It was probably anticipated that this would pique Adam Walker, the finance director, another contender for the chief executive role. And it duly did. When he resigned, Jos Sclater stepped out of the talent pipe to take his place. Ironically, as a former company secretary, Mr Sclater’s formal qualifications are not in accountancy, but his financial experience includes de-risking GKN’s pension liabilities and financing the balance sheet.
It looked as though Mr Cummings’ initial challenge would be to fend off speculation that GKN might break itself up. He had headed GKN Aerospace, which supplies aircraft and engine structures and electrical systems to the global aerospace industry. If that was now to be the focus, why not sell off the Driveline business, which provides parts and systems to almost half of the world’s passenger cars and light trucks? That would repay GKN’s debt, wipe out its pension deficit, leave cash for more acquisitions – and concentrating on aerospace might narrow GKN’s hefty discount to the sector as well. Mr Stein had resisted this sort of speculation for years. Driveline was successful, potentially lucrative but cyclical – to counterbalance this, his strategy had been to expand the aerospace business through acquisitions.
13 October
Being a chief executive involves juggling all manner of balls in the air. When one drops, it’s best to make a clean breast of it as soon as possible. And so it was in October when a double whammy hit Mr Stein. On the same day, two customers – one from Aerospace and one from Driveline – independently threatened to sue GKN. He said their £40m claim felt “like walking down the street and being mugged”. He also warned that third-quarter trading was “disappointing” and that “revised assumptions on programme inventory and receivables balances” in Alabama would involve a £15m non-cash charge. What’s more, GKN was reviewing how it had valued goodwill and other assets, so shareholders must expect a hit to the balance sheet at the year-end as well.
16 November
A month later, and that £15m profit warning had ballooned to more like £130m. It wasn’t just Alabama. The value of stock and receivables in St Louis and other north American plants were suspect as well. This was in aerospace, and who’d had operational responsibility for that? Rather embarrassingly, it was the chief executive-designate: Mr Cummings. The GKN directors quickly announced their conclusion that “the next stage of GKN’s development is best delivered under alternative leadership”. The share price fell by about 10 per cent.
Mr Stein had been due to continue as a non-executive director until March, but now he too would be leaving early. The conventional talent pipe had run dry, so Anne Stevens, a non-executive director, was asked to steady the ship until a proper replacement could be found. When she joined the board in July 2016, GKN’s chairman, Mike Turner, had said she would “bring a fresh perspective to discussions” at board level. She has certainly done that.
12 January 2018
Just 12 days after Ms Stevens took charge, her appointment was made permanent following the first unsolicited approach from engineering turnaround specialist Melrose Industries (MRO). She had been the architect of the 'Way Forward' plan at Ford’s US division about 12 years ago, which was credited with staving off bankruptcy there by closing 17 sites and cutting 30 per cent of the salaried staff. True to this heritage, her 'Project Boost' at GKN will separate the businesses, identify which parts are “core” and classify them under three headings: improve, grow or develop. Capital and expectations will be defined for each, together with stretching targets and a “much stronger performance and accountability culture”.
In other words, GKN will kick out its sleepy bits and nurture its best parts. She says that there’s been too much talk about growth and not enough focus on margins or cash generation. For employees and businesses at GKN, the message is clear: shape up or ship out. Before long, Mr Stein might not be the only one feeling as though he’s been mugged.
9 March
“Succession planning is a key board responsibility and a strong talent pipeline is crucial to the group’s success,” Mr Turner said in GKN’s 2016 annual report. Less than a year later, only one of the four executive directors then in place is still standing. That’s Phil Swash, who heads GKN Driveline. Now, he might be going too – for on 9 March, in a bid to outwit Melrose, Ms Stevens rushed through a deal to fold Driveline into Dana Corp, which would leave GKN shareholders with 47 per cent of the combined entity. Perhaps she was bowing to the inevitable, but it enabled Mr Peckham of Melrose to call it a fire sale and wrap GKN in the flag by saying that Driveline would become part of a new UK company, Dana plc, with a primary listing in the US, run out of Ohio by a foreign management team and rebranded as a US organisation.
