Profit Paradox
(obliquity: The most profitable companies are not, in general, the most profit oriented.)

Fifteen years after formulating the notion of “obliquity”, author JOHN KAY explains the paradox: the pursuit of shareholder value often destroys it.

Obliquity is the notion that complex goals are often most successfully pursued indirectly. That the happiest people are not those who pursue happiness; that the wealthiest people are not the most materialistic, but those who – like Sam Walton, Bill Gates or Warren Buffett – have a passion for the activities that make them rich.

Obliquity recognises that the buildings designed as ‘machines for living in’ proved, in the end, to be buildings in which few people wanted to live. And that the most profitable companies are not, in general, the most profit-oriented.

It was in the context of the profit seeking paradox – that the pursuit of shareholder value was not, in the long run, productive even of shareholder value – that I first began to formulate this notion of obliquity. Almost fifteen years ago, I chose to focus on the changes that had then recently occurred in ICI.

For most of the 20th century, ICI was Britain’s leading industrial company, describing its mission as the ‘innovative and responsible application of chemistry and related science’. After the brief threat to the independence of the business posed by Hanson’s acquisition of a stake, the company changed its objectives: shareholder value was the goal.

The company’s history recorded the pursuit of the mission of ‘the innovative and responsible application of chemistry’ in different areas that reflected the evolving nature of scientific discovery. The original business, based on explosives and dyestuffs, found a new focus in fertilisers and petrochemicals.

After World War II, ICI’s senior management took the view that the next opportunities were to be found in pharmaceuticals and recruited a team of young scientists to engage in drug research. The decision was to be proved right, but not quickly – the division lost money until the 1960s.

But its fortunes were then transformed by the discovery of beta blockers, the first effective drug for hypertension, by a team led by one of these scientists, James Black. Ultimately, the pharmaceutical division of ICI, now part of Astra Zeneca, would be considerably more valuable than its parent. But it is hard to believe that any company would display such patience today.

I interviewed Black to establish why, soon after the discovery of beta blockers, he had left ICI. He explained that management wanted him to spend much of his time promoting beta blockers, while his own priority was to further his research. At the company he joined, SmithKline, Black found another blockbuster drug, the anti-ulcerant drug Tagamet: and on the announcement of that discovery a smaller British pharmaceutical company, Glaxo, refocused its research efforts.

Glaxo’s therapeutically similar compound, Zantac, would become the best selling prescription drug in history. Black created more shareholder value than anyone else in British business; but, he explained, his intentions had been quite otherwise. ‘I call it the principle of obliquity’ he told me. And so the title for my book suggested itself.

The verdict on ICI is now in, of course. The company’s share price peaked in the spring of 1997, soon after the announcement of its new strategy, and after my conversation with Black. Thereafter, it began a process of steady decline. Today, ICI no longer exists as an independent company.

And the last decade provided many other illustrations. Enron, Lehman, Bear Stearns – perhaps the most profit-oriented companies ever – are no more. The Halifax Building Society became a public limited company to enable it to create shareholder value – and destroyed almost all of it. The most valuable chemical company in the world today is Johnson and Johnson, whose business has been governed by the wordy, stakeholder credo that Robert Johnson promulgated in 1943.

I thought 2010 was a good moment to bring the principle of obliquity to a wider audience. But sadly, Sir James Black, Nobel Laureate, died just two days before my new book’s publication.

Obliquity – Why our goals are best achieved indirectly JOHN KAY ISBN 1846682886 ISBN 139781846682889 March 2010 Price £10.99 Hardback, 224 pp.

Rules are not Enough
You get the nagging feeling, suggests Rupert Merson, in a recent BDO internet discussion Freedom to think, that corporate governance is always caught on the back foot.

“Perhaps from a review of history we have to conclude that much of our thinking about governance has just been misguided and that, if we’re to make governance work, we have to explore new approaches.”

Although some companies willfully ignore the rules, he suggests, we need to remember that RBS complied with the Combined Code. And, up to a few weeks before its demise, even Enron was extolled as a shining example of corporate governance.

“The challenge is to find new ways of understanding governance,” he insists, “and to ensure companies apply it in ways that last.” Some of those ‘new ways of understanding’ are explored in Merson’s latest book Rules are not enough*.

Governance, he says, is not just for the select few running mega companies. It’s an integral part of management. Real managers running real businesses need to see it as an opportunity.

Full of challenging questions, Merson draws on his experience advising organisations on the problems that fall into ‘the gap between accountancy and human resources’ to provide a practical guide to corporate governance and how to make it work.

*Rules Are Not Enough: The art of good governance in the real world Rupert Merson ISBN 1846680913 ISBN 13 9781846680915 February 2010; Price £15.00/Paperback 272 pp.

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