The MT Debate: Can experience help us navigate the crisis?

Seven business wiseheads discuss how we should confront our economic predicament.

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Last Updated: 09 Oct 2013

In association with Towers Perrin, MT invited seven business wiseheads to a round table debate to discuss how the lessons of previous downturns might help us bounce back from our current woes.

Matthew Gwyther:
The subject of this round table is the recession. There are few other things that we can think or write about at the moment, but we want the accent to be on the constructive. You have been invited because of your experience of how you dealt with downturn within your organisations, and how you emerged maybe even fitter at the end of it. Let's start with Michael - you have lived through many downturns in your life. What is different about this one?

Lord Heseltine:
Three things. The first is the speed with which it all happened. After the events of last September, things began to crumble very fast. Secondly, the extent to which it has crumbled, which is dramatic. Thirdly, I do not believe anyone knows the answers to how we get out of it or the scale of the mess we are in.

There is an anxiety about the valuation of debt, and I am amazed that the auditors have signed off the accounts over the years with these massive 'assets', which were based on sand. It is also a world crisis, which makes it worse, because the banks are lent all over the world into assets that they have limited knowledge of how to value. What is now missing is any confidence.

As far as my own company is concerned, we are a medium-sized business with 2,500 people; we have just stopped spending anything we can avoid. Anything that can be cut, we cut, except for the quality of the product. Of course, green shoots will come - the world is not going to stop spinning - but I don't know when. Until I feel that our feet are on the block, we will go on taking the most cautious view.

Sir Richard Greenbury:
I first became a director of M&S in 1970 at 34. So I've been through several recessions, but in an executive position I have never been through anything that is like this one.

During the last really serious recession of the early '90s, I was both chief executive and executive chairman. It was not global, but bad enough: the UK had 3 million unemployed and interest rates at 15%. M&S's solution was simple: we cut capex by re-prioritising ambitions, and anything that did not have a short payback we said: 'We will wait and see.' In the retail business you can cut staff costs without making people unemployed. You have just got to talk to your staff, and very often they will accept and understand that instead of working 30 hours you only want them to work 25 hours.

My bible was Winston Churchill, who famously said: 'In critical and challenging situations, it is always best to return to first principle and simple action,' and that suited us fine, because Simon Marks had told us for years: 'Run the business, keep it as simple as you can.'

I called in all our major suppliers without exception, and I said: 'This is getting worse. I do not know when it is going to get better, but in the meantime the one thing we stand for is high quality and value for money.'

That is one of the lessons I would reflect on for the future: there is always somebody who can do it cheaper. You must always 'keep the quality'. So I went to our suppliers and said: 'We are going to reduce the margin we put on the goods that you are selling us, we are going to bring our margins down across the board significantly. We would like you to make a contribution in terms of your margin.'

It actually gave our buyers more confidence. They are the goal-scorers and they are dependent on confidence. We re-emphasised what we were good at, and what we were famous for, which was high quality at affordable prices, but we made them even more affordable. The result was that our market share went up and so did our profitability.

It actually was, for us, a springboard to the success we then enjoyed. We did not do anything very clever - it is not rocket science - but you have to decide what it is you are good at, what it is you are respected for, what it is you are seen to do well, and try to do that a bit better. Whatever happens, you have got to keep the confidence of your people, and you have got to give people a sense, including the board, that you are not worried, you are not desperate: 'Listen, we are going to get through this.'

Ivor Dickinson:
It is a difficult balance to strike, though. Obviously, as a leader, the one thing you want to do is be confident, because that is what inspires people and makes them want to stay with you, because they think jobs are going to be safe. You do not want to sound as if you are in a panic, which sometimes you are. At the same time, you do not want to have an air of complacency either.

There is a certain feeling that 'I will be fine at Douglas & Gordon, it will survive - all the other estate agents will go bust; I will be fine'. People occasionally need to know this is very serious indeed, so they are going to have to work very hard, and they are probably going to have to take pay-cuts. The balance between panic and total confidence is not quite as straightforward as that.

Lord Heseltine:
I strongly hold the view that you have got to tell them the truth, because, actually, they know the truth, they all read the same newspapers and listen to the same radio and the same television. They know how awful it is, and if you try and con them, then you are just making yourself irrelevant and not achieving anything at all. I was surprised when one of our colleagues said that there was a morale problem; we rather detect a British determination to fight it through.

Ann Cairns:
I am restructuring Lehmans, which is in Chapter 11 as far as the US holding company is concerned, and under British insolvency law here in the UK. There are many people who were investment bankers in Lehmans, who wanted to rejoin and to work out the whole situation, because they felt proud of their bank, they felt good about some of the transactions they did.

