Anthony Hilton: Corporate titans are carrying too much fat

BP was thought of as being fairly lean, mean and efficient before the Gulf of Mexico spill

24 May 2017

The oil giant BP announced this week that it was hoping to grow its assets in the North Sea, and was upping its investment to effect this.

Because most of the past few years have been about retrenchment, it was taken as a positive sign that it had finally emerged from the shadow of the Macondo oil spill in the Gulf of Mexico.

But what really ought to be noted is how remarkable it is that the company is still here.

The costs of the disaster and subsequent settlements of legal claims is thought to be around £60 billion. Much as we might welcome these renewed signs of life, it does make one wonder how any company could take a hit of this size and still come through it with the bulk of its operations intact.

This is even more the case as BP was thought of as being fairly lean, mean and efficient before the Gulf spill.

Perhaps, though, its survival suggests the opposite; maybe it is still here because there were, in fact, layers and layers of fat which in a dire emergency could be stripped out to pay the bill.

One might say the same of Volkswagen, the German car-maker whose Macondo moment came when it was forced to admit that it had for years been lying about the emission levels of its diesel engines.

The eventual cost of this scandal as it works through the legal systems of dozens of countries has yet to emerge, but will surely again amount to sums of money which are almost impossible to comprehend. Yet, in spite of this potentially astronomic cost, no one seems to doubt the company’s ability to absorb the hit.

If there is this much fat around in the best-known names, it makes you wonder how efficient big businesses really are. If you look at longer-term trends — peering through the short-term volatility of annual results — most big firms here, in Europe and the US, seem simply to grow in line with GDP. If the economy expands, they expand but if it does not, they don’t.

This suggests veritable armies of management dedicated to maintaining the status quo. Perhaps the top levels of these businesses should be thought of as simply the Civil Service with share options.

Interestingly, though, it varies from country to country.

One executive with a long career in international business is convinced that US companies are almost always better managed than European ones.

Certainly they seem more single-minded. But there are variations within European countries too: one executive described Britain as a place with lean management and inefficient factories. Germany in contrast has efficient factories, but dreadfully bureaucratic management.

Then there is the problem of potentially good businesses neglected within large companies.

Drive-by activists sometimes create enough of a stir to prompt management to restructure and sell off some of these, or some which are well past their peak — witness the Unilever decision to sell its margarine business or the long battle between Elliott Advisors and Arconic.

This last example has already led to the departure of chief executive Klaus Kleinfeld as a possible prelude to further changes, but it has yet to achieve anything in what is an increasingly rancorous stand-off with Akzo Nobel.

However, more often than not the activists are short-termist too.

If they can deliver an upward kick to the share price they are content and move on long before they have achieved a significant dent in the culture of the target company. Nothing really changes.

More institutionalised shareholder impatience does not help much either. PwC, the accounting and consultancy firm, reported the other day that the average chief executive in the largest UK businesses now holds onto his or her job for less than five years, which is shorter than any major economy apart from India, Brazil and Russia.

The implication is that this turnover signifies the impatience of shareholders and a restless hunger for growth. But if that is indeed the message, it is not working.

As PwC points out, five years is not long enough in most big businesses to make real tangible change and it is further not helped by all that instability.

And what price all that self-satisfaction about corporate governance in which we tell ourselves that we lead the world? Perhaps we do — but what improved performance has governance actually delivered?

Given that there are so many undermanaged businesses around — and quite a lot which are, frankly, badly managed — one might expect more effort by management teams to sort them out.

But they are surprisingly thin on the ground — perhaps because they fear they might fall victim to Warren Buffett’s observation that when a manager with a good reputation goes into a company with a bad one, it is usually the company’s reputation which remains intact.

Private equity operates in this space, of course, and does make a difference even if too few focus on delivering operational improvements, and too many still rely on financial engineering to deliver the returns.

So, in the search for teams which basically bring good management to businesses which badly need it, you are left with companies such as Melrose.

Over what is now almost three decades it has bought businesses, turned them around, sold them on and returned the cash to shareholders, each time without any obvious own goals. After a massive sale and return of cash a year ago it has now let it be known that it is scouting around for another deal, though the team also stress that it could take months to find the right one.

It is just a pity that there are not more like them.

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