John Mayo’s account of his troubled tenure at Marconi should serve as a warning to managers. Success in business is achieved by supplying goods and services effectively; not by seeking to boost share prices.
Successful businesses are more effective than their competitors in delivering goods and services that their customers want. They add value if their superior delivery enables them to command a premium price: or if they design their operations in such a way that they meet these needs at lower cost. The job of the corporate executive is to achieve these objectives.
These points seem so basic to any understanding of business that one feels embarrassed at writing them down. If they are worth repeating, it is as a reminder to those who have been reading John Mayo’s account of his stewardship of Marconi in recent issues of the Financial Times.
As I see it, Mr Mayo has a quite different perception of his role, in which the director of a company is a meta-fund manager, managing a portfolio of businesses for his shareholders. His function differs from that of an investment trust manager only in that the investment trust manager buys and sells stakes in companies while the manager of the company buys and sells the companies themselves. And – as with an investment trust manager – the executive’s job is to buy cheap and sell dear. It is on his success in doing that that he believes he should be judged.
Since the costs of buying and selling companies are much higher than the costs of buying and selling shares in companies, great skill and fine judgement is required to make money in this way. Unfortunately for the shareholders of Marconi, Mr Mayo and his colleagues lacked those skills. They bought telecommunications companies at very high prices and they and their successors will have to sell them at lower ones. But the problem is not just that they did the job badly. It is the wrong job.
It has been said that the only reference to teaching in C.P. Snow’s extended series of novels about Cambridge University is when one of the dons agrees to postpone a tutorial to enable him to devote more time to politicking. And Mr Mayo’s attitude to the operational activities of the company of which he was a director is very similar. There are no references to products, customers or employees. Or even to profits, except in the context of managing stock market expectations.
Now, in Mr Mayo’s defence, it must be acknowledged that he was the company’s finance director: the bursar of the College rather than one of its tutors. But this is a weak defence. Even the most foolish bursar knows that finance is a function that makes the activities of the university possible, rather than the object of the university itself.
But Mr Mayo and others who think like him, believe that business is different. The portfolio shift he masterminded was the company’s central strategy. And Mr Mayo asserts that the measure of performance – the company’s performance, not just the finance director’s performance – should be the total shareholder return. He devotes a lot of space to an elaborate calculation of that measure.
The paradox to which this gives rise is found in Mr Mayo’s description of his principal disagreement with his boardroom colleagues. In February 2000, he explains, it was obvious to him, as it was to others, that telecoms stocks were absurdly overvalued. At that point, he concluded, the right thing to do was to sell the company. His logic is impeccable. But the conclusion to which it leads is so absurd that he could not bring his fellow directors to agree with it.
Even more absurd is the lesson he draws – that you should never buy a business without an agreed exit strategy. Sensible advice to a fund manager. Ludicrous advice to a businessman, dependent on the continuing loyalty of customers and staff.
If Mr Mayo had been a fund manager, rather than the finance director, his recommendation to sell Marconi shares would have been appropriate and well timed. But a company director is not a fund manager. His job is to run a business that adds value by means of the services it provides to its customers. If he succeeds, it will generate returns to investors in the long term. And this is the only mechanism that can generate returns to investors.
The problem is that the equivalence between value added in operations and stock market returns holds in the long run but not the short. Share prices may, for a time, become divorced from the fundamental value of a business. This has been true of most share prices in recent years and was true of the Marconi share price throughout Mr Mayo’s tenure. In these conditions, attention to total shareholder return distracts executives from their real function of managing businesses. And their reactions in fact reduce the ability of the corporate sector as a whole even to generate total shareholder returns on a sustainable basis. This the price we pay for the hyperactive capital markets of recent years.
What a fund manager needs most is a bull market, and the meta-fund managers, such as Mr Mayo, did well in the great bull market of 1982 – 2000. Marconi, Enron and Swissair will not be the only businesses run in these ways that will come to grief as the rising tide that once raised all boats gradually ebbs. Perhaps we shall move into an age in which senior executives again understand that managing companies is not about mergers, acquisitions and disposals, but about running operating businesses well. And that corporate strategy is about matching the capabilities of the business to the needs of its customers.