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Setting corporate objectives
2
Long Range Planning Vol. 10
December
1977
Setting Corporate Objectives* J
H. Redwood-j-
This paper states that ‘the resources are raw materials, people and capital. The private sector company can survive as such only by using all three resources efficiently’. These statements summarize the need not only for the setting of Corporate Objectives but the cogent and incontrovertible argument for such objectives being financial. Let no one doubt the painful process that is involved in determining the right objectives for the corporate entity or, indeed, for any entity which seeks to survive and continue. This is why the process of setting, accepting and working towards objectives has to start from the top but must continue throughout the whole organization. Who am I and where am I going ?-is a question that is as valid for the Company as it is for the individual. The corporate objective of the Fisons Group is consistently to achieve profitable growth in real terms by increasing earnings per share and raising the return on capital employed. I hope you find this paper as constructive to you as it has been to me and my colleagues.
giving a lot of time and energy to the tedious process of defining company objectives when managers in action may well ignore them. But managers will take their lead from the top and will not ignore a Chief Executive who demonstrates concern for objectives and their achievement. A management team can last a decade or a generation : time enough for results. But what kind of results? All around us, society is calling the function and purpose of business into question. The least that we can do is to carry out the same exercise for ourselves. If it does nothing else, it will enable us to answer back; at best, it will crystallize that sense of purpose which is often the hallmark of successful enterprise. Managers with policymaking responsibilities need to know the aims of the corporation as a whole and their own r61e in achieving these aims. Mostly they also want to know.
What Setting Corporate
Objectives
To talk about Corporate Objectives is to walk a narrow plank: one false step and either you sink in a morass of solemnity or else fall with a splash into torrents of cynicism. That is hardly surprising; for to advocate Corporate Objectives is to be on the side of the angels, and not everyone believes in angels. To the unbeliever, the whole idea of stating your business objectives is sentimental and about as gainful as the flowery greetings on a birthday card. The hard-nosed practitioner will argue : get on with your business; let managers manage ! The rest is useless clutter, turned out by armchair philsophers who have never sold anything except words nor made anything except trouble.
Why Bother? So the first question about Corporate Objectives that needs an answer is: why bother? What is the point of *Presentation given at Corporate Planning in Practice Programme, Henley Administrative Staff College, 22 February 1977. tGeneral Manager, Corporate Planning, Fisons Limited.
are Corporate
Objectives?
Corporate Objectives are a set of basic principles defining the purpose of corporate activity-‘what are we in business for?‘-and the criteria that will direct a company’s conduct and measure its progress. Basic objectives are not the same as budgets, plans, or quantitative targets all of which represent methods of achieving the objectives and have to be flexible and responsive to frequent change. By contrast, Corporate Objectives are guidelines that ought to stand the test of time. As such, they are best expressed qualitatively, a seemingly easy but in fact very difficult task if the objectives are to be workable. They must be relevant to a wide range of circumstances without being vague; general in tone and expression yet unambiguous in meaning. Pertinent today without kow-towing to short-lived fashions in management or social doctrine. Nothing is more ridiculous than to be continually updating principles. Yet business guidelines cannot be eternal. They will change gradually as society itself changes. When John D. Rockefeller
conceived
the idea of the
Setting Corporate Standard Oil Trust in the 1870s his objective was nothing less than an all-embracing monopoly in oil refining. An example of criminal megalomania? Not at all. A hundred years ago, such a scheme was the embodiment of the American Dream: from rags to riches and no questions asked. Rockefeller was exceptional only in coming near to achieving the totality of his dream while quietly strangling competitor after competitor. Finally, the law stepped in and Anti-Trust was born. Today no respectable company would dare to emulate Rockefeller. Those who try, generally end up in the dock. Corporate Objectives, then, must last longer than next week’s crisis but can hardly survive to be revered by our grandchildren. What is a reasonable period? Perhaps 10 years between reviews. Anything much less than a decade will dilute the corporate sense of purpose and allow insufficient time for longer-term strategy to bear fruit. It will encourage stop-go policies and frequent reversal of decisions, leaving management in a state of dazed uncertainty or mounting panic. After 10 years, however, Corporate Objectives can acquire an aura of sanctity that will blunt the corporate response to external challenge. Changes in the external world are then seen in soft focus as they cease to fit the notions of the previous decade, and management may be reluctant to restore sharp focus on the world outside if that means a retreat from enshrined Objectives. A review is necessary also if there is a major change of senior management, because nothing less than the personal commitment of those who have powers of decision will be capable of drawing the organization as a whole into the consistent pursuit of longer-term objectives; and personal commitment-that most elemental force in business-is very much a matter of individual make-up and outlook. The attempt to reconcile ideas with individuality is the essence of successful team work. If it fails, the corporate objective quickly turns into a dead letter. The need for senior management to take an active and committed part in defining Corporate Objectives, then, is axiomatic. This diminishes in no way the need for the objectives-if they are to be of practical use-to be acceptable to the various ‘stakeholders’ in the business, from those who work in it, to the shareholders, and ‘society’ -which for internationally active companies means many different forms of society. A head-on clash rarely leaves the company in victorious occupation of the field. The nation state may compromise but it will not be flouted. Corporate Objectives must therefore be realistic.
are We in Business For?
Let me start with an example, from Robert Townsend’s Up the Organization. With this admirable clarity, he goes straight to the heart of the matter in his chapter on ‘Objectives’. For his company Avis, he writes, ‘it took us six months
3
to define one objective-which turned out to be: “We want to become the fastest-growing company with the highest profit margins in the business of renting and leasing vehicles without drivers”. There it is: a single sentence expressing three basic concepts : the objectives of growth, profitability, and business profile. Take ‘renting and leasing vehicles without drivers’. Robert Townsend explains: ‘This let us put the blinders on ourselves and stop considering the acquisition of related businesses like motels, hotels, airlines, and travel agencies. It also showed us that we had to get rid of some limousine and sightseeing companies that we already owned’. Obviously, these Corporate Objectives were not intended to gather dust in a filing cabinet. Action followed. To stop himself from straying, Robert Townsend put up a sign opposite his desk with the trenchant message: ‘IS what I am doing or about to do getting us closer to our objective?’ So much for Avis. It would be rash to recommend their formula for indiscriminate and universal application. ‘We want to become the fastest-growing company in the industry in which we are already established’ will not take us very far if our industry happens to be in decline and we are market leaders. All we would achieve would be to shrink more slowly than our competitors. Moreover, ‘the highest profit margins’ would, I fear, provoke hollow laughter in a country where government imposes control on profit margins. Far from wanting ‘to put the blinders on ourselves and stop considering the acquisition of related businesses’, we might regard diversification as an imperative need in order to lessen our dependence on market leadership in a declining industry fettered with profit margin control. It just goes to show that one company’s meat is another firm’s poison. There is no universal formula; no short cut avoiding the step-by-step process of defining your company’s objectives. The first step is the most critical: a straight answer to the question ‘What are we in business for?’ At first sight, that looks easy. To take some of the more obvious alternatives: we may be in business in order to : * Own it. Make money. Grow (larger, more powerful, gain market leadership). * Perpetuate the present management group. 6 Maximize shareholders’ return. * Serve a social purpose (e.g. stable and rewarding employment) * Serve the nation (by investing and exporting) * Serve mankind (by scientific innovation or philanthropy). *
*
What
Objectives
4
Long Range Planning Vol. 10
December
Here we have a spectrum of basic objectives ranging from the openly selfish to pure altruism. Which is it to be? Do we just pick one at random, or have we time to pause and think? There is no need to pause if you are a billionaire with a power complex or the idealist with the Midas touch. But most business enterprise is more complex than the folk tales of heroism or villainy as portrayed in soap opera or by political pamphleteers. Take the nationalized corporation or the subsidized project where there is an acute conflict between social purpose and cash flow that successive governments have not resolved. WHAT IS THE OBJECTIVE? you are impelled to ask, like the child that failed to see The Emperor’s New Clothes. Here is a quiz: I invite you to become Brains of Britain by answering correctly before the permitted 10 seconds are up-starting tzolv:
(1)Are
the railways a service to the community should they make a profit?
or
(2)Why
are Sunday postal collections from the pillar box at the corner alternatively being withdrawn and reinstated?
