Introduction to 'Having Their Cake'

In the comedy programme, "The Fast Show", two characters were talking together. Said one; "I went down the pub the other night. The place was full of blokes, they were drinking, chatting, telling jokes and laughing....What the bloody hell was all that about?"

One afternoon in late 1997 we found ourselves having a similar conversation.

We were in the middle of a takeover battle, on the defending side. Lafarge, a large French building materials company, had bid for Redland, our employer.

We are from very different professional backgrounds, Don from marketing, operations and human resources and Pat finance. We had worked together for many years and in more than one company and had observed the same events from different perspectives.

As a main board director responsible for the whole Redland group, Don was wondering at the focus of the defence. Two large businesses doing real things in the real world through real people were being treated like commodities. The two 'principal' directors, the Chief Executive and the Finance Director, had been whisked away to a place known by some as the 'War Room' and others as 'The Bunker', where they and their advisers plotted ways to extract value for these commodities. In the space of a few weeks any links between directors and business seemed to have been severed. What was going on?

As a veteran of more than three hundred 'deals' (although never before on the receiving end) Pat had a very different slant. In her experience, there comes a point in every transaction when the 'deal' becomes more important than the subject. The process becomes transaction driven, and the removal of key decision-makers into a new environment was an important part of achieving this mind shift. The break with 'normal reality' was quite deliberate.

Okay, perhaps this is simplistic. Perhaps it was unreasonable to expect the defence team to be focussed on anything other than getting value for the shareholders. After all, the outcome would be in their hands. Perhaps Pat was being overly cynical.

Yet, still there was a dislocation from reality. The priorities were askew. The real drivers of business value seemed to count for little in this process. Most stakeholders in the business were bystanders, spectators of the drama playing centre stage.

On top of it all, some organisations seemed to be making disproportionately vast amounts of money out of Redland's distress.

And it wasn't just Redland. This was happening all over the place.

We're not naïve idealists. Through long careers in private sector enterprises we had both risen to roles at the apex of large publicly quoted companies. We had worked in many industries and in many companies, some huge, some relatively small. We had also separately set up small companies from scratch and participated intimately in growing them to be successful.

We had worked with a vast array of people in a varied assortment of organisations, ranging from some that were stable and successful to others that were in the depths of crisis. And, we had experience of working with colleagues from many cultures, so could compare our perspectives with those of other countries.

So we'd been around and seen it all, or a lot of it at least! If we felt there was something amiss with the situation, then it was worth further investigation.

But of course, at the time we were busy. We had a corporate battle to fight; we had parts to play in Redland's great life and death drama. Saving the world would have to wait until later.

After the takeover of Redland we both separately decided that the time had come to "go plural".
One of the advantages of being away from the constant time and travel demands of a senior executive role is the opportunity to explore topics that are deeply interesting. For us, one of these is: 'What drives the behaviours of top management and their counterparts in the financial markets?'

This is particularly interesting because, whilst it will be evident to any observer that top managements and the various players in the markets have a deep influence on each other, and that they are interdependent in many, many ways, not much has been written on how the complex of their inter-relationships works.
So, our 'Fast Show' conversation might go something like this:

"There's all these companies, some's doing well, some's doing badly, sometimes one buys another and sometimes one disappears.

"Then, there's all these people, called bankers and investors, stockbrokers and analysts and journalists, who spend a lot of time thinking and talking about the companies.

"Then there's another bunch of people, called chairmen, non-executive directors and chief executives and finance directors.

"They all use funny language, such as P/E ratios, shareholder value and Beta factors. And these chairmen and chief executives and such also spend a lot of time wondering what the investors and others are up to and how they might help or threaten them.

"One thing though. They all seem to earn a ton of money".

"What the bloody hell's all that about?"


So how do the many players in the financial markets and their supporting casts interact with the top managements of larger quoted companies? What are the effects of these interactions on companies, employees, industry and the wider economy?

We talked with over 60 individuals at the heart and round the periphery of the financial markets, from Chairmen and Chief Executives through brokers, analysts and investors. We explored research into the impact of 'deals' and considered what other commentators had said on the subject. We discovered a complex array of interactions, some of them quite direct and obvious, others much more diffuse and subtle.
Our investigations, and therefore the book, started with us in a reasonably open-minded position. We knew from experience and direct observation that the financial markets had a very significant influence on the attitudes, confidence and frequently the actions of top managers. But, we did not formulate definite hypotheses about the broader nature and significance of the interfaces between the markets and management until we had interviewed many people and listened to their perspectives.
Thus, the three major 'Propositions' that you will find in Chapters 9 to 11 developed out of our investigations, rather than driving them in the first place.

