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Business & Society with Senthil Nathan
Inspiring and thought-provoking conversations with eminent thinkers and sustainability leaders about business in society. Hosted by Senthil Nathan, Chief Executive of Fairtrade Australia New Zealand.
Business & Society with Senthil Nathan
#21 Relationships Over Resources: Why Human Ingenuity Drives Corporations in the 21st Century with John Kay
Sir John Kay delivers a masterful analysis of how corporations have evolved from their industrial origins to today's knowledge-driven enterprises, revealing profound insights about the changing nature of business success.
Drawing on his distinguished career spanning academia, business, and finance, Kay traces the corporate journey from the industrial titans of the Gilded Age through the professionally managed firms of mid-20th century America to today's "hollow corporations" like Apple. His historical perspective illuminates the critical shift that occurred when businesses abandoned their focus on building excellent, enduring companies in favor of maximizing shareholder value—a shift Kay argues has been self-defeating.
The conversation explores fascinating case studies of once-dominant corporations that lost their way. General Electric, once America's most admired company under Jack Welch's "make the numbers" philosophy, has now broken itself apart. Boeing abandoned its culture of engineering excellence for financial metrics and suffered devastating consequences. ICI, Britain's industrial crown jewel, collapsed within 15 years of changing its mission statement from applying chemistry to creating shareholder value.
Kay argues persuasively that human relationships and ingenuity have superseded physical assets as the true drivers of modern business value. The smartphone exemplifies this transformation—a device replacing libraries, record players, and atlases in our palm. This shift demands rethinking how businesses operate and create value in an economy where capital intensity has diminished while financial influence has paradoxically increased.
For leaders navigating today's complex business landscape, Kay offers this wisdom: focus on building great products that customers value and creating organizations where employees proudly identify with the mission. The score—profit—will take care of itself. As we grapple with questions of corporate purpose, sustainability, and societal trust, Kay's insights provide a thoughtful roadmap for businesses seeking authentic, lasting success.
Link to John Kay's website: https://www.johnkay.com/
Please visit our website, www.businessandsociety.net, for more inspiration.
Hello everyone. Welcome to the Business and Society podcast, where we discuss ideas at the intersection of business and society. I'm your host, senthil. I'm excited to be joined by one of the most influential economists of our times, Sir John Kay. John is a fellow of St John's College, Oxford, and has a distinguished career in academia, business and finance. His writing, including the best-selling Obliquity and a regular column for the Financial Times, has been recognized by numerous awards. He was the first dean of Oxford Said Business School and has held chairs at the London School of Economics, the University of Oxford and the London Business School. I sat with him to discuss some of the ideas from his latest book, the Corporation in the 21st Century, from Yale University Press. Warm. Welcome, john. Thank you for joining me today.
John:Pleasure to be with you, Senthil.
Senthil:John, before we get into the book, I have an open question to start with. So much is happening today. I'm sure you're watching it... geopolitics, trade wars, technology, climate change and the convergence of business and politics. I'd like to know how you see all these developments, particularly what it means for business and society.
John:Gosh, that's a very wide-ranging story. Let me give a bit of background, which is to say that, as I see it, business in the first two-thirds of the 20th century was a business of trying to create the discipline of professional management. The great corporations of the 20th century the General Motors, the ICIs in Britain and so on were not creations of single individuals. They were businesses that planned to go on forever developing their own professional management , and that was the model of the professionally managed firm that was developed in the first two-thirds of the 20th century. Then it changed, and the key to the change we can describe as a mixture of individualism in politics and society more generally, along with the cult of shareholder value, which is exemplified by Jack Welch, who was famously in 1999 declared the manager of the century by Fortune magazine. In retrospect, I don't think he was the manager of the century by Fortune magazine. In retrospect, I don't think he was the manager of the century. In fact, I don't think in retrospect he was a great manager at all.
