Hair-shirt management leads only to the grave

City & Business

EXPANDING a mature business is terribly, terribly difficult. Ask Mike Smith. Dr Smith is chief executive of Argos. For years he has been trying to find a productive home for the ton of cash his company generates each year. He expands the core retail chain as fast as he can, but that only absorbs a fraction of the profits. He looks at acquisitions, but is ultra-cautious about expanding into new areas. He occasionally experiments with green field ventures. But the ackers just keep piling up.

Last week he threw in the towel, announcing plans to hand back a substantial chunk of his cash pile to shareholders in the form of a special dividend. He is not the first. These bumper pay-outs - either in the form of special dividends or via share buybacks - are suddenly all the rage and have been widely applauded in the City.

Shareholders have become fed up with egotistical managers who pay top dollar for businesses they know nothing about in the arrogant belief they can do better than the previous management. And they are equally suspicious of start-ups, which invariably take more time, money and management effort than was pencilled into the business plan. Much better to hand back the money to institutional shareholders who are proficient at recycling capital towards more productive businesses and ideas.

Any number of companies have reached this conclusion. Barclays has already done two buybacks. Reuters and Boots have done one each. Several utilities have paid out special dividends. British Petroleum, WPP and ICI are among the companies which now have the subject firmly on the agenda. Guinness last week joined the club, announcing a share buyback.

Are they right? Or could it be that some of our top managers are being too picky, too defeatist, too cowardly even? No one would argue with Barclays or the regional electricity companies handing capital back to shareholders. They have shown themselves incapable of doing anything useful with their growing reserves. But with the others the decision is less clear-cut. Argos, after all, has an excellent track record. Dr Smith is highly regarded by shareholders. Surely cash is as safe in his hands as given back to shareholders who, like as not, will inject it into the latest investment fad, be it biotechnology or cyberspace? And what about Guinness? Its record of brand management is second-to-none. Is it really incapable of inventing and developing new products capable of delivering a decent return?

Of course, Argos and Guinness have made mistakes. Argos blew a small fortune on Chesterman's - a catastrophic attempt to sell upmarket furniture in the teeth of the house-buying slump. Guinness suffers from its insane spree in Spain, when it bought the brewer Cruzcampo. But it is absurd to think they are now incapable of making sound investment decisions.

The pendulum of business best practice has - quite rightly - swung away from the profligacy and optimistic folly that infected much decision making in the 1980s. Most managers now bow to the new orthodoxy of sticking resolutely to the knitting or, in business school jargon, "focusing on core competencies" (yuck). There are a few exceptions. Richard Branson is still happy to invest in anything from cola to pensions and railways to bridalwear shops.

I suspect the pendulum is now about to swing too far. The new business puritans are ready to stamp on the smallest investment outside a narrowly and rigidly defined area of expertise. Business leaders now delight in telling you all the industries and products they won't consider investing in. The smallest pilot project in new territory is frowned upon. The hair- shirted business leaders of the 1990s are proud of how narrow their horizons are.

Argos, for example, won't invest in any business outside the four product areas it knows inside out: electrical goods, toys, jewellery and housewares. Nor, within these narrow parameters, will it consider any business with different operational characteristics - so it is reduced to looking at low-cost, low-margin, limited-service businesses. Plus it really only wants businesses where there is headroom for geographical expansion. And any business idea has to make a more than 10 per cent rate of expected return - a hurdle rate which has not been lowered one jot despite today's lower inflation. Hardly surprisingly, Argos has discovered there's no such animal.

The City should not be cheering every time another company announces a special dividend or share buyback. The short-term goodies may be attractive, but they point to a management that has run out of ideas. The whole point of capitalism is that businesses bet capital on new ventures. Business leaders no longer prepared to do that eventually become mere pallbearers, overseeing a business's slow passage to the grave.

Wessex man

THE pounds 800m-plus battle for control of South West Water promises to be prolonged and ill-tempered. Wessex Water entered the fray a fortnight ago, announcing it was interested in making a hostile bid for the utility. It was joined last week by Severn Trent, which rushed out a counter-offer so that the two bids could be examined at the same time by the Monopolies and Mergers Commission.

The hurry shows. Neither bidder is prepared to put any figures on its proposals. But while Wessex is confident and precise about why its merger plan would work for customers and shareholders, Severn Trent so far sounds woolly and uncertain. There seems no compelling reason why South West should keep its independence. Its consumer record is abysmal. It has the highest charges in England and Wales, and has even succeeded in poisoning a number of its customers. Nor can it expect much loyalty from shareholders, who have seen a comparatively poor return for their money.

The larger Severn Trent has greater firepower than Wessex and could easily outbid it. But logic is on the smaller bidder's side. It neighbours South West, and would be much more able to exploit scale economies than Severn Trent which is 50 miles away. Wessex also has a similar rural customer base and coastal topography, unlike urbanised, landlocked Severn Trent. Finally Wessex has the far better service record - no hosepipe ban for 20 years - a performance Severn Trent can only dream of. That may weigh in its favour with the regulators.

This will be a long contest, but for me Wessex wins round one.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Client Services Manager - Relationship Management - London

£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Guru Careers: In-House / Internal Recruiter

£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project