It is not a complete pile of toxic waste - there are things that are very good and viable. And the people have a sense of ownership, as well as a sense of grit and determination, that they were going to make this better, and get as much as they can raise from creditors.

There is a very different sense of ownership and regime between the way the Americans behave when they are in Chapter 11 and the way it works under British insolvency law. Under Chapter 11, what you are trying to do is keep the bank running as a viable business, keep the parts that are healthy to sell them, motivate the staff to be able to do that. And you go in there as a bank manager running the thing. Under the British rules, it is very different: the company is simply wound down.

Val Gooding:
This is a time when you want to be focusing on the core of your business, and not faffing around with things that you do not need to do. You cut out all the fat. I remember what British Airways did in the late 1980s, when it launched something called 'the world's biggest offer' in the face of a serious economic downturn when nobody was flying. It was actually really a marketing promotion, but it totally exceeded any marketing promotions before or since.

Margaret Thatcher met Lord King on the steps of Downing Street to give it a bit of a push; it was the lead item on the ITN News at Ten. I have never seen any other marketing promotion do that, and it was an incredible offer where BA gave away Rolls Royces and things. It had the most amazing effect, because it was such a confident thing to do, at a time when everybody was on their knees and wondering if they were going to go out of business.

Who knows whether this situation is going to be very different, because the thing I've never seen in my lifetime is the collapse of banking; I am on the board of a bank (Standard Chartered) and still able to say I'm pleased to be on it. But we have never had a collapse of banking in our lifetimes, so to say that what we did before will work now is really assuming a lot.

One of the businesses I am associated with has taken advantage of some of its competitors being in dire straits, has gone out and swooped on all the talented individuals that it had wanted to recruit for years but had been unable to get its hands on. Sometimes, people say it's an opportunity to make acquisitions on the cheap, but it is also an opportunity to acquire talent in this sort of environment.

Marco Boschetti:
This is a time when managers of today earn their money. They have not really done that much over the past decade or so. There needs to be some heavy cutting across the lines, rapid cost take-out. This should not be the butchery approach that was used in the past, but more like aggressive surgery. You want to be careful about which talent you cut; you do not want to do these voluntary redundancy programmes to all the (company's) population, because the wrong people will leave. They will get a job elsewhere. But managers of today also need to do something different, they need to inspire their troops.

We talked beforhand about whether it is a recession or a depression; we are dangerously in depression mode here, where every day you read the paper and it is depressing. Folks come into work and they are depressed, they're down, and how do you think depressed people are going to perform on a day-to-day basis? Not as well as if they were 'eye of the tiger' engaged.

It is incumbent on the leadership and management of companies to inspire their troops: inspire from the front with decision-taking that is rapid and in the right direction. And be open. If you do not know the answer to when we are going to come out of recession, don't pretend you do. It's about basic leadership skills, and this is the difficulty. Leaders have got to be ruthless with aggressive cost-cutting, but at the same time inspiring, leading from the front.

Val Gooding:
It is interesting, because you are getting pay dichotomies that are opening up. One organisation I work with is mainly funded by the Government, and it was talking in November about a 4% pay rise in 2009 for its employees, and I said: 'Actually, what I'm hearing in the private sector is mainly zero.' This was very unpopular with the management of the organisation, and they said: 'Our people have been underpaid for years, so why should we not?' I didn't say anything, because it's not my call, but that is not going to be acceptable to voters and taxpayers.

Erin Hepher:
I own and run a small marketing services firm, which I set up about four years ago now. I'm here to represent the young, next generation of business leaders and entrepreneurs. What concerns me is the human fallout, looking to the longer term. I do not see that today's business leaders, except a notable few, are going to be the real losers in what we are facing today. The real losers are going to be the next generation of entrepreneurs and business leaders, my generation and certainly those younger than me.

By that, I do not mean what they are going to face in terms of reduced public spending and taxation; I mean in terms of the actual job opportunities as they start out in their career and feel motivated and excited.

If, by Christmas, 3 million people are out of work - and over 50% of those will be under 25 - how impossibly demoralising must that be in terms of graduate job opportunities, in terms of 'last in, first out' redundancy programmes, in terms of older people surely staying in work for longer now, because they have to. So (there will be) fewer opportunities to move up quickly, and perhaps more skilled young people having to take jobs that unskilled people would have been able to take. Surely, we are looking at a brain drain of the younger generation?

My generation comes to this recession unencumbered by the past. I have never worked through any recession, and I am in some ways excited by the opportunity that this is presenting. I am not weighed down by a lot of responsibility, my organisation is very flexible, very responsive, and I do not feel incredibly negative. But it's not going to be as easy as I have found it for the last four years, so I am certainly going to be doing things differently. But I do not feel turned off by that, I feel excited.

