UK: THE PURSUIT OF IMMORTALITY.

UK: THE PURSUIT OF IMMORTALITY. - The average life expectancy of firms at birth is 40 or 50 years - less than an individual's. So is corporate existence simply a matter of following an ageing process to an inevitable end or is there a secret of survival?

by Simon Caulkin.
Last Updated: 31 Aug 2010

The average life expectancy of firms at birth is 40 or 50 years - less than an individual's. So is corporate existence simply a matter of following an ageing process to an inevitable end or is there a secret of survival?

In the early 1980s, planners at Shell began to ponder what the company should do in the long term when the oil ran out. Shell's own sobering experience indicated that diversification out of oil and gas was in practice a much less obvious solution than it seemed, and other companies' attempts to broaden their portfolio told a similar story: the apparent attractiveness of an industry to relocate into was one thing, the capacity to succeed in it quite another. So was there life after oil? Or should the company accept that at some stage it would reach the end of its natural life, divvy up and return itself to shareholders? Shell decided to investigate how other large, long-established firms viewed the question.

The answer, it found, was that in a very large proportion the matter didn't arise. Most companies just died. They merged, were taken over, or went out of business. 'The average life expectancy of firms at birth is 40 or 50 years - less than an individual's,' notes Arie de Geus, co-ordinator of Shell's influential planning group at the time. A glance at the cast-lists confirms how extraordinarily vulnerable these mighty concentrations of economic power actually are. Far from 'having all the attributes of a world power', as a French intellectual warned of IBM in the late 1970s, time and time again such firms are made to look like muscle-bound giants nonplussed by the speed of events taking place around them. Of 1984's top 50 UK companies, around one-fifth have passed on. Of the 1974 list, the proportion is one-quarter, and of 1965 nearly half. Of the 30 original constituents of the FT Ordinary Share Index in 1935, only nine - Associated Portland Cement (now Blue Circle), Bass, Courtaulds, GEC, GKN, ICI, Tate & Lyle, Turner & Newall and Vickers - survive more or less intact. In the US death rates are even higher. Nearly 40% of 1983's Fortune 500 have dematerialised, 60% of 1970's, and of the 12 companies which comprised the Dow Jones Industrial Index in 1900, GE is the sole substantial survivor.

In short, 'the message of life cycles is that if bulk is the only thing you have, you may not survive,' says John Stopford, Shell alumnus, professor of international business at London Business School, and co-author of Rejuvenating the Mature Business. But this is far from the whole story. Quite as remarkable as the pervasive evidence of corporate mortality is the fact that a minority of corporations appear to be able to live, if not for ever, then many times the average span. To set against the run of corporate mortals, Shell's research turned up a steady stream of firms which appeared determined to cheat the grave. A handful of thriving Japanese companies - among them Mitsui, Sumitomo and the department store Daimaru - trace their origins back to the 17th and 18th centuries. In the UK, the Cambridge University Press received its charter in 1534, Lloyds Bank, Lloyd's of London, Coutts and the Bank of Scotland were set up in the late 17th century, and a bevy of brewers, food companies and auctioneers - Sotheby's and Christie's - in the 18th. In Paris, there is a thriving club for French companies which have reached the age of 200. Stora, a Swedish company which began life as a copper mine and successively mutated into shipbuilding, forestry, hydroelectric power, iron smelting and pulp, paper and chemicals, is more than 700 years old. In all, de Geus calculates that there are may be several hundred companies around the world over 100 or 150 years old.

The significance of these survivors is far larger than their numbers. They suggest that the whole notion of life-cycles for companies needs to be rethought. Until relatively recently, the economist might have argued that these exceptional companies were just that - exceptions. In a conventional economic perspective, the high corporate death toll is not only normal but necessary. Companies exist to make money for shareholders. If they don't, the market will deprive them of capital, reallocating resources to firms (and industries) which can. Alternatively, the market for corporate control will replace bad managers by more effective ones through the takeover mechanism. The equivalent managerial doctrine was that companies moved inevitably from hectic entrepreneurial youth to staid maturity and eventual decline as the entrepreneurial blood thinned and the joints became sclerotic. Either way, death comes at the end to make room for the living, and keeping pensioner companies alive artificially may actually damage the renewal process.

In the revised version, on the other hand, the company doesn't have to die at all. Or, to vary the metaphor, 'History shows that there is an after-life,' says Dr Terry Gourvish, director of the Business History Unit at the London School of Economics and author of The British Brewing Industry 1830-1980 which covers the history of a remarkable number of long-lived firms. He reports a growing interest in reassessing the lessons of the past, not only to avoid reinventing the wheel but also to bring corrective comparisons to bear on fashionable proposals for strategic and structural renewal. 'Of all the hundreds and thousands of firms, only a handful survive. Companies should be looking at the history for the insights which might help them live on.'

History doesn't say what the potential life of a company might be. But 'what we can deduce from the survivors is that most corporate mortality is infant mortality. Against the yardstick of the minority, the vast majority of firms are underachievers,' points out de Geus. Given the alternative, the case for resisting death seems strong. Take Shell. A company with a market capitalisation of $100 billion, Shell has 120,000 employees. Perhaps one million people and several small states around the world depend on it for existence. Could returning such a company to its shareholders be even considered by a management which was serious about its responsibilities? In a wider context, how much social dislocation in unemployment and migration could the world have been spared if the average life-span moved up to Shell's 100 years? 'You can't motivate 120,000 people without a long-term future,' shrugs de Geus. 'A company which has lasted for a century has earned the right to go on living, evolving and migrating as conditions change.'

