Where are the true business leaders?
Just as investors started thinking that things could not get any worse, the Dutch Ahold retail group announced a €462.6 million shortfall in revenue. As a simple-minded accountant, I find it difficult to see how you can misstate income in a business which takes cash through the till and either has made a sale or not.
Having written before Christmas in this newspaper that the Enron scandal was far less likely to happen in Europe, my initial reaction was that the US disease had reached the Netherlands. Further reading disclosed that the accounting scandal had occurred in one of the company's US subsidiaries. Accordingly, European honour has only been tarnished and not completely destroyed.
Ahold's CEO and CFO have done the honourable thing and resigned. As ever, it is the shareholders who will bear the real cost. The question must arise as to whether this is another, albeit isolated, instance of at best management incompetence or at worst fraud, and whether this is a pattern which will be repeated time and time again as auditors begin looking more critically at company balance sheets. And if the pattern will be repeated, then someone needs to start answering questions as to why the abuses were not discovered earlier.
The simple answer is presumably the fact that so long as there was real and sustained growth in the economy, the corporations continued to live on borrowed time and financing institutions and banks were prepared to continue pumping cash into the ventures. As the global economy started going into recession, there was no longer the growth which could disguise poor underlying performance, and presumably management started looking at ways of window-dressing the balance sheets.
Aside from the false accounting issues, it is becoming clear that the world may be facing a sea change in the economic paradigm, and that markets may in future not behave in the way that they have in the past. Where does this leave major corporations and how will their managements deal with the challenges? (Cynics might say that the scope for creative accounting may be running out and that real solutions will have to be found.) The reality is that there are now very few world leaders both among politicians and business leaders. Why should this be so? As far as politicians are concerned, the answer probably lies in the fact that most political leaders are the products of very slick party public relations machines rather than being natural charismatic leaders.
In business it is more difficult to find an answer. It is, however, clear that the old style of business leader capable of building and maintaining a successful business has been replaced by the corporate placeman whose contribution seems in many instances to be the destruction of long-established and respected businesses. The cases of Marks and Spencer and British Telecom in the UK, ABB in Switzerland and some previously robust companies elsewhere, including this country, spring to mind. This may be due in part to the age-old principle of business leaders surrounding themselves with less competent managers in order to avoid leadership challenges. There may also be a comparison with family-owned businesses. These historically have seen the first generation build the business, the second generation consolidate its success and the third generation typically destroy it.
The same may be happening in large corporations. Historically, these have grown on the back of entrepreneurship followed by a phase of rapid growth through organic expansion and acquisitions leading to economies of scale. We are now entering the third phase of flat demand and lack of opportunity for further economies of scale. The financial markets have continued to look for growth, expecting managers of mature businesses to pull white rabbits from hats. Is it surprising, therefore, that the managers have reacted either by seeking growth through overpriced acquisitions with no hope of achieving overall cost-savings or have sought to disguise lack of performance by creative accounting.
The time may well have come for the financial markets to stop insisting on what is no longer possible.
Having written before Christmas in this newspaper that the Enron scandal was far less likely to happen in Europe, my initial reaction was that the US disease had reached the Netherlands. Further reading disclosed that the accounting scandal had occurred in one of the company's US subsidiaries. Accordingly, European honour has only been tarnished and not completely destroyed.
Ahold's CEO and CFO have done the honourable thing and resigned. As ever, it is the shareholders who will bear the real cost. The question must arise as to whether this is another, albeit isolated, instance of at best management incompetence or at worst fraud, and whether this is a pattern which will be repeated time and time again as auditors begin looking more critically at company balance sheets. And if the pattern will be repeated, then someone needs to start answering questions as to why the abuses were not discovered earlier.
The simple answer is presumably the fact that so long as there was real and sustained growth in the economy, the corporations continued to live on borrowed time and financing institutions and banks were prepared to continue pumping cash into the ventures. As the global economy started going into recession, there was no longer the growth which could disguise poor underlying performance, and presumably management started looking at ways of window-dressing the balance sheets.
Aside from the false accounting issues, it is becoming clear that the world may be facing a sea change in the economic paradigm, and that markets may in future not behave in the way that they have in the past. Where does this leave major corporations and how will their managements deal with the challenges? (Cynics might say that the scope for creative accounting may be running out and that real solutions will have to be found.) The reality is that there are now very few world leaders both among politicians and business leaders. Why should this be so? As far as politicians are concerned, the answer probably lies in the fact that most political leaders are the products of very slick party public relations machines rather than being natural charismatic leaders.
In business it is more difficult to find an answer. It is, however, clear that the old style of business leader capable of building and maintaining a successful business has been replaced by the corporate placeman whose contribution seems in many instances to be the destruction of long-established and respected businesses. The cases of Marks and Spencer and British Telecom in the UK, ABB in Switzerland and some previously robust companies elsewhere, including this country, spring to mind. This may be due in part to the age-old principle of business leaders surrounding themselves with less competent managers in order to avoid leadership challenges. There may also be a comparison with family-owned businesses. These historically have seen the first generation build the business, the second generation consolidate its success and the third generation typically destroy it.
The same may be happening in large corporations. Historically, these have grown on the back of entrepreneurship followed by a phase of rapid growth through organic expansion and acquisitions leading to economies of scale. We are now entering the third phase of flat demand and lack of opportunity for further economies of scale. The financial markets have continued to look for growth, expecting managers of mature businesses to pull white rabbits from hats. Is it surprising, therefore, that the managers have reacted either by seeking growth through overpriced acquisitions with no hope of achieving overall cost-savings or have sought to disguise lack of performance by creative accounting.
The time may well have come for the financial markets to stop insisting on what is no longer possible.
