May 17, 2011 1:04 pm

Sustainable growth is the new incarnation of capitalism

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Financial meltdown and economic recession have shaken the foundations of companies. Yet arguably the most shocking blow to their ideological underpinnings came from the least likely direction.

In March 2009, in an interview with the Financial Times on the future of capitalism, Jack Welch said: “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy ... Your main constituencies are your employees, your customers and your products.”

As chief executive of General Electric, the largest US industrial group, until 2001, Mr Welch was the doyen of double-digit earnings increases and high priest of the primacy of shareholder

value. If ever there was a master of growth – steady, unshakeable, quarter-on-quarter growth – it was Mr Welch. Yet here he was dismissing the pursuit of shareholder value as “dumb”. What were companies to make of that?

Growth sounds great. The upward-slanting graph has become an aspiration, a symbol of success in every corporate PowerPoint presentation ever produced. But Richard Whittington, professor of strategy at Oxford University’s Saïd Business School, points out that it is “desirable but dangerous... it’s double-edged – and I think we fetishise it.”

It does not require deep analysis to realise that an unthinking quest for growth will usually end badly.

Entrepreneurial companies with innovative product ideas have gone to the wall because they could not expand quickly enough to meet the demand of a growing market. Historic corporate names have stumbled or even collapsed because, on the back of growth projections that turned out to be illusory or unrealistic, they bet heavily on markets or regions. Most perniciously, sensible, right-thinking business people have been tempted into obfuscation and even fraud in a desperate effort to hit growth targets that were never feasible, or were suddenly pushed out of reach by the vagaries of economic cycles.

Roger Martin, dean of the Rotman School of Management at the University of Toronto, points out that one of the illusions created by those growth graphs is that corporate development can be reduced to a single-line indicator, whereas, in fact, it is “a bunch of projects”.

“Companies don’t just grow at 4-6 per cent, as if every product line grows at that rate,” he says. “They have things that are going like gangbusters, other things that are shrinking and others that are flat as a board.” When these “projects” all falter at once – particularly in industries that have become used to steady overall growth – the effect can be devastating.

Prof Martin points to the pharmaceuticals industry, in which each company consists of a “bunch” of drug development projects. As innovation wanes and blockbuster drugs lose their patent protection, the fragility of straight-line earnings – and share price growth – become exposed.

But Mr Welch’s belated realisation of the perils of the growth quest offered hope to some companies. For Paul Polman, who took over as Unilever’s chief executive in the teeth of the financial crisis, two months before Mr Welch’s stunning declaration, economic turmoil provided cover to recalibrate expectations.

The food and consumer products company stopped offering “guidance” on its next quarter to shareholders and analysts, froze salaries and protected cash. Under Mr Polman, it also went back and re-examined the premise on which a large multinational does business, building an operating framework based on longer-term growth projections, not quarterly reporting.

The buzzword of modern corporate strategy, as practised by Unilever and others, is sustainability. Using a narrow definition, this is still linked to environmental goals, but increasingly companies are aiming for sustainable growth. This may be simply an ability to continue building the company without artificially straining for growth.

It is a difficult balance to strike. When A.G. Lafley took over as chief executive of Procter & Gamble, the world’s largest consumer goods company, in 2000, he reined in growth expectations, even at the risk of disappointing Wall Street. He told his first big conference of analysts: “On the one hand, you have to face the brutal facts and say we’re getting our tail kicked. On the other hand, we really want stretching goals.”

Prof Martin from the Rotman School says companies need strong leaders who have the courage to reset investors’ expectations. To guarantee their future, they need to be able to “go beneath the macro-numbers and decide what the next growth engines are”.

So far, so conventional. But two other forces are changing the way in which companies tackle the challenge of growth.

One is the rise of companies from emerging markets, often state-owned or family-controlled, that assess growth opportunities with a different eye and over a different timescale compared with their profit-maximising peers in developed countries. Chinese companies, for example, are securing food supplies by buying agricultural assets in Africa and financing long-term rail projects from Argentina to Ukraine.

Oxford’s Prof Whittington says: “There are lots of companies – from Russia, India, China – that will enter markets that western companies aren’t expecting them to enter, because it doesn’t make sense from a profit point of view.”

He adds: “The paradigm in business schools – that faith in growth is a good thing and momentum comes from the financial markets – is looking a bit shakier.”

The second force altering how companies assess growth opportunities is the idea that capitalism itself is changing. Enlightened companies are realising they will damage their own interests if they pursue unsustainable growth.

Michael Porter, professor at the Harvard Business School, and Mark Kramer, head of FSG Social Impact Advisors, a consultancy, call the alternative “creating shared value” to distinguish it from old-style corporate social responsibility. Earlier this year, in the Harvard Business Review,

they suggested that business schools should broaden their curricula to take account of this new phenomenon according to which companies invest, for mutual benefit, in communities they supply and which supply them.

Echoing Mr Welch, Umair Haque, author of The New Capitalist Manifesto, argues that “industrial-era growth ... is ‘dumb’. It is growth that is ultimately (not just environmentally) unsustainable because it is locally, globally, and economically self-destructive.”

Instead, he says, “constructive capitalists” – he cites Apple, Nike, Lego and Tata, among others – are renouncing the idea that “profit always requires economic harm”. They are finding other ways to create a virtuous circle of growth.

Mr Kramer argues that the development of an alternative to “Welchian” growth is not just a reaction to the financial and economic turmoil. “[The crisis] provided good examples of companies doing things in a short-sighted way, but it’s a trend that has been emerging and growing over the past decade,” he says.

For it to stick, however, will require an extraordinary reworking of the relationship between companies and their owners and customers – particularly in developed-world economies where shareholders are still comforted by the sight of those optimistic, upward-pointing graphs.

Mastering growth was hard enough before these new forces took hold; it is about to become harder still.

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