(3)Is Concorde
:
(a) an industrial project? (b) a post-colonial
ego-trip for the nation, or
(c) a life-and-death struggle technological skills?
to preserve
unique
(4)Should
cabinet ministers or chartered accountants decide whether the new mini goes ahead in order to maintain employment in the car industry? Or should we have a referendum on the subject so that we can all have a go?
*
It is announced with regret that there will be no Brain of Public Sector Britain Award this year.
Meanwhile, to be serious for a moment, how can we expect managers to manage effectively if they don’t know what they are in business for? In industry and commerce, large numbers of people work in the private sector where there is now a good deal of debate about corporate objectives among managers and in the media. Mostly they work in mediumsized or large companies which are owned by shareholders, quoted on the stock exchange, and financed by a mixture of equity, debt, and deferred taxation. So the ‘stakeholders’, as they are frequently referred to, are shareholders, banks and institutions supplying longterm loan capital, government, and of course employees. Others who are to some degree linked with the corporation or dependent on it are customers, suppliers, and business partners in joint ventures, for they stand to benefit from the company’s success (as many of Marks & Spencer’s chosen suppliers have done) or could be dragged down by its failure as happened in the inter-
1977 national chain of bankruptcies following the 1929 crash and the 1973 crisis. More peripheral but none the less real, is the link between the industrial corporation and the local community. The company town, where work is dependent on the continued presence of a single employer whose interests may be shifting to other localities, is a clear case in point. So is the problem of environmental safety or risk arising from new products or novel methods of production. Here, the conflict between the objectives of industrial growth, advanced technology and actual or believed safety risk is exemplified by the current controversy over the processing of nuclear waste.
Financial and Non-financial Objectives A leading question confronting any industrial or commercial company in the private sector that is trying to identify its corporate objectives is: what should be the relative priority between financial and non-financial objectives? Is it one or the other . . . or a mixture of the two? Can they be reconciled, or must we be either buccaneers or do-gooders? The problem was posed by Bernard Shaw with his customary wit when, in the second act of Major Barbara he confronted Peter Shirley (46, Fitter: ‘Chucked out two months ago because I was too old’)-with Andrew Undershaft (Arms manufacturer: ‘My dear, I am a Millionaire. That is my religion’). When Peter Shirley berates him: ‘I wouldn’t have your conscience, not for all your income’, Undershaft replies simply ‘I wouldn’t have your income, not for all your conscience, Mr. Shirley’. That was in 1906. And what are managers going to choose today: Social responsibility or earnings per share? Can the primary objective of a publicly quoted company be non-financial? I think not. We are surrounded by voices telling us that it cau and must; but I think that it cannot and must not. In an open society, the quoted cornpuny (and that is the type of corporation which we are discussing here) competes for resources with its industrial competitors at home and abroad, with state-controlled industry, and with non-industrial activities. What is at stake in this form of competition is, ultimately, survival. For one or other of the resources for which the quoted company is competing is scarce at one time or another. The resources are raw materials, people and capital. When all three are freely and cheaply available, manufacturing industry prospers until demand, controls, or cartels create scarcity and drive up prices. Eventually these collapse and the inevitable recession sorts out the high fliers from the lame ducks. The latter are usually companies that have misused resources in the belief that they are cheap and plentiful when in fact they are either costly or scarce or both.
Setting Corporate In the 1960s for example, capital and raw materials were freely available and comparatively cheap; people, on the other hand, were scarce and becoming more expensive. This constituted a relatively benign industrial environment in which even lame ducks managed to keep their heads above water. After the OPEC crisis of 1973, however, the climate changed: inflation greatly increased the demand for capital which became scarce and expensive. Raw materials, running short after a prolonged consumption spree, had rocketed in price; wherever political and economic power was strong enough (as among oil exporters) the new prices continued to be raised long after the scarcity had passed. People, too, remained expensive despite spreading unemployment. Today, it is a moot point whether raw material cartels will gradually crumble in conditions of slow economic growth, and whether people can remain both plentiful and expensive. But as inflation continues to run at above-average rates, there can be little doubt that capital, at least, will for some time remain scarce and costly by historical standards. The private sector company can survive as such only by using all three resources efficiently. If it wishes not merely to survive but to grow, the need for optimizing the use of resources is that much greater. Efficiency is measured in various ways, starting with the weight of raw material and the man-hours used for a given quantity of output. By the time these have been translated into money-values and related to capital input, we have adopted financial measures of efficiency. From there is only a step to the profit and loss account, the return on capital employed, the cash flow statement, and the balance sheet :f;nnncial, everyone of them. Companies that manage their resources inefficiently face financial ruin: the lenders of fixed-interest capital can call for liquidation, shareholders can lose their shirt, employees their job. Rescue operations by a compassionate government department make headlines, but are unpredictable and not always of lasting impact. A change of policy, a change of minister, a change of government. . . we have seen it happen time and again. Besides, whoever heard of a corporate objective reading ‘The purpose of our business is to misuse resources and to be rescued by Whitehall?’
Objectives
5
constraint. The right rate of growth and the optimal level of efficiency have to be determined periodically and are matters of feasibility and judgment. But the financially successful company will have a better chance of complying with society’s demands and satisfying the aspirations of its employees than one that is forever grappling with a cash crisis. The dilemma of conscience and money is best resolved either by having a hierarchy of financial and nonfinancial objectives in which one is The Prime Objective; or by concentrating on a single Objective with supporting policies and full recognition of constraints. In Fisons we adopted the first course 10 years ago, and the second when we re-formulated our objectives in 1976.
Fisons Corporate
Objective
Let Me Illustrate
In 1967 we declared our Prime Objective as: ‘To achieve continuous growth in earnings per share both in the short term and in the long term’. As a quoted company, we felt-and still feel-a strong sense of obligation towards shareholders. ‘Earnings’ are, of course, the profits attributable to shareholders after interest and taxation and are a suitable yardstick by which to measure corporate growth and efficiency. The concept of earnings in effect combines the results of trading at the Divisional level with those of a centrally controlled finance policy. Growth in earnings per share means that the earnings attributable to each share must grow which may not be the case if too many rights issues are made to finance too little growth. Moreover, in the days before dividend restraint, growth in earnings per share was also most likely to reward shareholders for supplying risk capital by giving them higher dividends and capital appreciation-an assumption which, in the U.K. inflation and the legislation of recent years have severely maimed.
So much for Money. What about Conscience? Are job satisfaction and employee participation, social responsibility, safety, and environmental concern dispensable frills? Of course not. They are vitally important, not only as objectives in their own right, but as constraints. If you slap society in the face because it stands in the way of faster growth and the most efficient use of your resources, society will hit back. That, in turn, will throttle your financial performance and may leave you with a bruised conscience.
But for operating purposes, we realized that ‘earnings per share’ is a meaningless concept for Divisional managers who have no direct responsibility for the debtequity ratio, the terms on which capital is raised, or taxation. The efficiency of the line management was, we believed, best measured in terms of the return on total capital employed. This became our Objective 2. Further objectives were then agreed: the shaping of the corporate profile (or mix) of activities in order to achieve growth in earnings per share and a better return on capital employed; manpower objectives; and-as a non-financial objective-theaim to achieve, or maintain, Fisons reputation as a successful and efficient industrial, scientific, financial and managerial organization.
111short, supremacy of financial objectives should not be misunderstood to mean that growth and efficiency must be maximized regardless of any other factor. A statement of corporate objectives has to recognize
These Objectives served us well for nearly 10 years, as I will try to demonstrate later when discussing the implementation of declared intentions and monitoring of progress.
