Boards clear out the alpha males who think size matters
TTHE morning after the London Olympics’ opening ceremony in 2012, I interviewed Jeff Immelt, the chief executive of General Electric. Ensconced in a marketing suite close to King’s Cross, I found a bona fide corporate titan, but one displaying unexpected frailty. Immelt, who oversaw an industrial empire with 300,000 staff, was nursing three broken ribs which meant he missed Bond, Bean and Beckham wow the stadium crowd the night before.
Since then, the whole of GE has fallen out of bed — or whatever misfortune had befallen Immelt. Last week, his successor John Flannery announced a solution to the all-American bellwether’s flagging share price and rising debt: the sale of its stake in oil services group Baker Hughes and spin off of a healthcare division built around Amersham, a medical diagnostics company that was the first big privatisation of the Margaret Thatcher government.
Even though the venerable GE will still produce hi-tech equipment for the power, renewable energy and aviation industries, the message is clear: another conglomerate bites the dust. For UK company watchers it has been a familiar refrain. Hanson, Bowater, Tomkins, Pearson: it is a long time since any chief executive has assembled a portfolio that combines waxworks with fine wines or bakeries with firearms and tried to convince the City they fit together perfectly, when in fact they are united by little more than a corporate logo and a pension scheme. But this year has still seen a run of demerger announcements. Breaking up is hard to do, but if it means better returns for investors, the message is just get on with it.
So Whitbread will split its budget hotels from its coffee shops and the Prudential is carving out its UK asset manager from sexier insurance assets in Asia and America.
WPP is sure to be slimmed down postSir Martin Sorrell and slowly being unpicked is the Thomson-Reuters merger, a media combination that has proved to be every bit as bad as AOLTime Warner. Even the new-wave conglomerates — outsourcers including Capita and G4S — have been tasked with doing fewer things better rather than anything for anybody.
Activist investors can take some of the credit: like World Cup goal poachers loitering on the edge of the six-yard box, they are happy to. Nelson Peltz barged into GE’s boardroom last year and both Elliott Advisors and Sachem Head called for the Whitbread demerger. Their presence is a useful hygiene check. If there is no improvement worth calling for, then surely company management is doing its job.
But the focus goes deeper than that. Pulling in horns plays to our times when “America First” is President Trump’s rallying cry and the first skirmishes of a trade war play out. Some recent research by The Economist suggests that globalism does not always pay. Splitting the 500 biggest companies into those that make more than 30% of their sales outside their home market and those that don’t found that the domestic majors increased profits by 30% since 2015, compared with a 12% rise for the globetrotters.
Certainly, Immelt’s international vision of supplying more goods to more territories was found wanting, just as the predicted economic miracles of India and Brazil have endured a bumpy ride. He should have listened to Diageo’s boss Ivan Menezes, and his predecessor Paul Walsh, who both insist the US is the drinks giant’s number one emerging market. GE could also take a lesson from Amazon, whose retail, video streaming and cloud storage activities are as diverse as anything a conglomerate from history has housed. However, it chooses to focus its considerable efforts on just a handful of countries, no matter how much it feels like founder Jeff Bezos has already achieved world domination.
With some exceptions in the technology industry, the leaders who are determined their firms should excel at less are shareholders’ top pick now. It does not make for an easy life. If Old Mutual’s Bruce Hemphill had not opted to slice the South African financial services group into four pieces he might have kept himself in a job longer.
It is no coincidence the death knell is sounding for diversified empires just as boardroom diversification gains traction. The game is finally up for corporate alpha males convinced that scale defines success.
Business leaders who are determined their firms should excel at less are shareholders’ top pick now