For a number of reasons, not the least of which is the fear of becoming an "insider", the communications between companies and the markets are often very indirect, based on hints, circumlocution and sometimes deliberate leaks.

At the centre of it all is a genuine market complete with a full cast of characters, and rumour and gossip abound.

Through many conversations with many different people we have built up a picture of what happens between the "City" and companies, who does what, what interests drive their behaviours and what we believe are the effects of a 'System' of interactions.

We have deliberately introduced the word 'system' to describe the ways in which top managements and the markets interact. We think it is reasonably accurate to believe that there is a system at work that connects the interests of the key players in the financial markets and in companies.

Two definitions of a 'system' seem, between them, to capture what we mean:

"A complex whole, a set of connected things or parts; an organised body of material or immaterial things"


"A group of bodies moving under mutual gravitation".

Perhaps the second definition most accurately describes how this particular system works!

We are not alone in thinking of the management-City nexus as a system. So do the many regulators and governmental bodies that try to act as referees.

As with all systems, there is an inside and an outside. We try to identify who is included in this system, who is not, whose interests are served by the system and whose are not.

We did not discover a great plot to defraud society, deliberately disadvantage others or to enrich insiders by corrupt means. If we had, we would have exposed it and become rich! Or dead!

The system is not like that. It is much more a diffuse but well understood set of arrangements that are used, often successfully and occasionally not, to serve the interests of the participants.

The surface lubricants that keep the wheels turning are relatively harmless; meals, shooting parties and entertainment at cricket matches, rugby games, regattas, opera and concerts. Underneath is thicker glue - contacts, wealth, appointments, careers, reputations and honours; all in the reach of system participants.
There is a considerable diversity of views about the markets and the ways in which they operate. However, everyone we spoke with believed that having competition for capital to finance industry is the best way of encouraging efficiency, necessary change and adaptation. We strongly agree with this view.

But behind what many people said was an often unspoken assumption that markets can be perfect. By "perfect", people seemed to mean that equity markets can be relied upon to make rational decisions about the allocation of capital amongst competing companies, based on objective information and rational analysis. In a perfect world, efficient, growing companies would attract the most capital and managements that misused assets would be replaced, or the assets redistributed.

Much of the language of the financial markets is based on rational, mainly numerate, analysis. Investors often judge top management on how adept they are with "The Numbers".

Readers may be relieved to hear that we do not plan to dwell on financial analysis, numbers, or how to create perfect markets. Our main concern is human behaviour. It is about companies as human communities, not just as bundles of assets. It is about the interests of people and how they make the market work. In this sense, it could be described as an investigation into human nature and how it will always subvert and distort theories such as that of a perfect market. (Thank the Lord!),

Thus, many of the analyses of how things work are based on verbal descriptions, not on "hard" numerical facts. This must inevitably be so, because we are describing a system of human interactions. We have been as stringent as we possibly can to cross check what we were told, but we are inevitably dependent to a degree on the views of others.

To reduce the risks of developing a distorted view of what goes on and of unbalanced conclusions about causes and effects, we invited a "panel" of experienced people from business, the City and business schools to critique our research and conclusions. We would like to thank all those who helped us in this way. Your views were invaluable.

We would encourage readers to use the book to develop their own views about how companies and markets operate, and whether the current 'system' needs to be challenged.

Because of this it is appropriate to spell out our own views and prejudices at the beginning. So here goes!


The performance of a society as a whole and each of its constituent parts, including its economic component, should therefore be judged by the degree to which it contributes to the overall well being of its members.

If any element - political, military, economic - is manifestly serving only the interests of a small part of society, with the effect of damaging its overall interests, then action should be taken to modify or regulate what it does so that its contribution to the whole can be positive.

The same applies to the so-called "global economy". If the functioning of the global financial system is manifestly damaging the interests of "global society" (and it may well be - think about the possible relationships between regional wealth and poverty, the exploitation of the weak and poor by the strong and rich, instability of governments, violence and international terrorism), then its activities need to be re-aligned with those interests. That is a major purpose of international co-operation.

To allow the self-interest of a nation or individuals to be separated from the interests of society will more likely than not create corruption and distortions in the effective use of resources for the benefit of society as a whole.

Equally, to argue that the interests of individuals are more important than those of the society of which they are a member is likely to result in significant distortions in the effective use of resources and also behaviours by some individuals which will seriously damage the overall interest.

