The arrogant high street giants of old are up against unprecedented shareholder anxiety and impatience as they fight to recover. Robert Heller reports on the threat of people power The trials and tribulations of Marks and Spencer and Sainsbury have stopped being hot news ­ even this week's departure of M&S chief exec Peter Salsbury warranted barely a murmur. They have become sad, familiar stories of arrogance leading to underperformance leading to devaluation. But their agonies ­ and those of many others, food and non food, in the same rocky boat ­ are by no means over. Unless the corner is turned soon, the delinquents will be turned upon by their own rebellious shareholders. Salsbury and his two director level colleagues Clara Freeman and Guy McCracken will not prove the only sacrificial lambs. Already, both these once-mighty firms have been compelled by their own failures and investor pressure to find new, imported management at the top: Sir Peter Davis at Sainsbury and the Belgian Luc Vandevelde at M&S. In old fashioned capitalism, shareholders were like good old fashioned children: seen, but not heard. What's more (or less), they were seen almost entirely in very small numbers at annual general meetings. There, the even fewer who were audible confined themselves to questions of the type Tony Blair prefers from Labour members in the Commons: bland and laudatory. As Sir Richard Greenbury found at M&S (likewise the last of the Sainsburys and the successors), new fashioned capitalism is made of much rougher stuff. Witness the extraordinary case of Vodafone. It has some claim to be Britain's most successful company, and its boss, Chris Gent, to be the country's leading corporate entrepreneur. Nothing can have seemed more natural to the board than to vote Gent a £10m bonus, half in ready cash, after he clinched the contested Mannesmann bid ­ but then the shareholder roof fell in. Powerful investors wanted to know why Gent was given this vast extra reward on top of his existing seven figure income ­ and given it, moreover, for strategic execution which is presumably a prime part of his job. Under shareholder assault, Vodafone stuck to its payment, but not its guns. The company had to recognise the money was a mistake in terms of investor relations and to grovel accordingly. Those relations are, increasingly, calling the tune. Salsbury's departure, though at his own instigation, was likewise a concession to investor disquiet. He might have been doing some good things behind the scenes, but he didn't do what investors want and offer quick profit wins. The key investors, as ever, are the institutions. Their fund managers are themselves under pressure to "outperform", to select stocks that do better than the market or at least their sector. These days the managers operate cheek by jowl with analysts who subject the strategic and tactical performance of top managements to regular and critical scrutiny. As proxies for the shareholders, analysts meet management quite often and cross-question away. Naturally, the fund experts take the analytical findings to heart ­ and any top managers who can't pass analytical muster are instantly vulnerable. They will be protected for quite a time by their boards of directors, which are bound by a code of solidarity and tend to stand by their CEOs through thick and very thin. Indeed, the M&S board, to its own eventual undoing, prolonged Greenbury's tenure. This loyalty is wrong in capitalist theory, which at the end of August was expounded, with unanswerable clarity, by Sir Clive Thompson, the chief executive of Rentokil Initial. If management cannot deliver on its promises, he said, "then I think shareholders should change the management". What added piquancy and weight to his statement was Rentokil's own succession of poor results, which has forced Thompson to abandon a longstanding target of 20% increase in earnings. He is now promising to grow annual profits over three years by between 8% and 15% on a sales increase of 6% to 10%. Whether this modest target will satisfy shareholders (let alone come to pass) is another matter. In any event, Rentokil has been buying back large quantities of shares, which prompted Lex in the Financial Times to write: "It is a good thing that Rentokil Initial wants to buy its own shares. Nobody else does." Those two sentences hold the key to the new order. Top management becomes vulnerable to shareholder onslaught less for poor economic performance than for an underperforming share price. When Thompson made his statement, the price was down 42% from the 52 week high. That represents the loss of £2.6bn in "shareholder value", the new totem of managements and institutional investors alike. Shares do not go into freefall of their own accord, however. They drop because more investors are selling than buying the shares. Those investors are predominantly the same institutions who complain about falling shareholder value and underperforming equities. In other words, they are bringing about their own losses, and then berating the managements concerned for the outcome. They would do better to intervene earlier in the game. If the analysts are as brilliant as their salaries and bonuses, they should detect the signs of corporate decay before teeth start falling out. The economic underperformance of Sainsbury, for example, has been obvious for years ­ as obvious as the inadequacy of management's attempts at revival. In another example, it was glaringly evident the merger of Somerfield and Kwik Save was a marriage made in Hell. As I noted at the time in this magazine, two supermarket drunks trying to prop each other up was not an edifying sight. The institutions, had they been so minded, could have stopped the accident before it happened. Instead, the fund managers pocketed their temporary gains from the sale. They have since been busily selling Somerfield shares ­ to judge by their price. The horrendous 69% fall from the 52 week high makes the M&S halving seem relatively good and the 22% Sainsbury decline look absolutely brilliant. But the previous year, of course, brought no joy to these companies' investors, either. The institutions have turned against the retail sector. Some managements once regarded as superb are now seen as