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Long Range Planning Vol. 10
December
Nevertheless, 9 years after the Board of Fisons Limited had approved the company’s first formal, written Objectives, the time was ripe for a thorough-going review. After 6 months work and extensive consultation with senior management, a modified document was put to the company’s Main Board in December 1976, and approved. Much has changed in 9 years. External conditions have grown tougher and more hazardous for reasons to which I referred earlier; government intervention (directly or indirectly) in industrial affairs is now a major factor in corporate strategy; and society’s desire for the exercise of social responsibility in business has developed a voracious appetite just at a time wheu the means to gratify it has diminished under conditions of severe economic and financial stringency. These considerations led us to reaffirm even more strongly than in 1967 the supremacy of financial objectives: not in order to play King Canute with the tide of social, economic and political pressures, but in order to ensure that we are strong enough to swim with that tide. Accordingly, it was decided that Fisons would have only one Corporate Objective; Earnings growth and return on investment. This reads : ‘The Corporate Objective of the Fisons Group is consistently to achieve profitable growth in real terms by increasing earnings per share and raising the return on capital employed’. It was stressed not only that the Objective
itself is preeminently financial but that its achievement can and will be measured and monitored, thereby imposing on management the discipline of actually pursuing the declared intention. We know from a succession of attitude surveys of Fisons shareholders in 1969, 1972 and 1975* that this objective is fully consistent with the needs and preferences of our private and institutional shareholders. It stands to reason that, in a tough external business climate, this Corporate Objective will also, in the final analysis, best serve and safeguard the interests of the company’s employees and its external business partners. It is our belief that confused and difficult times demand a single-minded objective as the focal point of corporate endeavour. It should be realistic, feasible, measurable and visible. Fisons Corporate Objective may not suit other companies any more than Robert Townsend’s objective for Avis suited us. My use of Fisons is illustrative-not lH. Redwood ‘Company-Shareholder relations’, talk given at Management Centre, University of Bradford, July 1975 (available from Fisons Limited). H. Redwood ‘Fisons shareholders in transition: the results of the third survey 1975’. talk given at the Stock Exchange, London, October 1976 (available from Fisons Limited).
1977 prescriptive. My only recommendation is that it helps to have an agreed, declared corporate objective as a basis for operations and future development. It crystallizes thought and concentrates effort. It is, of course, less exciting than the triumph of pure opportunism which occasionally mesmerizes the financial community and the press until-as often as not-the magic spell is broken by a resounding crash. The business genius, successful or otherwise, is ipso facto the exception to every rule. Corporate Objectives are not for him. Nor are business schools or management training centres. But then, we are dealing with the ordinary wellmanaged business that aspires to do better; and also (if we could gain its ear which is doubtful) with the complacent mediocre management that always waits until nature has taken its course, belatedly reacting to events that might have been anticipated. Yet we all make mistakes. Corporate Objectives are intended to help us make them less frequently and less disastrously, as well as for the purpose of positive achievement.
Supporting Constraints
Business Policies and
I referred
earlier to the need for supporting a single clearcut Corporate Objective with relevant policies and full recognition of constraints. In Fisons we have defined these under five headings: (1) Resources (2) Cash Flow
(3) Profile of Activities (4) Employees (5) External Relationships To take these in turn: Resources Policy. To deploy scarce resources selectively and with
optimal effectiveness Objective.
in support
of the
Corporate
That is rather general in tone, isn’t it? We therefore went on to be more specific. Firstly, the investment of both human and financial resources must be based on selecting from worldwide opportunities only those which are judged capable of contributing to the achievement of the Corporate Objective. Secondly, the corporate return on capital employed must be raised substantially in order to promote earnings growth through more efficient use of resources. Thirdly, finance strategy should be designed to provide, conserve, or release funds for investment on terms compatible with the Corporate Objective. It is surely clear that here we have the elements from which a practical strategy and development plan can be
Setting Corporate built: selective, concerned with efficiency as well as growth, and financially disciplined. The proof of the pudding is of course in the eating. Our second supporting policy, and constraint, is Cash Flow Policy. To ensure at all times an adequate margin of liquidity relative to practical borrowing ability, and to control corporate cash flow in line with the requirements of the Group as indicated annually in the Budget and Plan. We wrestled for some time with this innocuous-sounding statement before confining it to the twin points of safety margin and control. No mention of cash flow maximization and the virtues or otherwise of positive cash flow versus loan finance and gearing ratios. But lest the first point be overlooked, a second paragraph was added : ‘This recognizes that on occasion it may be necessary to give precedence to liquidity over all other objectives in the interests of corporate survival.’ A constraint with a vengeance: one it was felt, that would be accepted by employees, shareholders, lenders and business partners alike as being in the best interests of all. Our third policy is concerned with the profile, or mix, of corporate activities : ProfileofActivities ’ Policy. Firstly, to develop, and where necessary nzodify,
the Group’s profile of activities in a manner designed to achieve the Corporate Objective. Secondly, to balance the profile, making it less cyclical and avoiding overdependence on any one source of profit, in order to enhance stability of financial performance. There is an evident awareness here of the need for change and for the maintenance of a degree of balance and stability during the process of change. There are so many examples of companies, great and small, that have foundered as a result of failure to activate change or the passive acceptance of severe imbalance, that I do not think I have to labour this point. For internal purposes we app,ended to the Profile Policy a separate document setting out four sets of criteria and guidelines under the headings of Development, Acquisitions, Diversification, and Disposals. These help us to assess new ideas and projects qualitatively, on policy grounds which is a good way to ensure selective investment of scarce resources. Qualitative methods are strangely neglected in management literature because management has become obsessed with numeracy even in areas where qualitative approach is often more effective. We all know how diicult it is to resist a project that, nmner-
Objectives
7
ately, shows an apparently high return-on paper. Yet such a proposal could take the company far from its preferred areas of investment. Approval, in that event, should be a conscious act of will, a deliberate change in direction, not simply the result of a casual push given to an aimless boat. The fourth policy concerns: Employees
policy. To employ the optimum number of people of the right calibre, skills and experience and to organize, train and motivate and so remunerate them as to achieve the Corporate Objective. It is unfortunately difficult to sound other than pious and platitudinous when talking about people in general, as distinct from individuals whose emotions, loyalties, rivalries, fears, ambitions and achievements . . . whose efforts and involvement are the real flesh and blood of business life. It is a truism that lack of effort or alienation will put paid to any statement of Corporate Objectives. Motivation is really the heart of the matter. The other aspects: numbers, skills, organization, training and pay can all be monitored on a relatively objective basis in relation to policy. When this objective was discussed, someone asked how we proposed to implement the words ‘and so remunerate them’ under present legislation in the U.K.? The answer is plain: for the present, we cannot. If this situation lasts for long, however, the company must either accept the dilution of its declared policy or seek opportunities where demotivating restrictions do not apply. Finally, the policy of External Relationships: Here we extended the 1967 aims of achieving or maintaining an international reputation industrially, scientifically, financially and managerially with three further points : Commercially-in partners.
our
relationship
with
trading
Socially-concerned with safety, and balancing efficiency as a manufacturer with the community’s environmental concern. Also recognizing fully the local laws, customs and required codes of conduct wherever we operate and Politically-pursuing a serious policy of reasonable co-operation or negotiation with all legitimate governments in the best interests of employees and shareholders. When deemed necessary, the company reserves the option of openly and legally participating in the political processes of any country in which it operates in defending employees’ and shareholders’ interests. Such a statement is a major step from the unspoken but implied political unconcern of the 1960s. It does not express an active desire for political activity on the part
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Long Range Planning Vol. 10
December
of the company: that is not the objective any more than social responsibility per se. It recognizes, however, that an attitude of absolute passivity towards political events is no more tenable in present and future society than one of passive reaction to economic or social trends. No company is an island. That is the message.
Corporate
Objectives
in Practice
Fine words butter no parsnips. What needs to be done to ensure that fine words are not also eminently forgettable, and quickly forgotten? Four lines of approach spring to mind : (1) Adequate preparation. (2) Consultation
and communication.
(3) Assessment of major proposals for ‘fit” with Objectives before decisions are taken. (4) Measurement and monitoring
of company progress.
