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Centre for Business Research (CBR) news from 2004

31 December 2004

The article at a glance

CBR research casts new light on UK innovation process 25 November 2004 CBR research that was presented at a major conference in …

CBR research casts new light on UK innovation process

25 November 2004

CBR research that was presented at a major conference in Edinburgh on November – and covered by the Financial Times the same day – has shed new light on the role of universities in the UK innovation process.

The first findings from a new study comparing the innovative behaviour of small and medium-sized companies in the US and the UK show that the number of UK companies that have relationships with universities is greater than has previously been thought, and more than in the US.

The International Innovation Benchmarking research, being conducted by the CBR’s Professor Alan Hughes and Dr Andy Cosh in collaboration with Professor Richard Lester of the Massachusetts Institute of Technology, is a study that will ultimately quiz four thousand companies of all sizes in the US and the UK to create the first comparison of their innovative efforts and activities, and their resulting performance.

The study is being funded by the Cambridge-MIT Institute, and the first findings from it were unveiled on 30 November at ‘Exchanging Knowledge – Boosting Competitiveness’, the Cambridge-MIT Institute’s National Competitiveness Summit.

The study found that two-thirds of UK companies are using universities and higher education institutions as sources of knowledge, compared to one-third in the US; and almost one in four UK companies (23 per cent) are running research collaborations with them, compared to around one in seven (14 per cent) in the US.

But crucially the research also goes on to show that while fewer American companies tap into the expertise of US universities, those that do have a more intense relationship with them, and value their collaboration more highly. In the study, 30 per cent of US companies rated universities as a “highly important” source of knowledge, compared with just thirteen per cent in the UK.

This may be because American companies place a greater premium on education generally. The study finds that more American company chiefs have a degree than their UK counterparts (eight out of ten CEOs and managing directors in the US, compared with five out of ten in the UK); and that they are twice as likely to have an MBA as their UK peers. The US also boasts a more highly qualified workforce, with one in five workers in the US having a first degree, compared with one in six here.

The findings, taken from a sample of 800 small and medium-sized companies who responded to the survey, raise some interesting issues for innovation policy makers. The final report from the 2003 Lambert Review of Business-University Collaboration suggested that the main challenge for the UK was “not about how to increase the supply of commercial ideas from the universities into business. Instead, the question is about how to raise the overall level of demand by business for research from all sources.” But this new research suggests that stimulating demand for university research by industry may be difficult in a country where university expertise is not valued as highly as it is in the US.

The findings show a number of other revealing differences between smaller businesses in the UK and the US. Though the companies were matched by size and sector, American businesses spent significantly more on innovation activities such as in-house research and development (R&D); acquiring patents and licenses (US companies spent 40 per cent more on this than their UK counterparts); innovation-related market analysis; and purchasing specialised services, such as patenting advice.

The findings also show that though fewer US companies collaborate with universities, they are more likely than their UK counterparts to collaborate with early-stage technology based companies.

‘Acquisition addiction’ put under the spotlight

9 September 2004

A paper about ‘acquisition addiction’, written by the CBR’s Andy Cosh, Paul Guest and Alan Hughes, was nominated for a highly prestigious award at the Academy of Management Annual Meeting in New Orleans last month.

The study, entitled “Why Must All Good Things Come to an End? The Performance of Multiple Acquirers”, was nominated for the Academy’s Carolyn Dexter Award.

It was also published in the Academy’s Conference Proceedings – in itself quite an accolade, as only 10 per cent of the 2,000 papers accepted for the event this year were included.

The study, conducted with the researchers’ colleague, Charlie Conn from Miami University of Ohio, forms part of a Centre for Business Research project on International Mergers. It analyses the performance of firms over a 16-year period (from 1984 to 1998), comparing businesses that make just one acquisition with those that make multiple acquisitions.

The findings are troubling. While firms that make an unsuccessful first bid tend to improve their acquisition performance with subsequent bids, exactly the opposite is true for acquirers who make a successful first bid. “We find that their acquisition performance deteriorates,” say the authors.

They warn that “initial acquisition success is no guarantee of success in subsequent acquisitions”. They add, “Short run returns may be flattering in relation to the long-run picture.”

A version of this paper was also given earlier this year in Basel at a European Financial Management Association conference. It can be accessed online via the Social Science Research Network, where it has been on their Top Ten Download List for research on Corporate Takeovers & Divestitures.

Find out more

Visit the SSRN website to read the paper “Why must all good things come to an end? The performance of multiple acquirers” by Conn, Cosh, Guest and Hughes

Shell: cracked or shattered?

