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Why humans snap at the heels of private equity

Sun, 17th Jun 2007

THE FATE of Jaguar and Land Rover (see Oliver Morgan, pages 4-5) will be a key indicator of the state of 21st-century UK plc. That the most likely buyer is private equity already tells us much - not least because in our City-dominated economy there are no large manufacturing candidates left.

If they are snapped up by private equity, will two of the best-known names in UK manufacturing go the 'propertification' way of Rover, their assets seen to be worth more as shopping malls and offices than factories employing people to make things? Or will they be turned round, their pipelines stocked with new models and returned to the stock market in rude, restored health?

That is the official private equity scenario, of which the motor companies will be an acid test. But the test track will not be ownership as such. Some of the best-performing motor and ancillary companies are already privately controlled, with a strong family influence - think of Toyota, BMW, Porsche and Michelin.

Yet these companies work to time frames and visions that are in many ways the antithesis of private equity. All are the result of patient organisation-building that stretches far beyond building a product and selling it. Toyota makes its own microchips (thus saving itself the electronic glitches that damaged Mercedes's quality reputation) while in Michelin's idiosyncratic structure the tyre brand is underpinned and spread by its maps and restaurant guides. How long would those last if the private equity funds got their hands on the French tyre-maker?

The testing ground is management. The corporate world is increasingly dividing into two rival visions of how to manage performance. Private-equity-driven management is a kind of turbocharged version of the existing command-and-control orthodoxy, but vastly bidding up both its inducements for success and the penalties for failure, and bidding down the human angle. Generic, numbers-driven, financially-motivated, it claims to be able to manage anything.

In a kind of Gresham's Law, private equity-style management is driving out longer-term, more people-oriented alternatives. Pressure from the capital markets is one factor, leading companies to try to head off the attentions of private equity or to respond to activist shareholders (such as those on the case of Cadbury and Vodafone) by pre-emptively adopting their own behaviour.

A second, less acknowledged, reason is the lure of quantification: managers find numbers easier to manage (and manipulate) than humans. A striking testimony to this clash of values is the conflicting attitudes of executives around HR. In a worldwide survey by the Economist Intelligence Unit and Deloitte, while 85 per cent of senior executives said people were 'vital' to business performance, 63 per cent admitted they never consulted HR leaders on mergers and acquisitions, and in three-quarters of firms HR barely contributes to strategy formation.

By piling on the pressures to dispense with underperforming assets and wring the utmost from existing resources, private equity favours present efficiency. Whether the same reductive appeal to financial motivation and quantification is as effective when applied to the less certain process of innovation is moot - let alone the investment in people, products and the organisation that leads to enduring outperformance in a sophisticated industry such as car manufacture.

While it is greatly to the taste of the capital markets, the private equity management style runs up hard against what people say they want from work. According to studies such as Roffey Park's annual 'management agenda', most people are still more motivated by making a difference, by recognition and by doing a good job and feeling good about it than anything else. Put bluntly, beyond a certain point most people want meaning from work rather than money.

Such concerns might seem to cut little ice in the face of the high returns being claimed by the most successful private equity and hedge funds, quite apart from the extraordinary amounts being pocketed by those in charge of them. Despite what people privately think, money talks louder than anything else, doesn't it?

Yet even in this ultra-hardnosed world, the human factor has a habit of biting back. Last week the Financial Times noted that staff at top investment banks in London, struggling to cope with record deal volumes, were so overstretched that they were in danger of making costly mistakes. One consultant noted: 'The temptation is to drive your people harder. But there is a limit. There could be a danger of people slipping up.'

It's a delicious irony: the boiler room of today's voom-voom capitalism at risk of blowing up under the pressures it is imposing on others in the name of the virtuous disciplines of private equity. Down on the shop floor, whether in the City or a Land Rover plant in Solihull, you take the 'man' out of management at your peril.

The Observer, 17 June 2007


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