The first is adequate preparation. The d&&y with fine words is the incredulity that they engender. Two reactions are to be expected: ‘Do we really have to be told anything so obvious?’ and ‘That’s asking for the impossible!’ The sceptic is not in the least abashed by the fact that his two reactions contradict one another. Can an objective be both obvious and impossible? The best way of convincing management that it is worthwhile to set Corporate Objectives and act on them is to demonstrate factually the extent to which the company has fallen short of achieving in the past what is being proposed for the future; and perhaps also to prove that competitors have achieved some of the goals that are being dismissed as ‘impossible’. To do so involves a good deal of analysis and research, but time and effort are vindicated if the results demonstrate room for improvement which, almost invariably, they do, If not, it is a fair guess that the objectives have been pitched too low or wrongly designed for the company in question. The purpose of the preparatory analysis is to reveal the areas of weakness and vulnerability which, in every business, come to light if one probes deeply enough. After preparation comes consultation. Simply to impose Corporate Objectives on those who will be responsible for carrying them into effect, is to ask for the cold shoulder. Consultation and debate must therefore involve managers who have responsibilities for strategy and policy-making and who in practice determine the direction in which the business is to move. How far down the chain of command the process of consultation is taken is a matter ofjudgment. Somewhere along the line will come a point at which corporate objectives as such mean little to the employee and have to be translated into operational objectives before interest and commitment can be aroused. This applies also to the manner of communication once the objectives have been agreed and ratified.
1977 The practical use to which they are put is again seen most clearly in terms of strategic policy and project decisions where the allocation of scarce resources is at stake; capital, talent, skill, materials, andespace are all examples of resources that are rarely unlimited and where concentration of effort tends to produce the best results. That implies a selective and critical approach to development and investment. Knowledge of the resources available and testing of new proposals against the touchstone of agreed Corporate Objectives helps to develop a consistent strategy. To be effective, this form of assessment should be carried out in good time, before managers have become irretrievably committed to a project, for by then it has usually developed the force of an avalanche which no mere committee could stop from thundering downhill. To know when to be negative is a management skill, too. But Corporate Objectives are even more useful in a positive sense, for backing up and stiffening the resolve to take major risks without which no competitive business can advance. It is the choice and degree of risk taken, the marshalling of resources in support and the introduction of balancing safety factors elsewhere in the business which make up corporate strategy. Measuring risk and opportunity for compatibility with Corporate Objectives will normally help very greatly to crystallize decisions on which the company’s long-term future is dependent and which cannot be reversed once the button has been pressed. Finally, the monitoring of results. I need hardly emphasize how important it is to do so if the declared corporate objectives are not to pass gently into limbo. An annual review of the company’s progress towards its objectives is a good way of keeping them alive without inflicting constant pedantic reminders on busy managers. The more this can put the year just ended into historical perspective with earlier years and link it to corporate plans for the future, the more clearly will strengths and weaknesses, opportunities, and risks emerge into the light of day, and point the way to what needs to be done.
Fisons Corporate Monitored
Objectives
1967
To illustrate this, I should like to conclude by showing briefly how Fisons has performed in relation to its original Corporate Objectives set in 1967, singling out the first two where results can easily be measured and are published in our Annual Reports. First, earnings per share. This, as I mentioned earlier, was designed in 1967 as the company’s Prime Objective and read : ‘To achieve continuous growth in earnings per share both in the short term and in the long term’. I should explain that our insistence on ‘continuous’ advance stemmed from an analysis of the preceding
Setting Corporate
Figure 2 compares Fisons return on average capital employed during the years 1967-1975 with the historic cost return of U.K. Industrial and Commercial Companies, based on the national income and expenditure accounts prepared by the Central Statistical Office*: Some conclusions can be drawn:
Objectives in 1967 Plan for the years we then visualized share’ and compares
Fisons very unsatisfactory return of 7.3 per cent in 1967 was indeed raised substantially, although the setback of 1970 and the revaluation of land and buildings in 1973 were factors that slowed down the improvement. By 1975, the return had risen to 16.7 per cent. The tirst part of the Objective had therefore been ftiled.
It is very clear that, following beginner’s luck in 1968, the subsequent 3 years were a hard struggle to maintain the level of earnings, with a serious lapse in 1970 when our fertilizer business ran into a severe crisis. But once this was overcome, 5 successive years of continuous growth in earnings per share were achieved, although industry as a whole went through the greater part of two trade cycles during those same 5 years. Moreover, the speed of the advance greatly exceeded that which had formed the basis of our cautious Outline Plan in 1968-which at the time had been regarded as extremely ambitious in view of the repeated disappointments of the preceding decade.
That could not be said of the second part. During the period, U.K. Industrial and Commercial Companies as a whole had also improved their performance, though less significantly. Their return had in fact fallen from about 14 per cent in 1967-1968 to under 13 per cent in 1970 and had subsequently improved to 16*5168 per cent by 1973-1974 at the peak of a new trade cycle. By this time, Fisons had reached but was far from ‘maintaining . . . a level significantly above the average achieved by industry as a whole’. Another even more important consideration is the impact of inflation on real returns, which by 1974 had fallen to less than half the 1967 level for U.K. companies as a whole*, a trend from which Fisons was not exempt.
All in all, it can be said that during this period the prime corporate objective was achieved. Objective 2 (in the 1967 version) read: ‘To raise substantially the average Group pre-tax return on capital employed in order to promote the
‘Bank of England Quarterly Bulletin 16 (March 1976).
Original Outline Plan (1968) and Actual Results to 1975.
24.0 / Q 24 F
Outline Plan
2m 16 12 8, -
5
8.2
I
Year to 30thJune 1967 Calendar Year
I
I
I
9
achievement of Objective 1. Thereujer, to maintain it at a level significantly above the average achieved by industry us a whole.’
decade when our earnings per share had performed inconsistently in a cyclical manner. The emphasis on both the short term and the long term was intended to ensure that no manager would jettison agreed long-term policies (such as research which is the basis of several of Fisons operations) in order to engineer a short-term advance that would ultimately leave the company in the position of a shooting star which after shining brightly and briefly, is soon burnt out. Board approval of the Corporate was accompanied by an Outline 1968-1975. Figure 1 shows how ‘continuous growth in earnings per it with what actually happened.
Objectives
I
I
I
I
I
1968 1969 1970 1971 lSj2 1973 1974 1975 1970 1971 1972 1973 1974 1975
Figure 1. Fisons earnings per share. Original outline plan (1968) and actual results to 1975
Long Range Planning Vol. 10
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December
1977
Historic Cost Basis, Before interest and Tax. 18-
16.8
16.7
16 -
14.3 \
1:7 / \ /
\
\ \
‘v’ 13.6
6~
\
I
Year to 30th JIune 1967
1962
Calendar Year 1967
Figure 2. Return on capital employed.
’
I
I
,
1969
1970
1971
1972
‘Consistently to achieve proftable growth in real terms by increasing earnings per share and raising the return on capital employed.’
APPENDIX Table 1. Fisons Earnings Per Share
1970 1971 1972 1973 1974 1975
1968 Outline Plan’ (pence) Year to 30th June
Actual Results2 (pence) Year to 30th June
8.2 12.6 14.9
8.2 14.8 15.0
16.4 17.3 17.8 18.9 21.0 22.8
Calendar year 10.6 15.9 21.4 24.0 30.3 36.4
Sources: 1Fisons Limited, internal document. aFisons Limited, Annual Report 1975.
~ 1973
1974
1975
Historic cost basis, before interest and tax
As, moreover, Fisons return on capital in 1975 showed no significant improvement over 1974 (although earnings per share did), we had to conclude that more attention would have to be given to this aspect of company performance in the future. That was one of the reasons why the new, single Corporate Objective agreed in 1976 for management guidance for 1977 onwards, is:
1967 1968 1969
I
:
1969
1968
I
i
Table 2. Return on Capital Employed basis, before interest and tax)
Fisons’ (per cent) Year to 30th June
(Historic cost
U.K. Industrial and Commercial Companies2 (per cent) Calendar Year
1966 1967 1968 1969
7.3 Il.3 Il.5
14.3 13.6 14.7 13.3
1970 1971 1972 1973 1974 1975
Calendar year 9.4 12.0 13.7 14.1 16.4 16.7
12.8 13.1 14,3 16.5 16.8 n.8.
l
*From 1973, after revaluation of land and buildings. Sources and definitions : ‘Fisons Limited, Annual Report 1975 ‘Ratio of profit (before taxation and loan interest) to average assets employed’. 2Bank of England Quarterly Bulletin 16 No. 1, March 1976, pp. 36-37 based on national income and expenditure accounts prepared by the Central Statistical Office. Return defined as follows: ‘Gross trading profits (plus rent) net of depreciation at historic cost, but before deducting stock appreciation interest’ divided by ‘Capital stock valued at historic cost’ (The basis ‘traditionally used by management and investors in assessing company performance’).
