Incentives to create change
This article was first published in Business Times on 6 November 2020
Some businesses are having a rough time under Covid. In particular hospitality, travel, tourism, vehicle sales, retail shops, entertainment. Within each of these, there are good spots – home delivery, electric cars, private jets, for example – and some very bad ones. Routinely, it has been the job of management to rescue those heading for disaster. But managers are not always the best people to do so. They tend to be older, to have built the business and established the order of things. They are familiar with, and are specialists in, what it was originally intended for. And they are probably more set in their ways. Their relationships with each other, and with their customers, are long established. “It was all going so well and then, suddenly, the virus.”
Should management take the lead?
Employees expect management to take the lead in any change that is needed. They are paid to do so, have positions of authority, are supposed to be more creative – after all, they started the business, pioneered the process and negotiated with the original customers. They are ‘experienced’ and they will claim that that justifies their superior positions and pay packets. In times of change, they are not necessarily the right people to be in charge. Their minds may be less agile than they once were. Their processes are established, not to say fossilised. I once saw a huge bread business in the UK lose its grip on the market because the managers refused to see the disappearance of the wrapped and sliced white loaf and the emergence of fresh, crusty bread. They simply didn’t comprehend that people were not taking sandwiches to work anymore and so the square loaf was no longer needed.
Why don’t the young seize the opportunity to change when markets move and other forces dictate the need for something new? They do, often, by starting their own businesses which steal the market from the old. They seldom reform established businesses without a revolutionary upheaval. Their bosses don’t want them to, you see. And yet these are the very people who will likely be the cause of start-ups. So why the disconnect from the existing business? I believe it is because we fail to hand businesses on to the next generation in spite of the fact that they are the people who will modify, innovate and build – and have already been doing so for some time.
Who should inherit the business?
Business inheritance should be for those who are building the new structure, not for those who have already built and enjoyed the old. Existing stock options are not big enough to do this effectively in MNCs although they can achieve it for SMEs. At present the stock option is seen more as a reward for achievement than an inducement to innovate. This needs to change. I was introducing a slightly novel form of stock option to Cerebos Pacific at the time I sold the company. These were generous options that could not be traded for seven years. This gave option holders – growing senior management – every incentive to make the business more valuable in the future rather than purely at present. As new stock options were added each year, the incentive for future wealth rolled forward increasingly. I know there are option schemes of this sort today but they have not been widely used.
There should be other incentives for the young to plan the future of a business, too. The best way to do this is to offer to establish and fund new ideas that can be proved. Relatively modest starter funds can give entrepreneurial youngsters the basis for experimenting and they should be allowed to own most of the intellectual property of their developments. Given this incentive plus the options that would naturally go with their inventions, you can build ‘businesses within a business’ – it is the most effective way of preventing a giant business from becoming over bureaucratic. The purchasing advantages of scale can still be maintained, and more efficiently because of the right to buy more cheaply elsewhere.
Who is the competition?
Don’t underestimate competition, that great builder of the world’s wealth. It should be applied internally as well as externally. After building a tomato processing plant in Australia I noticed that there were what seemed an excessive maintenance staff off season and an incredibly large on-season crew. I really had no idea what the right number should be. Our own brands required pretty well the whole of the output. So I allowed our products to get a competitive quote from Heinz, which was significantly cheaper, with quality parity. Our plant lost its biggest – and, as the management saw it, perpetually guaranteed – customer for one year. After which the tomato processing plant payroll was reduced by 55%. Internal competition is very effective. The lesson I learnt from that was “don’t threaten, just do it”.
Can management let others take charge?
The most important management tool is letting others take charge and it is the one most seldom used. When a part of the business is doing well the management naturally wants to claim that it was their doing. ‘Success has a thousand fathers; failure is an orphan.’ How dramatically I learnt the truth of that – from a small and insignificant business in a part of the world my parent company didn’t understand. As the business grew the shareholders realized they had a potentially very valuable asset on their hands. That is the stage when an entrepreneur needs to be allowed to flourish, without helpful advice from head office. Of course, head offices have a vital part to play in the running of their overseas businesses. But given that the risk is not inordinate and the local managers are not deluded about their capabilities, they will do it themselves best, with minimum interference. And that applies whether the shareholders are based in the west or in the east or everywhere.
When major shareholders are able to allow the management of new developments to build their businesses, they demonstrate a wisdom and skill that is rare indeed. From now on they will be forced to do so if they want their assets to adapt and flourish.
Letting others take charge is the ultimate management tool. Can you do it?