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
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.
Comments
Post a Comment