Long Range Planning Vol. 10
December
1977
Setting Corporate Objectives* J
H. Redwood-j-
This paper states that ‘the resources are raw materials, people and capital. The private sector company can survive as such only by using all three resources efficiently’. These statements summarize the need not only for the setting of Corporate Objectives but the cogent and incontrovertible argument for such objectives being financial. Let no one doubt the painful process that is involved in determining the right objectives for the corporate entity or, indeed, for any entity which seeks to survive and continue. This is why the process of setting, accepting and working towards objectives has to start from the top but must continue throughout the whole organization. Who am I and where am I going ?-is a question that is as valid for the Company as it is for the individual. The corporate objective of the Fisons Group is consistently to achieve profitable growth in real terms by increasing earnings per share and raising the return on capital employed. I hope you find this paper as constructive to you as it has been to me and my colleagues.
giving a lot of time and energy to the tedious process of defining company objectives when managers in action may well ignore them. But managers will take their lead from the top and will not ignore a Chief Executive who demonstrates concern for objectives and their achievement. A management team can last a decade or a generation : time enough for results. But what kind of results? All around us, society is calling the function and purpose of business into question. The least that we can do is to carry out the same exercise for ourselves. If it does nothing else, it will enable us to answer back; at best, it will crystallize that sense of purpose which is often the hallmark of successful enterprise. Managers with policymaking responsibilities need to know the aims of the corporation as a whole and their own r61e in achieving these aims. Mostly they also want to know.
What Setting Corporate
Objectives
To talk about Corporate Objectives is to walk a narrow plank: one false step and either you sink in a morass of solemnity or else fall with a splash into torrents of cynicism. That is hardly surprising; for to advocate Corporate Objectives is to be on the side of the angels, and not everyone believes in angels. To the unbeliever, the whole idea of stating your business objectives is sentimental and about as gainful as the flowery greetings on a birthday card. The hard-nosed practitioner will argue : get on with your business; let managers manage ! The rest is useless clutter, turned out by armchair philsophers who have never sold anything except words nor made anything except trouble.
Why Bother? So the first question about Corporate Objectives that needs an answer is: why bother? What is the point of *Presentation given at Corporate Planning in Practice Programme, Henley Administrative Staff College, 22 February 1977. tGeneral Manager, Corporate Planning, Fisons Limited.
are Corporate
Objectives?
Corporate Objectives are a set of basic principles defining the purpose of corporate activity-‘what are we in business for?‘-and the criteria that will direct a company’s conduct and measure its progress. Basic objectives are not the same as budgets, plans, or quantitative targets all of which represent methods of achieving the objectives and have to be flexible and responsive to frequent change. By contrast, Corporate Objectives are guidelines that ought to stand the test of time. As such, they are best expressed qualitatively, a seemingly easy but in fact very difficult task if the objectives are to be workable. They must be relevant to a wide range of circumstances without being vague; general in tone and expression yet unambiguous in meaning. Pertinent today without kow-towing to short-lived fashions in management or social doctrine. Nothing is more ridiculous than to be continually updating principles. Yet business guidelines cannot be eternal. They will change gradually as society itself changes. When John D. Rockefeller
conceived
the idea of the
Setting Corporate Standard Oil Trust in the 1870s his objective was nothing less than an all-embracing monopoly in oil refining. An example of criminal megalomania? Not at all. A hundred years ago, such a scheme was the embodiment of the American Dream: from rags to riches and no questions asked. Rockefeller was exceptional only in coming near to achieving the totality of his dream while quietly strangling competitor after competitor. Finally, the law stepped in and Anti-Trust was born. Today no respectable company would dare to emulate Rockefeller. Those who try, generally end up in the dock. Corporate Objectives, then, must last longer than next week’s crisis but can hardly survive to be revered by our grandchildren. What is a reasonable period? Perhaps 10 years between reviews. Anything much less than a decade will dilute the corporate sense of purpose and allow insufficient time for longer-term strategy to bear fruit. It will encourage stop-go policies and frequent reversal of decisions, leaving management in a state of dazed uncertainty or mounting panic. After 10 years, however, Corporate Objectives can acquire an aura of sanctity that will blunt the corporate response to external challenge. Changes in the external world are then seen in soft focus as they cease to fit the notions of the previous decade, and management may be reluctant to restore sharp focus on the world outside if that means a retreat from enshrined Objectives. A review is necessary also if there is a major change of senior management, because nothing less than the personal commitment of those who have powers of decision will be capable of drawing the organization as a whole into the consistent pursuit of longer-term objectives; and personal commitment-that most elemental force in business-is very much a matter of individual make-up and outlook. The attempt to reconcile ideas with individuality is the essence of successful team work. If it fails, the corporate objective quickly turns into a dead letter. The need for senior management to take an active and committed part in defining Corporate Objectives, then, is axiomatic. This diminishes in no way the need for the objectives-if they are to be of practical use-to be acceptable to the various ‘stakeholders’ in the business, from those who work in it, to the shareholders, and ‘society’ -which for internationally active companies means many different forms of society. A head-on clash rarely leaves the company in victorious occupation of the field. The nation state may compromise but it will not be flouted. Corporate Objectives must therefore be realistic.
are We in Business For?
Let me start with an example, from Robert Townsend’s Up the Organization. With this admirable clarity, he goes straight to the heart of the matter in his chapter on ‘Objectives’. For his company Avis, he writes, ‘it took us six months
3
to define one objective-which turned out to be: “We want to become the fastest-growing company with the highest profit margins in the business of renting and leasing vehicles without drivers”. There it is: a single sentence expressing three basic concepts : the objectives of growth, profitability, and business profile. Take ‘renting and leasing vehicles without drivers’. Robert Townsend explains: ‘This let us put the blinders on ourselves and stop considering the acquisition of related businesses like motels, hotels, airlines, and travel agencies. It also showed us that we had to get rid of some limousine and sightseeing companies that we already owned’. Obviously, these Corporate Objectives were not intended to gather dust in a filing cabinet. Action followed. To stop himself from straying, Robert Townsend put up a sign opposite his desk with the trenchant message: ‘IS what I am doing or about to do getting us closer to our objective?’ So much for Avis. It would be rash to recommend their formula for indiscriminate and universal application. ‘We want to become the fastest-growing company in the industry in which we are already established’ will not take us very far if our industry happens to be in decline and we are market leaders. All we would achieve would be to shrink more slowly than our competitors. Moreover, ‘the highest profit margins’ would, I fear, provoke hollow laughter in a country where government imposes control on profit margins. Far from wanting ‘to put the blinders on ourselves and stop considering the acquisition of related businesses’, we might regard diversification as an imperative need in order to lessen our dependence on market leadership in a declining industry fettered with profit margin control. It just goes to show that one company’s meat is another firm’s poison. There is no universal formula; no short cut avoiding the step-by-step process of defining your company’s objectives. The first step is the most critical: a straight answer to the question ‘What are we in business for?’ At first sight, that looks easy. To take some of the more obvious alternatives: we may be in business in order to : * Own it. Make money. Grow (larger, more powerful, gain market leadership). * Perpetuate the present management group. 6 Maximize shareholders’ return. * Serve a social purpose (e.g. stable and rewarding employment) * Serve the nation (by investing and exporting) * Serve mankind (by scientific innovation or philanthropy). *
*
What
Objectives
4
Long Range Planning Vol. 10
December
Here we have a spectrum of basic objectives ranging from the openly selfish to pure altruism. Which is it to be? Do we just pick one at random, or have we time to pause and think? There is no need to pause if you are a billionaire with a power complex or the idealist with the Midas touch. But most business enterprise is more complex than the folk tales of heroism or villainy as portrayed in soap opera or by political pamphleteers. Take the nationalized corporation or the subsidized project where there is an acute conflict between social purpose and cash flow that successive governments have not resolved. WHAT IS THE OBJECTIVE? you are impelled to ask, like the child that failed to see The Emperor’s New Clothes. Here is a quiz: I invite you to become Brains of Britain by answering correctly before the permitted 10 seconds are up-starting tzolv:
(1)Are
the railways a service to the community should they make a profit?
or
(2)Why
are Sunday postal collections from the pillar box at the corner alternatively being withdrawn and reinstated?