John:GE added spectacular and shareholder value in the 1980 to 2000 period when Welch was the CEO. If we look at what has happened today, shareholders have lost the bulk of what they gained in the Welch period. The business has now broken itself up into what were its three traditional areas of aero engines, healthcare, plastics. Now, thinking about it for a minute to be America's leading electrical company in 1980 was a pretty good place to be, and yet where is GE now in relation to that industry? Nowhere at all. I can tell that story over and over again. I've told it in Britain about ICI and British GEC. Amazingly, these were Britain's two leading companies at the beginning of the 1990s. Neither of them exist anymore. That's quite a spectacular achievement. And it's quite a spectacular achievement in terms of shareholder value, because that was what they set out to create and that was actually what they destroyed.
Senthil:Well, John, let's move into how corporations evolved over the past three centuries, which I think is the main theme of your book the Corporation in the 21st Century. Let's start with the corporation in the 19th century. Let's go by chronology. Please tell us a little more about a typical corporation during the Industrial Revolution.
John:If we look at the beginning of the Industrial Revolution, the typical corporation is one in which some rich man was accumulated wealth historically through agriculture, builds a plant, funds the construction of a plant. There are some managers of that plant and there's a clear distinction. He builds the plant and takes control of the business that operates in the plant. There's a clear distinction between the capitalists who own and run the business and the workers mostly low-skilled are employed . That's the model then in Britain.
John:The model in the beginning of the United States is the model which was exported to Australia with so many British people who went and settled there. Move on to the 19th century and what you start to get is that, rather than relying on what Marx called primitive accumulation, or indeed Adam Smith prior accumulation, what you get is money being raised in more modest quantities from each, from well-off individuals. I was amused to discover that the Bronte sisters, for example, were early investors in a whole range of British railroads and there were actually arguments between the sisters as to which of the various railroads was the best investment, so that by this time we were getting the emergence of what we knew by the end of the 19th century as the modern stock market and that became the dominant model as the 20th century evolved. And you had great businesses then, like General Motors and General Electric and so on, with multiple diffused shareholders, professional managers and the professional management system.
Senthil:One quick question before we move into the 20th century. You said individuals started driving industrialization and businesses. So could we say then the 19th century is when the corporate power is at its peak. Some of the most powerful corporations in history, such as the East India Company, dominated global trade in that century, and Mark Twain called a crucial part of the century as Gilded Age.
John:Yes, that's right, but the Gilded Age was a period in which there were dominant figures in the United States in a way that there weren't really in Europe at that time, people that Mark Twain was talking about, people like John D Rockefeller and Andrew Carnegie, who were actually individuals from relatively modest backgrounds, who had built up businesses which dominated in Rockefeller's case, oil, in Carnegie's case steel and that gave you, at the beginning of the 20th century, Standard Oil and US Steel, as US Steel believe it or not, when it was formed in 1900, was by far the largest corporation in the world. It's quite amusing to watch in our papers at the moment the final disappearance of US Steel. For a long time, interestingly, it hasn't been the largest steel company in the world, hasn't even been the largest steel company in the United States.
Senthil:Please tell me a little more about the 20th century corporation looks like and how it differs from its predecessors.
John:It's largely an extension of that. If we'd been talking 100 years ago. We'd have been talking about what was Henry Ford's plant on the River Rouge, and that's extraordinary to think about from a modern perspective. It's huge. I sometimes use slides that compare Ford's River Rouge plant with Cupertino, where Apple are based. The River Rouge plant is about ten times the size. You can see the steel of the smoke from miles away. It's huge and, of course, it has rather low skilled workers managing a certain assembly plant. More than that, ford and his colleagues determine everything, every detail of the, every detail of the plant, every detail of the automobiles designed by them.
John:There's still an area of Brazil called Fordlandia. That's where Ford owned a rubber plantation in order to ensure that even the rubber that went into Ford tires was produced to Ford's standards and under Ford's specification. Ford, in this sense, controlled everything and the workers, as I say, were relatively unskilled and we had the model of the market economy, or capitalism, as people definitely called it, which is unskilled. Low-skilled workers are so disciplined by Henry Ford's management team and told what to do, and Taylorism, of course, is the quantification of that, in which people are given targets, instructions and so on. That's the business of the 20th century. And if we look at interestingly, Apple at Cupertino are not quite the same, the inheritors of Ford, because they are professionally managed businesses and Ford found it difficult to make that transition.
