Why customers must come first

ANYBODY with an interest in industry, management or the behaviour of the financial services industries cannot have missed the recent debates about corporate governance.

There is no doubt that governance is important, as the examples of Enron, Tyco, WorldCom and Parmalat show. In Britain, we have a very substantial framework of rules, all wrapped up into a Combined Code. With luck these rules will help to protect British companies from corruption and excess at the top.

But our research indicates that whilst strict governance may stop fraud and abuse, it will do little to ensure that companies are well run. Governance is mainly about companies as financial assets and legal entities, and the formal duties of directors.

Companies, though, are much more than legal obligations and bundles of assets. They are living institutions that contain the skills, knowledge and experience of many people. Real companies do not respond well to being bought, sold, merged, hacked about and subjected to sporadic headcount reductions by transient leaders.

The leadership behaviours that best support the living company could be called 'stewardship'. So, how are British quoted companies doing on the stewardship dimension?

Alas, not very well. A short review of the performance and survival of larger British companies - especially those in more advanced industries - will reveal a pretty depressing picture.

Over the last 30 years there has been a massive exodus of British-owned companies from advanced, knowledge-based industries, once a bedrock of the economy. When we turn to high added-value service industries such as large investment banks and consulting companies, most are now US or European-owned. Their British counterparts failed after the deregulation of the UK financial markets known as 'Big Bang'.

A look at research and development, investment and productivity and quality of leadership will offer clues to the reasons for the failure of British companies to compete in advanced industries. The bulk of them trail international competitors on most measures related to innovation and efficiency.

Britain has superb science, a reasonably well-educated and hardworking population and a relatively open culture. We are not taxed or regulated more than many countries that still manage to perform well, for example Holland. So these are not the root causes of underperformance.

The central reasons are the values and behaviour of the City and the influence that these have on British top managers.

At the centre of this 'black hole' is an investment industry that gambles on short-term share price movements and creates ever more elaborate means of betting on the future through vehicles such as hedge funds.

In addition to speculating on share prices rather than investing in companies, the City has in recent years become markedly more aggressive in insisting that managers fulfil its agendas, which are often about doing deals and pursuing short-term financial goals.

All the evidence shows that the most successful and durable companies care first about serving their customers and investing in innovation, products, services and people.

Satisfying the legitimate needs of shareholders is a consequence of running the company well, not its central aim. That should be satisfying customers' expectations.

The governance movement places the needs of shareholders first and subordinates managers to the investment industry. The corrosive effects of this on British companies are there for all to see.

What is desperately needed is better stewardship. Top managers and the City need seriously to accept that they have a duty of care towards the companies that they lead and invest in. This is not an optional extra, it is an urgent need, if further damage is to be avoided.

Don Young is a former industrialist and co-author with Pat Scott of Having Their Cake - How Big Bosses And The City Are Consuming UK Business.