Takeaways from a CEO Breakfast

On May 18th, I had an opportunity to attend a CEO breakfast here in Hong Kong hosted by Economic Intelligence Unit (EIU), a sister unit of The Economist, and Marakon Associates (file://www.marakon.com/), a management consulting company. The meeting was largely a networking opportunity. The speaker was Ken Favaro (file://www.marakon.com/firm_loc_favaro.html), the co-Chairman of Marakon who made a ten slide presentation that was followed by discussions.

He talked about "The Three Tensions" corporates undergo:

• Growth in Topline versus Growth in Bottomline. (Profitability vs Growth)
• Long Term versus Short Term. (Short Term vs Long Term)
• Standalone Business Unit Performance versus Synergistic Performance. (Whole vs Parts)

The key point is that successful companies are those that manage these 3 tensions and hence achieve Total Shareholder Returns (TSR).

Just as a typical management consultant would do, he backed these points with data, largely from a survey of about 1100 companies worldwide. Some key insights from the presentation and the ensuing discussion that I took note of were:

• In a similar discussion in Tokyo, one Japanese executive had said "I balance 3 tensions - boss, spouse and commute. Do I need 3 more?”
• Companies that purely focussed on topline or bottomline growth were likely to do so by focussing on competitors and were less likely to achieve sustainable growth. On the contrary, companies that focus on customer benefits and grow the marketplace are likely to have sustainable performance.
• A large part of discussion was focussed around Long Term versus Short Term, about how Short Term is manifest in the form of quarterly results. The pressure from investors would be relentless, to the extent of it being almost self-destructive, that is, investors may force companies to chase short term growth over sustainable growth.
• Debate on how Asian companies now mirror the state of companies in Europe post the Second World War, where growth is pursued at the cost of bottomline.
• Asian companies (ex-Japan) had a TSR of over 30%, comparable to the rest of the world. Japan was quite low. Ken said that this seemed perplexing and the only explanation seems to be the share prices are reflecting the future predicted growth of these companies.
• The merits and demerits of publicly listed companies going private.

These form the basis of a book “Three Tensions” (www.thethreetensions.com) and an article in Harvard Business Review in December 2006 (www.marakon.com/ida_061201_favaro_01.html).

My thoughts on some of these insights:

• These 3 tensions seem to be driven by the need to deliver Total Shareholder Returns. Shareholders are only one of the many stakeholders in any company.
• The distinction between Asian companies and non-Asian companies seems to be artificial when measured on the basis of financials. Leading Asian companies – companies with headquarters in Asia - increasingly derive a large part of revenues from the US and Europe. Similarly, leading American and European companies derive a large part of revenues from Asia. So, logically the financials of all companies should be broken up geographically and compared.
• One of the main reasons attributed to publicly listed companies going private is to be away from the glare of Wall Street analysts. However, this presumes that private equity funds themselves are long term investors, which is not necessarily true.
• This analysis focuses on traditional measures of sustainability like TSR. Newer measurers and indicators of sustainability like environment friendliness, socially responsibility, etc have not been factored in.
• How would some of these tensions manifest for governmental departments, social development organisations, education institutions, small enterprises, etc.

Apart from me, the attendees included:

• Managing Director, Hong Kong - Atos Origin
• Partner - Bain & Company
• SVP/Head of Risk Office - Bayerische Landesbank
• Executive Director, Client Development - Colliers International
• Managing Director, ECCO
• Managing Director, Fiducia
• Chief Operating Officer, Hang Seng Bank
• Managing Partner, Human Capital Partners
• Vice President, iRobot
• Regional Vice President, Lundbeck
• Managing Director, Merck Sharp & Dohme
• Regional Director, LaSalle Investment
• Vice President, Merrill Lynch
• Chief Executive Officer, Pentland Asia
• COO, China Beverages, PepsiCo
• CFO, Prudential Holdings
• CEO, Regus
• CEO, Talent2
• President, Telstra
• Regional Director, Finance, Walt Disney
• COO, Three Towns Capital
• Regional Director, EIU
• Managing Partner, Asia, Marakon
• Partner, Marakon