(3)Is Concorde
:
(a) an industrial project? (b) a post-colonial
ego-trip for the nation, or
(c) a life-and-death struggle technological skills?
to preserve
unique
(4)Should
cabinet ministers or chartered accountants decide whether the new mini goes ahead in order to maintain employment in the car industry? Or should we have a referendum on the subject so that we can all have a go?
*
It is announced with regret that there will be no Brain of Public Sector Britain Award this year.
Meanwhile, to be serious for a moment, how can we expect managers to manage effectively if they don’t know what they are in business for? In industry and commerce, large numbers of people work in the private sector where there is now a good deal of debate about corporate objectives among managers and in the media. Mostly they work in mediumsized or large companies which are owned by shareholders, quoted on the stock exchange, and financed by a mixture of equity, debt, and deferred taxation. So the ‘stakeholders’, as they are frequently referred to, are shareholders, banks and institutions supplying longterm loan capital, government, and of course employees. Others who are to some degree linked with the corporation or dependent on it are customers, suppliers, and business partners in joint ventures, for they stand to benefit from the company’s success (as many of Marks & Spencer’s chosen suppliers have done) or could be dragged down by its failure as happened in the inter-
1977 national chain of bankruptcies following the 1929 crash and the 1973 crisis. More peripheral but none the less real, is the link between the industrial corporation and the local community. The company town, where work is dependent on the continued presence of a single employer whose interests may be shifting to other localities, is a clear case in point. So is the problem of environmental safety or risk arising from new products or novel methods of production. Here, the conflict between the objectives of industrial growth, advanced technology and actual or believed safety risk is exemplified by the current controversy over the processing of nuclear waste.
Financial and Non-financial Objectives A leading question confronting any industrial or commercial company in the private sector that is trying to identify its corporate objectives is: what should be the relative priority between financial and non-financial objectives? Is it one or the other . . . or a mixture of the two? Can they be reconciled, or must we be either buccaneers or do-gooders? The problem was posed by Bernard Shaw with his customary wit when, in the second act of Major Barbara he confronted Peter Shirley (46, Fitter: ‘Chucked out two months ago because I was too old’)-with Andrew Undershaft (Arms manufacturer: ‘My dear, I am a Millionaire. That is my religion’). When Peter Shirley berates him: ‘I wouldn’t have your conscience, not for all your income’, Undershaft replies simply ‘I wouldn’t have your income, not for all your conscience, Mr. Shirley’. That was in 1906. And what are managers going to choose today: Social responsibility or earnings per share? Can the primary objective of a publicly quoted company be non-financial? I think not. We are surrounded by voices telling us that it cau and must; but I think that it cannot and must not. In an open society, the quoted cornpuny (and that is the type of corporation which we are discussing here) competes for resources with its industrial competitors at home and abroad, with state-controlled industry, and with non-industrial activities. What is at stake in this form of competition is, ultimately, survival. For one or other of the resources for which the quoted company is competing is scarce at one time or another. The resources are raw materials, people and capital. When all three are freely and cheaply available, manufacturing industry prospers until demand, controls, or cartels create scarcity and drive up prices. Eventually these collapse and the inevitable recession sorts out the high fliers from the lame ducks. The latter are usually companies that have misused resources in the belief that they are cheap and plentiful when in fact they are either costly or scarce or both.
Setting Corporate In the 1960s for example, capital and raw materials were freely available and comparatively cheap; people, on the other hand, were scarce and becoming more expensive. This constituted a relatively benign industrial environment in which even lame ducks managed to keep their heads above water. After the OPEC crisis of 1973, however, the climate changed: inflation greatly increased the demand for capital which became scarce and expensive. Raw materials, running short after a prolonged consumption spree, had rocketed in price; wherever political and economic power was strong enough (as among oil exporters) the new prices continued to be raised long after the scarcity had passed. People, too, remained expensive despite spreading unemployment. Today, it is a moot point whether raw material cartels will gradually crumble in conditions of slow economic growth, and whether people can remain both plentiful and expensive. But as inflation continues to run at above-average rates, there can be little doubt that capital, at least, will for some time remain scarce and costly by historical standards. The private sector company can survive as such only by using all three resources efficiently. If it wishes not merely to survive but to grow, the need for optimizing the use of resources is that much greater. Efficiency is measured in various ways, starting with the weight of raw material and the man-hours used for a given quantity of output. By the time these have been translated into money-values and related to capital input, we have adopted financial measures of efficiency. From there is only a step to the profit and loss account, the return on capital employed, the cash flow statement, and the balance sheet :f;nnncial, everyone of them. Companies that manage their resources inefficiently face financial ruin: the lenders of fixed-interest capital can call for liquidation, shareholders can lose their shirt, employees their job. Rescue operations by a compassionate government department make headlines, but are unpredictable and not always of lasting impact. A change of policy, a change of minister, a change of government. . . we have seen it happen time and again. Besides, whoever heard of a corporate objective reading ‘The purpose of our business is to misuse resources and to be rescued by Whitehall?’
Objectives
5
constraint. The right rate of growth and the optimal level of efficiency have to be determined periodically and are matters of feasibility and judgment. But the financially successful company will have a better chance of complying with society’s demands and satisfying the aspirations of its employees than one that is forever grappling with a cash crisis. The dilemma of conscience and money is best resolved either by having a hierarchy of financial and nonfinancial objectives in which one is The Prime Objective; or by concentrating on a single Objective with supporting policies and full recognition of constraints. In Fisons we adopted the first course 10 years ago, and the second when we re-formulated our objectives in 1976.
Fisons Corporate
Objective
Let Me Illustrate
In 1967 we declared our Prime Objective as: ‘To achieve continuous growth in earnings per share both in the short term and in the long term’. As a quoted company, we felt-and still feel-a strong sense of obligation towards shareholders. ‘Earnings’ are, of course, the profits attributable to shareholders after interest and taxation and are a suitable yardstick by which to measure corporate growth and efficiency. The concept of earnings in effect combines the results of trading at the Divisional level with those of a centrally controlled finance policy. Growth in earnings per share means that the earnings attributable to each share must grow which may not be the case if too many rights issues are made to finance too little growth. Moreover, in the days before dividend restraint, growth in earnings per share was also most likely to reward shareholders for supplying risk capital by giving them higher dividends and capital appreciation-an assumption which, in the U.K. inflation and the legislation of recent years have severely maimed.
So much for Money. What about Conscience? Are job satisfaction and employee participation, social responsibility, safety, and environmental concern dispensable frills? Of course not. They are vitally important, not only as objectives in their own right, but as constraints. If you slap society in the face because it stands in the way of faster growth and the most efficient use of your resources, society will hit back. That, in turn, will throttle your financial performance and may leave you with a bruised conscience.
But for operating purposes, we realized that ‘earnings per share’ is a meaningless concept for Divisional managers who have no direct responsibility for the debtequity ratio, the terms on which capital is raised, or taxation. The efficiency of the line management was, we believed, best measured in terms of the return on total capital employed. This became our Objective 2. Further objectives were then agreed: the shaping of the corporate profile (or mix) of activities in order to achieve growth in earnings per share and a better return on capital employed; manpower objectives; and-as a non-financial objective-theaim to achieve, or maintain, Fisons reputation as a successful and efficient industrial, scientific, financial and managerial organization.
111short, supremacy of financial objectives should not be misunderstood to mean that growth and efficiency must be maximized regardless of any other factor. A statement of corporate objectives has to recognize
These Objectives served us well for nearly 10 years, as I will try to demonstrate later when discussing the implementation of declared intentions and monitoring of progress.
