Tesco chief executive Sir Terry Leahy’s message to investors, published in a national newspaper this week, was an important rallying call for the way owners of public limited businesses and their management teams should run a company.
Leahy encouraged shareholders to engage with management, understand the business strategy by getting under the skin of the issues it faces and become true “partners” as opposed to simply investors.Leahy claims that investors’ obsession with the managing of a company’s share price, the focus on the next results as opposed to the next business cycle and lack of long-term strategy only serves to encourage a risk-averse management team.
“Executives,” he wrote, “who constantly have to look over their shoulders to satisfy the short-term expectations of analysts and investors, and do what is ’right for the market’, can develop an aversion to risk and be distracted from doing what’s needed to deliver value in a few years’ time.
“Many investors don’t have the patience for long-term value creation. They often have a one-dimensional understanding of the business derived from spreadsheets and have not invested time to understand the culture or meet the team.”
“Long-term value creation is… inherently linked to our brands and what those brands mean to our customers. It is not fluffy and should not be ignored”
Long-term value creation is not just a difficult concept to understand for those who earn their crust equating today’s numbers with future success in the City. It is also difficult to reconcile as something marketers should promote within our businesses as we simultaneously seek to convince others that we are tightly focused on return on investment. But we should. Long-term value creation is something that we should invest our time and expertise in. It is something we can own and manufacture within our businesses. It is inherently linked to our brands and what those brands mean to our customers.
It is not fluffy and should not be ignored.
In the 13 years Leahy has been the CEO of Tesco, the retailer has grown from a British supermarket that wasn’t even the market leader in its own sector into one of the world’s leading businesses. When he complains the conventional relationship between investors and the public limited companies they have a stake in discourages “the belief, the ambition and the commitment it takes to build great companies” it is something worth listening to. Sir Martin Sorrell actually thinks the boardroom is being won over – great news, but investors and analysts also need convincing.
Mark Choueke, editor