Sir John Kay has been our business strategy guru for the entirety of our professional careers. Whilst he’s known to the wider world as an economist, John has also been a very successful investor across public & private markets and across financial & physical assets. For over three decades, he managed the endowment of St John’s College in Oxford University and over that period John outperformed the legendary David Swenson by a country mile. If that weren’t enough, in the decade ending in 2020, John chaired the investment committee of Baillie Gifford’s Scottish Mortgage Investment Trust. The Trust compounded at 20% (UK sterling) over that decade, ended up entering the FTSE100 and became one of the most sought after investors in the world of tech investing.
John’s latest book, “The Corporation in the 21st Century”, was published a fortnight ago and almost immediately entered the FT’s ‘Book of the Year’ longlist. If you are an investor or if you run a business, there are threecompelling reasons why you should read this book.
Firstly, John convincingly debunks the notion that businesses should be run with profit maximization as the main motive. Lean-production, the use of leverage to juice-up returns for shareholders, the obsession regarding ROCE as a key financial metric, all of these John says are relics of a bygone era. To quote from Philip Augar’s review of the book in the FT: “Using the decline of former corporate icons such as GE, ICI and Deutsche Bank as examples, the author’s message from the first wave is that financialisation works better for the financiers than the financed and that, taken to extremes, shareholder value was indeed — to paraphrase its one-time flag-bearer Jack Welch, GE’s hard-charging former chief executive — the dumbest idea in the world. And yet, although partially discredited and softened by wider stakeholder concerns, shareholder value remains influential in many boardrooms.”
Secondly, John’s book explains what makes successful contemporary companies successful and this recipe John says is very different from what used to drive corporate success until as recently 20 years ago. Quoting again from the FT: “New economy companies such as Meta, Apple and Alphabet, distinguished from their predecessors in relying on intellectual rather than financial capital, redefined management. Out went command and control and transactional relationships, in came collaboration, involving employees in decision-making and a shared sense of purpose.
Outsourcing and the purchase of specialist services replaced in-house self-sufficiency in hollow corporations. Problem-solving replaced lean production as the principal competitive weapon, requiring a softer management approach with social as well as commercial consequences.”
Thirdly, John explains convincingly why capitalism is now less about financial & physical capital (both of which he says are abundantly available and hence are unlikely to be a source of competitive advantage) and more about how entrepreneurs pull together different types of human capital. It is the ability of the entrepreneur to combine the talents of diverse groups of people into a cohesive product or service which is at the heart of the “capitalism without capital” business model which underpins the modern world.
In fact, as John explains, the most successful companies today – such as Apple – outsource almost everything which actually involves the use of physical or financial capital. For example, in Apple’s case, all its products are produced in China or India by third party manufacturers and these products are sold in Apple stores owned by a variety of landlords (eg. the Jio Mall in Mumbai’s BKC). The only physical property Apple owns is its handful of offices around the world. John labels such companies as “the hollow corporation” which need negligible amounts of capital from VCs or from the stockmarket. To quote from John’s book: “ Neither Amazon nor Apple has raised any money from shareholders since their IPO, and neither is ever likely to in the future. Past stockholder investment represents less than .01 per cent of the current value of these businesses. Modern companies are typically cash-generative before they reach a scale at which they become eligible for a listing on a public market. The purpose of the IPO is not to raise capital but to demonstrate to earlier investors and employees that there is value in their shareholdings and to enable some to realise that value.”
In contrast to the fading scarcity value of financial & physical capital, John says that the modern corporation hinges around cerebral leaders: “When executives deliver that routine cliché of modern management – ‘Our people are our greatest asset’ – the commercial value of the collective intelligence developed within the corporation is probably what they have in mind. The asset is the capability of individuals and teams within the business to solve problems, to devise and deliver new products and to win the commitment of suppliers and the trust of customers. Collective intelligence is the basis of the competitive advantage of most successful corporations, and it is enshrined in its people.”
Disclaimer: Amazon & Meta forms a part of Marcellus’ GCP
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
