Every little hurts as Rolls loses its way
IS ROLLS-Royce the new Tesco? There certainly are parallels. Both are flagship British businesses that have been hit by ‘Sir Alex Syndrome’ – like Manchester United post-Fergie, they have run off course following the departure of a long-standing leader.
At Tesco, the problems bubbled to the surface when Phil Clarke took over from Sir Terry Leahy, while at Rolls the engine spluttered after Sir John Rose made way for John Rishton in 2011.
It is a reflection of the skewed priorities in this country that while Tesco’s travails have been subjected to obsessive coverage, relatively little printers’ ink has been spilled on Rolls, even though it is far more important to the economy as a whole.
As a retailer, Tesco is much more visible and seemingly a simpler business, but in terms of exports and our manufacturing base, Rolls carries far greater weight.
The unfortunate Rishton has had to issue a series of profit adjustments this year.
The most recent came this week along with the announcement of 2,600 job losses, starting with former finance director Mark Morris, shown the door with immediate effect and a near-£1m package. Fairly or not, he is taking the blame for botched communication with shareholders.
Much as Leahy was the architect of the Tesco business we know today, with the Clubcard and international expansion as his legacy, Rose – who took the helm in 1996 – turned Rolls into a diversified engineer that was not so reliant on its core defence and civil aerospace business.
Lauded at the time, these strategies are now under question.
Creative or aggressive accountancy has been a feature at both businesses: Tesco is accused of cooking its books to the tune of more than £260m.
Rolls was forced to reduce last year’s profits by £40m following discussions with accountancy watchdogs. These were over how it books profits on its TotalCare contracts, where customers buy engines on deals that tie them in to long-term servicing and spare parts arrangements, but it has been criticised for opaque accounts for years.
Tesco’s allegedly wayward practices have brought it under investigation by the Serious Fraud Office, while so far as we know Rolls has resolved its TotalCare accounting issues after talks with the Financial Reporting Council.
That is not to say Rolls does not have its own problems with the SFO. There is the little matter of alleged bribery and corruption in Indonesia and other emerging markets, which is being probed in an investigation that could drag on for years.
A complex business like Rolls needs top-flight financial analysis and reporting, but the question is whether its problems were primarily ones of communication or something more fundamental.
Rishton is making efforts to be more accessible: under Rose and Sir Ralph Robins the company was often at odds with the City over its doggedly long-termist strategy and developed a stubbornness that at times tipped into insularity and arrogance.
In the long term, Rolls might well come good.
Star fund manager Neil Woodford came out in support after the engineer’s previous profit adjustment in October, saying that the market is ignoring significant long-term positives. In his view, it remains a high-quality business, with top class technology, operating in a business with high barriers to entry. The long-term order book is still bulging.
After having pulled itself back from the difficulties faced in the 1970s and 1980s, it gives no pleasure to see Rolls floundering. One hopes Woodford is right. But there is a sense of unease about a number of aspects of the story so far.
Even industry analyst Howard Wheeldon, a loyal supporter over many years, has expressed some scepticism, saying: ‘I am not quite sure what it is that causes me to believe that something else is wrong at Rolls-Royce.’
PERHAPS it is the jarring notes struck in Rolls’ account of itself. These include blaming Russian sanctions, somewhat unconvincingly, in last month’s profit tweak, and the decision to include skilled engineers in the job loss programme. That seems short-termist when they will hopefully be needed for future projects.
One wonders whether there will be more executive departures.
Questions remain whether the defenestrated Mark Morris – a 27year veteran of the company and a Rishton appointment – was the real source of the communications problems or a scapegoat.
Rishton now has one less person to blame apart from himself. He is in a race against time to win back the confidence of investors, or he will be propelled in the same direction as Phil Clarke.