Managers and Markets - A Special Relationship.
That the investment markets are the dominant influence affecting the appointments, careers, rewards and tenure of the top management of large quoted companies.
That the players in the markets have become more aggressive and domineering since "Big Bang" and the control of the London market by large and ambitious foreign-owned investment banks.
Whereas once top management saw their activities and interests as being distinct from those of investors, a much more involved and symbiotic relationship has developed between them in recent years.
Most contemporary top managers understand that catastrophic sanctions can flow from displeasing the markets. Equally, they know that great benefits can accrue from pleasing them. To do this, they employ a wide range of stratagems - from aligning their behaviour and actions to those the markets seem to want - through creating and promoting carefully crafted 'stories' - to, at the extremes, manipulation of information and outright deceit.
Thus, top managers and the main players in the financial markets have tended more and more to become part of a 'System' of connected and symbiotic interests. This system, whilst informal, is coherent and well understood by insiders, and can create huge opportunities for rewarding the players.
Because of their informality and complexity, the interrelationships between managers and the many players in and around the financial markets are invisible to outsiders and thus almost impossible to regulate. They essentially only serve the interests of insiders, who are not accountable to other stakeholders or the wider public.
- A comprehensive study by a group of business economists from Manchester University has highlighted fundamental changes that have occurred in the fundamental nature of large companies' corporate strategies since the 1980's. Classical business strategy is based on the idea of companies competing in product markets and industries. It has concentrated on the means by which they can develop sources of competitive advantage. Strategic thinking has focused on how companies can compete, by differentiating themselves by superior products, more highly developed core competencies, lowest cost and so on. The assumptions of the most influential strategists, like Michael Porter, have been that corporate managers are the strategic leaders of their companies.
Not so any more, say the Manchester group. Owing to the overwhelming influence of the financial markets, corporate strategy is now aimed almost entirely at investors. Corporate offices now focus primarily on producing financial information - projections and analysis - for the investment markets. These 'Numbers', aimed at satisfying the markets, and supporting share prices, are complemented by carefully crafted 'Narratives' - stories about what lies behind the numbers, with a strong orientation towards proving that the numbers will continue to be good, or will improve. If the numbers and stories are convincing to the markets, they will get involved in elaborating the Narrative - remember the whole industry of business academics, market analysts and authors which developed the idea of GE as a super-corporation and Jack Welsh as an almost biblical hero?
The researchers use long-term studies of companies such as GE and Ford to demonstrate that quite often there is little connection in substance between the Narratives and what the companies are really doing.
In this sense, Enron is merely a 'bent' version of what most giant companies actually do. Remember that everybody believed, especially the investment markets, the story that Enron had discovered a new business.
So, many corporate organisations have become mirror images of the investment markets and as a result have become distanced from the operational realities of their customer-serving businesses. The researchers give the process a rather cumbersome but evocative name - 'Financialisation'. (i)
- The 1999 Cranfield University survey, "The Life and Times Of The CEO" resulted from surveying the CEO's of most large quoted companies. Respondents were convinced that the key challenges they faced and the factors most affecting their tenure in the job were "constant pressure from financial institutions to meet performance expectations", and "increased pressure from all aspects of the media".
The research also identified that the tenure of CEO's in post was reducing rapidly, having reached under 5 years and still decreasing - now estimated at just over 4 years(ii)
- Tony Golding, in his book, The City, comments on the development of what he calls the New Industrial Compact. Golding asserts that the relationships between top managers and the financial markets changed in a quite fundamental way in the 1980's".Once upon a time, many managers kept a prudent distance from investors and some from time to time complained publicly about "short-termism" on the part of the markets.
He says, "Industrialists no longer make speeches about short-termism because the rules of the game have changed. Today's CEO's and Finance Directors accept the process of regular dialogue, the mantra of shareholder value, target-setting and performance appraisal as a fact of life".
He goes on to say that many industrial managers now have very similar time horizons to those of fund managers, "Inevitably, the evidence points to the conclusion that managers have adjusted to institutional timescales rather than vice versa".
Golding's conclusions are that managers are prepared to accept a job in which they may not last very long and in which an undue amount of time(now estimated to be 25%+ for a CEO) must be devoted to responding to the constant demands of investors, sell-side analysts and the media for two important reasons; ambition and money.