6
Long Range Planning Vol. 10
December
Nevertheless, 9 years after the Board of Fisons Limited had approved the company’s first formal, written Objectives, the time was ripe for a thorough-going review. After 6 months work and extensive consultation with senior management, a modified document was put to the company’s Main Board in December 1976, and approved. Much has changed in 9 years. External conditions have grown tougher and more hazardous for reasons to which I referred earlier; government intervention (directly or indirectly) in industrial affairs is now a major factor in corporate strategy; and society’s desire for the exercise of social responsibility in business has developed a voracious appetite just at a time wheu the means to gratify it has diminished under conditions of severe economic and financial stringency. These considerations led us to reaffirm even more strongly than in 1967 the supremacy of financial objectives: not in order to play King Canute with the tide of social, economic and political pressures, but in order to ensure that we are strong enough to swim with that tide. Accordingly, it was decided that Fisons would have only one Corporate Objective; Earnings growth and return on investment. This reads : ‘The Corporate Objective of the Fisons Group is consistently to achieve profitable growth in real terms by increasing earnings per share and raising the return on capital employed’. It was stressed not only that the Objective
itself is preeminently financial but that its achievement can and will be measured and monitored, thereby imposing on management the discipline of actually pursuing the declared intention. We know from a succession of attitude surveys of Fisons shareholders in 1969, 1972 and 1975* that this objective is fully consistent with the needs and preferences of our private and institutional shareholders. It stands to reason that, in a tough external business climate, this Corporate Objective will also, in the final analysis, best serve and safeguard the interests of the company’s employees and its external business partners. It is our belief that confused and difficult times demand a single-minded objective as the focal point of corporate endeavour. It should be realistic, feasible, measurable and visible. Fisons Corporate Objective may not suit other companies any more than Robert Townsend’s objective for Avis suited us. My use of Fisons is illustrative-not lH. Redwood ‘Company-Shareholder relations’, talk given at Management Centre, University of Bradford, July 1975 (available from Fisons Limited). H. Redwood ‘Fisons shareholders in transition: the results of the third survey 1975’. talk given at the Stock Exchange, London, October 1976 (available from Fisons Limited).
1977 prescriptive. My only recommendation is that it helps to have an agreed, declared corporate objective as a basis for operations and future development. It crystallizes thought and concentrates effort. It is, of course, less exciting than the triumph of pure opportunism which occasionally mesmerizes the financial community and the press until-as often as not-the magic spell is broken by a resounding crash. The business genius, successful or otherwise, is ipso facto the exception to every rule. Corporate Objectives are not for him. Nor are business schools or management training centres. But then, we are dealing with the ordinary wellmanaged business that aspires to do better; and also (if we could gain its ear which is doubtful) with the complacent mediocre management that always waits until nature has taken its course, belatedly reacting to events that might have been anticipated. Yet we all make mistakes. Corporate Objectives are intended to help us make them less frequently and less disastrously, as well as for the purpose of positive achievement.
Supporting Constraints
Business Policies and
I referred
earlier to the need for supporting a single clearcut Corporate Objective with relevant policies and full recognition of constraints. In Fisons we have defined these under five headings: (1) Resources (2) Cash Flow
(3) Profile of Activities (4) Employees (5) External Relationships To take these in turn: Resources Policy. To deploy scarce resources selectively and with
optimal effectiveness Objective.
in support
of the
Corporate
That is rather general in tone, isn’t it? We therefore went on to be more specific. Firstly, the investment of both human and financial resources must be based on selecting from worldwide opportunities only those which are judged capable of contributing to the achievement of the Corporate Objective. Secondly, the corporate return on capital employed must be raised substantially in order to promote earnings growth through more efficient use of resources. Thirdly, finance strategy should be designed to provide, conserve, or release funds for investment on terms compatible with the Corporate Objective. It is surely clear that here we have the elements from which a practical strategy and development plan can be
Setting Corporate built: selective, concerned with efficiency as well as growth, and financially disciplined. The proof of the pudding is of course in the eating. Our second supporting policy, and constraint, is Cash Flow Policy. To ensure at all times an adequate margin of liquidity relative to practical borrowing ability, and to control corporate cash flow in line with the requirements of the Group as indicated annually in the Budget and Plan. We wrestled for some time with this innocuous-sounding statement before confining it to the twin points of safety margin and control. No mention of cash flow maximization and the virtues or otherwise of positive cash flow versus loan finance and gearing ratios. But lest the first point be overlooked, a second paragraph was added : ‘This recognizes that on occasion it may be necessary to give precedence to liquidity over all other objectives in the interests of corporate survival.’ A constraint with a vengeance: one it was felt, that would be accepted by employees, shareholders, lenders and business partners alike as being in the best interests of all. Our third policy is concerned with the profile, or mix, of corporate activities : ProfileofActivities ’ Policy. Firstly, to develop, and where necessary nzodify,
the Group’s profile of activities in a manner designed to achieve the Corporate Objective. Secondly, to balance the profile, making it less cyclical and avoiding overdependence on any one source of profit, in order to enhance stability of financial performance. There is an evident awareness here of the need for change and for the maintenance of a degree of balance and stability during the process of change. There are so many examples of companies, great and small, that have foundered as a result of failure to activate change or the passive acceptance of severe imbalance, that I do not think I have to labour this point. For internal purposes we app,ended to the Profile Policy a separate document setting out four sets of criteria and guidelines under the headings of Development, Acquisitions, Diversification, and Disposals. These help us to assess new ideas and projects qualitatively, on policy grounds which is a good way to ensure selective investment of scarce resources. Qualitative methods are strangely neglected in management literature because management has become obsessed with numeracy even in areas where qualitative approach is often more effective. We all know how diicult it is to resist a project that, nmner-
Objectives
7
ately, shows an apparently high return-on paper. Yet such a proposal could take the company far from its preferred areas of investment. Approval, in that event, should be a conscious act of will, a deliberate change in direction, not simply the result of a casual push given to an aimless boat. The fourth policy concerns: Employees
policy. To employ the optimum number of people of the right calibre, skills and experience and to organize, train and motivate and so remunerate them as to achieve the Corporate Objective. It is unfortunately difficult to sound other than pious and platitudinous when talking about people in general, as distinct from individuals whose emotions, loyalties, rivalries, fears, ambitions and achievements . . . whose efforts and involvement are the real flesh and blood of business life. It is a truism that lack of effort or alienation will put paid to any statement of Corporate Objectives. Motivation is really the heart of the matter. The other aspects: numbers, skills, organization, training and pay can all be monitored on a relatively objective basis in relation to policy. When this objective was discussed, someone asked how we proposed to implement the words ‘and so remunerate them’ under present legislation in the U.K.? The answer is plain: for the present, we cannot. If this situation lasts for long, however, the company must either accept the dilution of its declared policy or seek opportunities where demotivating restrictions do not apply. Finally, the policy of External Relationships: Here we extended the 1967 aims of achieving or maintaining an international reputation industrially, scientifically, financially and managerially with three further points : Commercially-in partners.
our
relationship
with
trading
Socially-concerned with safety, and balancing efficiency as a manufacturer with the community’s environmental concern. Also recognizing fully the local laws, customs and required codes of conduct wherever we operate and Politically-pursuing a serious policy of reasonable co-operation or negotiation with all legitimate governments in the best interests of employees and shareholders. When deemed necessary, the company reserves the option of openly and legally participating in the political processes of any country in which it operates in defending employees’ and shareholders’ interests. Such a statement is a major step from the unspoken but implied political unconcern of the 1960s. It does not express an active desire for political activity on the part
8
Long Range Planning Vol. 10
December
of the company: that is not the objective any more than social responsibility per se. It recognizes, however, that an attitude of absolute passivity towards political events is no more tenable in present and future society than one of passive reaction to economic or social trends. No company is an island. That is the message.
Corporate
Objectives
in Practice
Fine words butter no parsnips. What needs to be done to ensure that fine words are not also eminently forgettable, and quickly forgotten? Four lines of approach spring to mind : (1) Adequate preparation. (2) Consultation
and communication.
(3) Assessment of major proposals for ‘fit” with Objectives before decisions are taken. (4) Measurement and monitoring
of company progress.
