Financial Daily from THE HINDU group of publications
Monday, Nov 03, 2003
Corporate - Insight
Columns - American Periscope
Who decides the strategy?
Say that to the management of Eastman Kodak Co. They are under increasing pressure from a group of shareholders who control almost 25 per cent of the stock to change their planned strategy.
Kodak has seen its market change from under its feet, and perhaps waited too long as some critics would allege. Remember the days when corporate presentations meant a bunch of slides that would be loaded into a carousel? The charts would be made on paper, then sent to the local studio for getting converted into slides. Too bad if you had made a mistake in the chart, for the cumbersome process of preparing a slide made people go with their mistakes. Perhaps the only ones who use slides today are die-hard photographers who want to wow you with those glistening photographs of the Himalayan mountain ranges. Kodak has announced that it is shutting down the manufacture of those carousels in June 2004. So Kodak has now decided to go digital quickly and has already made acquisitions in dental software and imaging.
Major changes in strategy have to be accompanied by major resource allocation decisions and Kodak plans to pay for its planned $3 billion (Rs 13,500 crore) in acquisitions by, among things, slashing dividend. This has upset the investment firms which bought shares in Kodak. A few major investors are now proposing that Kodak should follow alternative approaches to maximise shareholder value.
One wonders who is really thinking long-term here. Shareholders are the owners of the company and as owners, they should be expected to tighten their belts when necessary and take the hard decisions on strategy from a long-term perspective. Unfortunately, the powerful shareholders these days are the investment firms and mutual funds which have a distinctly short-term perspective on life. They are interested in maximising the short-term gains on the stock they hold so that they can quickly get rid of it and book the profits in time for their quarterly report, show the increasing value of their own shares in the process, and the fund managers can then stake their own claims for generous bonuses.
Kodak is in the classic cash-cow business with its films high market share in a slow growing market. That is ok, if you also have some businesses in fast growing markets into which you can plunk the excess cash. Kodak is hoping that the digital imaging businesses would provide it with those opportunities, especially since the traditional film business itself is slowly drying up.
But questions of appropriate strategy aside, who decides the strategy? When the going is good, management makes the decisions, the board routinely rubber-stamps it and everyone is happy. The interests of all stakeholders are aligned. When major changes in strategy are contemplated under tough market conditions, it is important for management to ensure everyone is on board, otherwise the strategy of the firm gets kicked around like a football. Management usually proposes strategy which the board approves, and the board is supposed to represent the shareholders, apart from other stakeholders. If there is a disagreement in this triumvirate, one would expect the board meeting to be the forum where the differences are sorted out, and then no one is the wiser. But, occasionally, the disagreement spills over and that is when we see the stakes involved in major strategic decisions.
In November 2000, the management of Coca-Cola Co. decided it was a good time to buy Quaker Oats Co. Apart from breakfast cereals, Quaker had the valuable brand Gatorade, a sports/energy drink. All due diligence was completed by both companies, and publicity material announcing the deal was ready to be released when the board of Coca Cola decided that the deal was too expensive and refused to approve. The CEO of Coke was also the Chairman of the board.
The Executive Committee of the Board composed of six directors had given the go-ahead for the CEO to pursue the deal. Clearly, the Board has the right to disallow the deal but you would have wished they had taken their CEO into confidence earlier rather than wait till the last minute to change their minds. (PepsiCo subsequently bought Quaker Oats).
The Coca-Cola CEO explained that he had talked to several members individually and they were in agreement, but a full board sitting and discussing the issues involved in the acquisition brought up other issues that resulted in the rejection.
In the same month, another CEO ran into a similar whirlpool. The Chairman and CEO of Maytag Corp., the manufacturer of appliances, quit due to a difference with the board on the strategic direction for the company. A look at the role of the CEO in the Coca-Cola and Kodak situations. Clearly, the CEOs of both companies have learned a valuable lesson that they are not exclusively in charge of strategy.
The CEO would have to take the shareholders along, the board along, and also the bulk of management personnel along in formulating and executing a new strategy.
Strategy can be perceived as an onion that is constantly being peeled. The CEO tends to reveal one face of it to the employees as they work together in running the company. The CEO would be revealing another layer of the onion to the Board as he seeks their opinions on some ideas that he may have for the future of the firm.
By doing so, he would be preparing the board to more specific proposals that would come up from time to time for their approval. But there is another layer to this onion that I am sure a CEO would not reveal even to his board or his closest advisors in the company because they may still be seen as too radical, or not fully thought out.
These ideas may be still too raw to be revealed, and more work may be needed to flush out the ideas and to prepare the people to receive them. And if you have a CEO who is not thinking about such ideas as part of his or her strategy, perhaps it is time to sell the shares of that company.
(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@Suffolk.edu)
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