Chris Blackhurst is assistant editor of the Independent on Sunday.
New chief executive Marjorie Scardino's straight talking is certainly a change for Pearson, but can she make its line-up of famous brand names perform to their true potential?
As a lesson in how to handle a crisis, it takes some beating. Marjorie Scardino, the new chief executive of Pearson, is told there is an accounting problem at its Penguin publishing division in America, a problem that could cost her company up to £100 million. Scardino is livid and does her reputation for purple language no harm with a stream of expletives.
But she does not dwell on it. Still seething inside, she composes herself and gets to work. The press, she determines, must be told - and must be told as much as the company knows. Nothing should be kept from them. First, though, come the employees. They are sent a personal note from her. It is addressed to 'Everyone' and is from 'Marjorie Scardino' - no titles, no unnecessary ceremony. She is completely upfront about the matter. Staff are left in no doubt as to what the difficulty was and how she feels about it.
If they have any queries or are troubled by any of the press reports, they are invited to e-mail her or Michael Lynton, the head of Penguin, or John Makinson, the Pearson finance director. Scardino signs off from the memo with the would-be message: 'And don't worry. New brooms sometimes have this effect.'
Then the press are informed. She also sets up a hotline so that staff with any other accounting worries can ring in, day or night. In briefings to journalists and the City, Scardino gives it to them straight: a woman in Penguin's accounts office had been granting unauthorised discounts to booksellers in return for early payment. The employee had been under pressure from above to speed up the payments system and her response had been a 5% discount for clients which she had then proceeded to disguise in an elaborate system of accounts. 'I would like to make Pearson a group where we never have surprises and we never make mistakes,' said Scardino. 'But I think it is pretty unlikely. Candidly, every business has surprises and makes mistakes.'
Her candour works. Within days, Pearson shares, which dropped 70p immediately after the announcement, were back to close to their original price of around 760p. As an example of straight talking winning over a sceptical City and press, it is brilliant. As an example of just how much a company's culture can change under a new chief executive, it is breathtaking. This, after all, is Pearson, a group which has seen its fair share of bad publicity these past few years and which has acquired a reputation for being opaque, for treating the City, the press and even staff, with a snooty disdain.
The old Pearson would not have behaved like this.
As Scardino herself comments, she was counselled to take a low-key approach to the problem: 'We were told by our advisers not to make much of this and to release the minimum of information. But I did not want to do that.'
On the day that she took charge, back in January, one of her first jobs was to send a note saying hello to all staff. She smiles at the shock it caused: 'I had a wonderful response. People wrote to me saying, "Nobody has ever written to us before, it's terrific".' Likewise, with Pearson's annual results announcements. Conscious that the first staff usually ever hear of how well or badly their company is doing is when they read about it in the papers, she insisted staff were told at the same time as the Stock Exchange.
When we meet, in the week after the results, during which she is expected to behave like a whirlwind, briefing analysts and institutional shareholders, the first thing she does is usher Pearson's public affairs manager out of the room. Her style is one to one, no hangers on, nobody to hold up the flow. She has just come from meeting Hill Samuel in the City. Not wishing to go through the results all over again - and who can blame her? - she hands over her own presentation notes for Hill Samuel. This, you feel, would not have happened under the former regime where everyone had his or her place. A briefing document clearly intended for a pukka merchant bank would not have been shown to a journalist, no matter how innocuous the contents.
There's another example of the new, more open Pearson: at home over the weekend my telephone goes. It is Dennis Stevenson, the group's new chairman - he starts on 2 May. I had asked to speak to him and this was him returning my call, at 10.30 on a Sunday night. He begins briskly, saying he does not see what he could contribute. Fearing that this was the old Pearson rearing its head - Stevenson is a long-time non-executive director - I explain I am not expecting him and Scardino to reveal price-sensitive information by disclosing their detailed plans for the group.
