The bottom line is…the bottom line isn’t enough

The bottom line is…

the bottom line isn’t enough

Philip Beddows, Partner, The Silk Road Partnership 

Originally published in The Boardroom Magazine: August 2010

Despite the infamy of corporate failures such as Lehman Brothers, Enron and GM, the global corporation is not dead — and remains unlikely to die. Business coach and mentor Philip Beddows says the non-executive director has a responsibility to serve employees, the community and society beyond short term profiteering.

The bottom line in the corporate world, ultimately, is that the bottom line isn’t enough. Profit is incontestably vital, bringing a myriad of benefits to all levels of society. It is the lifeblood of any commercial enterprise; provides income to investors; taxes to government that fund public services, money for development, and expansion; ensures continued investment in the employment of people and regeneration of communities; and is the root of much charitable giving.

Perhaps most importantly, assuming that we hope to grow old with dignity and security, without profit investment for pension funds is reduced. That said, commercial success that comes at the price of social ill is no longer considered acceptable. Whole industries having developed around the concept of making a positive impact on humanity: organic and environmentally friendly product lines, for example.

Secondly, the issue of managerial remuneration is being hotly debated, particularly pay for CEOs. The cry is that CEOs and other top executives are rewarded for their heightened focus on short term commercial success. There is a paradoxical tension here: because the average length of office for CEOs has been getting shorter, it is unsurprising that they have an interest in their own short term reward, realising that they have a limited shelf life in which to gain it. There is widespread sentiment that failure should not be rewarded, yet there have been many examples of CEOs departing on terms that, while in line with their contracts, are perceived as rewarding the often fatal commercial failures in the companies they ran.

Similarly, all major companies have Corporate Social Responsibility (CSR) policies, strategies and drives. But how many of them truly incorporate such considerations into risk and financial management? How many let CSR inform the commercial ethics and raison d’etre of the enterprise itself?

Is it possible that had Lehman Brothers used some of its CSR practices as a model for managing risk, the bank may still be with us today? Added to this, was Lehman’s long and illustrious history honoured, thus informing decisions by the directorate? It is inconceivable that a house like Rothschild would have allowed its heritage and brand reputation to have been driven off the tracks in a mad rush to the finish line like other major banking casualties.

A family affair

A visit to the website of private bankers C. Hoare & Co provides a telling insight into enduring business. Under the heading ‘About us,’ the following is written: “Founded in 1642, we remain wholly owned by the Hoare family, and continue to be guided and led by the descendants of the bank’s founder. Our success and longevity derive from a commitment to personal service and the virtues of quality, integrity and reliability.”

Perhaps non-executive directors of non family-owned businesses should conduct themselves as if they were members of a company’s founding family, dedicated to preserving the financial value and survival of the business for the benefit of future generations, not just the one they happen to be members of.

In this respect, they can be seen more as trustees or guardians, with long term interests to balance against the – likely – short term involvement of the CEO. The John Lewis Partnership, with its impressive experience through the recession, has been looked upon very favourably in respect of its partnership model and customer commitment, blending partners and customers into a commercially-valuable community.

This does not mean that focus on the bottom line must be wholly diluted in favour of esoteric notions of moral crusading. Commerce, or profitable commerce at any rate, is not born of benevolence alone. Nonetheless, while it should not necessarily be the starting point, a prosperous bottom line can be influenced by the higher purpose of an organisation.

Profits with a clean conscience

Specific product brands can also have a message that resonates beyond the commercial transaction. In the midst of the recession, Premier Foods re-launched the Hovis brand with a return to enduring themes. The music of Dvorák’s New World Symphony and the vision of the cloth-capped boy carrying home fresh Hovis bread on his bicycle, cycling up a quaint, cobbled street evokes a reassuring and timeless message — all seeming to validate that Hovis makes “Bread as good today as ever.” Premier Foods CEO, Robert Schofield, confirmed that Hovis has made a major contribution to the company’s 5.6% rise in profits in the first half of last year. A nineteenth century innovation thus continues its legacy to this day, providing long term reliable shareholder value for generations and not simply a few wildly successful financial quarters.

