On consultants and chief executives

The Observer, Sunday 30 June 2002

    I have always entertained an especial detestation for the Irish saint Ursicinus of Saint-Ursanne, a pal of St Columba, who loathed wine and those who served it. Down the years, only management consultants have aroused my deeper dislike. The growing scandal surrounding corporations is thus an ill wind. It has wiped millions off the stock markets but it has brought an end to the myth of the visionary chief executive and punctured the arrogance of the consultant.

    In my not always happy experience, there could often be an unhealthy degree of connivance between them. The executive called in consultants to help him force through changes on which he had already decided. The consultants, with an eye on their fee, were always happy to oblige even if the scheme were rash, dangerous and ill-advised or, as often seemed to happen, a false economy.

    The visionary executive would dismiss opposition to his bright ideas as kneejerk conservatism, believing with Woodrow Wilson that: ‘If you want to make enemies, try to change something.’ Hindsight has proved that their notions were often wrong, though I would not go as far as my father’s old Edinburgh lawyer who liked to assert that there was no such thing as a change for the better.

    At least the books were straight. But it was obvious that pressure from the financial markets influenced the way executives behaved. Their decisions were not always taken in the long-term interests of the company but could be driven by short-term needs to impress investors.

    Even more disturbing than the American cases, which have involved outright fraud, is the extent to which the influence of the stock market combines with systems of executive remuneration to encourage practices which are at the outer edges of legality. Throughout the rising markets of the Nineties, it became standard practice for executives to be paid relatively small salaries but to be given generous stock options.

    The theory was that their financial interest in the company’s success would improve their performance. In some cases, no doubt, it did, but it also encouraged greed, vanity, a lack of accounting candour and manipulative behaviour.

    The New York Times yesterday gave details of some of the routine practices used by American companies. One, known as ‘backing’, arises because companies who fail to meet profit levels predicted by analysts are often severely punished by the markets, with heavy falls in their share price. So companies work their profits ‘back’ from the target figure, manipulating sales and expenses, for example between quarters, to achieve the required result.

    During the heady dotcom days, as executive pay increasingly reflected the performance of a company’s shares, such practices became bolder and more prevalent. Analysts and money managers have, of course, been perfectly aware of all this. As long as it happened on the margins of a company’s performance, they weren’t too bothered. But now scores of American companies have been restating their profits and the extent to which loopholes in US accounting rules have been exploited is becoming all too clear.

    Various tactics were used. Sales were recorded long before payments were due. Expenses were shifted to related companies. In the case of WorldCom, operating costs were treated as capital expenditure, to be written off over future years.

    If nothing else, these scandals should dim the uncritical admiration that senior politicians have for businessmen. Most businessmen give you the impression they would make a rather better fist of running the country. It has become fashionable in Scotland for businessmen to sneer at the ‘poor quality’ of Ministers in the Executive.

    One of the visionary chief executives with whom I worked – Terry Cassidy, who later ran Celtic – attended a lunch we had arranged with George Younger, then Secretary of State for Scotland. The purpose of the exercise was to lobby against VAT on newspapers.

    George arrived and was at first very sympathetic. But Terry lectured him throughout the meal about how businessmen like him could transform the Government’s effectiveness. As he left, George, by now rather less sympathetic, said: ‘Well, since you are such a brilliant manager, you will be able to cope with VAT without any difficulty.’

    The industry escaped, but now the Blair administration has bought the Thatcher mantra which assumes the private industry is necessarily more efficient than the public sector. Everywhere, evidence accumulates to suggest the opposite is true. Yet public private partnerships continue to be rolled out and the Government has been trying to smear the reputation of Professor Allyson Pollock, head of health policy at University College London, who has been a consistent critic of the schemes.

    It’s time we binned the British-American chief executive, preening himself in exquisite suiting and boasting of his genius. I sometimes get annoyed when my perjink Scottish accountant tells me with every appearance of cheerfulness how much I owe the Inland Revenue. But I am glad that he is a chartered accountant, not a consultant, and I am confident that he will keep me out of jail.