Managers with money but no vision

After Downsizing comes Giving Money to Shareholders.
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The Independent Online
The hatchet-men are in retreat. The arch-guru of sacking, Morgan Stanley's chief economist Stephen S Roach, has admitted that his creed of "downsizing" - a policy followed religiously by huge numbers of companies in the 1980s and 1990s - was wrong.

"If all you do is cut," says the man who inspired a generation of chief executives to wield the axe, "then you will eventually be left with nothing, with no market share." A blindingly obvious conclusion, perhaps, but one that escaped many of our most admired and highest-paid bosses.

But as one crass management fashion is ushered off stage, another is being taken up with fevered enthusiasm. The new big idea is called Giving Money Back To Shareholders, and it could prove every bit as damaging as downsizing. It has become the new management mantra.

Today there is barely a major boardroom in the country where the concept is not being enthusiastically discussed. Giving Money Back To Shareholders does not mean the twice-yearly ritual of paying out modest dividends. It is about handing out much bigger amounts of profit to shareholders instead of reinvesting it in the business - in new product ideas, in new factories, in new businesses, in new technology, in staff training.

Giving Money Back To Shareholders takes one of two forms: either a "special" or "bumper dividend", or, more usually, a share buyback. A share buyback is where the company uses its cash reserves to buy its own shares, which it then cancels. The effect is to give each shareholder a bigger percentage stake in a shrunken company.

The passion for these practices is becoming a stampede. On Friday, National Power announced plans to pay pounds 1.1bn to its shareholders, only days after PowerGen unveiled its own pounds 400m bonanza. The supermarket group Safeway also succumbed to buyback frenzy, saying it would seek shareholder approval to buy in up to 10 per cent of its shares. Reuters, Barclays, Guinness, Argos, British Petroleum and ICI, along with a host of regional electricity companies, have also done buybacks or are actively considering them. And where the blue chips lead, other companies will surely follow.

The sad thing is that every buyback or bumper dividend is greeted ecstatically in the City. The company's share price is marked sharply higher and the directors are applauded for their wise stewardship of the company. It is absurd. What these managements are admitting is that they have been unable to find a productive home for the money. They have been unable to come up with new business ideas, unable to translate them from drawing board to commercial reality, in short unable to build their businesses. All they are good for is the comparatively humdrum task of administering the existing assets.

On past performance, some of their caution is justified. The 1980s saw many bosses going out on insane sprees, paying high prices for sometimes worthless assets, often in industries or countries about which they knew nothing. Utilities in particular have proved themselves hopeless at investment. Shareholders have become understandably fed up. Certainly there was a case for some of the adventurous chiefs to pull in their horns. But the sheer glee with which the City greets these buybacks is truly depressing. A company that does not reinvest in new products and processes is heading eventually for extinction.

The new austerity has gone too far. Directors now win brownie points for investment inaction. Today's management philosophy is to "stick to the knitting", however narrowly defined. The result is that even the best managers are too timid to experiment. Why risk ploughing money into a new product or factory which may only generate a return five or 10 years hence, when you get more kudos by handing the money to shareholders today - not to mention a bigger personal reward because your bonus is linked to share price performance.

The City is partly to blame. It's that old chestnut, short-termism. A share buyback is almost certain to blast the share price higher immediately. The money managers who control most of corporate Britain are themselves judged by the short-term performance of their portfolios. And, of course, the stockbrokers and investment bankers who advise on share buybacks collect hefty fees for the service.

Management consultants, MBA professors and others who advise companies are not blameless either. Some have an almost puritanical view that - in their pompous jargon - companies should stick to their "core competences". Sometimes even the most tentative step into unknown territory is greeted with raised eyebrows and a sharp intake of breath. Once-bold managers now boast proudly about all the kinds of businesses they won't invest in. It is hair-shirt management and just as unhealthy as the profligacy of 10 years ago.

Following the herd is always easier than taking decisions that cost money in the short term and can seriously tarnish reputations if things go wrong. And investment often does go wrong, sometimes spectacularly. The drugs and shops group Boots spent more than pounds 200m and 10 years developing a heart drug, Manoplax, which it turned out actually hastened death.

Inflated expectations of returns are partly to blame. Managers have failed to adjust to a low-inflation environment. They still expect yields of 20 or 30 per cent or more on an investment. That was reasonable when inflation was in the teens, but is over-optimistic when it is around only 3 per cent.

Under-investment has been a British disease for decades. Of the 48 richest nations, Britain ranks 45th for investment. Only the United States, Denmark and Egypt plough back a smaller proportion of national income into investment each year. Compare Britain's paltry 16.3 per cent to France's 19.9 per cent, Germany's 22.4 per cent, Japan's 30.6 per cent and Singapore's 36.2 per cent.

Moreover, corporate investment has shrunk dramatically since the boom of the late 1980s. In theory, this late into the economic recovery, it should now be gathering pace sharply. But this it is stubbornly failing to do.

Some economists would argue that the bumper dividends don't matter. Shareholders, they argue, are efficient at "recycling" money from unimaginative unadventurous companies and directing it into more entrepreneurial hands. But in practice this doesn't happen. First there is inevitably a time lag. Second, some investors will spend their windfalls rather than reinvest them. Most importantly, big institutional investors - the pension funds and insurance companies that own most of the largest British companies - are bad at identifying and investing in the small and medium-sized businesses of the future. They are simply not interested in the fiddly business of investing a few tens of thousands here and there when they have to find a home for several billion. Most institutions won't even look at investing in companies seeking anything less than half a million pounds.

There is one other aspect to the new fad. For years we have been told that the bosses of our largest companies deserve their half-million-pound pay packages because of their irreplaceable entrepreneurial and management skills. But if all they are doing is supervising the existing assets - hardly a taxing job - then perhaps they need not be so generously rewarded.