City slow to give up on 'dumb idea' of shareholder value

LONDON BRIEFING:Companies fixated on short-term returns are risking other factors key to longer-term success, writes FIONA WALSH

IT WAS more than a year ago that Jack Welch, widely regarded as the founding father of shareholder value, admitted that the concept of measuring a company’s success by the enrichment of its shareholders was “a dumb idea”.

Even at the height of the global financial crisis, it was a bombshell conversion for the former General Electric chief, who for more than two decades had been the poster boy for the shareholder value movement.

His comments gave weight to calls for a new, less selfish and more inclusive form of capitalism, one that would no longer set such store by short-term share price gains nor encourage the reckless risk-taking that brought the system to the brink of collapse. As Welch went on to say last year, shareholder value should be “a result, not a strategy”.

The debate over the use of the short-term goals that have ramped up share prices and taken executive pay into the stratosphere was reignited last week by Richard Lambert, director general of employers’ organisation the Confederation of British Industry (CBI). In a hard-hitting speech, Lambert, a former Financial Times journalist, said the era of what he termed “Jack Welch capitalism” might be almost over. Company bosses were, he warned, increasingly regarded as “aliens” inhabiting a different universe because of the widening gulf between pay for the average employee and rewards enjoyed in the boardroom. For the first time in history, he said, it has become possible for a manager of a large public company, as opposed to just owners, to become seriously rich.

Companies which concentrate on maximising returns to shareholders over the short term are putting at risk the factors that will determine their longer-term success: “Suppliers, customers, employees, communities: their interests are aligned with those of shareholders over the long term, but not necessarily over the short,” Lambert said. “If they are going to be given greater weight in business decision-making, then ideas about profit maximisation will have to change.”

Lambert’s call has been taken up by other leading business figures. City minister Lord Myners urged the Financial Services Authority to join the debate, while Unilever’s Paul Polman, in a Financial Times interview this week, made it clear that shareholder value was no longer the Holy Grail. “It is very easy for me to get tremendous results very short term, get that translated into compensation, and be off sailing in the Bahamas,” he said. “But the goal for this company – and it’s very difficult to do – the goal is to follow a four- or five-year process. We need to change the strategy and the structure, as well as the culture.”

That’s easier said than done – and it’s taken the City long enough even to admit that change must come despite intense public and political anger over the way in which corporate Britain is being run and its executives rewarded.

The ranks of salaried executives reaching multimillionaire status continues to swell. Just days after Lambert made his “aliens” jibe, it was revealed that Frank Chapman, chief executive of BG Group, got a stratospheric £28 million (€31.9 million) pay package last year, comprising a base salary of “only” £1.1 million, ratcheted up by bonuses, pension top-ups, performance-related shares and gains on share options. BG’s defence of this lavish remuneration was to cite a 69 per cent increase in the company’s share price over three years.

Short-termist investors were singled out for criticism in a damning report released yesterday by MPs into the controversial takeover of British chocolate-maker Cadbury by the US conglomerate Kraft.

They weren’t the only ones – the report highlighted Kraft’s broken promise to save Cadbury’s Somerdale factory from closure, and Kraft chief executive Irene Rosenfeld’s no show at the business select committee hearing on the deal last month.

The politicians said Kraft had acted “irresponsibly and unwisely” during the takeover, and had undoubtedly damaged its reputation. The new owner of the much-loved maker of Dairy Milk would now have to invest “significant time and effort into restoring its reputation and regaining the trust of the public, its UK workforce, government and ourselves”, the MPs said.

It wasn’t all Kraft-bashing in the 94-page report, which reveals the US group is attempting to soften the blow of the Somerdale closure by saving the Fry Club, a sports and social club which runs skittles, football and netball teams. Kraft has said it is fully committed to rebuilding the club on the Somerdale site, and is working with the local community. Saving the local football team is a savvy move by Kraft, but it will take much more than that to restore its reputation.

Fiona Walsh writes for the Guardiannewspaper in London