The modern cult of the heroic chief executive is at the root of the problem. Greater shareholder activism may help, but the most valuable restraint would be more effective checks and balances within the company itself.
Many Prudential shareholders are relieved at the collapse of the company’s attempt to buy the Asian operations of American insurer AIG. The business history of the past two decades is studded with failed mega-mergers. Time Warner gave away half the world’s most successful media business for a web portal that proved to be worth almost nothing. Royal Bank of Scotland bid for ABN Amro at the peak of the credit boom and had to be rescued by the state.
Alongside these catastrophes are many smaller disasters. The story of Jean-Marie Messier, the French water company boss who used his shareholders’ and customers’ money to become a US media tycoon, borders on farce. The destruction of great companies of seemingly unchallengeable stability, such as GEC and Swissair, through inept acquisition strategies can only be rendered as tragedy.
Most of these deals are the product of a style of thought popular in business schools and consultancies. The Great Leader concerns himself with corporate strategy, and remains aloof from ordinary operational matters. He manages a collection of activities as a fund manager manages a collection of stocks. The scope of his vision is the key to success; price is secondary. “This is a strategic acquisition” is a euphemism for “we are paying more than this business is worth”.
At AOL-Time Warner, the vision was the fusion of content and delivery. At RBS, the vision was a global investment bank within a global retail bank. At Vivendi, formerly Compagnie Générale des Eaux, the vision was of glamorous celebrity parties on Park Avenue. The vision for GEC was to transform a boring telecoms and defence business into the electrical company of the internet age. Swissair’s vision was a global airline alliance radiating from the Alps.
But business success depends on being able to do something better than other people – and sustainable competitive advantage is a characteristic that other businesses will find hard to replicate.
The one-sentence mission statement of the visionary chief executive, often a familiar cliché – “look east”, “go global”, “content is king” – is all too easy to imitate. However, the capacity to translate such a broadly defined vision into products and processes is often a genuine competitive advantage. That capacity enabled Steve Job’s Apple to use technology to bring content to a mass market, allowed Walt Disney’s eponymous company to revolutionise children’s entertainment and Henry Ford to design a car for every man.
Such achievements are exceptional, and strategic acquisitions are rarely the means by which they are brought to fruition.
British law, regulation and market practice, perhaps surprisingly, give more power to shareholders to restrain executive aggrandisement than is available to US stockholders. That power has blocked Prudential’s Asian aspirations – as it had blocked attempts by Barclays (though not RBS) to buy ABN Amro. But it would be optimistic to think that these events mark a new phase of corporate strategy. There are too many voices urging ambitious managers on.
Domineering chief executives often fill their boards with cheerleaders, and rarely seek sceptical counsel. An army of professional advisers can hardly wait to get its hands on fees. The independence of equity analysts is compromised by their association with deal-making banks. Both analysts and journalists find their access depends on good relations with the businesses they cover. Many of the worst deals were widely applauded when announced.
The modern cult of the heroic chief executive is at the root of the problem. Greater shareholder activism may help, but the most valuable restraint would be more effective checks and balances within the company itself. “A man’s reach should exceed his grasp, or what’s a heaven for?” wrote Robert Browning, describing a recurrent theme of human behaviour. But the poet did not provide useful guidance for the stewards of great corporations.