IT was last Sunday evening when the trio met. They gathered in the front room
at the home of Lord (Terry) Burns, chairman of Marks & Spencer. With Burns
were the company’s senior non-executive director
Sir David Michels and Amanda Mellor, M&S’s head of investor relations.
Outside Burns’s Victorian house in the leafy West London suburb of Ealing, the
wind was picking up as Britain faced its worst gales for years. Inside, the
threesome began making a series of telephone calls to the retailer’s largest
shareholders.
But why call investors on a Sunday night? Secrecy, M&S reasoned, was
paramount. The information being given to shareholders was sensitive. There
should be no risk of a leak.
And what was this oh-so-sensitive message? It was that at 7am the next day,
M&S would unveil a plan to elevate chief executive Sir Stuart Rose to chair
the company: he was to take the role of executive chairman until the summer
of 2011. It was to prove explosive news.
When Rose was parachuted in to run the company in May 2004 — just as the
venerable M&S was facing the threat of a takeover by Sir Philip Green — he
had said he would stay until 2009.
By last weekend, the company had decided to extend Rose’s tenure by two years.
And more crucially, it proposed that the roles of chairman and chief
executive should be taken by one person — Rose — in complete defiance of
the rules on good corporate governance.
Unsurprisingly, only a handful of investors could be reached last Sunday: the
idea of the 24-hour City of London has its limits. (Later, Burns was vague
about exactly how many big shareholders he spoke to. “Most of the top four,
I think,” he said.)
When news of M&S’s plan broke on Monday morning, however, it was greeted with
indignation and outrage. Notably, Legal & General, M&S’s second-largest
shareholder, was contacted only on Monday morning. Just hours after the
announcement, L&G issued a rare public statement condemning the shake-up as
“unwelcome”, adding that it raised serious corporate-governance concerns.
The Association of British Insurers and Pirc, the corporate governance
watchdog, also weighed in to criticise the move.
Another institutional shareholder told The Sunday Times: “It’s hilarious that
they only tried to call shareholders on Sunday night. How many fund managers
are available then? I suspect the reaction ranges from those who are
indifferent to those who are disappointed to those who are quite angry.”
The shareholder added: “We don’t want to lose Rose — he has done a good job in
challenging circumstances that are getting more challenging. But it is
surprising that it wasn’t possible to work on a conventional succession
strategy.”
By Monday evening, 24 hours after the bizarre — and largely unsuccessful —
game of telephone tip-off was played out in Burns’s front room, M&S was
looking distinctly friendless. The company’s strategy had backfired.
IRONICALLY, Rose himself has been talking for months about the need to sort
out who should take over from him. Certainly, M&S has undergone something of
a renaissance since the dark days of 2004 when Green was on the prowl.
Rose has been indicating that, although his job is not complete, the evidence
of recovery is firm enough for the company to think about its next phase and
who should spearhead it.
But the stark fact is that Burns has failed to find anyone to replace Rose. If
he had, there would have been no need for the controversial plan put forward
last week.
One leading City figure said: “When Lord Burns was appointed chairman, he had
to deal with only one issue — finding a successor to Rose. But the truth is
the chairman made no progress in addressing this issue. There is only a Plan
A and no Plan B.
“For a company with a market value of £6 billion it just isn’t acceptable to
say there is nobody else internally who could take over at this stage.”
Burns admitted last week that no external candidates were interviewed before
the decision was taken to appoint Rose to the role of executive chairman.
“We haven’t gone out to outsiders now. It is not a real alternative,” he
said. “We would much prefer not to have Stuart leave the business.”
And analysts are beginning to question whether the Rose-engineered recovery is
really quite as robust as it appeared only a few months ago. M&S’s
post-Christmas trading statement was terrible, with underlying sales down by
2.2%.
The company’s share price has slumped to 367p — well under the 400p a share
Green was prepared to pay for the business four years ago.
M&S’s critics say that if you take into account the share-price fall — and
that Rose has invested almost £2 billion in the business since he joined —
he has created little real value.
One City player said: “His record isn’t actually that good if you look back.
He is a great tap dancer. Is he ever at the scene of the crime for long
enough?”
Tony Shiret, retail analyst at Credit Suisse, added: “The management changes
are a bit pathetic. Rose is getting rewarded just as his strategies are
showing signs of failing.
“He gets complete power and there is not really a very strong independent
director among the non-executives because Sir David Michels used to work
with Rose at Arcadia.”