20 June 2004

The business scandal that rocked Shell earlier this year is still creating tremors. Here Ian Jones and Michael Pollitt, two CBR researchers who have written and edited several working papers and books on business ethics and corporate governance, assess the impacts of Shell shock.

Shell admitted in January this year that it had overstated its proven reserves of crude oil by 20 per cent. This was followed by an internal report showing that Shell executives had hidden the company’s oil and gas shortfalls as far back as 2001. As a result, Shell is now under investigation by the US Securities and Exchange Commission, the US Department of Justice and the UK’s Financial Services Authority. And investor confidence has been dented.

What is surprising to us is not the scale of the scandal, but the fact that it should have happened to Shell. The company has, after all, been here before. After two major crises in the mid-1990s, it instituted a thorough review of its corporate governance structures that should have helped it avoid the current scandal. So what has gone wrong?

Root and branch reform

At a CBR conference in Cambridge in December 2001, the former Chairman of Shell, Sir Mark Moody-Stuart, gave an admirably candid talk. Under his leadership, he said, Shell had performed a root and branch reform of its approach to external issues – including the environment, political engagement and human rights – after the public outcries over the disposal of the Brent Spar oil platform and the execution of Ken Saro-Wiwa.

However, Shell appears not to have taken full account of two fundamental and related shifts in its business environment that have taken place since 2001. Firstly, the US Securities and Exchange Commission has been steadily increasing its requirement for information on proven oil and gas reserves (paralleled by Britain’s Statement of Recommended Practice). Secondly, businesses’ accountability to shareholders for policy and accuracy of reporting has increased enormously since the Enron and WorldCom disasters.

What has further compounded Shell’s error, in the eyes of some shareholders, is the fact that the company treated the downgrading of the reserves as a technical matter, and reported it to shareholders through its head of exploration and production, Walter van de Vijver. Shareholders felt that the then chairman, Sir Philip Watts, should either have announced the downgrading of the reserves himself, or made himself available to shareholders immediately afterwards.

An ethical issue

Shell gave the appearance of not having learned the lessons from previous occasions when they ignored external events. Senior executives involved did not seem to recognise that accurate reporting is an ethical issue, as much as it is a legal or technical one, and hence that Shell’s own principles (outlined by Sir Mark) – of ‘consultation’, ‘telling it as it is’, ‘looking people in the eye’ and ‘developing a management system to track the issue’ – applied.

There also appears to have been a failure at board level. The hallmark professionalism of Shell, with its emphasis on team-working, bringing in expert advice and analytical problem-solving, did not seem to operate at board level. It is very surprising that one of the most significant long-term strategic factors – the reserves on which the company could call for its future business, and the policy for increasing these reserves – was not fully discussed by the board.

Shell is not another Enron. In fact, the contrast between the two companies could not be stronger. There was no exceptional greed that was driving policy-making in Shell. It was more that there was, as the internal report shows, a lack of transparency about the reporting of reserves.

‘Trust is like a mirror…’

Management guru Charles Handy (who, ironically, began his career with Shell) has a phrase: ‘Trust is like a mirror. Once it is shattered, it becomes useless.’

Is trust in Shell shattered or just cracked? Our research would indicate that the company’s professional response to previous crises helped build its reputation. Shell is now embarked on ‘an accelerated review of its corporate governance and structure’, and though we have every confidence that it will do an excellent job in this, it will be some time before it can regain the confidence of shareholders, employees and government.

The art of performance

19 June 2004

When was the last time you read your pension statement thoroughly? Do you know which companies’ shares your savings are invested in? And if so, are you completely happy with the performance and behaviour of those firms?

Corporate accountability

Dr Paul Sanderson would like to know. Though he has recently left the Centre for Business Research, his interest in the CBR project has was working on – Institutional Investment and Corporate Accountability – continues. Fuelled by interviews he has conducted with fund managers and finance directors over the last three years, Dr Sanderson thinks that it’s as much the responsibility of individual investors, as well as institutional ones, to lobby for better corporate behaviour – “boring thought it may be to plough through the small print of a pension investment statement, or respond to a questionnaire on ethical investment from your life insurance provider,” he says.

He is currently working on a paper – arising from the research – that he will be delivering at the Institute of Governance Conference in Belfast in September, on ‘Governing the Corporation’. “What I will be discussing is the effect of the notion, coming from Trade Secretary Patricia Hewitt and others, that institutional investors should take the lead in the drive for better corporate governance,” he says. “I question whether financial institutions are equipped to undertake such a task.

Chain of accountability

“Institutional investors will never know as much about a business as the people who run it, and are only one of a number of stakeholders. Moreover, there are significant differences between the way the City operates and the way, for example, a manufacturing business operates.” The answer, he says, is “to strengthen the links in the chain of accountability, from the companies via the fund managers, investment consultants, pension trustees and company pension scheme administrators all the way through to the ultimate investor, the employee saving for a rainy day, or for retirement.”

