Peter Martin - A taste of his talentsHere's the bad news: big, old-established companies everywhere face a slow, long-drawn out crisis, from which many will not recover. Here's the good news: in English-speaking countries, at least, those companies' owners are now refusing to take the crisis lying down.
Together, these facts lie behind the abrupt departures this week of bosses at IBM and Westinghouse in the US, Lasmo in Britain, and Canada's PetroCanada, and a string of recent resignations in big companies, ranging from the UK's British Petroleum to Australia's Westpac, General Motors in the US, and Canada's Royal Trust.
The crisis of the large corporation creates an urgent need for change at the top; a revolutionary change in the attitudes of investors - and of the non-executive directors who represent them - is what makes the change possible.
Big companies are in crisis for a host of reasons. One is, simply, age: most developed-country economies are still dominated by the companies that first achieved national leadership in their markets a century ago. They are managed on a model which dates back to Alfred Sloan's General Motors.
A corporate culture with its roots in the 19th century is thus, in many companies, combined with a management structure that dates back to the 1920s.
Not surprisingly, many such businesses cannot cope with a wave of pressing problems: Global competition is now a reality in many sectors, spelling an end to protected domestic markets and safe, reliable profits.
The lean production system, pioneered by Japanese car makers, requires a complete transformation of manufacturing and distribution techniques - and may in time pose a similar challenge to service-sector companies as well.
The microprocessor wipes out the competitive advantages of companies relying on (or selling) older generations of computing equipment. More generally, today's vast, cheap information flows make the traditional management hierarchies of large companies obsolete.
Economies of scale, the solid foundation on which big companies have based their dominance for decades, may no longer be an overwhelming advantage. Changes in information technology, in the financial system, in flexible production techniques, in the growth of companies offering all-comers the distribution and support systems which previously only the largest companies could afford - all these are nibbling away at the advantages of economies of scale. The diseconomies of scale - communications overheads, inflexibility, the not-invented-here syndrome - are becoming increasingly clear.
In the long run, these problems may prove more than many old-line companies can cope with. Their owners are increasingly unwilling to accept that as inevitable, however. In the English-speaking business world, their unhappiness is starting to have a clear impact on the executive suite.
This week, for example, John Akers stepped down as chief executive of IBM; James Robinson left the same job at American Express; Paul Lego went as chief executive of Westinghouse; Chris Greentree resigned as chief executive of Britain's Lasmo; and PetroCanada's chief executive, Wilbert Hopper, was "relieved of responsibilities".
In the UK alone, the past year has seen some 25 British senior executives leaving their companies unexpectedly, usually under the pressure of poor corporate performance. In the US, where the cult of the 'imperial' chief executive had left many bosses in impregnable positions, the number of departures has speeded up recently.
The pattern was set, last year, by the resignation of Robert Stempel as chairman and chief executive of General Motors, perhaps the most ossified of America's industrial dinosaurs. Others are departing in his footsteps.
What has brought about this new lack of tolerance for poor performance, on the part of investors and corporate boards? From the investors' point of view, the past few years have produced growing dissatisfaction with the traditional remedies for poor corporate performance. Takeovers once provided a possible exit, but they have largely dried up. Market forces are not the only cause for this: in the US, legal changes have slightly tilted the balance of advantage towards a defending company. In any case investors feel a lingering regret over some of the takeovers they have allowed.
Simply selling the shares, the other traditional remedy, is also seen as less attractive. A growing recognition, on the part of many shareholders, that they are locked into holding a stake in the biggest companies has made them more interested in obtaining the best performance from those companies.
Although in principle investors have more freedom of choice over shares in medium-sized or small companies, in practice they feel just as trapped, said one UK institutional fund manager this week, by the lack of liquidity in such stocks. Selling out a significant stake becomes unthinkable, because to try to do so would move the price too far against you.
That has led investors to try harder to influence the companies of which they are shareholders. Just as important, corporate boards are starting to respond.
The mechanisms are different on the two sides of the Atlantic. In the UK, the intimate, clubby nature of the City has always allowed investing institutions to keep in touch with each other informally. They have traditionally preferred to exercise influence in the same way, over lunch or drinks with directors. Now, though, there is a growing tendency to act through letters or meetings with the company.
Institutions still prefer to act individually, rather than as members of a group, but the cumulative effect of a series of such meetings can be powerful. And power is closely concentrated: a survey of top corporate pension funds by the 100 Group of finance directors showed that six external money managers and five internal managers handle 55 per cent of their funds.
Because the typical British company has a non-executive chairman, there is an obvious point of contact for investors wishing to complain about the performance of the chief executive. In the US, where a big company's chairman is usually also its chief executive, it has been harder for investors to find an independent but influential figure to complain to.
There have traditionally been other disincentives for action in the US. The legal structure was for a long time tilted against shareholder action, both because managers were allowed wide freedom of action under corporate law and because large shareholders were legally discouraged from circulating material to each other about a company. A much less concentrated money management industry than in the UK, geographically scattered and divided between incompatible private-sector and public-sector camps, was also unable to bring influence to bear successfully.
Many of these factors seem to be changing. First, says Martin Lipton, of Wachtell, Lipton, the US corporate law firm, institutions have shifted their attention from the mechanics of corporate governance towards basic performance. This has given them much greater impact, because whereas the previous area of debate - about whether companies should be allowed to erect takeover barriers, for example - allowed plenty of scope for honest disagreement, the new one is much less ambiguous. It is hard to disagree, for example, with complaints about the management of a company which loses nearly $5bn, as IBM did last year.
Money management is becoming more concentrated, and some of the biggest funds, such as Calpers, the California state employees' pension funds, are starting to take a more intimate interest in the companies in which they invest. The legal framework has also shifted, in part to respond to complaints that unfettered company bosses are paying themselves too much money. The Securities and Exchange Commission has allowed shareholders to communicate more freely, and the judiciary in Delaware, where most big American companies are registered, has been emphasising the duty of the board to keep management under review. Directors are starting to worry that they may face shareholder class-action suits if they fail in this duty.
As a result, non-executive directors have been fumbling towards a mechanism that allows them to respond to complaints from shareholders. The typical pattern is for a leading non-executive member of the board - perhaps a retired chief executive from another big company - to take the lead, perhaps by obtaining the chairmanship of a committee specially set up to watch over incumbent management. He or she may orchestrate the departure of the chief executive, and will then head the search for a replacement, perhaps standing in as chairman for an interim period.
At one stage, the UK's Cadbury committee on corporate governance seemed about to institutionalise such a role at those British companies where the chief executive is also the chairman. In its final report last year, it stepped back from this suggestion, but continued to emphasise the desirability of a non-executive chairman. Institutions now seem inclined to demand this of every company where there is a problem with earnings.
US chief executives have the choice of two possible responses to the wave of executive departures, says Professor Jay Lorsch of Harvard Business School. The better ones will welcome greater accountability, restructuring their boards to accommodate it. Others will try to control their boards more tightly.
In the short run, that may help them keep their jobs. But in the long run, there is probably no alternative to embracing the new era, and facing up to the crisis of the corporation. It can be done: one of the oldest-established companies of them all, General Electric of the US, has reinvented itself over the past decade. Its chairman, Jack Welch, has transformed everything from its mix of businesses to its day-to-day operating procedures.
But GE is in many ways an exception, and the stock market knows it. Shares in the 10 largest US manufacturing companies, measured by sales, have underperformed the rest of corporate America by 22 per cent in the past decade. As long as this pattern continues, the crisis of the corporation will be a boardroom crisis, too.
