Feb 12, 2017

Could Whitbread’s bosses make a frothy cappuccino?

One of my core beliefs about business success is that domain knowledge really matters. What I mean by this is that directors should possess a deep understanding of their industry, acquired through practical, hands-on experience.

I define domain knowledge as technical expertise, market insight, industry networks and other specialist skills and attributes. I think custodians of large and small companies need such a background.

It is an unremarked tragedy that public companies are disappearing. The number of main market-listed stocks in London has fallen by more than half in the past 15 years. This means fewer British citizens own shares in local businesses, so not so many ordinary people are capitalists.

There are many explanations for this decline, including the rise of private equity and the burden of regulation. Another reason is the back-to-front way that too many public companies are run: form is prized over substance.

Our system for governance of public companies, while expensive and complex, is deeply flawed. It misses the wood for the trees. It places emphasis on issues such as diversity and independence — and omits to insist that directors possess relevant know-how about the business in question.

You would think that this requirement was so basic that it should be the very first qualification for the task. But it seems that those who devise such codes forgot to include it in the eligibility criteria — and if they do, they don’t enforce it. And so it leads to the farce of a big listed enterprise having an entire board where nobody has knowledge of the relevant industry.

A few years ago I wrote about how Tesco had so lost touch with its business roots that not one serving non-executive director had direct experience in grocery retailing. We all know how that one worked out: a world-leading British business went badly wrong.

I’m sad to say that another one of our great companies appears to suffer from the same disease.

The board of Whitbread has 10 directors. Not one of the six non-executive directors has any previous experience working in the hotel, coffee shop or pub trade — which is what Whitbread’s business actually is. Nor do the chairman, the chief executive or the finance director.

So who really holds the operational management to account? I am confident I could put 25 key questions to the non-executives about the detailed economics and markets with which Whitbread is engaged that they would be unable to answer — because they simply do not possess the hands-on learning and judgment that comes from being in the industry for many years.

One of the reasons this makes me despair is that it shows such contempt for the tens of thousands of staff working in the field at Premier Inn, Costa and Whitbread’s pub restaurants. It is as if the understanding of the craft of hospitality possessed by their 50,000 employees counts for nothing. Their imperial overlords somehow have such amazing awareness of how companies operate that they do not need to know any detail — that’s for the little people. This is the big picture illusion which leads to the decline and fall of outstanding firms.

I think it is a particularly British defect — we do not respect trade skills and experience sufficiently. Generalists are all very well, but how would you feel if you were about to undergo an operation, and the person wielding the scalpel said, “By the way, I’m not a surgeon — I’m a bank manager!”

Whitbread has been making and serving food and drink since 1742. It has prospered for almost 275 years by employing people who know their stuff. When it came to hiring a new chief executive, instead of looking for one of the 2.5m people working in the hospitality sector, in 2015 the Whitbread board chose to recruit a bank manager.

It starts its latest annual report by stating: “Whitbread is all about people.” Presumably that includes leadership with appropriate qualifications.

This article does me no favours in my day job.

I want Whitbread to do well. I want their shares to enjoy a high rating. That demonstrates the potential and profitability of coffee and restaurant businesses, which I love.

My writing might irritate the board of Whitbread, which includes people I should probably not annoy, but I feel the need to point out that the current plc model is broken. However, it is not in the interests of the merry circle of headhunters, nomination committees, governance consultants and so forth to upset the sham that is public company stewardship.

Private companies, particularly those led by founders, can enjoy a competitive advantage over corporates that are obliged to worship at the politically correct governance altar. Successful examples of the former are usually run by bosses with profound domain knowledge, supported by a board capable of making expert contributions based on long service in the industry. On selfish grounds I should, therefore, celebrate examples such as Whitbread, a legendary company captured by a board lacking domain knowledge. But actually I worry for the future of British industry if that’s the best we can do.