How changes to the law will help demand for venture capital

28 April 2004

Changes to personal bankruptcy law that came into force this month (April) are likely to help stimulate a demand for venture capital by entrepreneurial UK firms, two leading academics have found.

The researchers, John Armour and Doug Cumming of the Centre for Business Research (CBR) at the University of Cambridge, have just published a study entitled “The Legal Road to Silicon Valley”. It shows for the first time that the legal environment in which venture capital investment takes place is just as important as the size of a country’s stock market in stimulating venture capital investment.

Until now, it had been thought that the depth and liquidity of capital markets was the most important factor controlling the supply and demand of venture capital. But while the researchers confirm the importance of stock markets and economic growth, they also show legal factors to be of equal importance.

“If their ideas end in failure at this stage, some entrepreneurs will be put off from ever returning to the nation’s talent pool. Favourable tax and legal environments help the establishment of venture capital and private equity funds and increase the supply of capital,” they say. “Similarly, temperate bankruptcy laws stimulate entrepreneurialism and increase the demand for venture capital.” These findings, they say, are economically and statistically significant, and show that law plays an equally important role in affecting the supply of and demand for venture capital finance as other factors, including real GDP growth and patent activity.

In their study – just published by the Centre for Business Research – John Armour and Doug Cumming carried out an international comparison of the legal and tax regimes of 15 nations over 13 years. As part of this, they used an index created by the EVCA (the European Venture Capital Association) to measure countries’ legal and fiscal regimes.

Their study gave clear evidence of the link between ‘investor friendly’ regimes and good supply of, and demand for, private equity backing. To this end, the researchers used the EVCA’s index of 10 legal, tax and institutional factors to demonstrate, for the first time, that countries with lower (better) indices have a more robust supply of and demand for venture capital finance.

In addition, the researchers looked specifically at the severity of bankruptcy laws (a legal component absent the EVCA index) across the 15 countries. Their findings show that in countries with tougher bankruptcy laws – like Germany, where bankrupts have to wait six years to be discharged from their bankruptcy – there is significantly less demand for venture capital investment by entrepreneurs than in countries with more liberal bankruptcy regimes.

The findings are topical as a reform of UK insolvency laws – the personal insolvency provisions of the Enterprise Act 2002 – came into effect in the UK this month (April). Under this reform, the discharge period for most bankrupts has just been cut from three years down to a maximum of 12 months. One of the key aims of this and other reforms was to “aid rehabilitation and business start-ups and re-starts”.

The two researchers were considering the question of how parts of the UK could become as successful as California’s Silicon Valley in stimulating small firms. Dr Armour and Dr Cumming say: “Policy-makers around the world are interested in how they can replicate the phenomenal success of Silicon Valley in stimulating and developing innovative, high-tech products and companies. One reason for Silicon Valley’s success has been the supply of venture capital to it.

“But the importance of bankruptcy law on that supply has largely been ignored up – until now. Many people think that because a typical, venture-backed company has very few liquid assets, bankruptcy is not important. But we know that that is not the case. In reality, many entrepreneurs rely on personal funds and credit – re-mortgaging their house, for example – to get their ideas off the ground before they have even got to the point of seeking venture capital. If their ideas end in failure at this stage, some entrepreneurs will be put off from ever returning to the nation’s talent pool.”

In a further finding, the researchers also warn that Government attempts to boost the supply of venture capital to young firms by setting up publicly-funded venture capital schemes are very difficult to get right. Indeed, they say, they can be a recipe for disaster as they ‘crowd out’ private equity investment, and tend to reduce overall industry returns. This finding has important implications for UK Government moves to set up a publicly-funded ‘Enterprise Capital Fund’, announced in the Budget last month.

CBR Director appointed to Council for Science and Technology

16 March 2004

The Prime Minister has appointed Prof Alan Hughes, Director of the Centre for Business Research at Cambridge University, as one of the 16 new members of the Council for Science and Technology.

The Council of Science and Technology is the Government’s top-level advisory body on science, engineering and technology policy. It advises the Prime Minister and the First Ministers for Scotland and Wales on cross-cutting issues of strategic importance in science, engineering and technology. The 16 new appointees to the Council represent a wide range of experience from the scientific community, business and charities

Prof Hughes has considerable experience in advising Government committees and enquiries. Last year, Prof Hughes – who is also Professor of Enterprise Studies at Cambridge University’s business school, the Judge Institute of Management – acted as a special adviser to a House of Lords Select Committee enquiry into Entrepreneurship in Europe.

