Businesses in the US and the UK are paralyzed by a lack of self-confidence, says Stephen Archer. Processes and systems do not create wealth. Only organic growth through entrepreneurial innovation can do that.
We know that consumer confidence is weak and that business confidence is patchy. I have written about the dynamics of confidence on the economy in the past. However, I want to discuss a much more specific aspect of confidence and how it is holding back the US and UK economies.
I am seeing repeated evidence in the US and UK of not only a general weak confidence in the economy but more seriously a weakening self-confidence on the part of business leaders. This is illustrated by their deferring decisions, even decisions that have little or no cost implication.
Demands placed on board members to make a clear case for investment are ever greater and aversion to risk is nearly total. Business leaders are sitting on their hands – as if hoping that the storm will pass and they can emerge into sunnier economic climes once more, without having to do anything about it themselves.
There are two further, clear manifestations of this trend. Firstly, US and UK corporates are sitting on more cash in their balance sheets than at any time in history. In the US case, the figure is $20 trillion. That’s 50 percent more than the staggering US debt of $14.3 trillion. No wonder President Obama is imploring businesses to invest and hire. They have accumulated this cash as if re-investment had been banned.
This is a remarkable and unwelcome state of affairs. Corporates are taking the view that cash is the safest insurance against any further economic shocks. One might have some sympathy with their caution but not to this degree. Their behavior serves to damage the economic cycle as well as hinder immediate growth. As a result, the wider economy is lacking the growth opportunity that it would otherwise have.
Incentives as well as political pressure may be needed to break this cycle before it causes long term damage; for example, special investment tax breaks, especially in new factories and in infrastructure.
The second manifestation is that mergers and acquisitions (M&As) are occurring at a very high level. Does this sound like a contradiction to my previous point? It is, rather, a paradox. Indeed, a double paradox. On the one hand, balance sheets are remaining cash rich as purchase cash often goes to other balance sheets, and on the other hand, company cash is being used on a higher number of deals than the economic conditions would suggest would be likely. Why? Again, it’s a form of protectionism and with cash can come growth through acquisition.
Acquisitions equal fast growth and they usually sound very attractive, but these are the easy way out, too. They are very attractive to board members who want an M&A on their resume, but M&As are a mug’s game compared to organic growth, which is what businesses are founded upon.
Furthermore, acquisitions do not add value to the economy; they usually lead to shrinkage as the combined resources are consolidated and reduced. M&As rarely lead to net aggregate growth. They do, however, make CEOs look good and give shareholders an extra dose of hope. The markets also get excited, so this behavior is rewarded. Investment banks are, of course, a key driver in this behavior – they are doing very well from M&As. On the other hand, they have little stake in whether or not the deals actually succeed.
Attempting to grow a business from its heart, organically, is less well received by shareholders because the process is slow and as a consequence uncertain. Innovation, organic growth drivers and performance progress from good leadership are taking a back seat. For mature, western economies, this will lead to reduced global competitiveness and a sapping of the enterprise culture.
Clear thinking is needed on this and it is incumbent on boards and shareholders to wake up to the unfolding disaster. The problem is currently being ignored – mainly because very few recognize it. Indeed, non-exec directors as well as CEOs, through sales, operations and HR directors, need to be heard to call for entrepreneurialism to be re-invigorated.
Business leadership has become left brain dominated – it’s all about process. Boards and whole companies need to engage the right brain and create again. The process of right brain engagement leads to energy, opportunities and in many cases more confidence. Engagement of management in this is also vital to increase performance and externally focus enterprise initiatives.
Leadership is losing its grip and is obsessed with process and systems. These do not create wealth. Leadership seems to have forgotten its own raison d’être as well as the purpose of business. It’s as fundamental and serious as that, in my view.
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Stephen Archer is a business analyst and director of Spring Partnerships, a UK business consultancy that advises companies like Carlsberg, GE Healthcare, Disney and others about their leadership and corporate strategy.