At long last, the European continent is awakening from its economic slumber. The main reason is that Germany is taking on its traditional role as economic powerhouse. Over the past five years its productivity has improved spectacularly and its labour markets have become more flexible. As a result, Germany has regained its position as the world’s largest exporter and economic growth has picked up.
Germany is now poised to improve its economic performance further. The economy will be spurred on by low short and long-term euro interest rates. German consumers have maintained one of the highest savings rates in the world and are in the position to start spending once confidence is restored. Germany is well placed to benefit from by the fast growing economies in eastern Europe. Finally, there is the healthy interdependency between the German economy and the small but advanced economies of its neighbours (Benelux, Scandinavia, Finland, Austria and Switzerland): 140 million demanding and wealthy consumers provide a wide range of new business opportunities.
The question is how the UK, with five consecutive quarters of declining economic growth behind it, could benefit from these developments. How can exports be stimulated and investment opportunities captured? How can British companies develop more partnerships and how can mergers and takeovers facilitated?
How can the British private sector participate more actively in the constantly evolving networks that span the continent?
Advertisement
At least part of the answer lies in the recognition and exploitation of four important competitive advantages that continental European enjoys.
Horses for courses
The continent supports a range of enterprise models and legal frameworks from co-operatives to small firms and from state enterprises to family-controlled conglomerates. Each model comes with considerable national and even regional variations. In ever-changing markets, it is an advantage to be able to select the most appropriate form of governance, management, organisational structure, and planning and remuneration systems.
This flexibility contrasts sharply with the monoculture of the economically and culturally dominant Anglo-Saxon Enterprise Model with its one-tier board, personal and powerful leadership, decentralised decision-making (accompanied by tight financial controls) and strong reliance on financial incentives to keep personal and corporate objectives aligned.
Avoidance of value destruction in the name of the shareholder
Advertisement
The Anglo-Saxon Enterprise Model is designed to pursue shareholder return on investment: the highest possible increase of the share price over the shortest period of time. Persistent growth in profit-per-share is seen as the route to this goal. Managers are given short-term contracts and a large part of their remuneration is linked to this parameter. The inevitable result is that managers concentrate on policies that have an immediate impact on profit-per-share, such as share buy-backs, takeovers, cost cutting and outsourcing.
However, it can be demonstrated that these policies reduce the long-term future cashflows and therefore on balance reduce the economic value of the company. Most continental European companies escape the web of expectations that is spun around listed companies. On average they rely on stock markets for only 25 per cent of their capital requirements, much lower than in the UK
Escape from a flawed management model
The Anglo-Saxon Enterprise Model discourages innovation in various ways. Shareholders are adverse to risk and managers have to follow suit. Following the competition is safer than breaking away from the pack and facing the possibility of falling behind. The customer is king, but powerful business units defend their interests at the expense of the customer of the future. Internal competition within the company – which is supposed to yield new ideas and to allocate scarce financial and human resources – manifests itself predominantly in power struggles.
Advertisement
The pursuit of bonuses and options calls for a limited number of modest and quantified targets. Targets without the means to achieve them are poisonous which fuels internal competition. Targets that require co-operation need to be avoided. The gap between the worlds of management and markets grows and the basis for decision-making is eroded.
Low transaction cost
The building and continuous adaptation of networks means that transaction costs become more important. On the continent, contracting partners enjoy flexibility and protection under civil codes which is based on principles such as “good faith” and “acting in accordance with proper trading rules” and judges settle disputes by starting from the original intentions of the partners.
This is in sharp contrast to the situation in Anglo-Saxon countries where case law is applied. This allows partners to do everything that is not explicitly excluded in law or by contract and disputes can only be settled after exhausting searches for relevant precedents. This produces a business world driven by antagonism with control at a premium and co-operation a second rate solution. Moreover, the economic damage of preventing, starting and facing litigation is considerable. Foregoing attractive opportunities for fear of triggering litigation amounts to the destruction of value.
The conclusion must be that UK companies that seek out partners on the continent, that build tailor made Enterprise Models and dare to rely on civil law will create substantial additional value for their shareholders.
Advertisement
Donald Kalff, a Wharton PhD, former Shell manager and a former member of the KLM Executive Committee, is a writer, advisor, and biotech entrepreneur. He is the author of An UnAmerican Business, (£18.99, published by Kogan Page).