Inside Business: Industry's leaky bucket

PERHAPS it is no coincidence that yachting is a favourite pastime of captains of industry. The activity that is often likened to standing in a cold shower tearing up pounds 10 notes must for some at least provide a link with their working lives, where so many executives preside over operations in which cash is flooding out the door.

The point is graphically made in research published last week by PricewaterhouseCoopers, the accountancy and management consultancy firm. The findings of its study of 97 UK companies indicate that 11 per cent of British organisations' total sales are generated within business units which are earning less than they cost to run - and so destroying shareholder value.

However, more interesting - and more damning - are the reasons given for underperformance. Any seasoned observer of company results will be familiar with the litany of excuses that executives trot out for disappointing sales - most frequently tough market conditions and exchange rates.

But there are others: only last week, pub operators were blaming a shortfall in post-Christmas business on flu, having attributed their summer disappointments to the World Cup.

The weather also features strongly - and not just for insurance companies, which are, after all, supposed to take climate patterns into consideration when calculating the premiums they charge. Albert Fisher, the food distribution company, has been particularly innovative - blaming problems with various crops and fish stocks as well as the inevitable El Nino for its deteriorating finances.

A reasonable response to such comments would be that it is because they are supposed to deal with such challenges that executives are so handsomely remunerated. But apparently it is not as simple as that. Nearly half of the captains of industry questioned on behalf of PwC blamed underperformance of business units on a lack of appropriate skills.

Readers conditioned to think that the business world is a ruthless place where only the most talented, determined and aggressive inhabitants can survive would be surprised to learn that such under-achievers can remain in place. And yet, even in organisations led by chief executives who insist they are driven night and day by the desire to create value for the shareholders, they do.

There are probably many reasons for this. Senior executives presumably see the admission of problems as a sign of weakness and feel that the public acknowledgement that not all their managers are up to scratch reflects badly on them.

It is also arguable that "shareholder value" is more often about rhetoric than action. One of the most glaring examples of this concerns the US foods company Quaker Oats, which was a keen proponent of shareholder value management yet failed to apply the concept's techniques in its disastrous acquisition of the drinks company Snapple. It bought the company in late 1994 for $1.7bn, but in early 1997 decided to cut its losses by reaching an agreement to sell Snapple for just $300m.

The truth is that even executives who are drawn to the notion of managing for shareholder value can find it hard to achieve. Although the idea is obvious enough, businesses, particularly big ones, have been so inclined to load themselves up with overheads and generally become distracted from the main tasks that it can be difficult to get back to basics. And when they do grasp the essentials of the issue, there is an inclination to see shareholder value as all about profitability, rather than long-term, sustainable growth.

But if a company lacks the ability or inclination to sort out such difficulties for itself, there are plenty of firms around - PwC among them - that see themselves as pools of talent just waiting for such opportunities to prove their worth.

Much has been said about the dangers of companies letting consultants run their businesses. But the quick shake-out seems to be a classic case of the appropriate use of consultants' expertise. Moreover, if executives cannot bear the thought of passing the responsibility over to outsiders, it is always open to them to set up a specialist unit within the business charged with sorting out problem areas - in rather the same way that Hanson and Williams used "hit teams" in their heyday.

In fact, what tends to happen, as PwC's study shows, is that when they do decide to do something about the problems, companies tend to get rid of the offending units either through a trade sale or some kind of buyout. In 1997 alone there were about 700 such disposals, and the worsening economic outlook can only be expected to extend the flow.

That is all very well, in that it stops the business being the parent company's problem. Except that what frequently happens is that in fresh hands - or, more particularly, a buyout involving at least some of the existing management - an ailing operation suddenly takes off.

Another study, to be published by PwC next month, indicates that such businesses can suddenly achieve annual returns of the order of 75 per cent.

What this means for parent companies is that even when they have jettisoned their problems, they fail in management terms. By not being sufficiently aware of the potential of such businesses, they are apt to "leave value on the table", says Bruce Gregory, an experienced executive who is now a director in PwC's business regeneration team, .

It is little wonder Gavin Barrett, of PA Consulting's Sundridge Park management centre, concluded that in many companies managing for shareholder value really amounted to having a "leaky bucket": there was only an increase in shareholder value if the amount created exceeded the amount destroyed.