Big rewards - even for a fat lot of good cats

Having their Cake...
November 12, 2004

I am always in awe of four hands playing the same piano. I feel the same admiration for this book, written seamlessly by two distinct authors - Don Young and Pat Scott. Either the two authors have developed over the years a single style of writing, or the editor is so outstanding that one could entrust him with the editing of the Bible and get back a single Testament.

It is clear from the title that Young and Scott, two management practitioners turned management "gurus" (or something very similar), wanted to focus on the perceived illness of the British corporate world. It is less clear what this book was meant to be.

Academic research it is not, although reference is randomly made to other people's research. A simple discourse it is not, because too many "value-loaded" responses are given. One could say that it is a guide to therapy for UK business, but this conflicts with the authors' stated aim to "offer you a chance to act as 'jurors' and decide what you believe and what might be done about the things that need changing".

Not that it matters. Having their Cake ... is an excellent read - so clear and well laid out that you can digest it in just a day and retain most of what you read. It gives just enough historical background on the developing role of the management and board in British business to put recent events in perspective. It offers sufficient descriptive analysis of how the "system" works to explain the proclivity for deal-making and how the widening gap between the compensation of executive top management and labourers came about. Not only is it well padded out with contemporary events, but it is even brought up to date for the period that elapsed between final editing and public release. Its reviews of the pitfalls of mergers and acquisition are personalised, well thought through and excellently presented.

I also found Young and Scott's style of narrative much less judgemental than Philippe Augar's in The Death of Gentlemanly Capitalism , and therefore their attempt to expose flaws much more credible, despite their role as "insiders", at least for a time, in a system that they wish to reform. A well-written case study about Redland, which at times reads more like a Greek tragedy than a dour business account, does not appear jaundiced in the least, although both authors worked for the company.

There are only four gaps in this otherwise complete review of UK businesses' problems.

First, the book almost completely ignores the role of the consumer - as opposed to the shareholder or stakeholder - in allowing the system to emerge in its flawed form. Unfortunately, the British consumer is a docile buyer of low-quality products and services. It takes a mad foreigner like me to choose to fly in a well-trained technician from the Continent to execute a proper IT/ telecoms installation rather than accept a sloppy piece of work provided, at its convenience, by one of the privatised de facto monopolies. Demanding consumers rather than more government regulations are the only way to attract the CEO's attention away from sell-side brokers to his or her clients.

Second, Having their Cake does not address how the world of business has imported the "star-led" concept from the world of sports. While the world of sports may be rich, it is not awash with money. In business, on the other hand, investors may refrain from investing for a short period but, over the long term, pension funds, insurance companies and even private individuals cannot resist the pressure of the "wall of money". Unlike in sport, where "winner takes all", this "wall" ensures that in business even mediocre management is handsomely compensated, even in bad times. If we enjoy - as observers, tabloid readers or readers of equity research - the "star" paradigm, then we might as well stop complaining about having to feed it, despite the social consequences. The alternative is to look at business more as a serious process and less as a game.

The third gap relates to the role of hedge funds and private equity funds as "actors" in the system, and the role of private equity pricing as allocator of capital. The authors seem to disregard the area completely.

They also seem to look at equity holders as the only bona fide shareholders of a company. They disregard the interest of option or convertible debt holders, or that of short sellers, as a mere footnote, whereas their importance in determining the future of a company is - at times - of paramount importance. Equally seriously, they omit to consider in any depth the "agency conflict" - that is, the conflict between equity-holders and debt-holders.

The final gap refers to the forthcoming new slate of accounting standards.

At the risk of oversimplification, their likely impact will make the balance sheet marginally more understandable while making the profit and loss of many companies not only more volatile, but also largely meaningless against the background of common sense. It would have been interesting to hear the authors' views on what impact this will have on management compensation, on relations between companies and the City, and on governance in general.

Four gaps are not bad for such an ambitious project. I recommend it warmly to all those interested in the UK economy - but the book is not blind to events in the rest of the world. Furthermore, it attempts vigorously to debunk prevailing myths concerning top managers and, if only for that, deserves strong endorsement. Finally, for a book so concerned with management, it steers clear of creating a new management fad. For that alone, it has my applause.

Rudi Bogni, a former investment and private banker, is trustee and director of various foundations and companies.

Having their Cake...: How the City and Big Bosses Are Consuming UK Business

Author - Don Young and Pat Scott
Publisher - Kogan Page
Pages - 4
Price - £17.99
ISBN - 0 7494 3861 4

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