Editor’s note: William Dunk of William Dunk Partners is an international business consultant who has been based in Chapel Hill since 1996. He writes frequently about business and cultural issues in his column “The Global Province.” He compiles a widely read and quoted review of corporate annual reports. WRAL Local Tech Wire is publishing Dunk’s 2007 reviews “Beast in the Jungle” beginning today.
CHAPEL HILL, N.C. – The Decline of the West.
In 1918 Oswald Spengler celebrated the end of World War I by publishing The Decline of the West, his view that all the West was caught up in slow, inexorable decline, an outlook that resonated widely with the intelligentsia at that time. It rails against both democracy and the corrupting power of money, with a passion not shared at all by modern day intellectuals. Of course, Germany defeated felt pretty bad after the War. By claiming that everybody was in the same sinking boat, Spengler, a German supremacist, could make his dejected buddies feel better.
But a handful of contemporary thoughtful statesmen and original academics in our own time, not only Kissinger but many others, privately talk about the decay of all our institutions, though still publicly paying lipservice to the idea of continual progress and to the great things that lie ahead for mankind. For them we are slowly coming unglued. Grandiose pessimism is somewhat back in fashion.
More sober minds would say that the jury is still out on the century behind us. Who’s to say whether we’ve regressed or progressed since 1918. We suspect that the pattern of erosion is a little clearer over the last 15 years. The end of the Cold War and the triumph of capitalism throughout the world—so overwhelming that it has even engulfed Communist China—has weakened the fiber of the West. Developed nations appear to have lost their raison d’etre and have been swept off their feet by the rush of digital technology and the fecklessness of global dynamism. The corporation has become arthritic at the moment that should be its zenith.
What annual reports over the last two years reveal is that the corporation, or the corporation as we knew it, has been caught up in a frenzy of dismemberment and disfigurement that we had not seen before. From 1975 on, as world markets grew increasingly demanding and political leadership in the western world failed to tend the store, companies in all the developed nations began too chop off divisions, cheapen their product offerings, and, worst of all, strip their middle management ranks, while pretending they were just shedding a little excess fat. They cut to the bone. All of this was done with the help of management consultants who offered all sorts of nostrums that ostensibly would turn senile corporations into young studs, but really just put a smiling face on relentless cost cutting.
For some reason, the B-school fad that most sticks in our mind is business process reengineering. Its chief cheerleader was a onetime MIT professor named Michael Hammer who said the task for corporations was to design out makework that added no value and build orderly, automated processes that led to high value creation. This effort itself led to a whole lot of makework where the deckchairs got pushed around the corporation, but it did not really much change where the enterprise was headed. If looked at from the planet Mars, companies seemed to be up to the same things that had kept them busy for decades.
At the end of the day, when re-engineering worked to some degree, it sliced out a chunk of expense and a bunch of people. It was just a process—not a belief system that would help the corporation to accommodate itself to an entirely new world.
Unfortunately, Hammer, while relentless, was not as entertaining as Mike Hammer of detective story fame, whom history will better remember. Not only was re-engineering fruitless for society: it was humorless.
The difference circa 2007 is that companies don’t much bother to put a happy face on what they are up to—in their reports or anywhere else. All the window dressing has been stripped away. One way or another they nakedly cut in-house employee cost and shift work to other venues, particularly China and India, but also Eastern Europe, and a host of other places. By and large, their annual reports have become just as emaciated as they are, a far cry from the days of gala annual reporting in the 1960s and 1970s when the chief executive personally put considerable energy into the written document about his doings. Then individual shareholders, small and large, rather than hedge funds, were his target, and these shareholders cared about growth and good products, more than margins.
Today reports pour across the threshold that consist of a hodgepodge of paper directed at regulatory bodies sandwiched to a cover and a president’s letter that do not serve to raise our expectations for the corporation or the economy, but further hint at decline. Annual report quality has declined at about the same rate as the American newspaper. Ironically, the newspaper is very much alive and well both in China and India.
Nonetheless, the most astute businessmen heading public companies, both here and abroad, still turn out reports that tell us which way the wind is blowing, point out where we should invest, and imply changes in political economic policy that might make the world hum a little better. It is the purpose of this report to focus on those few reports that give us some extra insight into the state of business.
A Private Affair
.It used to be that the report to read in America was General Electric’s. If you read what Reg Jones, onetime CEO of GE had to say, you could fairly well tell what business practices were working and which were flunking, what industries you should be in, and which you should be exiting. But GE is a trifle passé at the moment. Today we would have you look at the Washington Post Company. Even though we think its flagship newspaper is less than its reputation would lead you to believe, we think it’s a pretty good company with a great chairman Donald Graham.
For some reason he’s able to talk straight. It helps to come from the founding family: you don’t have to mince words, even if the Bancrofts (Wall Street Journal) and Sulzbergers (New York Times) up in New York are a little tongue-tied. It helps that he newspapered at Harvard (Harvard Crimson), did some journalism in the Army, and worked as a reporter at the Washington Post. We like the fact that he was a Washington D.C. cop for a while: that, too, may have helped him learn to talk simply and think clearly.
Washington Post’s 2005 report owns up to a disappointing year and lays out what the company has to do to turn itself around. It presents the company as a bunch of enterprises built around a newspaper. Washington Post’s 2006 report shows that Graham knows he no longer heads a newspaper company; now it’s a diversified media and education enterprise. Kaplan Education has become all important, and the Post itself delivers continuous disappointments. Of course, newspapers are sinking all over America, and the test of media enterprises is and has been to transform themselves into something dramatically and completely different. The trick is do it without cutting into the bone, as at Time Warner: there the products no longer merit our attention or loyalty.
Graham’s most important observation comes near the end of the 2006 report where he laments:
“The Post went public in 1971 and will certainly remain so. Until the past few years, I’d have advised a company going public that there was no reason not to.
“No longer. The current interpretation of Section 404 of the Sarbanes-Oxley Act has imposed costs on public companies that far outweigh the benefits. We won’t change, but a corporation would need truly compelling reasons to go public today.”
Media chiefs such as Graham, more than most chief executives, realize that whole industries are being turned inside out and that our unrealistic political leaders with pie-in-the-sky thinking are not helping them get where they have to go.
Indeed, Sarbanes-Oxley was put together by two nice, well-meaning legislators, in response to Enron, but it has been a utter disaster, creating huge costs that unjustly reward the lawyers and accountants who are largely responsible for the sins of omission and commission that this Act seeks to remedy. As is acknowledged by many, it has created an atmosphere in which true disclosure and transparency have diminished. Moreover, it and poor Federal Reserve policy coupled with egregious errors in tax law have created a boom in private equity. The big investment gains of the last few years, as a result, have come from investment outside the public equity markets. Yale University, which under David Swensen has led the pack in major investment gains, has reaped its rewards through handsome diversification outside public equity—in venture capital, etc. He’s written about this in Pioneering Portfolio Management.
Tuesday: Go Abroad, Young Man