"Having their Cake - How the City and Big Bosses are Consuming UK Business"

By Don Young and Pat Scott (Kogan Page 2004)

Books based on conspiracy theory are rarely objective and difficult to substantiate with convincing evidence. The authors have recognised this problem and state that their research has been subjected to review by "a panel of experienced people from business, the City and business schools" There is no evidence of the content and impact of this review but this may be due to sensitivity about loyalties within the "system" which the book attacks.

The authors state up front their "values":-

• There is such a thing as society

• The economy is an integral part of society

• The main goals of society should be to strive to ensure the greatest well being of all its members

The premise of the book is that vested interests within Society are exploiting its system of governance to gain personal advantage. There are several hints in the book that those vested interests are class-based, not least in a paragraph at the end which analyses the roots and behaviour patterns of English gentlemen (who are seen to be at the heart of the present social and economic system). Rather less class prejudice and greater objectivity would have reinforced the message of the book, which is too important to dilute.

The authors take considerable trouble to detail the nexus between business and the City, identifying the players and explaining their roles. They show how the influence of shareholders has waned, both because their understanding of the businesses in which they invest has decreased (due to complexity) and because most shares are now held by institutions who are "punters" rather than investors. A further change is the emergence of executive directors as the driving force of most company boards. Few institutional investors have wanted to be briefed by non-executive directors, so that the regular briefing sessions between chief executives, with finance directors, and institutions have become the key communication channel of the system. Out of this channel flows information, much of which is "privileged" which can be evaluated by stock analysts and fed to their parent investment banks. Information also flows to the media, through "leaks" and controlled releases, which help to create a cliate for action.

The authors show how investment banks exploit this climate for action by persuading executive directors to make acquisitions or disposals which demonstrate their vitality and reinforce their remuneration claims. Acquisitions and disposals create substantial fees for investment banks and their associated lawyers and accountants. They also feed the hunger of media for news. Unfortunately the history of acquisitions and disposals is one of failure in three out of four cases, leading to a loss of shareholder value for the acquiring company (and usually for the disposer). The book talks a great deal about value destruction but provides no figures to show its real impact. There are a number of case studies, including Marconi and Invensys, but no proof that these are part of a much larger phenomenon of reckless management.

The book examines the concept of "good" investment, taking Warren Buffet's "golden rules" as a model for institutional investors:-

• Concentrate your investment in outstanding companies run by strong management

• Limit yourself to the number of companies you can truly understand. Ten is a good number; more than 20 is asking for trouble

• Pick the very best of your companies and put the bulk of your investment there

• Think long term - 5 to 10 years minimum

• Volatility happens; carry on

These rules can be adapted for use by individual companies and their application would help to reduce shareholder losses. Use of such rules requires a system of governance which restrains the greed of executive directors and takes a more strategic view of building the business. Such a system would require more effective non-executive directors and greater involvement from all shareholders. It would also require a more demanding audit - not one which is conditioned by the search for consultancy work!

There can be no doubt that the authors have identified a dangerous pattern of behaviours threatening British business, which has been in relative decline for many years. The world wide expansion of US business has been fuelled by many of the same behaviours identified in this book - and America has had as many scandals and losses of economic value as the UK. Many other countries have managed to conceal their microeconomic mis-management until recently but reality is emerging. Around the world people are better informed and less willing to suffer economic exploitation. Ways to improve corporate governance and increase openness and accountability are being sought. These need to go beyond better structures and processes to changing cultures and behaviours.

This book barely mentions corporate governance and yet its main theme is the failure of the stakeholders in British business to control executive directors and ensure that companies are run for the benefit of shareholders and other stakeholders over the longer term. The City and media live for the short term and those involved in them often have short term personal agendas. The real theme of the book is how to harness the ambitions of executive directors to the long term needs of the companies they are paid to direct. Such directors are stewards of the company, rarely its owners (even in these days of share options). Unless power is effectively distributed to those who need to exercise it on the company's behalf rather than concentrated in the hands of those who usurp and abuse it, no company can succeed for long. Controlling the exercise of power requires vigilance and commitment from investors and from other stakeholders. The authors believe that the "system" is impervious to change - now that all our pensions depend on companies producing wealth consistently for all stakeholders, we can no longer accept the penalties of corruption.

Adrian Davies - 22nd March 2004