Repeating and perpetuating proven bad habits.
Warren Buffet’s famous idiom: “Only when the tide goes out do you discover who's been swimming naked,” can be expanded to give some new meaning in these tough times. The naked swimmers will mostly retreat with the tide to continue hiding their nakedness. Or they could scramble for some covering attire, or, like turtles, withdraw into their shells. More often than not, however, even those who are not naked follow the tide into deeper waters.
That is a fitting analogy for the behaviour of many, if not most companies in troubled times. They follow the irresistible temptation to opt for containment rather than growth and in the process revert to those techniques that played no small role in the receding tide. A recent line in the Economist speaks of the backfiring of the shareholder-value revolution of the 1980’s, pointing not only to the source of this constricting behaviour, but its continued presence and the folly of a strong resurgence.
To be clear, shareholder-value criteria on their own are relatively benign. It is when a strong dose of short-termism, another product of the 80’s, is added to it that one creates a highly toxic cocktail. It was a good decade for the champions of capital supremacy and exclusivity. It was unquestionably seen to be synonymous with freedom during the cold war, ending in victory with the collapse of the Berlin wall. There was a scramble for a plethora of old and new measurements and techniques that would support and enhance shareholder-value criteria, including EVA, ROAM, ROE, ROTA, RONA and many others.
Broadly, the purpose and destiny of a business simply became a matter of financial technique, manipulating and pulling levers that are tangible and measurable. We see this spirit reflected in this praise singing of ROAM (return on assets managed) which proclaims that “the only legitimate purpose of managers is to maximise the value of the firm for shareholders”. I recently saw some advice to small business owners to focus less on income generation and more on profit. Individually and in themselves they are all valid as supporting indicators of company health, but many simply become an end in themselves. In that they can threaten the long term growth of the enterprise and are arguably counter-productive even in longer term shareholder-value terms.
An excellent example of this phenomenon is the behaviour of Tim Cook, successor to the late Steve Jobs at the helm of Apple which, until recently was the largest company in the world by market capitalisation. The approach of Jobs to the company was legendary – product innovation and market growth. Now hitting some troubled waters, Tim Cook has opted for share buybacks, lifting earnings per share and share value. He has spent $110 billion on share buybacks, $43 billion on dividends and debt has skyrocketed to $63 billion. Another IT giant, Amazon has adopted a similar approach and has boosted its share-buyback programme. Perhaps both companies have not fully understood that investors were attracted to their innovative and market growth strategies to begin with. Both shares have shown bigger falls than the broader market.
Of course, as the previous mining giant Anglo American has discovered, debt has its own pitfalls. It may be cheap at a given time, but can quickly reverse with central bank intervention, fickle bond markets and credit ratings. Debt is not as forgiving as equity, and its cost not as malleable. It becomes particularly questionable when used in a non-productive manner such as paying out dividends or executives cashing in share options; and not for investment in productive assets, growth, and innovation.
Shareholder value arguments in general and share buybacks in particular, speak to a much deeper issue that has supported an ideological argument: the premise that capital is a scare commodity that has to be revered and wooed by all means possible, including exclusively seeking maximum and quick yield on its deployment. That argument crumbles somewhat with easy and cheap credit and muddies the theoretical distinction between capital and debt. It also distorts some of the efficacy of the typical measurements mentioned above and that are often obsessively and exclusively followed.
The whole approach has been questioned for some while, particularly in the last decade or so. Early responses to the destructive effects of short-termism that invariably accompanies the shareholder value approach, especially if it is linked to executive rewards, saw the creation of broader metrics aimed at sustainability. They included the Triple Bottom line and the Balanced Scorecard.
For some inexplicable reason, the value-added statement, initially established to share information with broader stakeholders including labour, was never recognised as a far more powerful, growth orientated strategic template. (Even more so if the statement is adjusted to reflect what I have called a Contribution statement). Yet a focus on maximum wealth creation, or value-added automatically drives an organisation to greater growth orientated behaviour. All of the other measures, including profit and the others mentioned earlier, fit under optimum wealth distribution.
They are valid in their own right, but using them as the primary drivers is arguing that wealth creation is driven by distribution, which is putting the cart before the horse. You clearly have to create wealth before you can share it. There seems to be a blatant hypocrisy in arguing for maximisation of one component of distribution, profit; against maximising (or even for minimising) another, wages. As singular and obsessive focuses, both are wrong when longer term wealth creation itself suffers.
If applied vigorously, the wealth creation template does not imply letting go of prudence and cost containment. Anything but. In just one of its three dimensions, that of transforming one situation into another of greater value, it interrogates the productive use of every activity, every resource used and every asset employed.
Business behaviour is broadly reflected in three ways: profit driven, wage driven and service or market driven. They are not mutually exclusive and should be mutually supporting. But there are times when an enterprise might have to put emphasis on one above the other. Containment invariably puts behaviour in the first mode often creating destructive tensions.
Letting go at any time of the third, being service or market driven, is perilous to say the least.