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Corporate Darwinism

Only 19 of 1,513 UK companies survived 70 years after mandatory consolidated accounts in 1948, says natural selection-inspired study at Cambridge Judge Business School.

A yellow rocket ship blasts past a row of grey hot air balloons floating in the clouds.

Business has long been portrayed in survival-of-the-fittest (“dog-eat-dog”) and scriptural (“David and Goliath battle”) terminology. A new study from Cambridge Judge Business School, inspired by natural selection theory, finds that only 19 of 1,513 UK companies (1.26%) survived over the biblical “threescore years and ten” (70 years) from the postwar Companies Act in 1948 which made consolidated accounts mandatory.

The study just published in the journal Business History, entitled “Death on the Stock Exchange”, finds further that the half-life of companies has been “remarkably stable” over the 70-year period of 1948-2018, with a consistent 10-year survival rate of 50% (except for the years immediately after World War II when survival was higher due to post-war takeover controls).

“If long-run survival rates for the company population are low, this calls into question the dependability of long-term contracts that companies might sign”, the study concludes, citing promises to pay defined benefit pensions or clean up nuclear power stations (or, more trivially, to replace boots or socks worn out during a wearer’s lifetime).

The study is co-authored by Geoff Meeks, Research Director (Honorary) and Emeritus Professor of Financial Accounting at Cambridge Judge, and Geoffrey Whittington, Emeritus Professor at the University of Cambridge and Honorary Senior Research Associate at the Cambridge Centre for Finance (CCFin) and Cambridge Endowment for Research in Finance (CERF) at Cambridge Judge.

A company’s “death” is defined by the study as its disappearance from the population of larger independent UK companies listed on the London Stock Exchange – mostly through takeover by another company (1,555 firms or 83%), followed by 89 firms that failed outright through liquidation, receivership or administration, and 17 firms that ceased being quoted.

“The lesson provided by our survivors is that adaptation to a changing environment is essential for survival, although by no means does it guarantee survival,” the study says.

“The vast majority of firms perished by takeover in this period. Many of these were forcibly changed by the takeover, and those that survived may have avoided takeover by anticipating the actions that an acquirer would take. An example of this is Whitbread’s recent decision (2018) to divest its Costa Coffee arm, in order to fend off a bidder who proposed to do precisely this.”

The study is based on listed UK companies in 1948 as catalogued by the National Institute of Economic and Social Research, requiring them to be independent companies (not majority owned by another company), operating primarily in the UK, and engaged mainly in manufacturing, distribution, construction, transport and certain other services (firms in finance, mining and agriculture are excluded). The study acknowledges that such a “death” may not greatly impact customers or employees when, for example, brands continue under new owners.

The factors behind 70-year “survival” are not crystal clear: eight of the 19 surviving companies did not keep pace with the growth of the economy, thus growth does “not appear to be a necessary condition for survival”. Most of the survivors were larger companies less prone to takeover owing to their size, but the survivors’ list also includes Tesco, which was relatively small in 1948 and has since become a retailing giant.

Although only five of the 19 survivors changed industry according to the two-digit Standard Industrial Classification code, those classifications are very broad: for example, Unilever in 1948 was classified in the personal/home care category but was already strong in another category, food manufacturing;, and while Marks and Spencer was in the retail distribution category throughout the 70-year period, “at the beginning it sold everyday clothing; whilst at the end, 60% of its turnover was derived from selling food – mostly in prepared form, a market which scarcely existed in 1948.”

“It is notable that the companies which survived over the period showed the ability to adapt their business activities, in some cases radically. Thus, the takeover mechanism may be credited with introducing a high degree of mobility and dynamism into the quoted company sector. On the other hand, it is not clear that this was necessarily a benign process,” the authors say, given the mixed record of many takeovers in terms of financial performance and whose interests they actually served.

The full list of 1948-2018 survivors, from the smallest to largest in 1948, is: Tesco; Avon Rubber; Daniel Thwaites; Smith & Nephew; The 600 Group; De La Rue; Johnson Matthey; Low & Bonar; Renold; Smiths Industries; Weir; Wolverhampton and Dudley Breweries/Marstons; BICC/Balfour Beatty; Lead Inds./Vesuvius; Guinness/Diageo; Marks & Spencer; Tate & Lyle; Unilever; and Whitbread.