Daiwa Anglo-Japanese Foundation: Challenges of Corporate Leadership Seminar 12 July 2012 Address by Stuart Lyons CBE I feel deeply honoured to take part in the Daiwa Anglo-Japanese Foundation seminar series this evening. It’s an excellent and imaginative programme and I would like to thank Sir John Whitehead and Jason James for inviting me to share my thoughts with so many distinguished guests. The essence of the discussion this evening is what makes for effective business leadership in the current challenging environment, and whether there are useful insights that Japan and the UK can share with one another and with others. It seems to me that the issue of corporate leadership in the 21 st century has two aspects. First, how can we ensure that our businesses survive and prosper in a sluggish international economy, providing jobs, goods and services, and economic dynamism? Secondly, how can we restrain ourselves and particularly our financial services sector from the excesses of corporate ambition and personal greed? The UK and Japan both like to see ourselves as punching above our weight in the global economy. We think carefully about our strategies and management. Because we are high- cost countries, we depend on superior design and product development, and on the outsourcing and delegation of products, components and services. Our people are skilled, good at what they do, and generally work hard. But complacency is our enemy. We both risk slipping down the international tables as a result of slow growth, an ageing population and the emergence of China as a global force. We risk political, as well as economic disruption, if we do not work harder, smarter and more effectively. In the UK, the major corporate objective for many years has been the enhancement of shareholder value. That’s because so many companies were accountable to equity markets, and market traders take a short-term view. JCB, which is in the same business sector as Komatsu, was and is an exception because it is family owned. In general, the British industrial tradition is mercantile and entrepreneurial. The leadership role is carried out by an individual who reports to a board, rather than by the board itself. Individualism and ego can override the sense of corporate endeavour. This is quite different from, say, Nissan, where the organisational chart used to show the President sitting in an apex at the bottom of the triangle, a figure of dignity and respect, to whom ideas flowed downward from his team as though by the natural rules of physics. Japanese companies take a longer view that their British counterparts. They are more likely to be financed by banks. The keiretsu system of alliances is still evident. Management is generally consensual. The group, and group loyalties, appear more important than personal ego. Of course, we should not confuse form with substance, for Japan is a formal and gracious society. Personal ambition exists and so, sometimes, does corruption, but it seems to me that the Olympus scandal was about corporate ambition rather than individual greed.
2 You could take these general arguments and assume that they account for the recent differences in performance between, say, the super-brand of Sony and opportunistic Vodafone. The Japanese company, despite its tradition of quality and the apparent visibility of its leadership, seems to have stalled. Vodafone, which originated as a British company, but now has a Dutch chairman and an international board, has cottoned on, through internal debate as a group, to the social and technological changes of the communications era. But this narrative is too selective. You would not arrive at the same conclusions if you looked at Panasonic instead of Sony. Nor is Vodafone typical of what has been happening in British industry. Our national media, being London-based, give an unbalanced picture. They focus on three categories of businesses not because they are typical, but because it is a convenient way of selling newspapers or television commercials. Journalists like to write about businesses quoted on the London Stock Exchange; London- or City-based businesses; and businesses with a high consumer profile or high-society owners. These create good news stories, particularly when things go wrong. However, there is a different story in Britain’s industrial heartlands. In the Midlands and North of England, we have a large number of small and medium-sized enterprises, which have been buffeted by the short-termism of City traders, the high cost of regulatory compliance and the lack of liquidity in their equity shares. Stockbrokers and corporate finance houses can no longer be bothered with businesses turning over less than £500 million a year. During the past twenty years, many smaller companies have moved from stock exchange listing to private ownership with venture capital and private equity partners. This is quite a turnabout. Twenty years ago, conglomerates like my old employer the Pearson group, which owned Royal Doulton, were looked down on. Pearson was persuaded to divest itself of non-core businesses like Lazard’s Bank, Madame Tussaud’s, Royal Doulton and Chateau Latour, with no discernible improvement in its results. Today, the UK’s private equity businesses, such as Apax and Terra Firma, are conglomerates under another name and are now the height of fashion. Private equity is, however, still short-term in its time horizons. The objective is to use the freedom from immediate pressures to remove cost, improve margins and prepare businesses for resale to or with the benefit of a revitalised management. Another significant change has been the successful encouragement of inward investment. In the West Midlands, when I led the Regional Development Agency, we attracted 17 out of the world’s 18 leading automotive manufacturers, several of them from Japan. Here in the capital, Thames Water was German owned and is now mainly owned by the Australian infrastructure fund Macquarie. The French EDF owns London Electricity and British Energy. The sovereign wealth fund of Qatar now owns all of Harrods and a large slice of Sainsburys. In short, flexible ownership can help reduce short-termism and provide a way for mature businesses to survive and prosper. Much, however, continues to depend on leadership, motivation and a sense of mission. I referred a little earlier to Panasonic. It’s instructive to compare the British mercantile approach with that of the Japanese company.
3 Panasonic was founded in 1918 and was originally Matsushita, a light-bulb manufacturer. On 5 th May 1932, the fourteenth anniversary of the company’s founding, Konosuke Matsushita assembled his 162 employees and announced a 250-year corporate plan, broken up into ten 25-year segments. Matsushita later added a company creed, seven philosophical precepts and a company song. The creed read: “Through our industrial activities, we strive to foster progress, to promote the general welfare of society, and to devote ourselves to furthering the development of world culture.” The seven precepts, which became known as the “Seven Spirits of Matsushita” were: • Service through Industry • Fairness • Harmony and Co-operation • Struggle for Progress • Courtesy and Humility • Adjustment and Assimilation, and • Gratitude By 1968 Matsushita had a 5,000-item product line, compared with 80 items run by Sony. In 1981, there were 100,000 Matsushita employees worldwide celebrating the company’s entrance to the third 25-year phase of its 250-year plan. By 2011, Panasonic had annual sales of nearly 9,000 billion yen and nearly 370,000 employees. There is, of course, an Anglo-American blueprint for meeting the challenges of corporate leadership successfully. Here’s a ten-point list which I derived from the Advanced Management Program at the Wharton Business School in Philadelphia, and used successfully at Royal Doulton in the 1990s. A world-class company, we determined, has: 1. A communicated sense of mission, or vision. 2. A global perspective. 3. A strategically- rather than a tactically-driven business plan. 4. A determination to create shareholder value. 5. A market and customer orientation. 6. An obsession with learning. 7. An unshakeable commitment to quality. 8. A relentless search for technology and innovation. 9. Constant study of competitor activity and competitive threat. 10. The ability of the leader to motivate his or her teams with a common purpose. With hindsight, I should have added an eleventh point which struck me as a result of the King’s Cross fire: commitment to the lives and safety of employees. On coming back to the UK from Wharton, I found that a new fashion was taking hold at my holding company. There were now apparently three criteria for a successful business unit, by which a chief executive was judged: 1. a positive cash flow; 2. sustainable competitive advantage, and 3. relevant management capabilities within the organisation.
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