particular morning when it is announced, so there is a big insidious effect. The headline will be created by what fund managers say. I think it has become an increasing trend. What happens now is that the fund managers don't have any experience and are much more concentrated on trying to build their financial models and feel that they've got a bigger remit to interfere in the management of the business, even indirectly, via corporate governance and all the rest of it.
• What the hedge funds do, they arbitrage. So they are either pushing the price up or down and then making a turn on the difference. They don't give a toss about the employees, they don't give a toss about the long-term sustainability.
• You've set yourself an agenda with investors against which you've then got to try and deliver. The mistake is actually setting those original targets too high because you want to justify a rate of growth that will in your opinion drive the share price to a level where you would like it to be. Some boards allow themselves to be driven by that objective, by how do we get the share price from here to there. I think it is very dangerous

About Investor-driven governance compliance

• I think the problem you've got now is that with all this corporate governance stuff, in lots of companies I think there are two boards. All this stuff about the British model is to have a unitary board is a lot of twaddle because basically now the investors tend to look at the non-execs as being policemen.
• The board was a sort of confrontational area rather than a sort of co-operative group looking at the future of the business. One is getting much more a feeling that there is a development of a 'them and us' culture between execs and non-execs.
• If you look at the way a board spends it time, it will spend much more of its time on things like audit committees and making sure the boxes are ticked than it would have done a few years ago and proportionately less time on strategy.
• It's just that boards pay more attention to shareholders than anyone else. It's much more difficult to get honest feedback about the customer or about what your employees think.
• I think a lot of executives find the corporate governance procedures wearisome. And I think a lot of executives would not consider that they add value, and therefore I think that then translates into saying that for a lot of executives, the board has become less relevant than it might have been a few years ago.
• Depending on how many people there are on the board from the executive group, you will have let's say board meeting rehearsals, typically. I've been in situations where I've been aware of the fact that that's been going on, whereby the board meeting becomes a staged affair in effect.
• 'Every time that the board fails to focus on the operational management of the business, then effectively the operational management of a business goes elsewhere. So it goes into executive boards or whatever you name it and I would argue very, very strongly that unless the board focuses on the operational aspects of the business, it has no basis against which it can judge whether governance is working. The reverse does not work, so if you focus a board on governance I guarantee you will not know what's going on in the operations, because the operations is real world.

Wisdom from a Chairman....

'If people say: "What will the City think?" and they start to get defensive, I close that down very quickly and my comment is very simple. Look, we've got to ignore that for the moment. This board's job is to decide what ideally we think we should do. Lets decide that first. If we find that having decided it, its too big a gap between that and outside expectations, then OK. Let's still decide this is what we are going to do and then lets design the communications strategy to prepare the way for it. But in practice you try to avoid that because you want to keep your communication with the outside world moving in line with what you are doing operationally. Companies that complain that institutions are short term are quite often the companies that have not presented a very clear long term strategy and they are actually having themselves mirrored back to themselves. That can be uncomfortable.'

In Summary......

Many of to-day's top managers are very concerned about the twin pressures for short-term results and the narrower aspects of corporate governance that they believe derive from the investment community aided and abetted by some elements of the financial press.
They also believe, paradoxically some might think, that if boards were encouraged to spend much more time, effort and skill on crafting and monitoring business strategy, then business risk would be reduced. In other words the pressure for externally imposed control and narrow governance actually increases risk.
And, would you believe, there is good evidence from the US that this is precisely the case. Recent research by Booz, Allen Hamilton indicates that, despite the Enrons, Tycos and Worldcoms, more than 80% of value destruction comes from poorly conceived and executed strategies.
(See strategy-business.com ) click on to all Resilience Report articles and then on 'It's Time to get your Sox Off').

Managers' concerns need to be coalesced into coherent pressure for change in the system of investment - otherwise the decline of British-owned industry will continue - maybe a good role for the CBI?