Books

The Corporation in the 21st Century: Why (Almost) Everything We Are Told About Business is Wrong

John Kay

Profile – R450

Sir John Kay may fairly be described as one of Britain’s most distinguished economists. The founding Dean of Oxford University’s Saïd School of Business, he also held a chair at London’s Business School. No mere theoretician, he also managed the endowment of Oxford’s St. John’s College for more than 30 years and chaired the investment committee of Baillie Gifford’s hugely successful Scottish Mortgage Investment Trust for a decade. The Trust compounded at 20% (UK Sterling) during that period. All of which is to suggest that when it comes to business, John Kay knows whereof he speaks. 

His central thesis is simple: a quarter of the way through this century business as we know it has changed. It’s an evolutionary change, but the language and ideas we use, in boardrooms, business media, and business schools, to describe and understand business has remained stationary.

We are still stuck in the weeds of master and servant, providers of capital and labour, socialism and capitalism, whereas, according to Kay, “Twenty-first century business needs little capital, mostly does not own the capital it uses and is not controlled by the people who provide that capital. A modern firm buys capital services just as it buys water, electricity, and transport – and as it purchases the services of workers, accountants, executives, and suppliers.”

Or, as he continues, “The modern business is defined by its combination of capabilities, not its production function.”

Grasp this, says Kay, and we will realise that “the focus on the firm as a collection of capabilities gives a different and more illuminating perspective for understanding the extraordinary diversity of business organisations and of businesspeople over geographies and over time.”

This, he suggests, “will point the way not just to a better understanding of business but to the better conduct of business itself”.

Do not let me oversimplify, however. Kay’s approach is detailed, closely argued, and supported with examples that stretch back to Adam Smith. Along the way we learn about the evolution of business from the Industrial Revolution in Britain and onwards. There’s a particular focus on the 20th century, and its second half, because that’s when, according to Kay, we see the emergence of the giants – icons, he calls them – such as Boeing; Sears, Roebuck & Co; and General Electric (GE) in America, and ICI and General Electric (GEC) in Britain. All rightly famous at their peak, all subsequently either destroyed or just shadows of their former selves.

Kay attributes their decline to shareholder capitalism and its rapacious assistants, the mergers and acquisitions specialists.

The former, of course, traces its roots back to Chicago economist and Nobel Prize winner Milton Friedman, whose 1970 article for The New York Times, The Social Responsibility of Business Is to Increase Its Profits, was foundational. Profit and the financialisation of business superseded everything – product, community, employees.

Hard on its heels came wave after wave of mergers and buyouts: KKR/Nabisco; AOL/Time Warner, Vodafone/Mannesmann. Those last two were the most expensive in history and among the most disastrous.

Suddenly, it’s 2008. Bear Stearns collapses in March and Lehman Brothers in September. The Great Financial Crisis is upon us and more disastrous mergers in the banking sector have to be bailed out by their governments: Citigroup in America and Halifax Bank of Scotland (HBOS) in the UK, among others.

Kay’s warning is clear. Unless we understand the success factors that go into the construction of a modern giant like Apple or Amazon, and unless we move completely away from the self-enrichment of senior executives, bankers, lawyers, and other advisers through the mergers and acquisitions (M&A) scams, dodgy share buybacks, credit default swaps, and all the rest, yet more financial disaster lurks just around the corner.

Capitec: Stalking Giants

TJ Strydom

Tafelberg – R320

Having read and reviewed John Kay’s magisterial The Corporation in the 21st Century (see previous page), it was instructive to pick up TJ Strydom’s unofficial history of South Africa’s biggest bank by customer numbers and one of its most valuable, Capitec. 

Kay is particularly incisive as he traces the rise and fall of giant corporations such as Boeing and ICI, which he attributes – loosely – to management taking their eye off the product “ball” and focusing instead on the share price, bonuses, mergers and acquisitions, and share buybacks, and on the numbers and the money in shareholder pockets, including themselves. In Boeing’s case, for example, it transitioned away from being a great engineering company that made legendary aircraft to a cost-cutting specialist with harder and harder financial targets.

Capitec, on the other hand, played it exactly as Kay might have suggested: a relentless focus on customers and understanding their needs, a ruthless determination to secure the right people for its teams, simplicity of product, relatively inexpensive yet highly efficient IT systems, and then only a very sharp eye on costs.

Three successive CEOs – Michiel le Roux, Riaan Stassen and Gerrie Fourie – have ensured that Capitec’s success is rooted in its background businesses: the microlending of the late 1990s, the liquor company that we now know as Distell, and what was once Boland Bank. At first sight, that’s an unusual combination, perhaps, but the microlending space was piratically competitive and needed intense discipline to survive. Selling beer and wine has always depended on getting out there into the pubs and shebeens to know who’s drinking what, where, and why. And Boland Bank, based in Paarl, had a provincial underdog mentality yet housed some very smart people. 

TJ Strydom’s tale is sharply told and thorough, easy reading. Unofficial it may be, but he’s talked to nearly every one of the people who made Capitec what it is today and it’s highly recommended.

Money: A Story of Humanity

David McWilliams

Simon & Schuster – R450 

Money is something I think most of take for granted. It’s just there: rands and cents, dollars, euros, pounds and so on. Most of us could do with a bit more, some of us a great deal more and a very few have more money than they would be able to spend in a thousand lifetimes. 

But how many of us stop for a moment to think about where money comes from? Or about the role it has played in the development of our civilisations and societies? We understand critical developments in human history like fire, the shift from hunter-gatherer to pastoralist, the Industrial Revolution and now the Digital Age. But what about the role played by money in all of this?

Someone who has given great thought and attention is Irish economist, author and broadcaster David McWilliams and he pulls it together for us in Money: A Story of Humanity. His approach is unusual. “Money,” he suggests, “is an ingenious technology that humans invented to help us negotiate an increasingly complex and interrelated world.” He’s right when he says we don’t normally think about money like this.

To make his case, McWilliams links money and its evolution to a series of short historical stories or portraits. From the banks of the Congo River comes the Ishango Bone – which may have been the first known way of recording debts. Then to ancient Mesopotamia and from there on to the Lydians, a people living in what is now Turkey, and who invented the first coins. Fast forward to the banks of medieval Florence; the stock exchange of Amsterdam and the VOC; the Scottish murderer John Law, who became French King Louis XV’s Controller of Finances and backer of one of history’s great Ponzi schemes. And many more, right up to the modern day, with Kenya’s M-Pesa and our current obsession, Bitcoin. 

Fascinating, brilliantly researched and written, I learnt a huge amount and enjoyed myself very much in the process.