This appears to be a more feasible proposition as companies are released from the straitjacket of industry economics. Theorists have long debated the part that industry structure plays in company profitability. The 'economic' view is that it is determinant. But 'perhaps notions of forces around firms are too dominated by economics and not enough by management,' suggests Stopford, who notes the finding of newer research that industry structures explain a much smaller proportion of the difference in performance between firms than previously thought. In the monumental Scale and Scope: The Dynamics of Industrial Capitalism, Alfred Chandler shows how in industry after industry successful firms shaped markets, structures and profitability in their own image rather than passively accepting pre-existing norms. Stopford's own conclusion that 'maturity is an attitude of mind' chimes with this history. Reversing the conventional logic, Stopford argues that a 'mature' industry is simply one in which there aren't many innovative firms, that market share is the reward not the condition of success, that David can successfully challenge Goliath. The implication is clear. Corporate existence is not a matter of following a preordained ageing process to an inevitable end. It is about whether management is capable enough to determine its own trajectory. Asserts Stopford: 'The freedom to create the future really is in management's own hands.'

Viewing companies in this light decisively alters conceptions of their potential - and of the responsibility of managers. This is not just a matter of how long they may live. In Built to Last, Stanford Business School professors Jerry Porras and James Collins compare 18 long-established, mainly US, 'visionary' companies with a selection of not-so-visionary, but by no means hopeless, industry counterparts. They calculate that while $1 invested in a general stock-market fund in 1926, with all income and dividends reinvested, would now be worth $415, and the same amount invested in the comparison firms would have grown to $955, a 'visionary-companies fund' would have produced a return of $6,356 - six times their rivals' and 15 times the market as a whole.

There is an apparent paradox here. All long-lived companies need to survive crises, sometimes extreme ones. Stora, the Swedish firm, literally had to take up arms to fight a monarch who tried to suppress it by force. Mitsui had its corporate heart and brain removed by McArthur in 1945. To come through against such odds as these, exceptional firms by definition must possess exceptional self-belief. At the limit, in the interests of survival they must put responsibility to themselves above all other considerations - specifically above the interests of shareholders. When continuity is all, shareholders must take their place in line. Sometimes this is made explicit - Porras and Collins point to Johnson & Johnson's famous credo, which places responsibility to stockholders fifth after (in order) customers, employees, management and the community; and to Motorola's commitment to 'reasonable' returns to shareholders. At other times it is implicit, as in Shell's tacit preference for continued existence. But always the underlying implication is that the organisation comes first. This leads Porras and Collins to the insight that the visionary company is one whose overarching creation is not products or profits but the process by which the company reproduces itself: the company itself. 'Westinghouse's greatest creation was the AC power system; (Charles) Coffin's greatest creation was the General Electric Company.'

The paradox, of course, as the figures prove, is that such 'selfish' companies do far better for stockholders than the 'economic' company of the textbook which puts shareholders first. In fact, recent research goes a long way to making sense of the paradox (another irony) in economic terms. Thus, John Kay, an economics professor at LBS, argues that successful companies derive their strength from distinctive capabilities based on relationships with customers, suppliers and employees. Trust and continuity in these relationships are essential for a flexible and co-operative response to change. Stopford puts it differently, suggesting that firms which defy the life cycles sustain themselves by trying to deliver value to all stakeholders. This has the effect of growing the overall value cake, whereas non-survivors simply argue about the division. 'Companies with a long-term approach maintain a much higher level of investment in the workforce, treat their suppliers better and are much more rigorous about customers. And they are surrounded in society by a heck of a lot of people who need them to succeed.' Contrast this with a firm which is not sustained by a resilient cat's cradle of interwoven relationships. It's not surprising, notes Stopford, that 'companies that die in hostile situations are the ones where shareholders are the only stakeholders'.

Ironically, the first step for firms which crave immortality is to accept that they are living entities, albeit supra-human ones. 'It's simple,' says Dee Hock, architect and president of the Visa organisation. 'Most companies are hierarchical machines. If you structure a company on a machine metaphor, that's what you'll get - a machine that wears out. On the other hand, if you structure it on a living metaphor, you can use the techniques of evolution and biology to create something that will have a very long life. And if it doesn't it can give rise to extensions of itself by replication; its genetic structure survives.' For examples of living organisations, Hock points to the Internet and Visa itself, a non-stock, for-profit corporation where ownership is in the form of membership rights so that it cannot be raided or traded, bought or sold. Visa now embraces 23,000 financial institutions in 240 countries.

Hock believes that the world is on a cusp, poised between the increasingly rickety mechanistic organisation models of Newtonian physics and the more promising organic metaphors of the future. Wishful thinking? Perhaps not. At the Santa Fe Institute in New Mexico, complexity scientists are beginning to provide theoretical underpinning for radical new models of how complex systems such as markets, economies and human organisations evolve and progress. These have more in common with the biological images of de Geus and Hock than with traditional command-and-control organisations. Despite its radical implications, this work is enthusiastically supported by an advance guard of corporate heavyweights including Citicorp, Coopers & Lybrand and John Deere. They boast encouraging results from using the concepts in areas ranging from organisation structure to the adoption of new technology.

The vision of the organic company is not driven by dogma. Today's long-term survivors such as 3M and Shell are far from corporate New Agers or believers in the paranormal. On the contrary: they have a better grasp on the managerial here-and-now than less permanent counterparts. True, not all the factors affecting life and death are in full control of managers - the most significant corporate demise of the last few months is not Barings but Wellcome, sold out from under its management by (irony of ironies) a single, long-termist shareholder - and de Geus, for one, argues for reforms to company law in the interests of legitimate longevity. Nevertheless, the basic revisionist doctrine is at heart an optimistic one. Its means are managerial free will, its goal both humble and inspiring: as Peter Drucker once wrote, the long-term aim of any business is survival.

Simon Caulkin edits the management page of the Observer.

Find this article useful?

Get more great articles like this in your inbox every lunchtime