City & Business: Actions louder than words at Grand Met
Sunday 01 December 1996
The figure has been well flagged and is largely attributable to accounting adjustments to write back goodwill relating to the sale of the Pearle optician business and a clutch of European national food businesses. So while investors can largely the ignore a loss that has no cash-flow implications, they can learn more by looking at what underpinned the disposals that gave rise to the charge. Therein lies an important message about how John McGrath, the Grand Met chief executive, intends to drive the business forward under his tenure.
The company is now moving into another phase of its development, which sees a clear focus on managing for value. In essence, this will see Grand Met taking a much more rigorous approach to the return on capital that each business earns and a more discerning attitude to the allocation of cash resources.
The reason why Pearle and the national food business are not deemed appropriate members of the Grand Met family is that they simply did not have the potential to justify the further investment that was demanded. The view now is that unless a brand can produce after-tax returns on capital significantly in excess of 10.5 per cent it must be discarded.
That is not to say that Grand Met will not invest in businesses that are earning below 10.5 per cent. However, to secure the necessary resources they must show that they can generate profitable sales growth. This is one of the attractions of a value-based approach to management. It intensifies the competition among businesses for resources. Grand Met will only allocate capital or marketing investment to those brands that will earn good returns for shareholders.
A natural by-product of this is that much greater attention is paid to the allocation of cash between the business and shareholders. Grand Met is now looking quite carefully at any acquisitions to ensure that any proposed investment would not earn a better return for investors by being passed back to them as a dividend.
This is something that shareholders will appreciate. There have been times over the last decade when they have perhaps felt a little neglected. However, Mr McGrath's new philosophy should not be interpreted as an indictment of previous management strategies. Indeed he is the first to acknowledge that he can only implement his management for value strategy because of the legacy he has inherited from his predecessors. If Allen Sheppard had not taken the decision to move Grand Met from being a conglomerate to a focused drinks group in 1985 and followed this up a few years later with the acquisition of Pillsbury, and if George Bull had not pioneered the food restructuring to free up cash to put behind the brands, Mr McGrath would not be in a position to embark on his new strategy. He is not saying his strategy is best. Rather he believes it is the best for Grand Met at this time.
Grand Met is not making a great song and dance about the new philosophy. Mr McGrath believes you can only talk the talk after you have walked the walk. However, investors can only benefit from this new internal discipline. The grand words may not be there, but as Mr McGrath points out, it is the action that speaks louder.
The bean counter bites back. Coopers & Lybrand's decision to issue writs against nine former Barings' employees to join them in actions that have already been brought against the firm by the administrators of the merchant bank that collapsed last year is a bold attempt to try and establish an important point of principle. All too often it is the auditors who become the soft target for those attempting to seek retribution in the wake of a corporate collapse. Unlike the directors of a collapsed business, who tend to be a little short of readies, the auditors are perceived to be stuffed to the gills with cash and insurance policies. It is only natural that those who represent aggrieved creditors tend to pursue the cash rather than those who are perhaps a little higher up the pecking order of responsibility.
Coopers is now attempting to redress the balance. It is merely arguing that those who seek financial redress must consider casting their net wider.
Coopers believes that it carried its work out properly. But so too the nine former Barings staff believe they behaved properly. Just that they are ex-employees is no basis on which to assess their responsibility for the collapse.
The danger here is that the important general principle that Coopers is trying to establish will be lost by applying it to the specifics of the Barings case.
Has anyone actually seen and spoken to Ian Lang, the President of the Board of Trade, recently? I have not and neither have any of my colleagues. There is a worrying theory doing the rounds that he has been kidnapped by aliens and is being held hostage until the Government apologises publicly for the lampooning of beings from the planet Zarg in the commercials run for Smash instant potato mix some years ago. Mr Lang it is said is being impersonated by a lookalike from central casting until the release of our gallant minister can be secured.
Ridiculous though this theory may be, it would explain the curious inertia that appears to have afflicted the DTI of late. Nothing appears to be happening by way of firm decision-making. We await news on the BA/American alliance, the Bass acquisition of Carlsberg Tetley and two bids for electricity companies. Last week, we witnessed the quite ridiculous reference of the P&O merger with Stena of their short-sea routes across the Channel to the Monopolies and Mergers Commission. This was not a decision but an ill-judged buck-passing exercise, which defers the necessity of the Secretary of State to pronounce for three months. Given that the two companies had been excused their undertakings not to merge five months ago, it can only be supposed that the reference was not the work of an active and intelligent man like Mr Lang.
I can only conclude that the aliens do have him. Those that say they can keep him are ignorant buffoons. I say when Ian Lang works, Britain works. But as someone who believes in aliens I would, wouldn't I?
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