John:But nevertheless, what Apple does is it coordinates the activities of a whole variety of suppliers. And for Apple's products, as you can see from the box, are labeled as designed in California, which they are, but they're not made in California. They're made predominantly in mainland China by, or assembled rather in mainland China by, Foxconn, which is a subsidiary of the Taiwanese Honhai Industries, the largest supplier of parts for the iPhone, almost unbelievably Samsung, which of course is Apple's principal rival in producing and assembling smartphones. And equally bizarrely, if I go into the Apple store in Regent Street, which is their largest retail outlet in Europe, I discover it's owned jointly by the King of England and the Norwegian Sovereign Wealth Fund. That's the nature of capital and capital ownership in the modern economy.
John:Apple is, in the sense, what people call a hollow corporation. It assembles a range of functions, a range of capabilities which it doesn't have itself. It's a professionally managed, modern business. You might also look at the iPhone itself and think of what it does. It's a phone. It also replaces our Atlas, it replaces our record player. it replaces our libraries, and then it does all this in a device where we can hold an upper hand. There are a lot of implications of that if you think through them, but the essence of these modern products is that they're assemblies of competences. The entrepreneur, in the classical French sense of bringer together of things, the entrepreneur that is the Apple Corporation, has created
Senthil:Hmm, so the implied message there is the capital intensity has reduced from the last century to now.
Senthil:But I also want to ask you the 20th century has seen remarkable events two world wars, cold war and the onset of globalization, which benefited countries such as China and India. Tell me a little more about what these developments meant for corporations by then.
John:Well, they meant that it was possible to create these hollow corporations, and there are both positive and negative consequences of that. The positive aspect for me in many respects is that these businesses pioneered professional management. Alfred Sloan at General Motors and his colleagues believe they were developing management techniques that could be applied to a wide range of businesses, and the people at General Motors famously, in the beginning of the Second War, hired Peter Drucker to document how it was they were creating professional management. That was what happened then. Another striking example of the professionally managed businesses was General Electric in the US, which had its origins in the electrical innovations that transformed life at the end of the 19th century in a way that the modern corporations and information technology have done now. But it was these large, established monopolies that not only came together to build electrical conglomerates but actually produced the innovations in these industries, the fabulous wide range of things that electricity did for us, ranging from lighting our homes to, today, powering our cars. And it was General Electric which pioneered that kind of thing.
John:I've talked about in the book and quite often in seminars in Britain about ICI, which of course was Britain's leading industrial company through the 20th century, and what ICI did is. It was formed from businesses in the ice dyestuffs and explosives. It shifted its focus to petrochemicals and fertilizers very successful. It then shifted its focus to fibers and pharmaceuticals, which were the more modern chemistry businesses. That was ICI, and what it said it was doing was it was engaged in responsible application of chemistry and related sciences to business. That was what drove ICI. And in the 1990s ICI changed its mission. Its mission became to create shareholder value by, they said, focusing on businesses in which we have cost leadership and a competitive advantage.
John:The earlier version of the company lasted half a century and the new version didn't last 15 years, and there's a lesson for us in that. The even more dramatic example of that in that we read about now is Boeing. And Boeing, at the end of the Second World War, was set up to become a leading civil aircraft manufacturer. Bill Allen, who was CEO of Boeing for years in that decade, said our aim is we aim to live, sleep and breathe the world of aeronautics, and that was the company that produced the 737, the best-selling plane ever made, the 747, the jumbo jet and so on.
John:The end of the 20th century Boeing had a merger with McDonnell Douglas. It was the dominant. Technically it was a takeover of McDonnell Douglas by Boeing, but culturally the McDonnell Douglas influence, which was shareholder value oriented, was dominant, and the CEO of Boeing at the time come from McDonnell Douglas famously said people say this is a great engineering company. It is a great engineering company, but people invest in the company because they want to make money. That was the change that occurred at Boeing and at so many companies in that era and if you look at shareholder value now, you will not feel that Boeing has been successful in doing that and they're certainly not anymore a company that eats, sleeps, breathes the world away to aeronautics.