In order to meet their side of the 'Compact', managers must be prepared to demonstrate complete commitment to the interests of shareholders (in reality, investment institutions), be prepared to confide in them, warn them of impending moves, or sound out their attitude towards any proposed corporate development.
They must also be prepared to put up with a considerable amount of apparently unreasonable behaviour and conflicting or inconsistent demands.
However, says Golding, prudent managers tend to keep their views about investor behaviours to themselves, because, "The upside is financial security, and quite possibly substantial wealth, while the downside would be the inability to get another job in a quoted company, anywhere!"(iii)
- Dr. John Roberts of the Judge Business School, Cambridge University, together with colleagues from the Centre for Business Research at the University of Cambridge conducted research in 2005, producing a Paper entitled: In the mirror of the market: the disciplinary effects of company/fund manager meetings.
The researchers concluded that the demands of investors and the elaborate and time-consuming meetings that managers have to spend with fund managers, together with the behaviour of investors at the meetings had had deep effects on the values, perspectives and behaviour of many top corporate managers.
They say: The meetings take place in the context of a proliferation of techniques through which corporate performance is disclosed, modelled, compared and ranked. Such visibility makes possible processes of executive subjection which this Paper traces firstly in the anticipatory self-discipline of extensive rehearsals for the meetings, and secondly in the rituals of face-to-face scrutiny of the meetings themselves where the body of the executive is understood to represent the company. The Paper then explores the ways in which subjection to investors enables executives to speak on behalf of the investor within the business and effect it's restructuring in the name of shareholder value. We suggest that these neglected disciplinary effects of company/fund manager meetings have been all too potent in recent years.(iv)
- The Performance and Reward Centre (PARC) sponsored research, led by Dr. John Roberts and Don Young, entitled: The Role of the board in creating a high-performing business.
The researchers interviewed just under 40 directors of large companies, including 10 of the FTSE 100's top 30.
The results indicated that directors strongly believed that the twin pressures of investors for short-term results and for the detailed observance of Governance codes was having a marked and detrimental effect on the functioning of boards. Most believed that the board's proper role of providing strategic leadership was being seriously undermined by the needs to observe and answer detailed questions from investors about governance - furthermore non-executive directors were being to adopt role of policeman in relation to the executive, thus causing friction and undermining the character of the unitary board. (v)
- Further research by PARC, by Margarethe Wiersema, Professor of Strategy at the University of California and by the author for the book Having Their Cake revealed in some considerable detail the importance of investors in both the dismissal and appointment of top managers.
Wiersema says: Typically a CEO gets fired not because the board has thoughtfully and deliberately concluded that its time for a change at the top but because investors, concerned about poor performance, demand a change. (Non-executive) board members, who have little idea how to address the underlying problems that got their company into trouble in the first place, seek to appease investors in the short-term by handing them the CEO's head on a platter.(vi)
In our own research, chairmen, non-executive directors, executive search consultants, investors, and brokers described in detail the elaborate soundings that are taken in the financial markets before a CEO appointment is made in a FTSE 100 company. (vii)
There is a mass of evidence pointing to an almost total domination of the directors of large companies by the investment markets, whose motivations, as we shall see, are seldom to do with the long-term health of companies.
The quid pro quo for managers has been the opportunity to get rich by keeping investors happy.
In Proposition Two, we shall review some extraordinary research that points to the effects of this dominance on the strategies that top managers adopt for their companies...........
(i) Financialisation and Strategy: Narrative and Numbers, Froud, Johal, Leaver and Williams. Routledge, 2006,
(ii) The Life and Times of the CEO - Harrington and Steele, 1999
(iii) The City, Tony Golding, Financial Times/Prentice Hall, 2001
(iv) In the Mirror of the Market, Roberts, Sanderson, Barker and Hendry, Judge Institute of Management and Centre for Business Research, Cambridge University, 2005.
(v) The Role of the Board in Creating a High-Performing Business, Roberts and Young, Performance and Reward Centre (PARC), 2005.
(vi) Holes at the Top: Why CEO Firings Backfire, Margarethe Wiersema, Harvard Business Review, December 2002.
(vii) Having Their Cake, Don Young and Pat Scott, Kogan Page, 2004.