Philip Whiteley's Blog

February 8, 2010

Builders don’t wait for completion before checking for safety

Filed under: Uncategorized — felipewh @ 8:16 pm

The big news in the past month has, of course, been the merger of Kraft and Cadbury. As is customary, the major sources of discussion and news coverage were the finances and the offer price, rather than the management challenge of integration.
It is antiquated that accountancy and financial due diligence dominate in a world where human capital makes up the vast bulk of company value. Irene Rosenfeld, CEO of Kraft, was quoted in the Financial Times as having identified ‘cost savings’ in the merger, but was unchallenged by journalists on this. The fact is, she has no idea whether potential savings will outweigh costs of integration and loss of talent. Not even a CEO can foresee the future.
Stefan Stern in the FT’s management blog noted on 19 January that: ‘the majority of big M&A deals ultimately fail to create value for shareholders. Alleged synergies never materialise. The disruption, and added costs incurred by the transaction, wipe out many of the financial benefits of doing the deal in the first place.’
He’s spot on. But what a shame that this sort of analysis does not inform the way in which the news is reported in the run-up to the bid. No architect or builder will complete a structure and only then analyse whether it is safe.
Tougher questions came from the blogosphere. Management author Gordon Pearson noted that the legal duty of the Board is stewardship of the company, not selling out to a high bidder. The Cadbury Board may not even have been acting lawfully, never mind prudently: ‘The Cadbury directors … are not agents of the shareholders. Their contract is with the company …and their duty is to serve the best interests of the company. Shareholders have limited liability with regard to the company and their ownership rights are similarly limited.’
At times, it’s as if the world of leadership and management is divorced from the strange world of agency theory and financial calculations that inform merger activity. Robert Heller, writing in online magazine Management Issues, asked why Peter Drucker, the late legendary management thinker, was not more widely followed despite being lauded as the thinking manager’s guru.
He wrote: ‘Turning to the recent and current chaos, it’s doubtless that Drucker would have had no patience with strategies that ignored a lifetime of his wisdom. Rosabeth Moss Kanter is surely correct when she wrote in the Harvard Business Review: “Listening to Drucker might have headed off some of the excesses associated with Wall Street in general and with AIG in particular, in which bonuses not only were decried for their amounts, but also were often uncorrelated with company results.” That is a surprisingly mild critique considering the enormity of the scandals.’
On the matter of the banking scandal, Matt Rogan of Lane4 is right to prioritise the significance of risk management, rather than the size of bankers’ bonuses. If the bonuses are high, but individuals are rewarded for long-term stewardship of investments and of the institutions they work for, that’s a good deal for the citizen and tax-payer: ‘The issue for me is not the P&L of the investment banks, but the balance sheets. If these annual profits are generated via excessive balance sheet risk, the man in the street gets hurt.’
The error common to the banks and the Kraft-Cadbury affair is to imagine that the management task, even though it is responsible for delivering the vast bulk of the returns from investment strategies of banking employees, or take-over activity respectively, is still bizarrely regarded as a junior matter, not front-page material.

A longer version of this article can be found at:

Stefan Stern at the FT:
Gordon Pearson:
Robert Heller:
Matt Rogan:


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