Senthil:Tell us a little bit about this shareholder priority and stakeholder capitalism, John. You wrote having profit as the defining purpose of a corporation leads to a decline of ethical standards, and it seems like you advocate strongly for stakeholder capitalism. Help us understand these ideas.
John:Yes, I mean what I see the purpose of these kind of businesses as being is to create great businesses. That's what happened at Boeing, at ICI and so on. And it's a great business in the sense that it's not only it's well regarded in the community, and it's well regarded by the people who work there, who are proud of doing that, by the people who buy its products or use its products, and ultimately, by the way in which it changes its focus as the environment in which it operates changes. That was characteristic of these corporations and I think it should be characteristic of corporations.
John:But what happened in the latter part of the 20th century was this financialization, essentially. One of the paradoxes I've talked about is that capital is not as important to business, and certainly not important in the same way that it once was. And yet, at the same time, the financial sector has grown dramatically in size and remuneration and companies have been forced into the priorities of that sector, which are basically doing deals and making the numbers. That's well to summarize the Welch philosophy in one sentence, that would be it ... m ake the numbers and make the deals, and that's, of course, what the financial sector wants. And my argument is that doing that has not just led to the destruction of businesses, but has actually led to the destruction of the shareholder value it was supposedly about creating, and creating shareholder value as an objective is self-defeating in its own terms, and at the beginning you mentioned my book Obliquity, which was a first, relatively popular attempt to explain this argument why the most profit-oriented companies were not necessarily the most profitable
Senthil:Interesting. A recurring theme in your definition of 21st century corporations is how people have superseded land and machinery as companies' most productive assets. I want to quote a few that stood out for me in particular, and I quote "the essence of the firm was an assembly of relationship among individuals. All physical resources have finite limits, but human ingenuity does not. The unprecedented prosperity of the modern world is the result of our collective intelligence. So you wrote this in various chapters, but these are some of the quotes I found really impressive. Do you see that a hundred years from now, or at least a few decades from now, this would still be true? Or would things like artificial intelligence define the cooperation of the future?
John:I don't think there's any inconsistency between these two. Artificial intelligence is a modern version of the kind of developments I've been describing. That economic growth is not about having more stuff, which a lot of people think it is, and I described earlier the smartphone, which is a very good example of that. The smartphone, ideally, is doing a great deal more with less stuff, and this comes up again and again. I put a table in the book that talks about the value per kilogram of a whole variety of products, and possibly the most valuable in the sense of manufacture at the moment is the mRNA vaccines that were developed against COVID, which are much more valuable per kilo than gold. But of course, it's not the kilos that matter, but it's the ingenuity that went into enabling that product to do what it does that we're paying for, and I'm sure the world of artificial intelligence is one in which that will be even more true than it is today. Indeed, we can already see some of that in our smartphones now.
Senthil:How satisfied are you with the current functioning of the markets? Do you believe that Adam Smith's idea of the invisible hand or Ricardo's theory of comparative advantage is working optimally? I'm particularly keen to hear your thoughts about market dominance and symbolic terms such as big tech or big pharma.
John:Yeah, that's an interesting story, which is Adam Smith is. People endlessly talk about the invisible hand as being Adam Smith's defining concept. It wasn't, as people who've read Adam Smith actually know. In fact, Adam Smith has at least two great books, and the other one begins with an emphasis on the sympathy as the essential driver of the relationship between people. The invisible hand, rather oddly, is relevant in the way to the current tariff debate, because when Smith wrote about the invisible hand, he was writing about tariffs and explaining that objectives were not necessarily determinative of what the outcome was, which is very far from the idea that Adam Smith was an unfettered enthusiast for free markets. He was, but that was because he was very negative about the role of government in all of this, and quite rightly he looked at the governments that existed in his time.
