Comment: How to make a sleeper look sharp

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The issue of corporate governance - the relationship between shareholders, directors and management in running companies - won't go away. Yesterday the National Institute hosted a useful seminar on the subject, which looked at two aspects: how broader lessons could be drawn from companies that had made a radical improvement in their performance; and how British and German systems of governance differed. Both were concerned with efficiency - how performance might be improved - rather than morality - how British Airways might have avoided the Virgin debacle, or indeed NatWest the Blue Arrow affair.

The first drew on the 'Sharpbenders' project by the about-to-be-disbanded National Economic Development Office, which looked at a number of companies that had suddenly made a radical improvement in their performance. (The title is meant to describe the change in the performance of the company concerned, not that the managers were either sharp or bent.) Co-author Peter Grinyer drew 13 ways in which sleepy companies had been revived.

These included the appointment of a new chairman or chief executive (who might well already be in the company); separation of those two roles; the creation of a 'ginger group' of non-executive directors; bringing together executive directors with different backgrounds or bringing in new young managers; and the application of a number of now-conventional managment techniques such as benchmarking, new venture units and scenario-building.

LOOK AT DETAILS

The study is a helpful one in that it examines actual improvements in performance and then draws some theoretical lessons from that, rather than making a theoretical case and then arguing that performance will improve. It also demonstrates how companies can be transformed under the present system of corporate governance, for all its faults. The other paper at the seminar, written by Peter Hart, argued that as British manufacturing productivity was lower than German, we should look at the German system of two-tier boards of directors, complete with worker representation on the upper tier.

Maybe, maybe not. In as far as UK productivity is lower than German (which on average it is) that surely has more to do with different educational levels of the workforce and different training methods, as much of the excellent work by the National Institute's Sig Prais would seem to show. The approach here is to look at the same industry in the two countries and see why in detail performance differs.

For example, in the biscuit industry we seem to suffer from longer downtime from plant because we do not maintain the plant as well as German factories do. We also tend to make lower value-added products: we are exporting digestives and rich teas to Germany while we are importing fancy little confections at three times the price. True, we might prefer honest, sensible biscuits to the over- decorated, sugary things the Germans serve to each other, but the fact remains that there is more valued added in the latter than in the former.

The perceived relative failure of the Anglo-American system of governance, with the threat of takeover as the main stimulus to change, has inevitably led to self-examination. Britain has had Cadbury. It now seems that the Clinton administratioEn will look at the German system of worker representation on boards: Larry Black, in his View from New York last Saturday, reporTHER write errorted that Robert Reich, the new Secretary for Labor, was interested in giving workers a greater voice in the management process.

Advocates of the German and Japanese systems of management, however, do have to acknowledge a number of facts that suggest that the Anglo-American model is not, in itself, a handicap. Indeed, it might actually be better than the German or Japanese. That it is not a handicap would be supported by the fact that US industrial productivity is still the highest in the world, and during the 1980s British productivity was rising faster than German. Indeed our manufacturing productivity rose faster than that of any of the Group of Seven countries; Germany's rose slowest.

Perhaps most interesting of all, both Germany and Japan are concerned that their present systems have flaws that might inhibit change. In the case of Germany, there is certainly evidence that the motor industry is cutting capacity too slowly, while in Japan a core element of the worker/company partnership, life- time employment, is now under threat.

CONVERGENCE

Another paper distributed to the seminar, though sadly not discussed, looked at the way Japan is examining the failures of its own system to see if it can learn from the US. Two Nomura Research Institute analysts, Shigeru Watanabe and Isao Yamamoto, argue in the winter 1992 NRI Quarterly that management does not pay sufficient attention to shareholder interests and that this is curbing productivity growth. In the name of 'long- term' growth, they have continued to make investments that earn low returns, building up surplus assets that in the US would be challenged by shareholders and liberated by takeovers.

Japanese management, the authors conclude, must be more self-disciplined and pay more attention to financial objectives. They also call for employee share option schemes, and the appointment of non-executive directors to increase the shareholders' voice in company management.

What is surely interesting here is that some sort of process of convergence is taking place. Just as manufacturing techniques cross national boundaries very rapidly, so too do ideas in corporate governance. But this flow is two-way, and Germany and Japan have at least as much to learn from the UK and US as the other way round. There is certainly one overriding reason to expect the voice of shareholders to be heard more loudly throughout the industrial world: the growth of pensioner power. As funded pensions expand in continental Europe and Japan, so the power of institutional investors will rise, as they have done in Britain and the US. As their power rises, so will the pressure on them to improve their investment performance. The growing army of pensioners will see to that.

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