The wider community, during George Cadbury’s tenure, benefited from the generous use of chocolate wealth to funds schools, hospitals, convalescent homes, churches, housing, swimming pools, games fields, the cricket pavilion, and even such meaningful touches as the Bournville bells. These enhancements contributed to the local community’s sense of unity and belonging. But in today’s global village, Birmingham is fast losing its proud manufacturing heritage, and there are growing ghettos within the city that no longer convey “that eager spirit of application” so admired by the
Chambers Edinburgh Journal
in 1852. The writer and columnist A. N. Wilson, whose father helped to create village houses for the Wedgwood workforce in Staffordshire, points out that the thriving communities created by enlightened
nineteenth-century business leaders “lie in sad contrast to the antisocial attitudes of modern business magnates who think only of profit and the shareholder.” Writing in the
Daily Mail
on January 23, 2010, he argues, “The depression, the human redundancy in all senses of the word which has resulted from the globalisation of the market place has made us all come socially adrift,” adding, “We are all victims of the ‘hostile takeover’ of one kind or another.” Needless to say community leaders and Birmingham MPs campaigned against the sale of Cadbury in Westminster.
There was anger too at the lack of action from politicians. Prime Minister Gordon Brown stated, “We are determined that the levels of investment that take place in Cadbury in the UK are maintained, and we are determined at a time when people are worried about their jobs, that jobs in Cadbury can be secure.” But he had no power to enforce his statement. The role played by the Royal Bank of Scotland was seen as a bitter betrayal. This British bank, which was 84 percent owned by the taxpayers after the government bailout during the credit crunch, joined the syndicate that funded Kraft offering a £630 million loan facility. “When British taxpayers bailed out the bank, they would never have believed that their money would be used to put British people out of work. Isn’t that plain wrong?” argued the Liberal Democrat leader, Nick Clegg, in a stormy House of Commons debate on January 20.
Betrayal or not, the British government believes in an open-door policy with regard to foreign takeovers. Some economists argue this is to Britain’s benefit with takeover rules focused on value and a clear financial code that leaves decisions on deals to shareholders who all have equal voting rights whether they are short-term or long-term investors. For others, like former Treasury Minister Geoffrey Robinson, this is “a one-way street,” and too many British companies, especially in manufacturing, have passed into foreign hands: glass, steel, chemicals, and confectionery, to name but a few. How much closer to the truth is city columnist Anthony Hilton, who argues, “We have an economy dangerously skewed towards financial services,” and “the whole nation pays the price.” He points out that “investment bankers actively tout our companies around the world because one
big bonanza can set them up for life.” Business Secretary Peter Mandelson too questions who benefits from such deals: “The open secret of the last two decades is that mergers often fail to create any long-term value, except perhaps for the advisors and those who arbitrage the share price.” The
Guardian
summed up the anger: “This is an old-fashioned Square Mile stitch-up, driven through by City short termists.”
So how has this happened? For Sir Dominic Cadbury, at the heart of the issue is the changing concept of ownership inherent in our modern form of shareholder capitalism. In fact, he argues, “There’s no ownership concept,” at least not in the traditional sense of stewardship and long-term planning for a company that his Quaker capitalist forebears understood. The current system is far removed from the Quaker philosophy of business and “aligns too many people to be incentivised over the short-term.”
“It comes back to the role of the shareholder—the shareholder is the owner of the business. But the difficulty with all this is that they are not acting as owners of the business,” he says. “There are thousands of shareholders in Cadbury who would probably have said they didn’t want to sell their shares and would have voted against. But they didn’t have a vote, because if you are the average shareholder, you don’t hold your shares personally; you hold your shares through your pension scheme or your bank. In the case of Cadbury, sixty fund managers made the decision.” But fund managers are under pressure to focus on immediate gain and short-term performance targets rather than long-term wealth creation.