Reassured, Stevenson is charm personified: I can call him at his home on Saturday morning. Pearson is not supposed to be like this. It is difficult enough to imagine Lord Blakenham, Stevenson's predecessor as chairman, telephoning a journalist on a Sunday night, even more so to conceive of him issuing an invitation to ring back on a Saturday morning.
Under Blakenham and his family, the aristocratic Cowdrays, Pearson was run as a group that happened to own some fantastically good but disparate brand names, including Madame Tussaud's, the Financial Times, Penguin, Latour and Royal Doulton, not to mention its half-shares of the Economist and Lazard Brothers. These were names to die for, yet Pearson gave the impression of not really caring. It was, says Matthew Horsman, media analyst at Henderson Crosthwaite, run very much as 'a rich man's investment trust'.
There was a simple, underlying truth: for all the international nature of some of its brands, Pearson was run almost as a British private company. There was always that sense of a group which did not need to try, which was relatively safe from takeover (but for the Cowdrays' historically large stake, 20% in 1990, it would surely have been acquired by someone by now) and which, while it had a roster of institutional shareholders like any other member of the FT-SE 100, never needed to break sweat. Nobody, it seemed from the outside, was pushing, cajoling, driving that extra yard. A company which on paper should be great has consistently underperformed. Pearson, to use a sporting phrase, is a showboat team - lots of gifted players, great individual touches, but no killer instinct.
This is a company that last year had sales of £2.2 billion, and made profits of just £281 million - £181 million if the £100 million Penguin write-down is included. Pearson is heavily concentrated in some of the highest-growth sectors; while revenue grew by 19% in 1996, operating profits only rose by 8.9%, even before the Penguin charge. With that write-down, the operating margin fell to under 10%.
Derek Terrington, media analyst at stockbrokers Teather & Greenwood, says Pearson's weakness is stark: 'The benchmark has to be that if you compare Pearson with its peers, it underperforms in terms of profitability.
Pearson has never made a decent, good, average margin.'
Blakenham and his chief executive, Frank Barlow, were acutely aware of Pearson's problems, not least because the City kept baying for change.
Their solution was to begin a restructuring process, to sell the bits that seemed peripheral, to turn a hotchpotch resembling a throwback to the conglomerates of the '70s and '80s into a focused group for the '90s.
Out went Doulton china, Latour wines and the oil services division. This on its own, though, was nowhere near enough.
This was tinkering at the margin and smacked of a short-term solution characteristic of any investment trust: if it does not work or does not fit, sell it; do not try to make it work or actually try to make it fit. In the long term, disposing of the pieces achieved little. The core that remained was still rotten, still firmly in the grip of a deep malaise.
As if to emphasise the sense of laissez-faire management, Pearson then made a monumental mistake. Anxious to show that the company was abreast of technological innovation and intent on becoming a serious player in the computer entertainment age, in 1994 it plunged headfirst into the market, paying £290 million for Mindscape, a Californian software publisher. Billed as a strategic purchase designed to give Pearson a prime position in the booming electronic publishing market, and to allow other parts of the group to reap the benefit of having a major software house alongside them, it was a disaster. Mindscape, says Terrington, 'has proved to be a significant commercial disappointment, almost from the word go, as well as a major corporate embarrassment'. Last year, Mindscape lost £45.5 million.
And yet, according to Terrington, 'Mindscape's problems showed clearly on every major line of its profit and loss account'. Sales were too heavily dependent (62%) on electronic games, a notoriously fickle market, open to intense competition. Research and development ate 58% of Mindscape's income, compared with an industry average of half that amount, 29%.
All this should perhaps have been obvious to an inquisitive Pearson board.
Significantly, while Pearson dived into a brave new world, nobody else followed suit. Points out Terrington: 'No other major media company took this "big bang" route into software publishing.' As for the cross-fertilisation of Pearson's other subsidiaries, that objective, says Terrington, 'could have been more easily met by means of a suitable acquisition at a fraction of the price'.
