The get rich slow plan

Putting profits above all else cuts no ice with an investment movement that measures firms on more than the annual dividend, reports Arlene Foster

Money talks, and it could speak volumes for companies that adopt an inclusive approach to business. This at least is the hope of the Centre for Tomorrow’s Company, a charity set up to promote the findings of the 1995 Royal Society of Arts report on competitiveness.

To succeed, says the report, companies should make a success of relationships with all stakeholders – workers, suppliers, customers, the wider community – not just shareholders.

Last month, the centre teamed up with Kleinwort Benson Investment Management to launch a new sort of unit trust – one which invests only in companies adopting this approach. The backing of a big bank was a strong endorsement of the centre’s aims.

Centre director Mark Goyder hopes success in the City will encourage more companies to adopt the inclusive approach. `It’s action rather than words,’ he says. `Kleinwort Benson studied the RSA report and concluded that it made sound business sense and could create enhanced shareholder value.’

Working with Kleinwort Benson, says Goyder, will also have a decisive influence on breaking the `dialogue of the deaf’ between business and the City, identified in the report. All too often, the City has taken a short-sighted view of gains, while business has talked only to the investment community about financial performance.

Kleinwort Benson, part of Dresdner Bank, was one of the original sponsors of the RSA report and a founder member of the Centre for Tomorrow’s Company. But its attachment to the centre’s principles, it claims, is much more than cosmetic.

The new unit trust comprises up to 90 companies across a range of business sectors, including manufacturing, all of which are adopting the inclusive approach. By the end of 1996, subscriptions were about £2million, mainly from institutional investors. The fund is aiming for at least £100 million by the end of 1997.

`Tomorrow’s stock market winners will be companies that can convince the investment community of their long-term growth potential,’ says Brennan Hiorns, chief investment officer with Kleinwort Benson Investment Management.

He says the days of inflation-fed paper profits are over. `In this era of moderate growth and low inflation, competition is becoming ever more intense. Companies need a growth strategy and the RSA report provides them with this,’ he says. This economic scenario will create the need for a deeper understanding between the investment community and companies, he says.

Paul Sheehan, assistant director of Kleinwort Benson Investment Management, says: `We’re broadening the scope of the investment process to include behavioural aspects of companies. This provides a more active and forward-looking basis of assessment. It also provides a sounder assessment of management quality.’ A 1995 Mori survey of institutional investors, for example, revealed quality of management as the single most important factor in making a judgment about a company.

Kleinwort Benson claims a model portfolio of about 30 `tomorrow’s companies’, back-tested to 1992, would have outperformed the FT-SE All-Share Index by 38%.

Yet not everyone is convinced. `There’s a dichotomy between some of the principles used in choosing the companies and the way fund managers run their portfolios,’ says Donald Butcher, chairman of the UK Shareholders’ Association, which represents the interests of private shareholders. Butcher claims nearly all fund managers have a high churn rate – the turnover of companies within a portfolio. This would seem to contradict the principle of investing in companies with a sustained growth strategy. Kleinwort Benson claims to have a lower churn rate than its rivals. `Our intention is to take long-term positions,’ says Hiorns.

Scorecard worries

Doubts have also been voiced about the effectiveness of the scorecard system used by Kleinwort Benson to assess and select companies for the portfolio. `We need to see a lot more detail on how this works,’ says Russell Sparkes, a fund manager with the central finance board of the Methodist Church, a £600million investor.

`The scorecard places a positive value on so-called soft issues – training, staff development, quality awards and supply chain organisation,’ says Sheehan. The values can be changed if a company falls back or improves in any category. And the scorecard is followed up by detailed financial analysis.

Some prominent industry bodies, including the Confederation of British Industry, have yet to be won over by the Tomorrow’s Company approach. In a report, Boards without Tiers, the CBI comes down against companies giving too much weight to stakeholders. `Putting the interests of shareholders first should continue to be the goal for directors,’ it says. It does, however, recognise the value of taking stakeholder interests into account. `A company’s success depends on building relationships. It must attract, motivate and retain staff. More and more it must create partnerships with suppliers.’

Nonetheless, the inclusive approach is growing. Sir Anthony Cleaver, chairman of recently privatised AEA Technology, believes it has done wonders for his company.

Cleaver chaired the original RSA inquiry and is president of a board which will monitor the Kleinwort Benson fund. He attributes much of the success in preparing his company for privatisation to successful stakeholder relationships and performance measures. AEA now has 20 performance measures, ranging from a European quality assessment to customer satisfaction ratings, to compliance with health and safety regulations.

Has it worked? `The government would not have let us anywhere near a flotation if it had not been convinced of our ever-improving performance,’ he says.

Cleaver’s words are backed up by a sound financial performance. Operating profits for the first half of 1996 were up 18.5% to £6.4 million.

Ultimately, as the centre proclaims, tomorrow’s companies are unlikely to succeed through reliance on any one performance measure. `We must continue to challenge complacency,’ says Goyder. Drawing on the philosophy of orchestra conductor Simon Rattle, he concludes: `You’re in trouble if you think you’ve arrived. You must keep exploring, finding new paths.’