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30 Nov

What can we learn from corporate longevity?

By Jane Simms, Work.

‘Google is not a conventional company,’ pointed out Larry Page and Sergey Brin in the opening line of their 2004 IPO letter. The message was intended for potential shareholders, but maybe it should have been seen as a warning for the hordes of businesses that try to emulate it, forgetting one vital detail: Google is rich. In April 2017, its parent company Alphabet’s market cap surpassed the $600bn mark for the first time. Clearly it can afford to lose money on risky ventures or empower its employees to be creative with innovations such as 20% time.

While Google’s profitability may, if it’s lucky, ensure its future, rapid technological advances, changing consumer habits and major geopolitical shifts are, on the whole, combining to reduce organisational life spans. Today, according to Scott Anthony, managing partner of innovation and growth consulting firm Innosight, the average company life span on the S&P 500 index of the US’s largest listed businesses is around 20 years, down from 35 in the 1960s. And over the last 50-odd years, the number of companies falling out of the index each year has increased from an average of 15 to 25.

‘Over the next decade we’re projecting 25 to 50 companies per year leaving the index. That’s a lot of change,’ says Anthony. In short, there is no longer any guarantee of a successful corporate life — most of the businesses Tom Peters discussed in his 1982 bestseller, In Search of Excellence, have delivered far from excellent performances, and many of those Jim Collins praised in Good to Great (2001) have also failed.

Does that matter? Yes, maintains Anthony, who warns that this level of churn is dangerous: ‘I believe in competition and that good should win over bad, but when we celebrate “creative destruction” and the rise of the new, we forget the damage destruction creates,’ he says. Rochester in New York State, for instance, was devastated when Kodak went out of business in 2012.

‘Legacy mindset’ and corporate lifespan

We need to ‘recognise the intrinsic value in companies that last a long time’, says Anthony. ‘Having a “legacy mindset” means thinking about how you are set up for generations to come, as well as doing well today.’ Because, of course, businesses don’t exist purely to make profits. The notion that their primary purpose is to ‘maximise shareholder value’ is relatively new — it gained currency in the 1970s as a way of aligning the interests of executives and shareholders.

Yet a legacy mindset won’t guarantee survival — witness the demise of Cadbury, which in 2010 capitulated to a takeover by Kraft — but there are a number of organisations that have bucked the trend for ever-decreasing company lifespans, and they have little in common with Google and its Silicon Valley stablemates. Examining four of those companies, as well as a worker co-operative, we discover that they have many common features.

Human values prevail over economics

If we needed evidence to nail the lie that high pay correlates with high performance, Mondragon Corporation — the world’s largest worker co-operative — provides it in spades. Based in the town of Mondragón in Spain, it was founded in 1956 by a Catholic priest, José María Arizmendiarrieta, to create employment for local people in a climate of severe hardship following the Civil War.

Today it is a constellation of worker-owned ventures, with production subsidiaries and corporate offices in 41 countries. The fourth largest employer in Spain, it has proved enviably recession-proof. Some 44% of its workers are still based in the Basque region, which has the lowest unemployment in Spain and the most equal distribution of wealth.

The average ratio between the salary of the highest and lowest-paid workers is 9:1, compared to an average ratio for FTSE 100 companies of 129:1. Its slogan, ‘Humanity at Work’, has been its lodestar since Father Arizmendiarrieta (‘Arizmendi’) insisted that ‘human values must prevail over purely economic and material ones’.

Mondragon was founded when Arizmendi encouraged five young graduates to set up a co-operative-style enterprise making paraffin stoves named Talleres Ulgor (subsequently Fagor Electrodomésticos). Further co-operatives followed and, in 1959, recognising Mondragon needed a financial institution to support its expansion, Arizmendi created Caja Laboral, which was structured as a credit union and is now one of Spain’s biggest banks. Over the decades, Mondragon became increasingly international, responding to competition from the developing world by setting up factories or buying companies in countries including Vietnam, Russia and China. It even set up its own university, in 1997, committed to social transformation.

Today Mondragon is a series of diverse organisations, largely worker-led and owned — around 80% of its employees are ‘members’ — but they are united by the common values of cooperation, participation, social responsibility and innovation established at the outset. The cooperatives work collaboratively (sometimes reallocating staff to cope with rising or falling demand), prioritise R&D, foster the exchange of knowledge and channel contributions to the wider community.