Mindscape was a huge shock, the sort of blunder that Pearson, of all companies, is not supposed to make. This, after all, is the company that owns the Financial Times which prints the Lex column where journalists are so active in pouring scorn on such self-made disasters. Blame for the debacle was shouldered by Barlow, possibly, say close Pearson-watchers, a mite unfairly. Barlow, it is thought, was not enamoured with the Mindscape price. Nevertheless he went along with it and, like the old trooper he is, when the time came to take the rap, he accepted it. Pressure for a new face at the top intensified.
After speculation that an outsider such as Granada Forte's Gerry Robinson or Lord Hollick of United News and Media would be appointed, followed by the rumour that Greg Dyke, chief executive of Pearson's television arm, or David Bell, who ran the FT division, would be chosen, the board settled for a compromise. Scardino ran The Economist Group which is 50%-owned by Pearson but which guards its independence jealously. She is, if you like, an outsider with a proven inside track record, having grown the Economist's profits by 110% during her tenure.
Scardino has more to prove than most chief executives new to their post.
She is a woman, the first to head a FT-SE 100 company, and must work extra hard at dispelling inherent sexism in the City. More relevant ammunition, however, for those seeking to cast stones is her lack of experience. Pearson is a huge, sprawling business, embracing lots of different sectors and markets. The biggest thing Scardino has managed to date is a specialist business magazine group.
Pearson's annual sales are over £2 billion, while the Economist's in comparison are a tenth of that size.
She was not the heavy outside hitter the City wanted - Pearson shares fell 11.5p on the news of her appointment. Analysts do not fault her personable and forceful character. They just question whether, allied to that, she has the know-how and commitment to keep budgets tight and take tough decisions.
In picking Stevenson, Pearson similarly went for a chairman who is both outsider and insider. A non-executive (and therefore an insider), he is nevertheless not from the traditional mould of non-executive directors, particularly at Pearson.
A quick-witted, well-connected workaholic, he has made a name for himself by sorting out other people's messes. He sits on numerous boards, is chairman of the Tate and is a leading light in helping Third World charities. Totally unstuffy, he really calls a spade a spade, even if it upsets those around him. Twice in his career he has taken on the City great and good: first, when he blew the whistle on some sharp practice and provoked what became known as the Blue Arrow affair. Then, when as chairman of GPA, he clashed with some seriously big name directors, won, and turned the Irish aircraft leasing group's fortunes round. 'I'm not exactly your FT-SE chairman of the old school from central casting,' says Stevenson. 'Already, some people are worrying they will need another chairman to look after Marjorie and her chairman.'
Penguin was not Scardino's call. The black hole had nothing to do with her. All she could do, as the new chief executive, was respond - and respond she did. In public she was upfront, in private she ordered an immediate investigation and review of all controls and procedures. The problem, she feels, has now been contained and, she claims, there should be no lasting economic impact, either for Penguin or for the organisation as a whole. Meanwhile, Mindscape's product list is being reined in and less emphasis is being placed on the risky games market. By next year, especially if the cuts are made, Mindscape should be back in the black.
Nevertheless, there are indications in Mindscape and Penguin of the scale of the task ahead of her and Stevenson. Her answer, when asked about Mindscape, is that the company paid too much and that, before making such a large purchase, it ought to have known more about the markets it was entering.
Hindsight, of course, is a wonderful thing. Yet, Scardino does give the impression that, had she been in Barlow's position, she would have resisted the Mindscape buy. For all her relaxed, devil-may-care exterior, she is a worrier and a planner. 'I lie awake at night thinking about strategy issues,' she says. Presumably, her insomnia would have embraced the decision to acquire Mindscape.
That sense of her is backed up by Stevenson. 'Marjorie is thinking this, thinking that,' he says, about the future direction of the group. She will not be led by anyone and, he emphasises, she will not be swayed by 'a cacophony of press speculation' calling for her to move one way or the other.
