Profit or greed?

Recalling Gordon Gekko's famous line - greed is good - Stefan Stern writes on how companies like Tesco are treading the fine line between achieving high profitability and good corporate behaviour

In Oliver Stone's remarkable film Wall Street (1987), the most memorable scene of all takes place at a shareholders' meeting of the struggling company Teldar Paper. Into this rather sedate setting bursts Gordon Gekko, the notorious buy-out king and an extraordinary force of nature.

Gekko, played by Michael Douglas, hurls a brutal tirade against the board directors in an apparent defence of the interests of the company's long-suffering shareholders. 'The new law of evolution in corporate America seems to be survival of the unfittest,' Gekko declares. 'Well, in my book you either do it right, or you get eliminated. In the last seven deals that I have been involved with there were 2.5 million stockholders who have made a pre-tax profit of US$12bn.'

But the shareholders (not to mention the board) are suspicious. Isn't Gekko simply an appalling, ruthless asset-stripper? 'I am not a destroyer of companies,' Gekko swears. 'I am a liberator of them!'

And then he makes these final, chilling comments. 'The point is, ladies and gentlemen, that greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit. Greed, in all of its forms - greed for life, for money, for love, knowledge - has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper but that other malfunctioning corporation called the USA.'

This famous credo of avarice seemed to sum up many people's attitudes as the 1980s wore on. Black Monday in October 1987 (the year Wall Street came out), and the subsequent late recession of the 1980s and early 1990s, took the spring out of the step of the Gekko-ite triumphalists (that and the convictions of some of the financial world's other famous mavericks, such as Ivan Boesky and Michael Milken).

But today, as some chief executives' salaries soar ever higher, and as the private equity machine moves into top gear, creating fantastic amounts of wealth for its leading players, you have to wonder: is Gordon Gekko being finally vindicated? Stone's film was intended as a bleak satire when it originally appeared. Perhaps now, in some people's eyes, it would look more like a training video.

But hold on a minute. Whatever happened to that uplifting phenomenon known as corporate social responsibility (CSR)? Surely - and especially in this post-Enron, Sarbanes-Oxley-constrained world - businesses have been forced to suppress any gross, greedy instincts that they may have had, and learned how to present themselves as upstanding citizens instead?

It is a complicated picture. The truth is that the most successful companies have learned how to square the circle of achieving high profitability without offending too violently in the court of public opinion.

Take Tesco, the dominant UK supermarket chain. There can be no question about the success and sheer muscularity of this great British company. In its home market, Tesco dominates with a 30% share of grocery spending. It even accounts for around £1 in every £8 that is spent by British consumers in every kind of retail outlet. ('That gives us another £7 to go for,' as Tesco's driven chief executive, Sir Terry Leahy, likes to joke. At least, I think it is a joke.)

In April the firm reported record annual profits of £2.55bn. Tesco's remarkable global success continues uninterrupted. It is now even launching a new chain of outlets in California, called Fresh & Easy, in an attempt at the unthinkable: taking on Wal-Mart in its home market.

Astonishing profitability, then. But greed? Here things get much more controversial. The UK's Competition Commission, having initially declared that Tesco's market position presented no threat to fair and free trade in the UK, is now reconsidering that view. Environmentalists and other campaigners, such as Andrew Simm from the New Economics Foundation, have declared that Tesco's stranglehold on the UK market is highly damaging: to consumer choice, to the prospects for small, independent retailers, and to the vitality and variety of life on the UK's high streets.

Critics also challenge Tesco's definition of the word 'local', used in its defence of its market position. The super-grocer says that if local is taken to refer to a 30-minute car drive, then the great majority of households have more than enough choice in their 'local' vicinity, and Tesco has no monopoly on provision. But, the protesters argue, how many of us would really consider a half-hour drive the equivalent of that time-honoured practice of 'just nipping out to the shops to pick up a few things'?

It gets even more complicated. Tesco has a strong and long-standing commitment to various CSR-related activities. It long ago launched its 'computers for schools' campaign, which enabled parents to support their children's education by getting Tesco to provide IT equipment to their school - in return for their loyal custom, of course.

Tesco has committed itself to opening up new stores in deprived inner-city areas, bringing new employment opportunities (as well as modern supermarkets) to parts of towns that had not been well served by large employers in the past. And as an employer, Tesco has a very strong record. Its HR policies and practices have been widely admired. It has offered flexibility to working mothers, students and others who need the option of part-time work. Decent training is provided. There is even a long-standing partnership agreement with the shop-workers' union, Usdaw. Tesco is by far the UK's largest private sector employer of trade unionists.

So, enlightened, healthy capitalism, then? Well, not so fast. Only recently the company has been shamed into increasing the amount of money it is paying to dairy farmers for their milk. (One farmer had famously poured away gallons of the precious stuff in protest at his treatment at the hands of the big supermarkets.)

Not only that, but for all that Tesco trumpets its CSR credentials, the fact is that the company has a huge (and negative) environmental impact. Its impressive and highly efficient supply chain is based on the regular and frequent movement of trucks, from storage centres to outlets, 24 hours a days, seven days a week. Humble British potatoes and carrots clock up thousands of food miles every day to reach central processing plants.

In addition, Tesco's famously efficient buying policy means that raw products are often sought out from all parts of the world, no matter how far they have had to travel. Onions from New Zealand and tinned tomatoes from Argentina can be found on their shelves, even though perfectly good onions grow in the home counties and the Italian tinned tomato is hard to beat.

Profit pressure

But modern capitalism is ruthless and moves at lightning speeds. Publicly-traded companies are under constant pressure to record healthy profits and to forecast double-digit growth, even at a time when the world economy may be growing by only 3%.

Maybe companies are getting all this the wrong way round. Perhaps the only way to keep ungrateful investors (and private equity stalkers) off your back is to adopt a different approach altogether.

Perhaps, as the writer John Kay suggests, businesses should simply set out to try and be great businesses. Like happiness, he says, profitability is in fact a by-product of living and working well and doing the right things. We need to approach profitability, like happiness, at an oblique angle.

At a stroke, we can relax about CSR-related scandals and other PR nonsense because we will all have nothing to hide. And we need not fear investors who demand absurd profits because the oblique pursuers of profit will never attract such investors in the first place.

Is that enough to fend off the latter-day Gekkos of private equity? Maybe not. But, you know, it could be worth a try.

Stefan Stern writes a regular column on management for the Financial Times.