Despite the inbuilt resilience of the model, however, it is not infallible. When Fagor Electrodomésticos went bust in 2013, with the loss of 2,000 jobs, it shook the organisation to its core. Even pay cuts of 20% or more weren’t enough to stave off disaster after five years of falling sales and mounting debts, but most of the workers were redeployed. As one member puts it: ‘We are not some paradise, but rather a family of cooperative enterprises struggling to build a different kind of life around a different way of working.’

Building blocks of success

Today Lego is the world’s most valuable toy company (in May 2016, Forbes estimated its worth at $7.1bn) and in March it posted record revenue of DKK 37.9bn (more than £4.1bn) for 2016. But it nearly didn’t make it. Over-diversification in the 1990s led to the first loss in its history, in 1998, and from 2003 to 2005 turnover fell by around 40%, bringing Lego to the brink of bankruptcy. Attempts to stave off competition from electronic games and toy discounters were choking it with complexity.

Master carpenter and joiner Ole Kirk Kristiansen first began making wooden toys in the small town of Billund, Denmark in 1932, and started manufacturing the plastic bricks we know today in 1958. For nearly five decades, Kristiansen, his son Godtfred and his grandson Kjeld pursued slow, steady growth. It could take years for a new product idea to get to market and demand was often so high they had to slow sales down. Careful attention was paid to every aspect of the business, and the precise specifications Godtfred laid down (the moulds used to produce Lego elements are accurate to within 0.0004mm — less than the width of a single hair) meant that the bricks created 60 years ago are interchangeable with those made today.

But the sudden rise in competition triggered incontinent brand extension into areas as disparate as theme parks and clothes — and, in doing so, Lego ‘turned its back on the brick’. The saviour was Jørgen Vig Knudstorp, the first non-family member to head Lego, who was just 35 when he became CEO in 2004. He returned the company to its founding principles — the Lego name is based on the Danish words ‘leg’ and ‘godt’, meaning ‘play’ and ‘well’ — focusing on core products (it sold its theme parks in 2005 to Merlin Entertainments), reducing product complexity, managing cash carefully, reining in innovation and re-engaging with consumers.

Still 75% family-owned, with the remainder owned by the Lego Foundation, the business is now stable and poised to exploit the potential of its brand — but in a disciplined way. According to the 2017 Brand Finance Global 500 report, it has overtaken Disney as the world’s most powerful brand, helped by The Lego Batman Movie and digital innovations such as the Lego Life social network.

Collaborative leadership

Bettys & Taylors has been a Yorkshire institution since it was founded nearly 100 years ago by a young Swiss immigrant, Fritz Bützer, who arrived in Yorkshire by accident after catching the wrong train  (he’d intended to find work on the south coast). Undeterred, he changed his name to Frederick Belmont and opened his first European-inspired café in the conservative spa town of Harrogate in 1919.

Today, the award-winning business remains family-owned and there are six tea rooms, all in Yorkshire, a craft bakery, a cookery school and an online shop, as well as the tea and coffee business Taylors of Harrogate (which originates from 1886), acquired in the 1960s.

The company has been run on a stakeholder model since well before such terms became fashionable — a bonus scheme, which typically gives employees an additional five weeks’ pay a year, has been in place for more than 30 years. The business also fosters long-term ethical relationships with its suppliers and has planted more than three million trees and protected an area of the Amazon rainforest larger than the Yorkshire Dales — a crusade it began in 1990 after former chief executive Jonathan Wild found his children in tears over a programme on deforestation.

Wild ran the company until 2011 but, with the fourth generation of the family not yet ready to join the firm, his retirement plunged Bettys into an existentialist crisis. Andrew Baker, former CEO of Duchy Originals, joined as the first non-family CEO in May 2011, only to leave five months later because of a difference in approach over ‘the long-term ambitions and cultural direction for the group’.

Chairman Lesley Wild admits she couldn’t see a way forward and almost left: ‘I knew we needed a fundamental shift in culture and approach,’ she says. ‘We struggled in our business to deal with conflict and to be open and honest because we are terribly, terribly nice.’

