Inside Business: Industry's leaky bucket

PERHAPS it is no coincidence that yachting is a favourite pastime of captains of industry. The activity that is often likened to standing in a cold shower tearing up pounds 10 notes must for some at least provide a link with their working lives, where so many executives preside over operations in which cash is flooding out the door.

The point is graphically made in research published last week by PricewaterhouseCoopers, the accountancy and management consultancy firm. The findings of its study of 97 UK companies indicate that 11 per cent of British organisations' total sales are generated within business units which are earning less than they cost to run - and so destroying shareholder value.

However, more interesting - and more damning - are the reasons given for underperformance. Any seasoned observer of company results will be familiar with the litany of excuses that executives trot out for disappointing sales - most frequently tough market conditions and exchange rates.

But there are others: only last week, pub operators were blaming a shortfall in post-Christmas business on flu, having attributed their summer disappointments to the World Cup.

The weather also features strongly - and not just for insurance companies, which are, after all, supposed to take climate patterns into consideration when calculating the premiums they charge. Albert Fisher, the food distribution company, has been particularly innovative - blaming problems with various crops and fish stocks as well as the inevitable El Nino for its deteriorating finances.

A reasonable response to such comments would be that it is because they are supposed to deal with such challenges that executives are so handsomely remunerated. But apparently it is not as simple as that. Nearly half of the captains of industry questioned on behalf of PwC blamed underperformance of business units on a lack of appropriate skills.

Readers conditioned to think that the business world is a ruthless place where only the most talented, determined and aggressive inhabitants can survive would be surprised to learn that such under-achievers can remain in place. And yet, even in organisations led by chief executives who insist they are driven night and day by the desire to create value for the shareholders, they do.

There are probably many reasons for this. Senior executives presumably see the admission of problems as a sign of weakness and feel that the public acknowledgement that not all their managers are up to scratch reflects badly on them.

It is also arguable that "shareholder value" is more often about rhetoric than action. One of the most glaring examples of this concerns the US foods company Quaker Oats, which was a keen proponent of shareholder value management yet failed to apply the concept's techniques in its disastrous acquisition of the drinks company Snapple. It bought the company in late 1994 for $1.7bn, but in early 1997 decided to cut its losses by reaching an agreement to sell Snapple for just $300m.

The truth is that even executives who are drawn to the notion of managing for shareholder value can find it hard to achieve. Although the idea is obvious enough, businesses, particularly big ones, have been so inclined to load themselves up with overheads and generally become distracted from the main tasks that it can be difficult to get back to basics. And when they do grasp the essentials of the issue, there is an inclination to see shareholder value as all about profitability, rather than long-term, sustainable growth.

But if a company lacks the ability or inclination to sort out such difficulties for itself, there are plenty of firms around - PwC among them - that see themselves as pools of talent just waiting for such opportunities to prove their worth.

Much has been said about the dangers of companies letting consultants run their businesses. But the quick shake-out seems to be a classic case of the appropriate use of consultants' expertise. Moreover, if executives cannot bear the thought of passing the responsibility over to outsiders, it is always open to them to set up a specialist unit within the business charged with sorting out problem areas - in rather the same way that Hanson and Williams used "hit teams" in their heyday.

In fact, what tends to happen, as PwC's study shows, is that when they do decide to do something about the problems, companies tend to get rid of the offending units either through a trade sale or some kind of buyout. In 1997 alone there were about 700 such disposals, and the worsening economic outlook can only be expected to extend the flow.

That is all very well, in that it stops the business being the parent company's problem. Except that what frequently happens is that in fresh hands - or, more particularly, a buyout involving at least some of the existing management - an ailing operation suddenly takes off.

Another study, to be published by PwC next month, indicates that such businesses can suddenly achieve annual returns of the order of 75 per cent.

What this means for parent companies is that even when they have jettisoned their problems, they fail in management terms. By not being sufficiently aware of the potential of such businesses, they are apt to "leave value on the table", says Bruce Gregory, an experienced executive who is now a director in PwC's business regeneration team, .

It is little wonder Gavin Barrett, of PA Consulting's Sundridge Park management centre, concluded that in many companies managing for shareholder value really amounted to having a "leaky bucket": there was only an increase in shareholder value if the amount created exceeded the amount destroyed.

Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
sportDidier Drogba returns to Chelsea on one-year deal
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
ebookA unique anthology of reporting and analysis of a crucial period of history
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
Tovey says of homeless charity the Pillion Trust : 'If it weren't for them and the park attendant I wouldn't be here today.'
Rhys Williams
commonwealth games
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little