Time to go big on downsizing

Anthony Hilton
19 Nov 2008

It was obvious 30 years ago that General Motors couldn't change. It was accepted by management gurus of the time that a company of such a size would need at least five years of intensive effort to move in a different direction.

In those days, no one got to be chief executive until they turned 61. The company had a mandatory retirement age of 65. This meant that no one was in office long enough to achieve anything. Not that they cared much. Having spent a working life climbing the greasy pole, they were generally pleased to cruise out the last few years enjoying the power and prestige.

Niall FitzGerald had a similar view at Unilever. In his early interviews on assuming the highest office in the mid-1990s, he would describe the typical five-year term of a chief executive thus: the first year was spent on the introductory tour, the second on devising the plan, the third getting buy-in for the plan and the fourth implementing it. The fifth was the farewell tour.

The result was, middle-tier management down in the bowels of the business knew if they dragged their feet and delayed any top-management initiative, it would run out of steam in 12 to 18 months. The storm - and the chief executive - would pass, and they would have three or four clear years before the next one. Thus they too never needed to change. Fitz-Gerald's great opportunity, he used to say in those far-off days, was he was the first Unilever boss in a generation young enough to do two terms, which gave him 10 years. He would be around long enough to make things happen.

In fairness, he did a lot. But in the end, he went out on a disappointing note. He may have dented the inertia of the organisation but did not defeat it.

Looking today at the disaster that is General Motors, and also at Citigroup, the financial firm which has just announced 50,000 job losses, it seems obvious businesses of this scale are just too big to manage. This brings us to the added irony that the frustration of chief executives in failing to make change is often to do the one thing which makes matters worse. Unable to make a mark internally, they decide to seal their legacy with some gigantic deal - one that almost always adds more to complexity than to profit, but which they think will make a difference.

FitzGerald, who had always been sceptical about big M&A, eventually spent billions on Bestfoods. Sir John Bond's farewell gift to HSBC was the purchase of the disastrous US subprime business Household - "as bad a company as you can imagine" in the words of a regulator at the time, which has cost the group billions. Even pharmaceuticals companies that merged so they could spend more on research and development have found the results disappointing because scientists don't like being treated like battery hens.

The nightmare of this financial crisis is that when we wake up from it, we will find the banks that were already too big and destabilising before it began will be even bigger when it ends. Banks that were already too big to fail will have the power to wreak even more havoc.

It is time to speak up for smallness. Even the bosses of the biggest banks admit privately there is no evidence size has made them more efficient, or that big banks are better than small ones. And we now know that size makes them potentially lethal for the rest of us.

It is time to bring scale back to banks - indeed to all business organisations and reduce them to a size where they can be run effectively. Even investment bankers would like it. They could make vast fees undoing all those deals they previously charged vast fees to do.