THEMES – CORPORATE GOVERNANCE
The British model of corporate governance ensures shareholders and directors thrive on short term success, but not necessarily the country as a whole. Robert Bischof asks whether companies should also be run for the benefit of employees and society
2016 were the most successful Olympic Games ever for the United Kingdom. With 27 gold medals – and 67 medals overall – Team UK came in second place, ranking only behind the United States. In spectacular fashion, the UK beat both China (3rd) and Russia (4th), as well as Germany (5th) in the overall standings.
What makes this very special Olympic glory so noteworthy is the contrast to the Olympic Games two decades earlier. In Atlanta in 1996, the British team received just one gold medal – its lowest score ever.
WHAT A DIFFERENCE SMART PLANNING MAKES
What has made the difference over these 20 years? The short answer seems money from The National Lottery, with each ticket sale generating proceeds that were dedicated to funding Team UK at the Olympic games. But that is not the whole story. Once Britain was awarded the 2012 Olympic games, the country’s then-government under Blair and Brown decided to change things around a bit. A long-term strategy was developed and priorities were set to focus on certain sports where the chance of medals were greatest. To that end, specialised facilities like the Manchester Velodrome were created. In addition, the best coaches were hired, and they and the athletes were highly motivated through incentive schemes based on performance.
Britain has got plenty of sports talent but, as the Olympics strategy has proven, that talent must be properly nurtured. England’s national football team failed at the European Championships in summer 2016 because of systemic problems. A key part of the explanation is short term pressure on results, paired with too many foreign owners and managers with no interest in the national game. They look for spectacular foreign signings rather than developing home-grown talent over the long term.
SHORT TERM DECISION-MAKING
The Anglo-Saxon ‘shareholder value’ governance system, with its inherent pressure on quarterly results, drives short-term decision-making by boards. M&A activity yields quicker results to make a corporation larger than organic growth would. For the latter approach, you need patient product improvement and development, investment in the latest technologies, focus on opening up new markets and, above all, on skills development
in-house – at all levels, from shop floor to top floor.
All that costs money and reduces profits in the short term. The approach chosen instead is to massage the balance sheet – often through share buy-back schemes – to make the company’s results ‘look’ better, even if this is just a financial engineering exercise achieving no real enhancement in value. It is part of the shareholder value model where the incentives for directors are in line with those of the shareholders; unfortunately,
both thrive on short-term results.
Even more importantly, they mostly just pay mere lip service to the stakeholders – employees and their families, the towns and cities where operations are based, as well as society as a whole. To give a concrete example of how far society can be affected by irresponsible corporate governance, just consider Sir Philip Green’s purchase and subsequent sale of British Home Stores.
The sale of BHS and its subsequent collapse has left 20,000 employees potentially facing hardship in retirement thanks to a £570 million black hole in its pensions scheme, which is now being probed by the Pensions Regulator. This ugly chain of events has rightly been described as the unacceptable face of capitalism. It clearly highlights big shortcomings in the UK’s corporate governance. To cut a long story short, under the British business-as-usual rules, the deck is amply stacked against long-term thinking and value creation.
SELLING ASSETS TO SHORE UP ECONOMY
Britain has lived for decades on the proceeds of selling assets to shore up the country’s current account deficit and the exchange rate. Ports, airports, the energy sector, and huge numbers of industrial businesses have been sold to foreign investors. The London Stock Exchange and high-tech ARM Holdings plc are the latest in a long line. For a long time, all this selling off the family silver was falsely heralded as underlining the attractiveness of Britain as an investment location and considered a virtue.
Why was all this misleading thinking pushed on the British public? Because plenty of people in the City got rich in the process of acting as advisors to, if not instigators of, these transactions. Just ask all the lawyers, investment bankers, accountants and management consultants. Now, at long last, doubts are being voiced over the long term effect of all this so-called inward investment. Mark Carney, the governor of the Bank of England, warned before the Brexit vote that the reliance on “the kindness of strangers” might backfire. There undoubtedly is a short-term gain for the national accounts when the proceeds of a sale support the British balance of payment. However, the dividend flow leaves the country forever. Unsurprisingly, the UK’s once considerable earnings flow from overseas investment has reversed. While the country’s trade balance has for decades been negative, it is a new and worrying development of the last few years that the service sector is in deficit, too.
In some areas, the open door policy has of course worked with remarkable results. The car industry, once the perpetual laggard, is now thriving as it is almost completely under foreign ownership and management. That is a great success story — and so are hundreds of foreign owned businesses in the UK. The profits from these operations, however, are only partly re-invested in the UK. The largest part flows abroad. It is thus like English league club football – a great success story, but sadly not so much for the national team. Prime Minister Theresa May appears to understand that there is a problem. Rather atypically for a former Home Secretary, she has been referring to rethinking the role of workers on boards of publicly-listed companies; and refocusing on industrial strategy and board room remuneration in terms of the ease with which British companies and assets can fall into foreign hands. It will be interesting to see what she can actually do about it.
WORLDWIDE GLOBAL COMPETITION
Britain’s businesses are up against worldwide competition from the Germans, Japanese, Chinese and others who are determined to play the long game. These nations engage in the long game for very different reasons. For example, most German companies, even in the export sector, are not listed on the stock market. They are family-owned enterprises, whose main aim is to grow, survive and
look after their stakeholders – their employees, customers, suppliers and the community. But even those companies that are listed on the stock market have supervisory boards with worker and management representation. This structure, reflecting in actual voting rights for workers at the supervisory board level, prevent a company’s top managers from purely self-interested behaviour that underlies most prettifying balance sheet manoeuvres. I know because I was there: as a top manager of German companies, I was always paid bonuses on market share and profit – never on profit only. It is impossible, and even counterproductive, to try to copy the German governance
system and corporate culture for many reasons. It would be ironic, to say the least, if Britain would turn in the direction of the continental economic model after leaving the EU. But the search is on for a workable construction that combines the best of both worlds and allows British managers to act in a long-term oriented fashion to the benefit of their shareholders, employees and the national performance.
Bob Bischof is chairman of the German British Forum