In 2007, the UK supermarket group Sainsbury’s faced a private equity bid. The Sainsbury family fought off the bid. Writing about it six years later in his book ‘Progressive Capitalism’ David (Lord) Sainsbury said:
'There was not the slightest pretence of seeking to improve the performance of the company…The only change that they proposed to make was to sell off all the properties of the company and replace them with massive debts. Then they would put the company back on the market, stressing the high return on equity but not the high risks involved, and walk away with £1bn of profit.'
David Sainsbury calls this 'a perfect example of wealth appropriation as opposed to wealth creation…it was economic behaviour which aimed to extract value from other participants in the economy without making any contribution to productivity'.
Nine years on the House of Commons Work and Pensions Select Committee is investigating how BHS was able to pay dividends amounting to £414 million over 4 years and yet bequeath a £571m pension deficit to its new owners.
The previous owner, Sir Philip Green defended his actions in selling the business for £1 to its new owner in the face of major questions about Dominic Chappell’s previous track record: 'If I give you my plane, right, and you tell me you’re a great driver, and you crash it into the first …ing mountain, is that my fault?'
Well, it depends on how you see the company. There are two views.
Under one of those two views the company is a pile of transactions. It’s a glorified cash machine. Punch the right buttons in the right order and out spills the cash. Never mind how it was produced. Never mind the impacts. Ignore the company’s future ability to generate cash, let alone innovation, quality products, salaries jobs, pensions, a healthy economy. Call it extractive capitalism. Under this view, the owner of a business does not have a responsibility for its relationships, its purpose and its future wellbeing.
There is another view. Call it stewardship. Call it a wider definition of value. Call it a focus on real wealth creation, on healthy companies and the long term. Under this view the company is a bundle of relationships, a vital organism, a contributor to a healthy economy and a healthy society. It has personality and its owners, if they are effective owners, will be forgoing some rewards now in order to build its future health.
In Tomorrow’s Company we promote an approach that recognises that success starts with engaged employees, satisfied customers and stable suppliers; with shareholder returns being the end result, not the starting aim. It is underpinned by a clear purpose and set of values that help guide behaviours, and a long-term view that embraces risk.
That’s the vision and the philosophy. But what about the practical agenda? In our new report, UK Business: What’s Wrong? What’s Next?, we set out an agenda through which boards, pension trustees, fund managers, and government policymakers and regulators can combine to put companies at the heart of our future success, to the shared benefit of shareholders, employees and society .
The report is full of practical ideas to match the vision. Here’s one topical example. Get rid of the remuneration committee with its focus on pay for the few people at the top. Replace it with a culture, talent and pay committee which looks at the culture the business wants to create, the talent it wants to attract, the sense of shared purpose across the business and how to construct a whole company approach to shared reward for shared success.
Whether we are in or out of the EU, the UK needs to develop a growth agenda which puts healthy companies at the heart of our plans to grow the economy. Only then will we address a disappointing record on productivity (15% below the rest of Europe) employee engagement (less than half of the UK workforce would recommend their company as an employer) and low public trust.
As David Sainsbury put it in his book 'Capitalism is one of the great constructions of the human mind. It is a set of institutions which must be justified by its contribution to the wellbeing of society.'