It was a seminal moment, for at the time M&S seemed to be at the top of its game. Customers were sold on the M&S brand, synonymous with high quality, good service and value for money. The brand brought competitive advantage, market share and pricing power - the sort of barriers to entry that long-term investors seek out, along with other must-haves such as strong financial figures, margins of safety and quality of management.
So why should Sir Richard Greenbury react like this? It was all the more surprising because, in many ways, he was a quality act. In the 10 years that he'd led M&S, it had grown its business and strengthened its brand. If ever there was an example of long-term planning and long-term success, M&S was it. True, the question was dumb. Sir Richard was hardly likely to announce his retirement there and then, let alone name his successors. But it had clearly struck a nerve.
First, was he under pressure and if so why? Why would a succession plan be a threat? Could it be that things weren't running quite so smoothly as the company would have people believe? Secondly, if Sir Richard was that explosive in public, what was he like in private? How did his senior executives cope with him? Fearing for their jobs if they talk about setbacks, people can respond to overbearing bosses by reporting only the positive. Starved of real information, the boss becomes less in touch with reality. Had Sir Richard presented a one-sided picture of how the businesses were operating?
Thirdly, did the M&S board tolerate behaviour like this? Apparently they did, because seasoned journalists had grown used to his abrasive side.
Add these up and the real warning shot for M&S shareholders was that a precious intangible has been thrown into doubt: quality of management. Why does this matter? Because unless investors believe that the CEO and senior executives can deliver the business strategies, they'll look to invest elsewhere. This is why shareholders allow companies to pay handsomely for the right people. It's also why institutional investors like to meet the top team in person. It's not just to hear their insights, it's also to watch their body language and judge their character and ability - private investors can and should do the same by attending company meetings wherever possible.
In truth, M&S really was at a turning point. For all of Sir Richard's bluster, that doyen of value investors, the barrier to entry (in this case, the competitive edge from the M&S brand), was weakening and the top team knew it.
M&S was losing customer loyalty. M&S used British suppliers; supermarkets had begun selling clothes, undercutting them with cheaper imports. Online competitors were becoming a threat. M&S clothes were too drab for younger customers - the very ones they needed to attract. By refusing to take credit cards apart from their own charge cards, M&S was turning business away. International expansion had not been a success.
M&S would respond with short-term measures such as squeezing costs further. Profits held up for a year, then quickly tumbled along with the share price. The first phase alienated suppliers, employees and customers; the second, the shareholders. The company was to struggle for several years.
Investors are often blamed for causing short-termism, as are bonus schemes - something we'll explore in a later article. But M&S's short-termism was because they were adapting their strategy too slowly. They'd underestimated the challenges and were hunting for quick-fix solutions at the expense of long-term relationships.
Quality of management cannot be measured. It's subjective and these days, better organisations manage performance by taking the 'how' (meaning behaviour) as well as the 'what' (was achieved) into account. Annual reports contain more clues - key performance indicators demonstrate progress in delivering business strategies; the analysis of the risk factors list the challenges that companies may face. Warning signs associated with drops in performance include the departure of a long-serving CEO (Tesco is a more recent example), the building of new headquarters or (perversely) the winning of business awards.
We can't ignore quality of management - it makes all the difference between success and failure. For outsiders looking in, it will always be hard to pin down, especially if there's not a so-called "silly little girl" around to ask the right probing question.