The first is adequate preparation. The d&&y with fine words is the incredulity that they engender. Two reactions are to be expected: ‘Do we really have to be told anything so obvious?’ and ‘That’s asking for the impossible!’ The sceptic is not in the least abashed by the fact that his two reactions contradict one another. Can an objective be both obvious and impossible? The best way of convincing management that it is worthwhile to set Corporate Objectives and act on them is to demonstrate factually the extent to which the company has fallen short of achieving in the past what is being proposed for the future; and perhaps also to prove that competitors have achieved some of the goals that are being dismissed as ‘impossible’. To do so involves a good deal of analysis and research, but time and effort are vindicated if the results demonstrate room for improvement which, almost invariably, they do, If not, it is a fair guess that the objectives have been pitched too low or wrongly designed for the company in question. The purpose of the preparatory analysis is to reveal the areas of weakness and vulnerability which, in every business, come to light if one probes deeply enough. After preparation comes consultation. Simply to impose Corporate Objectives on those who will be responsible for carrying them into effect, is to ask for the cold shoulder. Consultation and debate must therefore involve managers who have responsibilities for strategy and policy-making and who in practice determine the direction in which the business is to move. How far down the chain of command the process of consultation is taken is a matter ofjudgment. Somewhere along the line will come a point at which corporate objectives as such mean little to the employee and have to be translated into operational objectives before interest and commitment can be aroused. This applies also to the manner of communication once the objectives have been agreed and ratified.
1977 The practical use to which they are put is again seen most clearly in terms of strategic policy and project decisions where the allocation of scarce resources is at stake; capital, talent, skill, materials, andespace are all examples of resources that are rarely unlimited and where concentration of effort tends to produce the best results. That implies a selective and critical approach to development and investment. Knowledge of the resources available and testing of new proposals against the touchstone of agreed Corporate Objectives helps to develop a consistent strategy. To be effective, this form of assessment should be carried out in good time, before managers have become irretrievably committed to a project, for by then it has usually developed the force of an avalanche which no mere committee could stop from thundering downhill. To know when to be negative is a management skill, too. But Corporate Objectives are even more useful in a positive sense, for backing up and stiffening the resolve to take major risks without which no competitive business can advance. It is the choice and degree of risk taken, the marshalling of resources in support and the introduction of balancing safety factors elsewhere in the business which make up corporate strategy. Measuring risk and opportunity for compatibility with Corporate Objectives will normally help very greatly to crystallize decisions on which the company’s long-term future is dependent and which cannot be reversed once the button has been pressed. Finally, the monitoring of results. I need hardly emphasize how important it is to do so if the declared corporate objectives are not to pass gently into limbo. An annual review of the company’s progress towards its objectives is a good way of keeping them alive without inflicting constant pedantic reminders on busy managers. The more this can put the year just ended into historical perspective with earlier years and link it to corporate plans for the future, the more clearly will strengths and weaknesses, opportunities, and risks emerge into the light of day, and point the way to what needs to be done.
Fisons Corporate Monitored
Objectives
1967
To illustrate this, I should like to conclude by showing briefly how Fisons has performed in relation to its original Corporate Objectives set in 1967, singling out the first two where results can easily be measured and are published in our Annual Reports. First, earnings per share. This, as I mentioned earlier, was designed in 1967 as the company’s Prime Objective and read : ‘To achieve continuous growth in earnings per share both in the short term and in the long term’. I should explain that our insistence on ‘continuous’ advance stemmed from an analysis of the preceding
Setting Corporate
Figure 2 compares Fisons return on average capital employed during the years 1967-1975 with the historic cost return of U.K. Industrial and Commercial Companies, based on the national income and expenditure accounts prepared by the Central Statistical Office*: Some conclusions can be drawn:
Objectives in 1967 Plan for the years we then visualized share’ and compares
Fisons very unsatisfactory return of 7.3 per cent in 1967 was indeed raised substantially, although the setback of 1970 and the revaluation of land and buildings in 1973 were factors that slowed down the improvement. By 1975, the return had risen to 16.7 per cent. The tirst part of the Objective had therefore been ftiled.
It is very clear that, following beginner’s luck in 1968, the subsequent 3 years were a hard struggle to maintain the level of earnings, with a serious lapse in 1970 when our fertilizer business ran into a severe crisis. But once this was overcome, 5 successive years of continuous growth in earnings per share were achieved, although industry as a whole went through the greater part of two trade cycles during those same 5 years. Moreover, the speed of the advance greatly exceeded that which had formed the basis of our cautious Outline Plan in 1968-which at the time had been regarded as extremely ambitious in view of the repeated disappointments of the preceding decade.
That could not be said of the second part. During the period, U.K. Industrial and Commercial Companies as a whole had also improved their performance, though less significantly. Their return had in fact fallen from about 14 per cent in 1967-1968 to under 13 per cent in 1970 and had subsequently improved to 16*5168 per cent by 1973-1974 at the peak of a new trade cycle. By this time, Fisons had reached but was far from ‘maintaining . . . a level significantly above the average achieved by industry as a whole’. Another even more important consideration is the impact of inflation on real returns, which by 1974 had fallen to less than half the 1967 level for U.K. companies as a whole*, a trend from which Fisons was not exempt.
All in all, it can be said that during this period the prime corporate objective was achieved. Objective 2 (in the 1967 version) read: ‘To raise substantially the average Group pre-tax return on capital employed in order to promote the
‘Bank of England Quarterly Bulletin 16 (March 1976).
Original Outline Plan (1968) and Actual Results to 1975.
24.0 / Q 24 F
Outline Plan
2m 16 12 8, -
5
8.2
I
Year to 30thJune 1967 Calendar Year
I
I
I
9
achievement of Objective 1. Thereujer, to maintain it at a level significantly above the average achieved by industry us a whole.’
decade when our earnings per share had performed inconsistently in a cyclical manner. The emphasis on both the short term and the long term was intended to ensure that no manager would jettison agreed long-term policies (such as research which is the basis of several of Fisons operations) in order to engineer a short-term advance that would ultimately leave the company in the position of a shooting star which after shining brightly and briefly, is soon burnt out. Board approval of the Corporate was accompanied by an Outline 1968-1975. Figure 1 shows how ‘continuous growth in earnings per it with what actually happened.
Objectives
I
I
I
I
I
1968 1969 1970 1971 lSj2 1973 1974 1975 1970 1971 1972 1973 1974 1975
Figure 1. Fisons earnings per share. Original outline plan (1968) and actual results to 1975
Long Range Planning Vol. 10
10
December
1977
Historic Cost Basis, Before interest and Tax. 18-
16.8
16.7
16 -
14.3 \
1:7 / \ /
\
\ \
‘v’ 13.6
6~
\
I
Year to 30th JIune 1967
1962
Calendar Year 1967
Figure 2. Return on capital employed.
’
I
I
,
1969
1970
1971
1972
‘Consistently to achieve proftable growth in real terms by increasing earnings per share and raising the return on capital employed.’
APPENDIX Table 1. Fisons Earnings Per Share
1970 1971 1972 1973 1974 1975
1968 Outline Plan’ (pence) Year to 30th June
Actual Results2 (pence) Year to 30th June
8.2 12.6 14.9
8.2 14.8 15.0
16.4 17.3 17.8 18.9 21.0 22.8
Calendar year 10.6 15.9 21.4 24.0 30.3 36.4
Sources: 1Fisons Limited, internal document. aFisons Limited, Annual Report 1975.
~ 1973
1974
1975
Historic cost basis, before interest and tax
As, moreover, Fisons return on capital in 1975 showed no significant improvement over 1974 (although earnings per share did), we had to conclude that more attention would have to be given to this aspect of company performance in the future. That was one of the reasons why the new, single Corporate Objective agreed in 1976 for management guidance for 1977 onwards, is:
1967 1968 1969
I
:
1969
1968
I
i
Table 2. Return on Capital Employed basis, before interest and tax)
Fisons’ (per cent) Year to 30th June
(Historic cost
U.K. Industrial and Commercial Companies2 (per cent) Calendar Year
1966 1967 1968 1969
7.3 Il.3 Il.5
14.3 13.6 14.7 13.3
1970 1971 1972 1973 1974 1975
Calendar year 9.4 12.0 13.7 14.1 16.4 16.7
12.8 13.1 14,3 16.5 16.8 n.8.
l
*From 1973, after revaluation of land and buildings. Sources and definitions : ‘Fisons Limited, Annual Report 1975 ‘Ratio of profit (before taxation and loan interest) to average assets employed’. 2Bank of England Quarterly Bulletin 16 No. 1, March 1976, pp. 36-37 based on national income and expenditure accounts prepared by the Central Statistical Office. Return defined as follows: ‘Gross trading profits (plus rent) net of depreciation at historic cost, but before deducting stock appreciation interest’ divided by ‘Capital stock valued at historic cost’ (The basis ‘traditionally used by management and investors in assessing company performance’).