Investors and companies have become closer in the past two decades, but in a dysfunctional way. This tends to lead to destructive short-termism, and there hardly is a more topical example of this than Marks and Spencer.
As I write, the fate of Marks and Spencer, Britain’s iconic retailer, hangs in the balance. Will it remain a quoted company or be taken private by an audacious bidder? The outcome is significant, but more important still is the fact that it is possible to put the question.
Twenty years ago, it seemed inevitable that the large business organisation would be a listed company with dispersed, but predominantly institutional, share ownership. Those few commercial activities that were not structured like that all seemed on their way to market. Some of these trends are still evident. But the business landscape today is more heterogeneous.
The governance of listed companies is a more complex issue than was realised then. While the central cause of M&S’s problems lies in operational failures, the immediate source of its current crisis is the inability of the company’s board to satisfy either shareholders or customers of its ability to deal with the consequences. The current – and credible – chief executive got the job only after the bid threat became too powerful to ignore.
The primary role of the non-executive director is to deal with the problems that arise when incumbent management is too strong or too weak – or both at the same time. Many non-executives have been failing conspicuously in this function.
At J Sainsbury, the supermarket group that is similar to M&S in so many ways, the board is discredited: business underperformance has been compounded by gaffes over the appointment of a new chairman and the remuneration of an old one. These problems – not of the propriety or integrity of governance but of its effectiveness – are worldwide. At Walt Disney, DaimlerChrysler and Shell, non-executives are seen to have failed to challenge or remedy business failures. Against this background, the direct accountability of managers to investors in a private equity business seems increasingly attractive.
The sophistication of modern financial systems has made public equity markets insignificant sources of capital. The listed company came into being to secure the massive resources needed to build railroads or oil refineries. The paradox today is that private equity is most active in capital- intensive industries such as retailing and commercial property.
But the most important threat to the economic role of the listed public company is the growing dissatisfaction of managers and investors with their relationship. Investors and companies have become closer in the past two decades, but in a dysfunctional way. Analysts focus not on business strategy but on anticipating what the company will announce. Companies manipulate that process to present their affairs in the most flattering light. There is no better illustration of the destructive short-termism that results than M&S itself. In the initially successful pursuit of unsustainable earnings growth in the 1990s, the company sacrificed its legendary relationships with suppliers and reputation with customers. M&S today faces the strategic problem of reinventing itself as a more conventional retailer. As Dean Acheson, former US secretary of state, famously said of Britain, it has lost an empire but not yet found a role.
In this context, the management response elicited by Philip Green’s unwanted bid proposal is largely irrelevant. The central idea is to restructure the balance sheet, mostly by selling peripheral businesses. One unsuccessful experiment will be ended, a more successful one slowed to conserve cash. Costs will be taken out of the supply chain.
There is nothing here that would re-establish the remarkable business that Simon Marks built. But if Marks were again in charge of the company, what organisational structure would he want? We can be sure he would despise investor roadshows. The private equity route might attract him more, but he would have little interest in backers who planned an exit in three to five years. He would look for the business structure he himself enjoyed – large and stable family holdings with an influence disproportionate to their size, and the long-term support of a small and committed group of big institutions: the environment in which, without ever having heard or uttered the phrase “shareholder value”, Marks was able to create so much of it.
