The following article is a summary of an event run by The Foundation in 2012. The event was held on February 29th and explored the effect of ownership on long term, healthy growth. The subject was discussed by independent economist and writer Michael Green, Luke Mayhew whose career in customer service businesses has covered running stores at Thomas Cook to being Managing Director of John Lewis Department Stores and Anthony Hilton, Financial Editor of the Evening Standard and a member of The Foundation’s Advisory Board. Their conversation has been summarised by Simon Caulkin, formerly Management Editor at the Observer.
Ownership is one of those paradoxical concepts that either means very little or a lot, depending on the vantage point. In terms of management, it is largely a red herring. Method is independent of ownership model (which is one reason to query the government’s faith in privatisation as a sole cure for the ills of NHS and the police), and no form of organisation has a monopoly of good (or bad) practice. After the sell-offs of the 1980s, pointed out writer and consultant Michael Green to a packed recent Foundation forum on ‘ownership and growth’, it turned out that deregulation and competition were the drivers of efficiency, not privatisation itself. Above all, a good business model executed by the right management trumps everything else. Take John Lewis, ‘one of the great UK social experiments of the 20th century’, in the words of Luke Mayhew, another speaker, and a previous managing director of the partnership. Mayhew maintained that whilst of course engagement and commitment are important and values and ownership make a real difference, management’s approach and behaviour is also critical. The starting point of John Lewis’s success ‘is [the highly entrepreneurial] Spedan Lewis and the people who’ve succeeded him: outstanding retailers, outstanding traders and outstanding businessmen, and that has come first’.
On the other hand ownership powerfully shapes incentives. As Adam Smith famously observed of the joint-stock company, ‘The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own …. Negligence and profusion, therefore, must always prevail, more or less in the management of the affairs of such a company’. Smith’s disapproval is palpable. He’d have disapproved even more, we might surmise, of limited liability, which weakens the ‘anxious vigilance’ of shareholders to hold these directors to account. As a result, ‘Large quoted companies are essentially the civil service with bonuses,’ suggested Evening Standard city editor Tony Hilton, the third speaker.
A good business model executed by the right management trumps everything
Smith’s was the first statement of an issue – the separation of ownership from management – that continues to bedevil thinking about companies today. In a recent column, FT writer Martin Wolf acutely noted that the chief failing of that ‘brilliant social invention’, the limited liability company, was that ‘it is not effectively owned’. How can it be, when the stake of British institutional shareholders – those best equipped to exercise stewardship – in the UK equity market has collapsed to 14 per cent, according to the latest figures, leaving 41 per cent in foreign ownership and much of the rest in the hands of short-term traders? Lack of ownership, observed Wolf, made companies vulnerable to looting, in this case by an unholy alliance of managers and shareholders subject to the same short-term pay incentives that derailed the banks and that have cumulatively tugged the UK economy out of shape. In the main, the UK is not a good steward of its assets, echoes the Ownership Commission in its just-published report on the subject, because many of the assets’ owners are transient, transactional and fiercely short term. In other words, ownership matters, a lot.
In fact, ownership takes a surprising number of forms beyond the public company, each, as Hilton remarked, with its own strengths and weaknesses. Private companies, not coincidentally, include many innovative firms that believe they can flourish better without the tyranny of quarterly reporting. In retrospect, Anita Roddick described taking Body Shop public as ‘selling our soul to the devil’. Richard Branson bought Virgin back to redeem it. But they can also hide plenty of sins away from the public spotlight. Nationalised industries are not widely considered paragons of growth. But it all depends. Shipbuilding and steel are one thing, BP (despite its recent troubles) and Rolls Royce quite another. GE’s Healthcare division is headquartered at what was once Amersham International, the first state-owned UK company to be privatised As for mutuals, being capital constrained they may not provide growth but they do provide survival, a fairly basic perquisite for other virtues, including growth. The good thing about the mutual model, Hilton mused, is that ‘the dynamic, thrusting young CEO can’t be dynamic or thrust very much, because the money ain’t there’. All the building societies that demutualised – Halifax, Abbey National, Alliance & Leicester, Bradford & Bingley, Friends Provident – went for growth and blew themselves up. ‘The old Nationwide,’ on the other hand, is still here.
Partnerships, finally, have a different portfolio of virtues and vices again. On the one hand they tend to risk-aversion – not very good for growth – but on the other, echoing Smith, there is strong peer pressure to maintain standards and ethics. With unlimited liability, the downside risks are too great. Legal firms, which mostly remain partnerships, have generally resisted pressures to dilute professional standards; this is not the case for former partnerships like investment banks (enough said) and accountants. ‘Over 30 years accountants have become charlatans,’ said Hilton. ‘No one believes accountants are of any value at all any more. Those who do might ask why they all gave the banks a clean bill of health in 2007 and none of them spotted the crash, or alternatively they all spotted the crash but looked the other way’.
The conclusion then has to be that no one form of ownership is better than the others. With a good business model and effective management they can all be made to work. Frustratingly imprecise for those making the decisions, whether investors or managers? A clue to a more productive way of thinking about the choices was provided by another of the evening’s insights. Companies, insisted Hilton, are biological, not mechanical, ecosystems, not machines. The same goes for economies, whose different components are both interdependent and necessary, each living off and supporting the others. Thus a vibrant economy consists of markets and organisations, each necessary but insufficient on its own. Markets put a brake on companies getting too big (or should); companies pass on some of the value they create to upgrade the capabilities of the market. Organisations are different from markets – that’s the point – and operate to different rules, including ownership structures.
Ownership takes a surprising number of forms beyond the public company, each, as Hilton remarked, with its own strengths and weaknesses
State-owned organisations – the public sector – are also part of the mix. They may not provide growth directly – but as Hilton noted, much of the knowledge that organisations have fed on to create huge amounts of wealth and value, including growth and jobs, originated there. Google’s algorithms, hypertext, the key components of Apple’s iPhones, the internet itself – all these originated in government laboratories. Now, innovation is a key strategy for companies to keep ahead of the market – which being blind and intentionless can’t innovate itself – but it feeds on the advances in knowledge and other inputs (education, legal and other infrastructures) provided by the public sector.
In other words, to adapt and thrive, the economy needs different ownership structures inhabiting different niches and making different contributions to the health of the overall ecology. Right on cue, the Ownership Commission argues that the UK is too monolithic, having become overdependent on the single ownership model of the short-termist, badly-owned PLC which accounts for over half of economic activity. By contrast, coops, employee mutuals and medium-sized family firms are grossly underrepresented, giving us the lopsided, unresilient economy of today. You heard it at the Foundation forum first: ‘I think what we’ve missed is the competition in different forms of ownership,’ Green said. ‘That actually if we have different structures of ownership…, we get a richer capitalism that is more likely to generate long-term value, and it’s that diversity and competition that is the real secret rather than choosing one kind of ownership over another’. Getting ownership right – including deciding where it does matter and where it doesn’t – may be more important than almost anyone imagined.
The Foundation’s view
As ever, we learned a lot…
- While some forms of ownership appear to favour growth in the short term, in the long term no one model is better than the others
- The economy is not a machine but an ecosystem, in which all the elements are necessary but insufficient on their own – the key to a successful ecosystem is balance.
- Balance is needed in two ways – between short and long term perspectives (which we could see before the event) and between risk-taking and accountability (which we realised was also a central point as a result of the event)
- Management trumps ownership: good management is necessary for every model, and it can make any model work…
- …but a poor business model can’t be rescued by a good ownership one.