As we stand in the foothills of 2023, pause for a moment and cast your eyes over the spectacle of 2022. This was the year investors finally sobered up and swapped tight-fitting catwalk numbers for a sensible outfit from John Lewis.
After a decade-long tech boom that fetishised newness, change suddenly went out of fashion. Cryptocurrencies collapsed. The FTSE 100 tortoise lumbered past the Nasdaq hare — with a 0.9 per cent gain, it was the world’s best-performing major market. Rising rates and the war in Ukraine reversed the pariah status of defence, energy and tobacco stocks. Liz Truss destroyed the case for short-term fiscal radicalism.
In some ways, the return of common sense is unhelpful. The FTSE’s tepid result masks the fact that some of our biggest companies need change more than ever. The year ended with the double defenestration of Unilever’s Alan Jope and Vodafone’s Nick Read. Both companies have been drifting — Unilever searching for ways to grow beyond increasingly outdated snacks such as Pot Noodles, Vodafone weighed down by huge debts and struggling to do deals.
Meanwhile, BP and Shell’s soaraway share prices in the energy crisis belie the scale of the transitions they face.
Glaxo Smith Kline successfully demerged Haleon, the Sensodyne consumer goods empire that caught Jope’s fancy to disastrous effect in late 2021 (Unilever’s £50 billion bid for the unit contributed to his downfall). But the jury is still out on Glaxo’s ability to innovate as a standalone drug developer, as evidenced by the one-third discount at which it trades to the sector.
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The ingredients that tend to hold back change on the London market are still there to varying degrees, rising rates or not: management teams who worry about the next quarter’s numbers rather than the next ten years; stodgy boards with non-executives who don’t want to rock the boat; disengaged investors who like to clip dividend coupons.
But there are plenty of companies that have defied these dynamics and thrived. As the blue-chip index’s sleeping giants try to shake themselves awake this year, let’s consider how others have done it.
A quote from tech investor Saul Klein often comes back to me. In 2012, when I interviewed Michael Acton Smith, who had ditched a previous venture to create the Moshi Monsters animated game, Klein praised him for doing “what some entrepreneurs find hard to do, which is take his first product out back and shoot it”. Reinvention is hard because it involves binning something else.
Three who have done it in retail are very different characters with several things in common. Lord (Simon) Wolfson of Next, Mike Ashley of Frasers Group (née Sports Direct) and Tim Steiner of Ocado turned their businesses from brands into platforms. Next offers online logistics to other companies and has bought stakes in Victoria’s Secret and Reiss. Frasers has mopped up the likes of Jack Wills and Missguided. (Perhaps more significantly, Ashley has allowed his son-in-law to move away from the pile ’em high, sell ’em cheap model that powered Sports Direct’s rise, and produce shinier stores that will be more appealing to Nike and Adidas.) Ocado wriggled free from the straitjacket of selling groceries and recast itself as a seller of intellectual property to supermarkets around the world.
For a while, the share-price reaction was spectacular, although Ocado was one of the London market’s biggest victims of the tech rout last year.
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The three have been able to ride out City squalls over strategy partly because they are owner-drivers. They have significant equity in the businesses they run — Ashley has by far the most, with 69 per cent — so are less beholden to institutional investors than others. Taking the risk of reinvention is easier when you know you’re difficult to sack.
This is not a prerequisite for success, though. At Astra Zeneca, Sir Pascal Soriot used a moment of drama, Pfizer’s 2014 takeover bid, to galvanise the company, investing more in R&D and swooping on the rare diseases specialist Alexion. At Diageo, Ivan Menezes (Sir Ivan, as per the New Year’s honours list) has taken a different approach, quietly improving the Guinness brewer’s culture and performance year by year. At Aviva, Amanda Blanc, our business person of the year, has got a grip on the insurer’s unwieldy structure by selling peripheral parts. Still in the teething stages of their transformation efforts are the London Stock Exchange Group, where David Schwimmer has placed big bets on data via Refinitiv and a partnership with Microsoft, and Pearson, where Andy Bird is trying to sprinkle Disney-style subscription magic on its textbooks.
A common complaint among chief executives is that investors tend to be passive on almost everything other than environmental, social and governance (ESG) concerns. “Public-company shareholders, on the whole, are totally inactive compared to private-company shareholders,” says the boss of one recently floated business. “For a chairman to get a view out of a shareholder on the strategy, things have to be going seriously wrong.”
In this setting, companies must be confident enough to lead investors by the nose and lay out the narrative. All roads lead back to two things: a strong chief executive with ideas and the resilience to keep going through short-term ructions; and, ultimately, a strong chair. The second is there to guide them and build a board where non-executives bring experience and a range of views — and aren’t afraid of calculated risks.
Boldness for its own sake doesn’t work, as Jope’s misadventure with his Haleon bid demonstrated. But as they grapple with the need for renewal, the FTSE’s stragglers — particularly Unilever and Vodafone — must be brave. They need leaders who are prepared to shoot the old, if necessary. Don’t let last year’s sensible rally fool you: the world will keep changing at an ever-faster rate.