Hair-shirt management leads only to the grave
City & Business
Sunday 24 March 1996
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.
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.
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