And he has also acted as a consultant to HM Treasury, the Inland Revenue, the Bank of England and the Dutch Ministry of Foreign Affairs. Together with his CBR colleagues, Dr Andy Cosh and Anna Bullock, Prof Hughes has been responsible since 1991 for running the largest, and longest-running survey of the UK’s small and medium-sized enterprises – a research programme which has attracted an international reputation.

Prof Hughes says: “The Centre for Business Research and the Judge Institute of Management both carry out a wide range of research into the organisational and management challenges facing firms as they seek to innovate, as well as research on the evaluation of policy initiatives in these areas. I look forward to bringing this background to bear on the work of the Council for Science and Technology.”

The key areas for the Council are:

  • sustaining and developing science, engineering and technology (SET) in the UK, and promoting international co-operation in SET;
  • fostering the practice and perception of science, engineering and technology as an integral part of the culture of the UK;
  • promoting excellence in SET education;
  • making more effective use of research and scientific advice in the development and delivery of policy and public services across Government; and
  • promoting SET-based innovation in business and the public services to promote the sustainable development of the UK economy, the health and quality of life of UK citizens, and global sustainable development.

In developing its advice the Council will take into account the cultural, economic, environmental, ethical and social context of developments in SET.

The Prime Minister said: “Science and technology are a foundation stone for future UK competitiveness and a better quality of life throughout the world. We are committed to excellence in UK science so that the health and wealth of the nation can benefit from new technology and scientific breakthroughs.

“I have today appointed an outstanding team from a wide range of backgrounds in science, social science, engineering and technology for the new CST. I am confident that they will provide Government with the necessary strategic advice to help us build a society that is confident about science and can gain from all that it offers for the future.”

Business stars and business scandals…

15 January 2004

It is not only our society that is obsessed with celebrity, a CBR workshop on corporate governance heard recently (Friday 9 January 2004). In a talk on corporate reputation and risk, Dr Charles Fombrun – executive director of the Reputation Institute at New York University’s Stern business school – argued that “the star system has also happened to our companies”.

The era of deregulation and liberalisation of markets, ushered in by Margaret Thatcher and Ronald Reagan, had fostered enormous forces of competition, he said, between companies and products, and for money, talent, knowledge and attention. While this had generated significant wealth creation and business growth, the more negative consequence was a ‘winner takes all’ mentality in both society and business, in which all the attention was focused on a few individuals. As a result, he argued, “a few companies are making huge incomes, while many others are barely eking out an existence.

“This leads to dissatisfaction and an incentive to cheat and to cut corners to become corporate super-stars.” This was the reason for the series of business scandals over the last two years that have engulfed corporates like Enron, Tyco, Adelphia and Worldcom.

Dr Fombrun was one of the speakers at “Soft risks, hard lessons: using corporate governance to manage legal, ethical and reputational uncertainties” . This was a workshop held in Cambridge, jointly run by CARR (the Centre for Analysis of Risk and Regulation at LSE), the Centre for Business Research (CBR) and The Forum for Philosophy in Business (part of Cambridge’s Philosophy faculty). Amongst the participants were Adrian Cadbury, father of the modern corporate governance movement, and representatives from the Foundation for Independent Directors, Reuters, accountants BDO Stoy Hayward, and The Change Partnership.

Dr Fombrun went on to consider how reputation could be used to regulate corporate misbehahaviour. Companies’ reputations, he said, were valued far more by the markets than by accountants, and therefore companies put a lot of emphasis on branding and marketing themselves, in order to gain the support of investors. At the same time, he said, lobby groups have a lot of power to affect a company’s reputation – and therefore its value – if they object to its behaviour. He cited the public outcry over GM foods, and over Shell’s decision to sink the defunct Brent Spar oil platform at sea, and more recently the protest marches that took place in France, and even by sympathizers in Spain, when Marks & Spencer decided to close its French branches. Therefore, he argued, reputation could be a more powerful tool for controlling corporate misbehaviour than legislation like the Sarbanes-Oxley act (introduced in the US in the wake of its recent business scandals).

Respondent Dr David Ladipo, a former CBR associate now working for corporate governance organisation Lintstock, argued that “we need a more challenging dialogue about what companies really mean by ‘social responsibility’”.

He argued that the most socially responsible act that companies could perform was to pay their taxes. However, he said, some larger firms were able to avoid doing this, through employing some very aggressive tax planning. He cited the example of the disgraced US conglomerate Enron, which in 2000 produced a 67-page booklet detailing the $8 million it had donated to good causes, and the awards it had won for its community work.

The reality behind that, he said, was that during the previous four years, through clever tax planning, the company had successfully avoided a tax bill of $420 million – more than 50 times the amount they had given to charity…