The Destruction of Accumulated Surpluses

The disposal of Cadbury is some kind of a marker. It was still a successful company and could have continued independently with no problem. It had a proud history which doesn’t need to be repeated here, but it also had a price. And that price was agreed by its board of directors who gained prodigiously from the sale. Cadbury’s loss of autonomy is surely the precursor of many cost reducing decisions taken at its new American headquarters without regard to the old Cadbury stakeholders, notably including its employees. Doubtless, in the end, Cadbury’s Bournville heritage will be preserved merely as yet another industrial museum, the dead remains of the once thriving industrial community. Such relics are strewn across the British landscape, commemorating our once pioneering roles in wool, cotton and silk textiles, machine tools, iron and steel, cycles, motor cycles, motor cars, trucks and buses, china and pottery and hundreds of other sectors where Britain was successful and achieved a strong position but then sold it off for the financial gain of the few and the bitter disadvantage of the many.

Peter Drucker suggested management’s most pressing preoccupation should be with survival, not maximising profit. Their concern had to be with “the inevitable and real risk of ending up with an impoverishing deficit and the need, the absolute need, to avoid this loss by providing against the risks.” Over many years companies habitually accrued surpluses which could be made available for the inevitable rainy day, but if their shares were freely traded on the stock market such surpluses could of course be acquired and the company effectively stripped of any such assets. And more. This destruction of accumulated surpluses has become an epidemic in Anglo-Saxon markets over the past thirty years. Less so elsewhere.

The German and Japanese motor industries, as an example from the list above, have survived and prospered while the Anglo-Saxon industries have been largely bankrupted. It could, of course, be persuasively argued that effective management might have helped the British and American motor industries. But that would have required management to be focused on the job of car manufacture, rather than the short term satisfaction of shareholders, which necessitated their giving up any surpluses set aside for a rainy day. The real job of management is not easy, balancing the interests of all stakeholders as required in the Companies Act.

Another household name is instructive. Boots the Chemist, having accumulated assets over a century and a half in retail and in manufacture, was well able to survive rainy days. However, via a somewhat tortuous route, lit by fat cats becoming ever more burdened with additional weight, it was persuaded to join forces with a lesser competitor and was subsequently acquired by a company known as AB Acquisitions Ltd, from whence it became Alliance Boots Gmbh, a private company incorporated in Switzerland, and carrying debts, largely incurred for its own acquisition, amounting to £10.5Bn, these debts being secured on intangible (ie difficult to value and impossible to realise) assets valued in the balance sheet at around £10.3Bn. Rainy days will not be good news for Boots.

This destruction is permitted to happen because of the wholesale acceptance in Anglo Saxon markets, despite company legislation, of the idea that management’s job is simply to maximise shareholder wealth. For this, as Thorstein Veblen put it, ‘the common man paid the cost.’ There are other ways forward. A more equitable approach to the balance of stakeholder interests is achieved in Germany, for example, with its two tier board system with half the supervisory board representing the employee interest. Similarly, retaining the mutual status of friendly societies where customer interests are the main focus. Or co-owned enterprises where employees are partners. Or straightforward co-operative organisation. These are all means of giving other stakeholders some franchise in corporate governance which protects the enterprise from rape by shareholders. These all seem to have survived the current downturn in reasonable shape.

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