History abounds with entrepreneurs who built very successful companies yet strove to maintain a sense of higher purpose for their businesses, making extraordinary contributions to communities in the process. Port Sunlight and Bournville are classic examples in the UK. The Cadbury family looked on the employees as members of their extended family — the business was far ahead of its time in this respect, and matched this by becoming commercial market leaders. While the Victorians were oft-noted for their philanthropy, charitable giving is once again being seen as central to commercial longevity, with Anita Roddick’s Body Shop held as the modern standard bearer for conscientious corporate operations. For Roddick, success in business wasn’t all about the bottom line, but nothing less than the survival of the planet.

So what does all this mean for non-executive directors? How many have read Built to Last: Successful Habits of Visionary Companies by James C. Collins and Jerry I. Porras, first published in 2000? Its conclusions strongly suggest that a single-minded focus on the bottom line is not in the commercial interests of companies. The text dissects those visionary companies built around ideologies consisting of core values and purpose, which are described as: “The organisation’s fundamental reasons for existence beyond simply making money.”

Beyond pure capitalism

This theme is echoed in a book authored by Professor Mihaly Csikszentmihalyi of the Peter F. Drucker School of Management, Good Business: Leadership, Flow, and the Making of Meaning. Csikszentmihalyi recounts the words of Norman R. Augustine, former Chairman and CEO of the Lockheed Martin Corporation, on being asked what the most important thing to achieve in his job was. “The legalistic answer,” said Augustine, “would be that I was seeking to increase shareholder value. But in truth, what I was trying to build was the greatest aerospace company in the world. And I thought that if we did that, maybe that would increase shareholder value. To me, you have to have a loftier goal than making money.”

Economist John Kay, in his new book, Obliquity, holds that those who have been the most spectacularly successful in business have been those who really cared about creating great companies. The financials were secondary, yet they also managed to make “bucketloads of money,” according to Kay.

BT is one of the UK’s leading exponent’s of the benefits of CSR, encapsulated simply by their strapline: “Bringing it all together for a better world.” Adrian Hosford, the architect of BT’s approach to CSR, also led the phenomenally successful advertising campaign whose headline words, “It’s good to talk,” still permeate the national consciousness. BT, led by Hosford’s vision, sought to take this simple statement to its logical conclusion by demonstrating that communication truly is central to our daily lives, be the forum corporate, private or otherwise.

It is fascinating to note that one of the investment management firms that pioneered the promotion of ethical corporate governance was Hermes — who still manage BT’s pension fund, and trumpet the strap line: “Taking the long-term view.” In their document, The Hermes Principles, the firm states that: “The ultimate goal of the company is to create wealth for its shareholders.” Similarly, Hermes’ overriding requirement is that “companies be run in the long term interest of shareholders”.

According to Hermes, those adhering to this principle will not only benefit their shareholders, but the wider economy in which the company and its shareholders participate. “We believe a company run in the long term interest of shareholders will need to manage effectively relationships with its employees, suppliers and customers, to behave ethically and have regard for the environment and society as a whole,” it says.

Steady as she goes

This focus on ethics and the long term view in the commercial interest of shareholders seems as near perfect an exposition of principles that should help guide the contemporary non-executive director. During previous years of Labour government in the UK, the media has featured the ups and downs of Gordon Brown’s on/off affair with ‘Prudence’ — a mythical lady whose figure adorns the old headquarters of another well-known and enduring British company, Prudential. Having initially shown himself as a dedicated amour of dear Prudence, Brown was later depicted as throwing her out of Downing Street as he mortgaged Britain Plc’s future. Within the past month, however, new Chancellor George Osborne is reported to have picked Prudence out of the gutter into which she had been thrown, and pledged his loyalty to her.

Prudence chimes with that old seafaring call: “Steady as she goes.” Non-executive directors need to keep their ships on an even keel, helping to steer them through good times and bad for the benefit of the ship owners those who prosper from the cargo and to provide employment for the crew of both the present and future.

If only the non-executive directors of some companies had fallen for prudence instead of having their heads turned by the intoxicating smell of tulip bubbles, their shareholders would have been immeasurably more satisfied — with the corollary that the widespread charges of misfeasance levied against directorates could have been met with a robust, ultimately exonerating, defence.

Philip Beddows, Partner, The Silk Road Partnership
July/August 2010

Philip is a business coach and mentor. He works with senior individuals from a wide range of businesses at critical transition points in their careers or their organisation’s development, to support the achievement of personal and commercial goals. The Silk Road Partnership is based in London and Singapore, and supports businesses and individuals in navigating their commercial and personal journeys with greater success.

Copyright © Philip Beddows 2010-2014



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