Some Stern lessons for big businesses

By JIM EAGLES

Corporate economics guru Joel Stern has only three concerns about New Zealand.

The deadliness of the sun's rays, the lack of good cigar smoke and the poor performance of most of our big companies.

Other than that, says the New Yorker who founded one of the world's most influential consultancies, "I love this place".

The sun he deals with by wearing a Panama hat everywhere.

To improve his chances of getting a whiff of cigar smoke he asks for our interview to be held in an empty hotel bar rather than the room hired for the occasion.

But as for the performance of New Zealand's big companies, well, that's not so easily fixed. "Not good," he says, gesticulating angrily. "Not good.

"The average company in New Zealand is not doing poorly, but there are enough large companies that are doing poorly enough that they more than offset the good work that's being done by the smaller companies.

"And there's no excuse. There's no reason why any company cannot create sustainable value if it does the right things." Stern's preferred right thing would doubtless be for our big companies to join the 400 others around the world - Sony and Siemens, Diageo and James Hardie, Telstra and Asahi, ANZ Bank and Coca-Cola - that have used Stern Stewart's concept of Economic Value Added (EVA) as a management tool.

But the really important thing, he says, is not so much who companies turn to for advice but that they adopt some objective measure of how efficiently they are using their capital and make that the basis for investment decisions and rewarding staff.

It is an idea Stern has been peddling in New Zealand, in one form or another, over nearly 30 years.

His first visit, in 1976, was at the invitation of Chase Manhattan Bank, which wanted him to "yack yack" about "a method of valuation I had developed which we called the free cash flow valuation model" - the precursor of EVA - "which was all the rage apparently".

During that trip he met Sir Ronald Trotter, then head of Challenge Corporation.

The two hit it off and Stern was employed to put the free cash flow system into place as a management system at Challenge. "They would price acquisitions with it, they would review performance with it. We had a fabulous time."

After that, however, Stern had little to do with this part of the world for many years.

"And then," he recalls, "I saw Sir Ronald on television, or rather I heard his voice, he was doing a travel drama on New Zealand that appeared on CNN in the middle of the night.

"I couldn't sleep, I turned on the telly to hear what the news was, and I heard a voice, and I said, I know that voice, and then they said it was Ronald Trotter."

The programme inspired Stern to send Trotter a letter saying, "If when you approach retirement you are looking for another vocation may I suggest you be a television reporter".

Trotter, who by then was head of Fletcher Challenge, "thought that was amusing, and he wrote back to me asking, 'What have you guys been doing these last 18 years?"'

Stern explained EVA, which solved problems with the old free cash flow valuation method and "made it possible to keep score on a company's performance year by year".

Trotter invited him to New Zealand "for a long weekend" to explain how the system might apply to Fletcher Challenge "and when I left on the Monday he let me know almost immediately that the company had hired us to work with it. That was the first company in this region".

Hmm. But Fletcher Challenge is not exactly seen as a corporate success story these days. Hardly a great advertisement for EVA.

Stern acknowledges that Fletcher Challenge was a disappointment and adds, sadly, "Well, may I say we could see it then".

The moment of revelation came, he recalls, when he went to a board meeting and the executive sitting beside him leaned over and whispered, "Watch for the fireworks".

"I said, 'What do you mean?' He said, 'Hugh Fletcher does not get on well with Ron Trotter'.

"I said, 'That's not good. We need someone to champion this'.

"And he said, 'Well, Hugh Fletcher's the CEO, and so if Ron Trotter brings in some initiative like yours what do you think is going to happen?"'

And so it proved. "It was terrible, terrible. I was so frustrated. But when people are fighting with one another it's not going to work for you, and that's all there is to it."

While things might not have worked out with Fletcher Challenge an introduction from Trotter to Roderick Deane, then chief executive of Telecom and, along with Trotter, on the board of ANZ Bank, did bear fruit.

Both companies adopted EVA "and it was so successful that suddenly we had planted roots in Australasia".

Interestingly, the two companies that have made the best use of the EVA system, according to Stern, are Telecom under Deane and the very first company to take up the idea, Coca-Cola, under the legendary Roberto Goizueta.

"We have an award we give out. It's called the Roberto Goizueta Award. That's if you win the MVA ranking for wealth creation three times in a row.

"There are only two companies in the whole world that have done that: Coca-Cola and Telecom New Zealand under Rod Deane."

For a New Zealand company to create more wealth in a year than the giants of the US, Japan or Europe sounds extraordinary. "Yes," agrees Stern, "they were number one in the world, three straight years. Telecom performed very well, under him."

Under him? What about under Deane's successor, Theresa Gattung?

The usually voluble Stern suddenly turns shtum. "I have a problem. I will not speak out of school. The only reason I was willing to comment about Fletcher Challenge was because a book came out here which was wrong."

However, he is willing to comment generally on the state of New Zealand business, which he regards as mostly disappointing, especially when it comes to the larger companies.

"And," he says again, vehemently, "there's no excuse for this."

But what about companies like, say, Carter Holt Harvey which are dependent on world forestry prices?

"We have a client in South Africa, Safi, that's in the same business and they've been creating tremendous value for a long time. So what's wrong with Carter Holt Harvey?

"Please, don't give me an excuse, give me results."

Warming to his lifetime message Stern leans forward, stabbing with a non-existent cigar to emphasise the points.

"There's no reason why any company at any time cannot create sustainable value if they do four things: don't write the assets off, put them on the balance sheet; measure return on assets; reward the return on assets; and don't pay out the reward all at once, hold some of it back that's based on sustainable increases in EVA. If you do that, you'll do a lot better.

"The most successful companies carry the idea right down through the entire organisation. They want all employees to have variable pay, they want all employees to have a bonus bank, they want all employees to become value change agents."

Stern acknowledges that his message is not universally appreciated.

Even in New Zealand companies have complained when the Business Herald published Stern Stewart's annual wealth creation rankings.

"Well," he shrugs, "most people do not like an objective measure of performance. Why? Because in difficult times it makes them look bad.

"What do you want from me? Did you go to school? Did you get bad grade reports? You mean you never recovered emotionally from it? I'm sorry but that's how it is out in the world.

"Those companies that [carry EVA right through the organisation], those CEOs have more respect for the people downstairs.

"To introduce EVA means they have confidence in their performance and confidence in their people."

But, hey, if you don't like that advice Stern has two other tips.

One is from J. Paul Getty, at one stage the richest man in the world: "Rise early, work hard, strike oil."

The other is from Groucho Marx: "Early to bed, early to rise, work like hell and advertise."

So if you want to be successful it's either strike oil or use EVA?

Stern spreads his hands in wry self-deprecation. "What can I say?"