06 June 2017 by Andrew Kakabadse
Shareholder survival is driving corporate decision-making, says Andrew Kakabadse
As global markets stagnate, shareholders are panicking and UK business leaders are being pressured into making damaging decisions due to their inability to realise desired returns on investment.
Our research into the challenges faced by corporations across Europe shows that the UK could learn much from Germany’s economy, which thrives on the development of small to medium-sized enterprises and family businesses.
Most company bosses are reasonable people with immense responsibility in a mature and unresponsive market. But shareholders, particularly those representing pension trusts, demand high returns, which create an interlocking ‘circle of need’ to get as much out of the market and then exit as quickly as possible. This is because pension funds, for example, have to pay their own members.
“Shareholders are exerting more pressure on company bosses to generate massive profits, which is difficult in a market with no growth”
It is not that shareholders are greedy, but they are exerting more pressure on company bosses to generate massive profits, which is difficult in a market with no growth. This phenomena is endemic of businesses focused on outdated western models which, if not addressed soon, will likely result in another 2008-style market crash. In the UK and US we have become particularly overexposed to public companies, and are still reliant on, what is essentially, 1960s thinking.
This pressure is causing companies to look for new, and potentially risky, business opportunities. My personal experience of leading interventions on behalf of companies, governments and local administrations suggests that doing business beyond Austria to the east, or below Spain to the south, invariably leads to encounters with corrupt practice. In trying to balance wealth creation and employment growth, corporations participate in ethically questionable practices, using external agencies to keep a distance from what is happening.
This can make the problem even worse. Many doctors, teachers and other public servants in Russia, Romania and some African countries I have encountered hate the suggestion that their homelands are becoming synonymous with bribery.
Our ongoing research, now in its twelfth year and based on detailed conversations with more than 900 business leaders, concludes that up to 85% of Western businesses bribe as a matter of course. Their choices are limited – it is either accept local conditions or exit that market.
Ultimately, shareholder demand for short-term growth is creating ever-greater instability in most societies around the world.
There are alternatives for Western businesses operating globally, however. There is much that can be learnt from countries where there is a less immediate pressure for instant market growth.
“Mittelstands also make considerable investments in employee benefits and well-being, as well as in the local community in which they operate”
The German DAX is one of the smallest stock exchanges in the world in a country where the market is firmly based on family businesses, which ultimately benefit the community.
In Germany, ‘Mittelstand’ has more to do with corporate philosophy and practices than with business size or product. In general terms, Mittelstand are family-owned companies that operate conservatively and place a premium on long-term stability rather than rapidly increasing profit margins, and investment in products and services rather than mergers and acquisitions.
Mittelstands also make considerable investments in employee benefits and well-being, as well as in the local community in which they operate, generating a great deal of loyalty from management and employees, as well as from local residents.
Most importantly, they are extremely successful. This can be clearly witnessed through their apprenticeship programmes. Recent developments show that Germany’s under-25 unemployment rate is the lowest at a European and member state level at 6.5%.
By their very nature family businesses and SMEs have to remain dedicated to day-to-day operations and, in the case of continuous change, smart companies are achieving competitive advantage by better harnessing the skills of their people.
ICSA Annual Conference
Andrew Kakabadse will be delivering the keynote speech on the morning of day two of ICSA’s Annual Conference, where he will be presenting his new research into boardroom tension. For more information or to book your place, visit the ICSA website.