The Penguin problem, as Scardino stresses, was down to the activities of a rogue operative, the sort of calamity that could befall any company.
'I would not class Penguin as a mistake,' she says. 'It was an impropriety, it was an employee who went astray and did some unacceptable things. It was not a mistake, it was not down to poor management.'
Well, yes and no. What sort of company takes five years to discover that one of its staff is offering generous discounts to customers who speed up their payments?
'It was called a "one-off" but she had been doing it for five years,' says Terrington. 'It smacked of the typical Pearson problem, of things not being under control.'
Undoubtedly, Scardino faces some tough decisions. Should she sell the Lazards stake? What about Madame Tussaud's and the FT? At meetings with analysts, she said she would start with a review of all operations, to see if they could be made more cash-generative and whether they fit into the group.
But there are no obvious candidates, apart from Lazards, for her to sell. According to Terrington at least, her priority in formulating strategy should be based on her ideal future size for the group. Does she want a global group or one which is mainly domestic? Does she want a broad-based company or one that is narrowly focused?
One of Pearson's enduring weaknesses is that while its brands are strong, none of them is global. The Financial Times is potentially a global business paper but has not lived up to that promise.
The old Pearson seemed to be happy to let the paper sell just 35,000 copies against the Wall Street Journal's one million-plus. Significantly, Scardino's first positive move has been to inject £100 million into the Financial Times and to try to boost its sales in the US. In similar vein, Madame Tussaud's is well-known in the UK but not a world player. With 12.3 million visitors last year to its attractions, which include Alton Towers, the division could well be developed into a global leisure brand.
To date, Pearson has lacked the management strength and depth to expand its excellent brands worldwide. Meanwhile, other competition companies, notably Reuters, have shown what can be achieved. Furthermore, Pearson's financial base has not in the past been big enough for it to become a global group. Parts of it may have to be sold to pay for the expansion of those that remain. But that, say the analysts, should come later, when all the divisions have been made to perform to their true potential.
Whatever Scardino does - and, she repeats, she will not be rushed although she says she expects there will be changes to the group structure within the next 12 months - her immediate aim is just that: to improve the performance of everything Pearson. For the first time, staff across the group are to be awarded bonuses for excellent group results. Instead of a feeling of everyone working in their separate boxes for the benefit of one share-owning family, the group should become as one family, working for each other. Corny, but that is the object. 'I want to create a feeling of Pearson-ness,' she says. 'We don't sell this group internally, there is no feeling of Pearson-ness.' She also has plans for the London head office in Burlington Gardens where, she says, she feels 'slightly uncomfortable. It doesn't seem to have much energy, which is something I'm trying to infuse.'
Already, says Stevenson, that is happening. Scardino's post-Penguin performance in controlling the crisis and communicating to staff and the City was so remarkable that out of disaster came some good. 'I had much rather Penguin hadn't happened, but one silver lining was seeing how right we were in our choice of chief executive,' says Stevenson.
The Scardino and Stevenson mantra, says the new chairman, will be, to borrow from Tony Blair, 'performance, performance and performance'. Truly, these are changed times at the top of Pearson.
ANALYSIS OF SALES AND OPERATING PROFIT/LOSS BY SECTOR
Sales (£m) Operating profit (£m)
Before exceptional items
1996 1995 1996 1995
Information 691.6 615.8 108.3 95.0
Education 554.3 358.9 83.7 33.9
Entertainment 803.0 712.4 65.1 116.7
Investment 40.8 39.9
Corporate (12.3) (6.9)
Continuing 2,048.9 1,687.1 285.6 278.6
Discontinued 137.1 143.3 36.1 27.7
2,186.0 1,830.4 321.7 306.3
Exceptional items in 1996 include £40.4 million in restructuring costs and
the £100 million charge to profits arising from improper accounting at