Eric Hobsbawm, the distinguished historian, made these points brilliantly:

"Government, the economy, schools, everything in society, is not for the benefit of the privileged minorities. We can look after ourselves. It is for the benefit of the ordinary run of people, who are not particularly clever or interesting (unless, of course, we fall in love with one of them), not highly educated, not successful or destined for success - in fact, are nothing very special. It is for these people, who, throughout history, have entered history outside their neighbourhoods as individuals only in the records of their births, marriages and deaths. Any society worth living in is one designed for them, not for the rich, the clever, the exceptional, although any society worth living in must provide room and scope for such minorities. But the world is not made for our personal benefit, nor are we in the world for our personal benefit. A world that claims that this is its purpose is not a good, and ought not to be a lasting, world." (Hobsbawm, 1997).

It also seems to us that the above propositions are not at all incompatible with a strong belief in capitalism.

However, they do mean that, no matter how difficult, the formation of policy needs to be under-pinned by the capacity to make balanced and sometimes complex judgments.

For example, encouraging free competition in the provision of consumer goods is almost certainly the best way of making sure that consumers get choice and the best deal. In some other spheres of activity however, where there are a number of overriding societal interests at stake, it has become manifestly clear that allowing market forces to determine outcomes has severe limitations. More complex arrangements need to be made. The provision of an effective national transport infrastructure in Britain has been clearly demonstrated as one of these spheres.

In another dimension, it is true that highly rewarding individuals with genuinely special talents will make it easier to retain those talents. But, allowing a complete "free-for-all" has been demonstrated as causing damaging distortions; for example, vast wealth contrasted with miserable poverty, or very high reward for moderate or poor performance.

Therefore, it is appropriate for a society to take an interest in the complex matter of deciding what means will be used to determine the distribution of wealth and what should be done about abuses.

All of this means that individuals, organisations and governments cannot avoid having to cope with considerable complexity and often face up to issues that have no one clear solution.

This fact is clearly regarded as irksome by some, who prefer simple, overriding rules to guide action.

An example is the assertion that top managements of large enterprises are likely to become confused if they have to cope with a multiplicity of possibly conflicting goals. A single overriding objective of maximising shareholder value will serve to focus their efforts. Furthermore, the argument goes, if shareholder value is maximised the interests of all other stakeholders will also be fully served. So far this has not been demonstrated to be true.
There is however a body of evidence which seems to indicate that good managers are perfectly comfortable with balancing the demands of many different constituencies when they make strategic decisions. Perhaps this is what being good at strategic management is all about!

So, it would appear that the desire of bright, fact-dedicated people to find analytical and even mathematical models which will solve all our problems have usually been thwarted by human nature and, more particularly, human behaviour.
This is unlikely to stop them trying, nor will it stop others (who do understand human behaviour) from using the arguments produced by the proponents of pure logic to further their own ends.

We would remind readers of John Maynard Keynes's remark, "Capitalism represents the most astounding belief that the most wickedest of men, doing the most wickedest of things, will be for the good of everyone."! Doubtless many of Enron's shareholders really did believe that that company had found a new business paradigm, one which would benefit the world!

Why, you might ask, have we spent so much space talking about the good of society? Well, we think that the field of investigation of the book, the functioning of the financial markets and how they interact with management, has great importance for our society.

We are after all, talking about the apex of our economy. Large, publicly quoted companies represent a huge amount of value. Their performance and behaviour has profound effects on the well-being of millions of people who work for them, or whose pensions depend crucially on their long-term performance.

Also, it is an inescapable fact that certain kinds of industries, which require very heavy investment in R&D or expensive plant, or need the application of complex bodies of knowledge, or extensive international marketing and distribution networks; need large organizations to attract the capital and support the business. The performance of large companies is likely to determine whether many key industrial sectors are represented in any developed economy.

It is therefore worth asking, echoing management guru Charles Handy - what are the underlying purposes of such companies? Is it simply that they are there to make as much money as possible for 'shareholders', whoever they may be? Or should large companies that produce goods and services for billions of people globally, and employ millions of those people, doing things that can often enhance or destroy the social and physical environments of communities, have purposes that are deeper than simply making money?

On another level, we see the public's disillusion with leaders in general. It is bound to be damaging if the public view leaders of major industrial companies as a venal and self-centred bunch, interested only in enriching themselves, no matter what the consequences to others. In the end, societies are likely to be healthier if leaders have a concern for, and are bonded with, the people they lead.

We aim to present a picture of what goes on between companies and the markets which is as untainted by our own views and prejudices as possible.

Towards the end of the book we offer you the chance to act as "jurors" and decide what you believe and what might be done about the things that need changing.

We hope that you find the book stimulating and thought-provoking.

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