There is more to Hanson’s demerger than the mortality of two ageing predators. Logical to the last, Hanson illustrates with unusual clarity the dead end of Eighties red-meat capitalism.
What went wrong? After all, for all its unfashionableness, Hanson demonstrates considerable management virtues.
For instance, contrary to much punditry, Hanson understands more about management focus than most of its confreres in the FT-SE 100.
Its focus is on management style. Rather than invest in related industries to pursue strategic synergies (a concept which exists in theory but not in practice, like England’s running game at rugby), Hanson has concentrated on buying firms that, although industrially unrelated, can all be run in the same way: with great operating freedom but little investment, no R&D, fast return and fierce financial controls.
Using this focus, Hanson has made routine an exercise that more industrially ‘focused’ companies regularly flunk: acquisitions. A study by the Economist Intelligence Unit confirms that making acquisitions work is largely a matter of experience and knowing what you want to get out of them. Hanson excels at both.
So here is the paradox. Hanson epitomises the economist’s conception of what a capitalist company should be. It prowls the market for corporate control, buying underperforming, undervalued assets and willingly selling them on to anyone who values them more highly. And it runs its companies for maximum short-term profit in the express interests of shareholders.
Yet this is a company on which the market has turned its back. Despite the highest dividends in the FT-SE 100, Hanson ‘s share price has fared miserably in the 1990s.
There are good mathematical reasons why it is harder now for Hanson to prosper, the chief of these being sheer size. (Again contrary to conventional wisdom, there are still plenty of terrible companies out there to acquire it’s just that after a decade of cost-cutting they are already partly ‘ Hansonised ‘ and thus no longer bad in ways that Hanson can easily cure.)
The underlying reason for Hanson ‘s fall from grace, though, is a remarkable shift in stock market values. The markets no longer believe that the best way to serve shareholder interests is to focus exclusively on the calculus of finance. They are beginning to accept the proposition that in the long term the best investment returns may come from companies that establish relations of trust with employees, customers, suppliers and community as well as shareholders. In short, they have bought the stakeholder argument.
The fate of Hanson, the ultimate shareholder-driven company, is the answer to those who continue to denounce stakeholder theory as a dangerous delusion and demand that management concentrate solely on the interests of the shareholder. Hanson’s end is as logical as its life. Those that live by the market have little option but to die by it.
THE REAL scandal about Cedric Brown’s leaving deal is that people still haven’t got it. In an attempt to pull back the curtain, here are some all too infrequently asked questions about pensions:
1 How about some figures?
Equitable Life says that to buy an annuity of pounds 247,000 (Brown’s pension) would cost pounds 4 million today. Other estimates put the value of his salary increase last year in pension terms at more than pounds 3m.
2 Where does the money come from?
The company pension fund, obviously, built up of the invested contributions of both the company and individuals.
3 But if large salary increases impose such a huge burden, how can the company fund it without putting up pension contributions?
Good question. If every British Gas employee stayed 40 years (like Brown), enjoyed steady pay rises and retired on a salary of three-quarters of final earnings, as is theoretically possible, contributions would have to rise. In practice, however, most people change jobs three or four times. This devastates their pension entitlements, and the company’s obligations, thus creating the leeway to top-up top people as they approach retirement. In other words, attrition of the lower orders is what makes it possible.
4 But doesn’t this give unscrupulous companies an incentive to prune their middle ranks?
You bet it does. The way pensions are loaded in favour of directors distorts the labour market. It bears particularly heavily on the over-fifties who, in pension terms, are expensive to employ. So age discrimination has an economic base. Unless the pensions issue is tackled head on, all campaigns to persuade employers to hire older workers will be pointless.
5 So pensions are set to become an increasingly important economic, social and management issue?
Yes – if we wake up to what is going on.