Shiret went on: “It masks the real issues in the business. The capital
spending levels are just astronomical at M&S now. There is significant
over-expansion of space as a result, and the company is focused too much on
low-price products where it has no heritage. It won’t help having Rose
surrounded by yes men.”
M&S, of course, put it another way. It insisted that Rose will hand over many
responsibilities to talented, up-and-coming executives, including Steve
Esom, head of food, and Kate Bostock, head of clothing, who have been
promoted to the board as part of the reshuffle.
Ian Dyson, who appears to have been earmarked as an early favourite to succeed
Rose, has also been promoted to head of group finance and operations.
Shareholders are unimpressed, and their anger will only be fuelled by the news
that Rose is likely to get a pay rise for his new job — although he is
handing over some of his responsibilities to the triumvirate below him.
In addition, Burns could receive up to a year’s salary as compensation for
giving up the chair to Rose.
AS the extent of investors’ unease became clear last week, Rose, Burns and
Michels embarked on a charm offensive to convince the press and shareholders
of the logic of their move.
Sitting in the group’s glitzy, glass headquarters in Paddington, Rose and
Burns portrayed the plan as a sensible solution to ensure an orderly
transition at the top during a time of great economic uncertainty.
“We wanted to be able to develop people like Bostock and Esom and create a bit
of space and elbow room for them to operate,” Rose told The Sunday Times.
“Terry is the one who has driven it, and we think it is an elegant solution.
We are very thoughtful about these things. But at some point somebody has to
make a decision; you can’t just sit there saying it’s too difficult.
. . As it is, I am exposing myself to two more years of potential brickbats.”
Rose last week dismissed suggestions that too much power will be concentrated
in his hands. “It’s not as if I’m Pol Pot here, going round and chopping off
heads,” he told delegates at a Retail Week conference.
“It’s not as if I rigged the election. We have a united board and believe this
to be in the best interests of the business.”
Rose may be facing brickbats, but it is Burns and Michels whose reputations
now face the most intense scrutiny. Burns, after all, is one who has to
accept responsibility for the changes.
He said: “If you didn’t have to employ judgment and think about
[corporate-governance regulations], there would be no need for people . . .
it would be mechanistic. Judgment has to be exercised at some stage.”
And Michels, the senior non-executive director, who assumes the role of
independent deputy chairman, also defended Burns’s decision. “This [having
an executive chairman] is quite common in America and Germany. It’s a sin
only on our side of the Channel,” he said.
Michels will be responsible for policing the board, and he insisted he is
tough enough to stand up to Rose. “Am I tough enough? Bloody hell, yes,” he
said. “I am not going to argue with Rose about next season’s fashion, but on
nomination matters and strategy and important matters of the board I can be
quite difficult if I need to be.
“Rose is head and shoulders above anyone else you might take. There isn’t a
big list of external candidates who could succeed him.”
Michels also defended Burns. “Terry is a bit of a hero,” he said. “This is of
no benefit to him whatsoever financially, socially and he loses his M&S
discount.
“We knew this was highly unlikely to get praise from the press, but this is
the beginning of something, not the end of it — a lot of power and
departments have been handed over, not just to Bostock, Esom and Dyson, but
to other talented senior managers as well.”
Rose, meanwhile, has to demonstrate that the strategy he put in place over the
past four years really has worked and continues to work.
In his defensive armoury, he has the knowledge that M&S is on track to deliver
profits of £1 billion for the financial year about to end. That’s double the
level of three years ago, although still short of the record set in the late
1990s.
He insisted that over the next three years he will be able to oversee a
“smooth and orderly” management transition and stretch the M&S brand,
generating £500m of internet sales and boosting revenues from its
fast-growing international business.
And Rose maintained that although M&S’s share price has taken a hammering, it
has done no worse than rival retailers. “We don’t like our share price being
off, but they are all down the toilet,” he said.
So what about the company’s huge investment plans? Rose said: “Regarding the
investment in the business, it’s a question of ‘do you want to come out of a
downturn on full throttle or not’. That is not even an intelligent question
to ask.”
Michels added: “Any idiot can save money by not investing, but it’s a coward’s
way out. You look good for five minutes but not for five years. For seven
years there had been little capital invested in the stores. It had to be
done.”
It is a week since the touchpaper on a very public row was lit in the very
private surroundings of the front room of Burns’s home. Shareholders remain
profoundly uneasy about concentrating so much power in the hands of one man
— albeit someone who is credited with having turned round M&S’s fortunes.
And Rose’s reaction?
He is as urbane and charming as ever — and tries to laugh it all off. He
sniggered: “I don’t think we had quite got to the point of erecting a statue
of me outside the office.”
