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
News
ebooksAn unforgettable anthology of contemporary reportage
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

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Syria civil war: Meet the military commander who says his soldiers will not rest until every inch of their war torn country is free of Islamist 'terrorists'

‘We won’t stop until Syria is back to normal’

Near the front lines with Islamist-controlled towns where Assad’s troops were besieged just last month, Robert Fisk meets a commander confidently preparing his soldiers for battle
Fifa corruption: Strip Qatar of the World Cup? Not likely

Strip Qatar of the World Cup? Not likely

But if a real smoking gun is found, that might change things, says Tom Peck
Twenty two years later Jurassic Park series faces questions over accuracy of the fictional dinosaurs in it

Tyrannosaurus wrecked?

Twenty two years on, Jurassic Park faces questions over accuracy
The inside story of how Bill Clinton built a $2bn global foundation may undermine Hillary's chances

The inside story of how Bill Clinton built a $2bn global foundation...

... and how it may undermine Hillary's chances in 2016
Genes greatly influence when and how many babies a woman will have, study finds

Mother’s genes play key role in decision to start a family

Study's findings suggest that human fertility is still evolving
12 best olive oils

Extra-virgin, cold-press, early-harvest, ultra-premium: 12 best olive oils

Choosing an olive oil is a surprising minefield. Save yourself the hassle with our handy guide
Rafa Benitez Real Madrid unveiling: New manager full of emotion at Bernabeu homecoming

Benitez full of emotion at Bernabeu homecoming

There were tears in the former Liverpool manager’s eyes as he was unveiled as Real Madrid coach. But the Spaniard knows he must make tough decisions if he is to succeed
England can win the Ashes – and Elvis Presley will present the urn

England can win the Ashes – and Elvis will present the urn

In their last five Test, they have lost two and drawn two and defeated an India side last summer who thought that turning up was competing, says Stephen Brenkley
Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)