bumbling no-hopers whose attempts at revival are treated with scepticism, if not outright derision. Part of the problem is that revolting shareholders (as they must seem in more senses than one to the beleaguered managers) want quick results when none are forthcoming. Davis has asked for years, not months, to turn round the lumbering Sainsbury. M&S sings the same tune. The trouble with that policy is that it tends to be a self-fulfilling prophecy. The great turnrounds, even at companies far bigger than M&S, have been done at considerable speed ­ and even then their architects, in hindsight, have blamed themselves for slowness. When Jack Welch, an insider, took charge at General Electric two decades ago, he swiftly transformed its fortunes with such radical measures as insisting that every business achieved either No 1 or No 2 in its market, or else. But his task was much easier than that of the Vandevelde and Davis at M&S and Sainsbury, because in the public view GE was still successful. It's the absolutely vital point made above: act before compelled by disaster, or (more simply still) a stitch in time saves nine. At another American company, Intel, the lesson was only learnt after the disastrous collapse of the memory chip business. From this calamity, Andy Grove, now chairman, learnt the theory of the "strategic inflection point" ­ the moment when a company's or an industry's growth curve is about to level off. Act before that point, and the evil is averted. Act afterwards, and (with very rare exceptions) you never catch up. Today's issue with M&S and Sainsbury is also faced by several global brand names in packaged goods: do their struggles mean a strategic inflection point has come and gone, and that the glorious past is just history? New shareholder restiveness means incumbent CEOs won't get the chance to buck these trends, while new ones have to prove themselves fast. "New CEOs," prophesises Business Week, "will get a year to show results". In fact, Coca-Cola's Doug Ivester lasted a mere couple of years before losing his job under pressure from two most potent investors, Warren Buffett and Herbert Allen. At Procter & Gamble, the tenure of Durk Jager was just 17 months. The vaunted strength of their brands did not save the CEOs ­ or the corporate financials: P&G has a halved share price, long static profits, and barely rising sales. Investors had for many years been buying leading global brands, following Buffett's lead, just as UK institutions used to back the best High Street names (Tesco above all) that stocked those brands. The evidence, however, indicates that customers are no longer so heavily indoctrinated with the virtues of brand leaders: that more and better promotion is required in support of still greater perceived value. The critical word here is "perceived". Customers will cheerfully pay more for a product or shopping venue that they perceive to offer better value. If prices rise more than perceived value, shares start to drop and profits to droop. Whether or not that has happened in cases like Coke and Gillette (or M&S), institutional investors have certainly got the message. Their former perception ­ that the biggest brands deserved the highest price-earnings ratios ­ has gone out of the window. Brand champions now have to prove they are management champions, a truly tougher task. The mighty Buffett has been buffeted himself. Coke and Gillette are among his largest shareholdings. They were retained even while their market value (and his investments) plunged by billions. The other way round, the great investor sold McDonald's and lived to regret it as the shares surged on a mild corporate recovery. As that indicates, once reliable super-brands have become volatile. Their managers must cope with the rising cost and difficulty of defending margins and sustaining growth at a time when affluent markets are saturated. Their problems work back down the food chain to retailers and distributors. Ivester's ousting at Coke was preceded by an ill-judged effort to make bottlers pay more for syrup. But the bottlers have more power within Coke's business system than any retailer ­ with the possible exception of Wal-Mart ­ has across the fmcg board. The fall in values for fmcg companies and their high and main street outlets therefore looks justified. But where does that leave the rebellious shareholders? Changing the management will not make pushing heavy stones uphill easier. Still more important, where does it leave managers? The first lesson, surely, is that they, too, have to learn to anticipate trouble ahead, to watch for "strategic inflection points". That demands a certain humility. At both M&S and Sainsbury, anecdotal evidence of declining standards of quality, service and efficiency circulated widely before the chickens came home to roost. It's better to hear bad news from customers and staff and act on what they say than to wait for worse news from institutional investors. The second lesson is for top managers to get cured of a disease to which retailers are especially prone ­ interfering with day-to-day operations. They often end up fiddling while Rome burns. Their main job is to manage the future, while ensuring that able, younger people are managing the present superbly. The future includes, not only strategy, but succession. At both Sainsbury and M&S, the replacement of powerful rulers was badly mishandled: contrast that with GE, where Welch has made his own succession his prime concern for a decade before departure. Third, the strategy must be radical, questioning what has worked well in the past, rather than enshrining it as the centrepiece of the future. That involves taking risks ­ with e-commerce as the present and most obvious challenge; however, risking the wrath of shareholders by missing the strategic inflection point is the most foolish risk of all. The fourth lesson, though, is that management's best efforts may not keep that wrath at bay. Investors are demanding short-term results and penalising lapses with short-term sell-offs. Consider that Business Week forecast, that new brooms have just a year to demonstrate their sweeping prowess. In fast-moving times (and goods), investor pressure is onerous: and it won't go away. {{COVER FEATURE }}

Topics