Bettys called in consultants who helped the management team to shift from its traditional paternalistic culture to one that embraces collaboration and ‘peer-based leadership’. The company now has not one chief executive, but ‘a Collaborative CEO’ — a group of five executives who share responsibility for organisational strategy and development, and the operations.

Living by principles

One of 3M’s best-known products, the Post-it®, might never have existed if it wasn’t for the frustration of church choir member Arthur Fry, who was forever losing the bookmark in his hymn book. A 3M employee, Fry realised a weak adhesive accidentally created by another staff member might be the answer.

That serendipitous moment led to the creation of the Post-it, but 3M’s famously innovative and collaborative culture is based on an approach that was established when the Minnesota Mining and Manufacturing Company was formed in 1902. The founders wanted to harvest a mineral called corundum and, when they failed, they turned to other materials and products instead, a move that ultimately led to a string of new ideas including such early breakthroughs as the world’s first waterproof sandpaper and masking tape.

The company’s commitment to innovation and collaboration extends to management and people practices, says UK HR director Stella Hegarty: ‘We are innovative through to our core. Many of our principles were established in 1948 by William McKnight [who joined in 1907 as an assistant bookkeeper and rose through the ranks to become chairman], and we still try to live by those today.’

One of those principles was to hire good people and let them do the job. ‘It’s essential that we have people with initiative, if we are to continue to grow,’ said McKnight, urging managers to ‘encourage experimental doodling’ on the grounds that ‘if you put fences around people, you get sheep’.

In 1948, 3M introduced its legendary ‘15 per cent’ programme, allowing employees to spend time developing their own ideas, followed by a technology forum in 1951 to facilitate the exchange of ideas across the globe. Today it still spends 6% of sales on R&D, even when times are tough, and its matrix structure supports collaboration. ‘You need to create space where unexpected connections can be forged,’ says Hegarty.

While the McKnight Principles are the business compass, they are matched by an ethical approach. Its code of conduct is: ‘Be good. Be honest. Be fair and impartial. Be loyal. Be accurate. Be respectful.’ In the 1970s, it set up an anti-pollution programme (saving an estimated 2.1 million tonnes of waste) and in 2016 the company launched a partnership with the Nobel organisation to help advance scientific research and education.

‘Someone asked our CEO what keeps him awake at night, and he said: “The fear someone, somewhere in the world, would do the wrong thing”,’ concludes Hegarty.

Finding the way through culture and history

Kao Corporation’s profile — or lack of it — is reminiscent of western consumer goods giants 20 years ago, before people became interested in the companies behind the brands. But if you haven’t heard of it now, you soon will. The quiet presence behind toiletries brands such as Molton Brown, Bioré and John Frieda has committed itself to ‘fostering a distinctive corporate image’ to help it achieve its global ambitions. By 2030, it wants to be making ¥2.5tn in net sales, ¥1tn of them outside Japan.

Founded in 1887 and named after its first product, Kao Sekken (face soap), the corporation now comprises four main businesses: beauty care, human health care, fabric and home care, and chemicals.

Much of its growth has come through acquisitions and Kao uses matrix management to drive synergies between the businesses and divisions. How it does business has always been as important as what it produces. Its corporate philosophy — ‘The Kao Way’ — is, according to president and CEO Michitaka Sawada, ‘like a compass we refer to if we are facing difficulties or if we are unsure what to do’.

‘The Kao Way is the path we walk along, as we go about our business. It really embraces and captures the culture and the history of Kao,’ he says. ‘One of the core concepts is integrity. And that is not just about compliance, it’s also about being true to who we are.’

The corporation hit a blip in 2013 when it had to recall whitening products after more than 2,000 consumers reported skin blotches. At the time Bloomberg reported that it would lose ¥6bn ($54m) of operating profit for that fiscal year, and Sawada admitted the corporation’s ‘reputation was hurt’.

The recall, however, did no real lasting damage to its reputation. This year the Kao Corporation was included in the FTSE4Good Global Index for the 10th consecutive year and is the only Japanese firm to be named as one of the world’s most ethical companies for 11 years in a row by the Ethisphere Institute. It was also one of only a handful of companies lauded by think tank Global Canopy Programme for its work to reduce deforestation and, in a country that has a word for death from overwork — karoshi — it has been promoting work-life balance for the past 30 years.

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