In this section:
- Structures – examples from the text
- Tate and Lyle demerger
- The Co-operative Bank – maintaining ethics whilst owned by hedge funds
- Indicative solutions to questions concluding the chapter (Chapter 11)
Structures – examples from the text
The text features and extensive discussion on the structure of Alphabet/Google which was reorganized around its numerous businesses generating greater transparency for investors. With the Lion’s share of revenue being generated by Google (the ads business) and YouTube, the new structure exposed the subsidiaries to the degree of cross-subsidization taking place and the degree of growth generated by the diverse businesses ranging for home IoT (Nest) and Moonshots.
The text also considers the byzantine structure of Samsung which has the appearance of a conglomerate with subsidiaries enjoying various degrees of autonomy. In reality the company resembles more a Korean Chaebol. These large firms are often highly diversified with their own finance houses. They are often close to government. Samsung remains largely a family firm with a skewed shareholding enabling a controlling minority stake.
By way of contrast, Mark Zuckerberg maintains a controlling minority stake in Facebook.
Tate and Lyle demerger
On 26 April 2021, Tate & Lyle confirmed that they were looking to break the company into two distinct businesses. T&L had been operating in two sectors through two divisions; namely, primary products and smaller food and beverage divisions. The proposal is to sell the primary products division (manufacturer of sweeteners such as Stevia and starches). As a division it competes predominantly in North America against larger companies such as Ingredion and Archer Daniels Midland. The primary products division made revenues of £1.8bn to the year April 2020.
The smaller food and beverage division earned £942m in the same reporting period. The company sees the growth potential in this sector, particularly in the field of products that contribute existing manufacturers such as Nestlé and Mondelez to make their products healthier (less fat, salt and sugar), as higher than the primary products. The margins are also higher.
The justification, however, for the change in structure is shareholder wealth. This is a case of the value of divisions being greater when de-merged. T&L had in 2010 previously demerged its sugar business.
The Co-operative Bank
The Co-operative Bank dates from 1872 and was formed to support the emerging co-operative movement in Victorian Britain. As a member-owned bank, governed under Co-operative principles, is presence in the UK high street grew until the impact of the financial crisis in 2008 and its ill-fated takeover of the Britannia Building Society. That takeover left the bank with a £1.5bn hole in the balance sheet.
The Bank was demerged from the Co-operative Group and effectively rescued by five hedge funds including Silver Point Capital, GoldenTree, Anchorage Capital, Cyrus Capital and the fund manager Invesco. In February 2022 it recorded its first profit for a decade (£31m) and is considering exit strategies for the hedge funds, possibly through a flotation on the stock exchange.
The challenge for the bank was how to maintain the ethics of the brand owned by hedge funds. The Guardian, reported that current CEO, Nick Slape, was quick to emphasise that “the bank’s ethical policies are enshrined in its articles of association, which its shareholders have in effect signed up to. ‘We take it seriously: with real policies that are approved by the board, and a values and ethics committee that monitors it all, and we report it to the Co-operatives UK’,” In effect, the Co-operative Bank is a profit-maximiser run on co-operative principles monitored by the guardian of the co-operative principles, Co-operatives UK.
Purpose is an increasingly salient issue for business. Part of the reason for this is increased awareness by companies – sometimes prompted by customers – that firms have responsibilities beyond their shareholders/owners and to society more widely. A key advocate of purpose-led approaches to business is Colin Mayer who led the British Academy’s programme on “The Future of the Corporation“.
Purpose is discussed in the following video from the programme:
The programme has identified 8 principles of purposeful business. These are:
- Corporate law should place purpose at the heart of the corporation and require directors to state their purposes and demonstrate commitment to them.
- Regulation should expect particularly high duties of engagement, loyalty and care on the part of directors of companies to public interests where they perform important public functions.
- Ownership should recognise obligations of shareholders and engage them in supporting corporate purposes as well as in their rights to derive financial benefit.
- Corporate governance should align managerial interests with companies’ purposes and establish accountability to a range of stakeholders through appropriate board structures. They should determine a set of values necessary to deliver purpose, embedded in their company culture.
- Measurement should recognise impacts and investment by companies in their workers, societies and natural assets both within and outside the firm.
- Performance should be measured against fulfilment of corporate purposes and profits measured net of the costs of achieving them.
- Corporate financing should be of a form and duration that allows companies to fund more engaged and long-term investment in their purposes.
- Corporate investment should be made in partnership with private, public and not-for-profit organisations that contribute towards the fulfilment of corporate purposes.
The Future of the Corporation has its own YouTube channel which hosts considerable resources that can be used in class. However, I have taken the liberty to edit one of the public sessions to highlight Innocent Drinks as a purpose-led firm. It is also a B Corp. The company’s CEO Douglas Lamont contributed to the session entitled “How can investors and owners support purposeful business?”. He is worth watching. Start from 3:09 to 15:08.
Higgardy Pies is a B Corp based in East Sussex, UK. Its CEO, Rachel Kelley, explains to Richard Freeman of Always Possible, what it means to be purpose-led.