In the City
Style in management
Tony Rudd
Three events last week demonstrated just how varied the style of management can be in top British companies these days. Creat ing a successful company and, particularly, keeping it successful against all the econo mic difficulties of this recession requires luck, judgment and guts, but above all guts.
First, there was the amazing deal by Lonrho to purchase the Observer. This was classic 'Tiny' Rowland stuff. Whereas any other company intent on acquiring this prestigious Establishment newspaper would have spent months preparing the ground, chatting up Lord Goodman, making friends with the editorial staff, entering into those inevitable, protracted and oh so exhausting negotiations with the chapels, not to speak of lobbying in Whitehall and Westminster. But not so 'Tiny' Rowland. It is his style just to talk with one person, the owner of what he happens to want to buy. In this world such people are more likely to be found in Acapulco than in the corridors of power in London. And having done his deal, quite typically, he talked with no one. Probably not even his board. For this style of management is Gaullism practised in commerce; only one person matters, the leader; his cabinet or board are there to advise when asked; the rest of us will prosper to the extent that the Leader's thought and judgment are guided by a Higher Authority. Only to this is he ultimately responsible. The voters, or in this case the shareholders, do have a theoretical right which they can exercise in extremis namely of forsaking their Leader. But while sanity prevails amongst them this course is not a consideration for him to worry about. Whatever the challenge, however strong the forces of the Establishment ranged against him may be, this ultimate alliance between the Leader and the followers will keep the whole enterprise not only intact but impervious to all assaults and battery. Inspectors may criticise, the Monopolies Commission may opine, the House of Lords could impeach him; Lonhro appears to be unstoppable under 'Tiny' Rowland. One by one the great British institutions fall to that encroaching conglomerate. The Observer has gone, Harrods can only be a matter of time. It is magnificent, an example to us all of what leadership will do. As always in the case of a relatively benevolent dictatorship, it will all work wonderfully so long as the Leader does not go off his head.
Secondly, the City had to digest what it never really believed it would ever be faced with, a cut in the ICI dividend. Many a smaller and less prestigious company has had to bow to the forces of the business cycle but not this past forty years, has It been the lot of ICI to blot its copybook in this manner. What was interesting was that the leading City chemical analysts (and there are some very good ones) had correctly predicted the terrible fall in ICI's profitability. Its operations, particularly those involving chemicals, are susceptible to analysis and reasonably accurate forecasting. So the figures were in the price but the expectation of the dividend cut wasn't, and yet, considering the appalling state of the chemical industry in this most appalling recession, surely cutting the dividend was the only safe and prudent thing for the ICI board to do? It really isn't sound financial management to pay out dividends when a company is actually making a loss. So it may come as a surprise to those who are a little distant from the City that, almost to a man, the securities industry expected the dividend to be maintained.
The reason was that the company's standing with the investment community was thought to be more important than the immediate expediency of not making the payment. A company like ICI spends enormous nine-figure sums annually on investment and as its business grows is bound to enlarge the capital base of the operation over and above the resources which are available to it from its own cash flow and from its banks. Thus it is a pound to a penny that ICI will be coming back to the market for large sums at various points during the 1980s. It was knowing this that made the analysts think that ICI would want to 'keep faith with' the big institutions on whose willingness to fund these capital needs at a reasonable price the company's future capital spending programmes depend.
But ICI's board, so unlike that of Lonrho in its approach methods, constitution and composite mentality, showed remarkable independence of view. They cut the dividend, knowing that the action would both surprise and displease. Their action is, in our opinion, to be applauded. For far too long large British companies have been in thrall to the big institutions. Consequently they have paid out dividends when they could ill afford to do so. Indeed, it can be asserted that far too much has been paid out by British industry in the way of dividends from earnings which hardly exist .(a fact which is going to be made altogether too clear when commerce shifts over to inflation-adjusted accounting). The reason for this, I suggest, is that because such a large proportion of the stream of savings in this country has become contractual, in other words is associated with pensions or various forms of insurance, too much security is being sought out of an industrial base which is simply not capable of delivering it. It is all very well for pensioners and policy-holders to rely on regular payments, but commercial life isn't regular. If ICI hasn't made any profit, who really is going to pay the pensioners and the policy-holders who are invested in British industry, while it is in loss? The company itself, by maintaining its dividend? Rather it should be the obligation of the fund managers, who should raid their reserves. If they answer that they can't afford to, then they must have been paying out too much in the past. ICI has to live on its reserves this year, and so ought the investor, if he's got the shares. In the meantime ICI's action shows just how independent and strong-willed a large board can be these days; full marks to them.
The other item of note last week was the announcement by Plessey of outstanding profits. This welcome and excellent news coming in a week when the industrial plight of Britain had been highlighted by ICI's figures, was in a sense the culmination of a story which started some twenty years ago. When the late Sir Alan Clark died, he had only just begun on building up Plessey from a medium-sized electrical and defence contractor to a giant of the telecommunications and avionics industries. The skeleton of the plan was in place and the two original bids, for Automatic Telephone and LM Ericsson, had been made, and that was all. After his death the question immediately arose: who was to implement it — his two sons, the elder of whom, Sir John, is now the chairman, or the professional and older figures who had been helping to structure the expansion? There was a brief struggle, nothing undignified, but this question had to be resolved and it could only be done by the two factions sorting it out themselves. In the event it was the sons who prevailed and who have managed this company ever since.
They have not had an easy time of it. The vagaries of the British Post Office, indeed of British governments, inevitably make the life of anyone guiding the fortunes of a large, company operating in the virtually public sectors of telecommunications and defence, a nightmare. Stopping and starting, cancellation of programmes, obstinacy and hubris on the part of the public corporations make long-term planning extremely difficult. So Plessey for many years, particularly during the Seventies, continued to disappoint. First one thing and then another occurred to prevent the profit achieving a smooth growth pattern. But now it has finally come through. The shares have been an excellent investment during the last few years and probably continue to be so. The act, as they say, has been got together and full marks to Sir John Clark and his style of management. A vindication which has taken some while to come through must none the less be extremely sweet.
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