Hedge funds demonstrate the extremes of short-termism. “The hedge funds are ‘owners’ whose motivation is to see that the company disappears,” says Dominic. “By definition, they have no sense of obligation and no sense of responsibility for the company whatsoever.” Yet in this case, by the end of the bidding process, they “owned” more than 30 percent of Cadbury and were happy to sell for a 20p profit—a stark contrast to the dedicated Quaker capitalist founders who nurtured the company from its humble beginnings. This has to be the ultimate in the throwaway society. “One day you
had the Cadbury company, the next day you didn’t,” says Dominic. “Gone. One hundred and eighty years of history down the tube, and I would argue 180 years of being a beacon of good practice. Something very precious got lost that day. Gone. And it was so easy.”
Sir Dominic is not opposed to takeovers but questions how they are achieved. “Even the Chinese, in their Communist way, actually feel very seriously about ownership. They are not going to let ownership drift away,” he says. Traditionally takeovers have been a way of removing bad management, but in this case, many argue that Cadbury’s management team was more dynamic and effective than Kraft’s. Todd Stitzer concedes the outcome was not consistent with his view of principled capitalism. “I felt immense frustration because this company stands for everything that is right in business,” he said. “It stands for performance on the one hand in terms of reward for shareholders but also social and sustainable responsibility on the other hand.” The key, he points out, is to find the right balance between short-term shareholder returns and the long-term needs of the company.
For some the takeover raised questions about the role of the company board. “Roger Carr was wrong when he said the Kraft takeover was all about price,” argues Mark Goyder, the founder and director of Tomorrow’s Company, a research organization. He believes the fiduciary duty of company leaders is to their company, not directly to the shareowners. “Neither the takeover code nor the general law imposes a duty on directors to recommend a bid on price grounds alone where they feel it isn’t in the best interests of the company,” Goyder told
Director
magazine. In a keynote speech to the city of London on March 1, 2010, Peter Mandelson, Secretary of State for Business, said that board directors should consider the interests of all stakeholders in a business: employees, suppliers, and a company’s brands and capabilities. He urged directors to act more like “stewards” rather than “auctioneers” selling to the highest bidder, adding, “If this requires restating the 2006 Companies Act, then so be it.”
Roger Carr, who fought for the best price for shareholders all the way through the takeover, now questions whether the current takeover rules are fair. Speaking at the Said Business School on February
9, 2010, he acknowledged that “something has happened to the system that appears to tip the playing field to short-termism. . . . Whilst capitalism is efficient, it may be unreasonable that a few individuals with weeks of share ownership can determine the lifetime destiny of many.” Rather than the government “speaking from the sidelines on national interest,” they could use their power “to deliver their view or at least tax measures to encourage long-term share ownership.” Why not raise the acceptance for takeovers from 50.1 percent of the share register to 60 percent, he asked, “reducing the odds of deal-driven investors unduly influencing the outcome.” Perhaps, he adds, shares acquired during the bid period should carry no voting rights to “ensure that short-term money does not determine long-term futures.” Richard Lambert, director of the Confederation of British Industry, and many other business leaders are questioning whether short-term investors’ voting rights should be curtailed. Some MPs are calling for a “Cadbury Law” to ensure that for certain “strategic” companies, two-thirds of shareholders will have to vote yes in a hostile takeover.
So why has the balance tipped to short-termism? “Greed,” in the view of Todd Stitzer. “People want money fast and they don’t really care. They just don’t care what it takes to get it. That’s what it’s all about. It’s disconnected. The connection between the humans who make the raw materials with the humans who make the stuff in factories, the humans who make the machines that go into the factories. It’s disconnected so no one feels responsible for how it works.” This disconnect, he says, leads to “people who are in it to see if they can get 20p out of you” as opposed to genuine wealth creation by innovation and increased capability.
He believes the current system can distort the notion of value and is open to abuse. “There’s a game that public companies play with shareholders—with financial statements. They do things to enhance earnings, so that people who are quantitatively orientated and think that all you need to do is look at numbers and numbers relationships, say this is getting more valuable and that’s going to keep going forever, but that’s not true. Just not true. Brands must have brand marketing investment. They have to have science and technology investment.