So much for succession planning. The irony is that GKN’s new chief executive, far from being seven years younger than the outgoing incumbent as intended, is now eight years older. Ms Stevens will turn 70 this year and has demonstrated how a new chief executive can transform a company. Her experience, drive and determination have impressed many investors. Her self-confessed weaknesses? According to a 2013 interview: “lack of patience” and “trying to change too much too quickly”.
Her breakneck change at GKN has also turned on its head how takeovers are normally conducted. It’s now GKN’s top team who is relatively new, and looking to break up the company; Melrose is the one with the long-established management, waving the Union Jack and claiming to “invest as if we were to own the businesses forever”. Even so, Airbus (which represents a fifth of the sales in GKN Aerospace) fears that Melrose would reduce the R&D budget, making it “practically impossible for us to give any new work to GKN under such an ownership model”.
Melrose Industries certainly has a different emphasis. Its 'buy, improve, sell' strategy aims to hive off businesses only after they have reached their full potential. “GKN is too concentrated – it tries to run everything from the centre,” Melrose’s chief executive, Simon Peckham, recently told a committee of MPs. He claims that he would run it better by empowering its individual businesses. The Melrose hostile bid values GKN at a third more than the market had previously and, if successful, 60 per cent of Melrose will be owned by former GKN shareholders.By 29 March we will know GKN's future.
Reputation under fire
In the battle to unlock GKN’s potential (and shareholder value), Mr Stein’s record has come under fire from foe and friend alike. “Good assets, bad management,” according to Melrose. “Money has been spent unwisely” on businesses that “did not earn the opportunity to grow”, said Ms Stevens. Mr Peckham claims GKN has lost its way; Ms Stevens claims she will get it back on track.
Mr Stein’s pay illustrates how the GKN board rated his performance. To reward sustainable long-term earnings growth, most of his pay was in shares, and the number released to him depended on what he achieved. The decline in the value he received each year (despite a modestly rising share price) also accords with the frustration of shareholders:
Mr Stein's rewards
| 2012 | 2013 | 2014 | 2015 | 2016 |
Total value received (£m) | 3.2 | 3.9 | 2.9 | 1.7 | 1.8 |
Short-term performance * | 42% | 75% | 48% | 61% | 58% |
Long-term performance * | 100% | 100% | 67.5% | 0 | 10% |
*Percentage of the potential award actually paid out
Last year’s figures have not yet been published, but Mr Stein’s 2017 performance will have been marred by the profit warning. His long-term performance outcome is also likely to be modest. Paradoxically, the increase in GKN’s share price following his departure will have made him over £2m better off – provided he hung on to the shares he’d had to own as chief executive.
Mr Sclater has defended Mr Stein’s strategy by saying that it helped GKN to outgrow the relative drag of its pension deficit. Melrose seized on this. Then won’t a hasty sale of Driveline leave the GKN aerospace rump with pension liabilities “inappropriate for the size of the underlying business” with the risk being borne by employees and pensioners? Not so, says GKN, because cash from the deal will reduce the deficit and Dana will take on pension liabilities from Driveline. It remains to be seen whether this reassures GKN’s Driveline people – Dana took protection from bankruptcy in the last downturn.
For some, the assessment of Mr Stein’s performance was tough but fair – less about failure, more about recognising the scale of the challenge that he set himself. Professor David Bailey of Aston Business School has been quoted as saying that “Driveline is the jewel in the crown of GKN”. Electric and hybrid vehicles are the future and Mr Stein deserves credit for having the vision to direct “over a quarter of Driveline’s engineering investment into electrified drivetrains”. Professor Bailey points to its partnership with Panasonic Jaguar’s E racing team as evidence of GKN’s cutting-edge technology and fears that the scale of its long-term investment policy might be sacrificed for short-term gains.
He also questions why markets treat GKN with its advanced technology differently to companies like Tesla, which is valued not on current sales but on future potential. If only Driveline could be rated in the same way as Tesla, then the current GKN would look seriously undervalued.
Henry Ford famously offered his model T customers any colour as long as it was black. Ms Stevens and Melrose are offering GKN shareholders a similar Hobson’s choice: GKN will be slimmed down either way. A stronger talent pipeline might have found a champion to build on GKN’s strengths and keep the company whole as a viable entity.
