Canadian-led thinking filters through at Davos index launch

The Canadian-backed launch of a nifty new stock index at the Davos World Economic Forum made me think of Chainsaw Al.

Should Chainsaw need an introduction, allow me to précis by saying onetime U.S. corporate executive Al Dunlap earned the nickname via his habit of clear cutting employees, most famously halving the 12,000-strong workforce at small-appliance maker Sunbeam Corp.

Here’s the nut: Chainsaw Al’s game was to boost the company’s stock performance by pleasing Wall Street. He accomplished this not only by slashing employees, but by perfecting the unseemly arts of bill and hold, channel stuffing and cookie-jar accounting.

Let’s say it’s November. Let’s express surprise that Sunbeam’s sales of outdoor grills are going through the roof. They weren’t, of course. The company was claiming revenues on grills that would be warehoused for another two quarters. This and other tricks of shifting sales lent the illusion that the company was doing far, far better than it was. Revenues bloomed. The stock went gangbusters. Wall Street loved Al.

Dunlap was fired in 1998. The Securities and Exchange Commission would find that a third of the prior year’s revenues came from accounting fraud. Sunbeam sought bankruptcy protection. And Dunlap was barred for life from serving as an officer and director.

In one of the more quotable highlights, Dunlap’s son, Troy, crowed to the media that he was happy to see his father face his comeuppance. “I laughed like hell,” said the son of the (obviously disliked) father. “I’m glad he fell on his ass.”

In my books, the Chainsaw debacle is an exemplary case of the distortion of short-term corporate thinking. I’m not referring to accounting trickery (pace Nortel etc.) but rather what has become the entrenched rules of engagement: Companies becoming hyper focused on the maximization of short-term results. Quarterly guidance. Earnings targets. None of this speaks to the long-term health of corporations.

Changing this thinking has been effectively and repeatedly explored by Dominic Barton. On the world stage, Barton has a high profile as global managing director of McKinsey & Co. He’s also Canadian.

Prime Minister Justin Trudeau drew a chuckle in his Davos speech last Wednesday when he said that “at least half of this room has employed Dominic Barton at one point or another.”

It was Barton who coined the phrase “quarterly capitalism” years before Hillary Clinton adopted it. What capitalism needs, Barton has repeatedly stated, is to shed this short-term thinking as part of a deep reform movement.

“It’s about rewiring the fundamental ways we govern, manage, and lead corporations,” Barton wrote in the Harvard Business Review five years ago. “It’s also about changing how we view business’s value and its role in society.”

He defined short-termism as a “tyranny.”

Chainsaw Al would roll his eyes. Possibly Stephen Harper would, too.

In 2013, Barton, via McKinsey, formally aligned with Mark Wiseman, CEO of the Canada Pension Plan Investment Board, to create Focusing Capital on the Long Term. The aim is to develop new metrics that advance long-term thinking. Linking CEO compensation to innovation and efficiency, by example, and conversely structuring compensation schemes with clear consequences for failure. (How novel.)

Big names are involved, including Paul Polman, the CEO of Unilever PLC. Polman was one of the first executives to call a halt to all this earnings guidance business, which Unilever did do.

A bigger step was needed, which is why I took notice of the launch, last Thursday, of a new index. The S&P Long-Term Value Creation Global Index was created via a collaboration between the CPPIB and S&P Dow Jones Indices and aims to track companies that seek longterm value. Shrewdly, Davos was chosen as the launch site.

“We are trying to use the index to change corporate behaviour,” Wiseman, a Davos attendee, told the Wall Street Journal. Big names are supporting the initiative, including the New Zealand Superannuation Fund, Singapore’s GIC and Dutch pension fund PGGM.

It’s cool to think of this sort of creative Canadian-led thinking filtering through all those Davos confabs. As the prime minister said in his speech, natural resources will always be the basis of the Canadian economy (yes, he said that), but growth and prosperity doesn’t just lie underneath our feet, but in the smart matter between our ears. jenwells@thestar.ca