Goodwill Hunting

An Aristotelian Model

I was recently ruminating on an article by Gus Carter complaining that Private Equity was, ‘hollowing out,’ Britain. He has a point.

He explained that 2.5 million people in the UK now work for a business which is ultimately owned by Private Equity. Carter explains how this is changing the way companies operate and uses the water companies as a bad example. In 1991 in the UK, they apparently had a debt-to-equity ratio of about 4%, today its closer to 70%. One such company, much in the news, bought by a PE consortium in 2016 has since seen its debt grow from £3 billion to closer to £10 billion. Carter’s contention is that such takeovers are designed to enrich management, buy-out partners and their financial backers via a short-term fix which does little to build value long term for a wider group of stakeholders, notably the historical priorities - customers and employees. Within two years of a public to private equity takeover more than 12% of the workforce tends to be laid off.

Not all commentators agree but the analysis chimes with me. Growing a business is much harder than squeezing one until the pips squeak. In the latter case there is a laser like focus on taking out cost and extracting cash to balance the balance sheet. The formula can certainly work, short term. However, I am reminded of something an old boss advised me of many years ago which is that ‘you can’t shrink your way to greatness.’ I found that quite profound when I reflected on it and still do.

Surely greatness is what a business should aspire to? Leadership creating a place where talented people aspire to work with a brand respected by everyone, providing customers with a fantastic product, partners and suppliers queuing up to work with them and delivering a broader positive impact on the social ecosystem in which it conducts its business. Could we perhaps apply to business the principle of Eudaimonia espoused by the ancient Greeks as the pinnacle of human attainment? A deep state of ‘living well’ which draws on a person’s innate capabilities to create a virtuous and rewarding life, rather than one delivering only momentary feelings of pleasure or contentment. Let’s not be content with that in building a business.

What should a business built on the Aristotelian model look like? For me it would be one designed to deliver an outstanding product or service which answers a customer need uniquely well, the source of differentiation which Michael Porter sees as the primary driver of long-term value and the cornerstone of good strategy. Such a strategy should allow a premium price, generate strong margins, and include the investment required to build a strong brand reputation. It clearly demands a long-term view on payback. People will be attracted to work in companies like these because they will find themselves joining an organisation striving together to develop and deliver something exceptional. Building a business like this is not transactional, is not a balance sheet exercise. It is goodwill hunting and though challenging if successful, likely to leave a lasting legacy for all involved.