How can we build a sustainable economic future for our enterprises? What do we mean by "corporate responsibility"? And what is the role of companies in society?
These are important questions that as CEO of ANZ and as a business leader of 35 years experience I have had to ask - and answer.
Companies need to focus on long-term growth and sustainability and avoid the pressure to overproduce today at the expense of tomorrow. There is fundamentally no inconsistency between the pursuit of this and our responsibility to our broader stakeholders, as therein sits part of our long-term competitive advantage.
The three main challenges facing companies today are:
• Staying alive
• Producing value for shareholders, and
• Building an enterprise that will not only survive, but also succeed over the longer term.
Why this emphasis on the longer term?
Of the top 20 companies in Australia by market capitalisation in 1980, only 5 are on that list today. That means only 25 per cent of those who started the race were sustainable in that form. This is not just an Australian phenomenon. In the United Kingdom, the FSTE 100 index of leading British companies started in 1984. When the index celebrated its 20th anniversary last year, only 23 of the original 100 remained - a 23 per cent sustainability level - similar to Australia's experience. In the United States, the S&P 500 index began in 1957. Forty-five years later, just 74 of the original 500 companies remained in the top 500 - or 15 per cent.
The reality is that few corporations survive as thriving entities over the medium term. They become less important, collapse, or end up as part of another entity. Some view this as the strength of the market economy operating naturally, where the strong survive and grow and eat the weak or discard their carcasses. Companies stuck in their ways decline, and new hungry, innovative and vibrant companies take their place.
There is nothing fundamentally wrong about eating or being eaten… providing it was an enjoyable meal. For those being eaten, if they were failing, they did not deserve to survive. That's a cheap meal. If they were tasty and worth significantly more to someone else than themselves, then fair enough. That's an expensive meal, rich and more difficult to digest.
For those doing the eating, the question is: what happens afterwards? In most cases expensive meals prove to be difficult to digest and fail to deliver value. The conventional wisdom is that over 80 per cent of acquisitions or mergers fail to deliver value and would have been better left undone.
Although the world has grown substantially over the past 50 years, survival in the developed world is generally tougher than it was then. Economic growth in the OECD has declined from 5.1 per cent in the 1960s to 2.5 per cent in the 1990s - a decline of well over half a per cent each decade. This means that companies have to fight harder for each dollar of profit, and the pressures on management have never been greater. And thus the current pre-occupation of the share markets with short-term performance, where investors prefer the certainty of results today to the prospect of higher but possibly riskier results tomorrow.
The institutionalisation of money, together with regular fund performance benchmarking, has refocused shareholders towards shorter-term returns. The current pressure causes companies to strive for superior short-term results, with the consequence that, instead of focusing on investing for tomorrow, they focus on harvesting today. This is in sharp contrast with the purpose of companies, which is essentially to produce acceptable returns for shareholders over the medium term. Many investors have become more concerned about a potential decline in short-term productivity rather than an opportunity to invest, as we at ANZ have, in customer service and expansion into growth areas.
This is an edited version of his speech to the University of Melbourne's 2005 Town and Gown event on August 31, 2005.
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