A company is a community of humans
Why do some companies survive for centuries while many more die within years? And why does it matter? Those were the questions the Financial Times has been attempting to answer over the past year through a series of events, discussions and interviews in Hong Kong, Johannesburg, New York and London.
Some felt it did not matter. Mor Naaman, associate professor at Cornell Tech, a New York-based partnership between Cornell University and the Technion — Israel Institute of Technology, told the US event that long-term corporate survival did not matter all that much. New companies would inevitably spring up.
Others thought longevity was important. The person whose writing inspired this project, Arie de Geus, did. In his 1997 book, The Living Company, de Geus, who worked for Shell, the oil group, for 38 years, wrote that a company was more than just a producer of goods and services. A company was “a community of humans”.
There are certainly human costs when a company dies. It leaves communities without jobs, suppliers without customers — and former employees with the feeling that they have been deprived of their memories.
Some companies do live for a very long time. Among those represented at the FT events were the Groot Constantia Estate, which has been producing wine in South Africa for 330 years, and the Hudson’s Bay Company of Canada, which received its royal charter from the British crown 345 years ago.
But old companies are the exception. De Geus wrote that the average life expectancy of a large multinational company was between 40 and 50 years. There were few other human institutions, he said, whether churches, armies or universities, in which the difference in age between the average lifespan and that of the longest living was as large.
Some companies have stayed in the same business throughout their existence. Groot Constantia is still making wine. Others have lasted but have changed what they do. Hudson’s Bay Company began by trading with Canada’s indigenous people, buying fur from them in exchange for European manufactured goods, such as knives, kettles and blankets. Today, it is an upmarket retailer with stores that include Saks Fifth Avenue in New York.
IBM, one of the companies represented at the Hong Kong event, has, since it was founded in 1911, moved from being a manufacturer of computers to one that focuses on information technology and consulting services. Ginni Rometty, IBM’s chief executive, told the conference: “A company does not need to be defined by its product. It can change. Like us.”
If the products change, what needs to stay the same if a company is to survive for a long time? Several speakers at the FT events said that the values needed to stay the same. But values are hard to pin down. If you had asked executives at Lehman Brothers, in the days before the financial crisis, whether the bank had strong values, the answer would have been: “You bet.”
It is true that many long-lived companies have a certain culture or ethos, and a powerful sense of who they are, but those are no guarantee of survival. Enron, the fraudulent energy group, had a strikingly strong culture. But while not all companies with a strong sense of identity survive, it is probably true that those that do survive have a strong sense of identity. It appears to be a necessary, but not sufficient, trait.
Many speakers mentioned flexibility and adaptability as essential for survival. Chris Griffith, chief executive of Anglo American Platinum, told the Johannesburg event that the key to longevity was “sensitivity to the social and political environment”.
This was, understandably, a particularly strong theme of the conference in South Africa, where companies that came to prominence during the era of white political dominance have had to tread carefully as workers demand more and the ruling African National Congress often strikes an anti-business tone.
The need to adapt also applies in countries that have experienced less dramatic change. Transformation can be technological. IBM had to move into consulting when its manufacturing dominance was undermined by faster-moving competitors making smaller, easier-to-use computers.
Markets can shift too. Hudson’s Bay Company survived by becoming a department store owner when demand for fur fell.
Kathryn Harrigan, a professor at Columbia Business School, saw Hudson’s Bay Company’s change as an example of the company’s pragmatism, which she identified as fundamental to its longevity. She said the company kept asking itself: “What is out there? What can we use? They always kept changing.”
Gerald Storch, chief executive of Hudson’s Bay Company, said adaptability meant paying attention not only to customers, but to employees too. “Listen to your people because they know what is going on. They know what is right and what is wrong, what will work and what will not work.”
Today, like all traditional retailers, Hudson’s Bay Company has to cope with another change: online shopping. The rise of the internet has damaged many businesses, from booksellers to travel agents to newspapers. Many of these have a very long history, but technological change is no respecter of age.
In an interview inside the Saks Fifth Avenue store, Storch insisted that Hudson’s Bay Company could deal with what the online and mobile world was throwing at his company. “The online world is a whole different universe. The internet is transformational. It changes everything. I would say it is not transcendent. It does not replace everything, so we strongly believe that bricks and mortar stores are still critical. Customers love to come. Look around us. They love to shop.”
People still like to try on clothes, he said. “At the same time, we know they are going to interface with us digitally, online, on their mobile phones, at home, and we embrace that too.”
So an ability to cope with change is central to long-term survival.
De Geus listed four attributes of long-lived companies. Sensitivity to the environment and a sense of identity were two. But he added that companies that survived were tolerant.
“These companies were particularly tolerant of activities in the margin: outliers, experiments and eccentricities within the boundaries of the cohesive firm, which kept stretching their understanding of possibilities.” So long-lived companies encouraged their people to try something different.
The fourth attribute was that companies that survived were financially conservative. “They were frugal and did not risk their capital gratuitously. They understood the meaning of money in an old-fashioned way; they knew the usefulness of having spare cash in the kitty.”
Conservative financing meant companies had the money to pursue experiments and explore new markets and technologies. “They could grasp opportunities without first having to convince third-party financiers of their attractiveness,” he wrote.
There is a final factor to consider: is probity essential to corporate longevity? There are tobacco companies that many regard as involved in an immoral trade but that have been around for a long time. There are mining companies that would not have survived without the use of badly paid and poorly housed labourers.
But Arthur Andersen disappeared because of its role in the Enron scandal. Other auditors have been fined for inadequate auditing, but have lived on. Lehman Brothers failed in the wake of the worst financial calamity since the Great Depression, but many other banks survived.
In corporate longevity, as in so many areas, life is not always fair.