Ivor Dickinson:
What Erin said about the young is interesting. My latest strategy, and my most successful, is getting rid of top management. They've had a really easy job for the last 10, 15, 20 years and have grown fat and lazy. But they are not used to this market, because no-one has been through it before. So they are no use to me in that sense.

The great joy of employing new people is that they have actually got massive enthusiasm: 'The whole world is in this and I am going to make the best of it, and I am not going to earn very much, and it is going to be really hard, but I am going to get stuck in.'

When you promote a senior negotiator to management, everything changes: you get enthusiasm, new ideas, and I long for new people.I am looking for new people the whole time, and, actually, getting rid of senior management is more cost-effective.

Val Gooding:
One of the most dangerous things about the change of climate - a view supported from all sorts of media sources - is the idea that the capitalist model is dead. Or even that the entrepreneurial business model is dead, and actually we are all Marxists now - or something. It is not at all helped by fuelling the flames with Fred Goodwin's pension. Those things are all quite dangerous.

There is an underground thing going on that is shifting the ground, maybe permanently, away from what we have always understood to be a powerful business model, which is to aim for top performance and incentivise it, and if you incentivise it you will get more top performance. All of my business experience backs up that model, and now people are saying that model is not fair. It's a big shift ...

Sir Richard Greenbury:
A lot of what has happened in this country has been brought upon us by bad business plans that were going to go wrong.

Val Gooding:
It was greed.

Sir Richard Greenbury:
I do not happen to think it was entirely greed, although I have views on the bonus system. I chaired a committee for government in 1995 which suggested that we ought to get back to the days where we paid people better basic salaries and stop the nonsense of 200% and 300% bonuses. And I put forward the principle of M&S, which was that the bonus could not be more than 20% of your salary. I was told I was out of date, living in the past, and this was the 1990s now.

We have brought a lot of it on ourselves. We've lived beyond our means - governments, companies, banks and individual borrowers - for 15 years. I don't think anybody can say how long it will take to repair the damage, but it is not two years; it will be a lot longer than that.

Lord Heseltine:
The view that the global capitalist model is bust so therefore let us all go to Marxism is complete nonsense. We all remember what nationalised industries were like. My own view, which is not that popular within my party, is that there is a very close relationship between the wealth-creating process and governance. It is hardly understood that two of the most successful exporting industries in this country - defence sales and pharmaceuticals - are among the most tightly regulated. If you think of the German (Standards Institute) DIN system, it is a quality-driven, government-led improvement of quality.

The conclusion I draw from this is that there was a massive failure of regulation here. That is the real problem: that the Treasury, the Bank of England, the FSA - you name it - were asleep on the job. The fact is that this was mirrored across the world, and that would be something of their excuse. They would have said: 'Were we going to destroy the City of London's capability to take advantage of this incredible boom by putting constraints on it?'

Well, the answer should have been, 'yes', but that would have been, politically, not impossible, but difficult.

Sir Richard Greenbury:
The culture has changed, and I say this from personal experience. My son is a very successful investment banker, a managing director with Rothschilds. Its name and reputation mean more to it than just making a buck. Having said that, he has spent the last 15 years - since he has been old enough and wise enough - explaining to me that I ran M&S badly. Why? Because I did not have any debt. 'You were not geared; you have got to be geared,' he used to tell me. I said: 'I like to own freeholds - I used to spend hundreds of millions buying freeholds.' 'No, no, Dad, you are a 1970s, 1980s man, this is the new era.' That was his line.

He has now had the most terrible shock to his system. There are a lot of people out there like my son - he's 43 - in their thirties and forties who do not know, without very strong leadership, what to do in this climate. This is a climate they are not used to. You want a new car, you go out and buy it; you want a new television or fridge with no deposit - don't worry, money is available.

This is a new culture, and I believe it will take several years for people to acclimatise to the new business culture. I can understand that, because I grew up in the reverse.

The round table discussion was held at One Alfred Place. You can read the full transcript online here.

THE PANEL
The Rt Hon Lord Heseltine, former deputy Prime Minister and chairman, Haymarket Group (publisher of MT)
Sir Richard Greenbury, former CEO and chair, M&S
Val Gooding, former CEO, Bupa
Ivor Dickinson, MD, Douglas & Gordon, estate agents
Ann Cairns, MD, Alvarez & Marsal
Marco Boschetti, UK MD, Towers-Perrin
Erin Hepher, Founder and CEO, Aura
Matthew Gwyther, editor, MT

Tags:
Strategy

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