You have to have machinery and equipment that’s replaced on a regular cycle that’s not milked and so on.” He believes that process has also led to a culture of wanting higher compensation. “In the rubric of ‘we want everyone to have options and identify with the shareholders,’ smart people, who aren’t quite as principled, figure out how to advantage themselves by manipulating the financials,” he explains. “The world has borne witness to legions of company leaders doing this.” The manipulation is all too easily disguised: “It’s purposeful,” he says. “They figure out how to fiddle with the accounting by doing certain things in the business to increase the value of their shares so they can cash in their stock options.”
For Timothy Phillips, chairman of The Quakers and Business Group, which aims to promote Quaker principles in the workplace, there are wider concerns related to our modern form of shareholder capitalism. Firstly, “Shares tend to be owned by institutions rather than individuals, and they collectively become almost more powerful than governments, which are overly influenced by the growing power of the shareholder lobby.” Is this truly democratic, he asks? He also questions the transparency of the process. “For example, the money that Kraft shareholders have borrowed to buy Cadbury will be repaid to the banks who funded the purchase; they in turn repay the funds they borrowed from in the first place. So what one is doing by supporting the argument that bigger is better all the time is creating essentially a global network of asset ownership on a vast scale.” This has led to “a number of international well-paid jobs in powerful institutions and corporations, but it also means wealth and power is concentrated into fewer and less accountable hands.”
This phenomenon has played out in the chocolate industry: A succession of smaller firms, Fry, Rowntree, Terry, and Cadbury, have disappeared into two giant corporations: Nestlé and Kraft. In the process, a myriad of middle ranking and senior positions have disappeared to create fewer, more highly paid top jobs. The credit crunch has brought with it stunning revelations about excessive pay, bonuses, and pensions for those in the upper echelons of multinational institutions and companies and a growing gap between rich and poor in the West. In the United States, the ratio of chief executive pay to
factory worker pay has risen from 42:1 in 1960 to 344:1 in 2007. In real terms, the median compensation for the chief executives of companies in the Dow Jones Industrial Average was $19.8 million in 2009, well over five hundred times more than the median worker’s pay of $36,000. The British press was quick to point out that in the year that Irene Rosenfeld launched a hostile bid for Cadbury, she received a 40 percent rise in compensation, bringing her total package of salary, stock, and other incentive awards to $26.3 million. By contrast, in the wake of the takeover, many Cadbury workers faced an ultimatum: Accept a three-year pay freeze or leave the final salary pension scheme.
For Timothy Phillips, who is also a director of Scott Bader, a chemicals firm owned collectively by its workforce, the astonishing differential between the highest and lowest salaries are socially corrosive and undermine the fabric of our institutions. He argues that the global village of the twenty-first century requires more aggressive international regulation—not the least to tackle glaring inconsistencies in how resources are shared worldwide. Again the chocolate industry illustrates the point. While the top executives of today’s global power-houses are handsomely rewarded, workers at the bottom rung of the ladder—in our global village, cocoa farmers in West Africa, for instance—may earn a mere $2 a day. In the worldwide race to manufacture chocolate ever more cheaply and maximize returns to shareholders, horrendous pressures remain on Third World producers. Several reports since 2001 have highlighted serious underlying concerns: the use of trafficked child labor in the production of cocoa in West Africa, especially the Ivory Coast. For these children, there is no pay at all.
The International Labour Organisation, a special UN agency that investigates labor issues, found there are more than 200,000 child laborers in the Ivory Coast of which 12,000 are estimated to be the victims of trafficking. Alarmed by the delay in improving conditions, the International Labour Rights Forum, a human rights watch group, filed a lawsuit in 2005 against Nestlé and commodity traders Cargill and Archer Daniels Midland. They claimed that Malian children were trafficked to the Ivory Coast and forced to work up to fourteen
hours a day with no pay and frequent beatings. “A Cocoa Protocol is in place setting out corporate chains of accountability,” said Timothy Newman for the International Labour Rights Forum. “It’s outrageous that this has not been implemented.” Nestlé replied that it is “committed to following and respecting all international laws and does not tolerate illegal and discriminatory practices.”