John:I believe strongly in markets, but I'm clear about that. What I want markets to do is to embed what I call disciplined pluralism. By that I mean that an effective market economy is one in which people are free to do what they like set up new businesses, develop new products, most of which will fail. We know. Most businesses, most new businesses don't succeed. Most new products don't take you off. That's the discipline of disciplined pluralism that says people are free to do things, but if these things don't work, they're shut down by the operations of the market. That, for me, is the essence of the market economy, which is a very different story from that of saying it's about people being as greedy as they like and the winners of that are the people who are the most greedy. It's not the people who are most greedy who set up the great business.
John:Even if Elon Musk is now the richest man in the world and rather justifiably unpopular man from a political perspective, he didn't set out to become the richest man in the world. What he set out to do was to build electric cars, put men on Mars and so on much nobler ambitions than making money, and, incidentally, he did make an extraordinary amount of money. A friend of mine, actually, who was a former England test cricketer and is now a journalist and book reviewer, referred me to an American book written by a guy who was America's leading football coach for 20 years, and he wrote an autobiography under the title the Score Takes Care of Itself, and that seems to me a very instructive mantra. If you build a great business, you create shareholder value. That's the way around it is.
Senthil:I'll ask one final question before we move into the last section. What is your take on corporate sustainability initiatives? You wrote in the book, and I quote "it would be a double tragedy if, by misunderstanding the nature of our own success, we were, in the name of sustainability, to deprive others of the opportunity to achieve theirs". What do you imply by this?
John:Yeah, and what has happened as a result of it are an aspect of the change where I described from building great businesses to focusing on shareholder value has been the need for business to try and make itself, to try and achieve greater legitimacy, and a convenient way of doing that has been to set up an ESG department, etc. And have senior executives making statements about how concerned they are about equality, the planet and so on, and, as far as I'm concerned, most of this is what some people call greenwashing. It has nothing much to do with what is really going on in the business and it's exemplified for me by one story, which is I have talked in this call and more generally, much more widely, about ICI and the collapse of Britain's largest industrial corporation of the 20th century.
John:I told that story in 2006, which was a year before the final demise of ICI, and a few days later I got a rather pained letter from ICI's vice president for corporate social responsibility, and what it said to me to paraphrase only slightly was that we might have screwed up the business, but we did a great job on corporate social responsibility, and I thought you were so far from understanding what corporate social responsibility is, and the things that ICI did in developing archetypally new pharmaceuticals were actually what corporate social responsibility actually meant.
John:The interesting thing about that story is that for 20 years after the Second World War, ICI would continue to lose money in its pharmaceutical business, and it was only when the people working in its labs came up with some blockbuster ideas. The biggest was beta blockers, which dealt with hypertension, were the first drug actually to do it. It was only then that pharmaceuticals became the profit driver of the company in the last decades of the 20th century, and that was corporate social responsibility, and it was corporate social responsibility which generated a lot of profit. It wasn't the brochure, printed on recycled papers, with pictures of ethnic minorities, people in wheelchairs, which came with that letter from the Vice President for Corporate Social Responsibility.
Senthil:That's a very interesting take. Let's say a CEO comes to you and asks some advice about his sustainability strategy or how he or she can gain the trust of society. What would your advice be?
John:You need to win back, as business does, the trust of society by producing great products and having people who are proud to work in your business. That's a successful business and, as I said, the score takes care of itself in the sense that that business creates lots of shareholder value.
Senthil:Interesting, but does this idea is in sync with the point we earlier discussed and having profit as a defining purpose of a corporation leads to decline of ethical standards.
John:I think they're both part of the same thing. The decline of ethical standards undermines the legitimacy of the corporation and that undermines, ultimately, the business of the corporation. Boeing is the extreme example of that, where the shareholder value orientation undermined the relationship between the business and its customers and ultimately, that fundamentally damaged the profitability of the company and, most of all, its share price.
Senthil:Right. So your point is, you know, focus on building a great business That'll take care of everything.
John:That's what great business people do, and incidentally well, not incidentally, but in doing it, they create shareholder value.
Senthil:Right, John, let's move to the segment how I Did it, where we ask all our guests three personal questions to draw lessons from their life and career. How do you handle differences of opinion and setbacks? You have such a long and distinguished career. You might have seen people who disagree with you. How do you handle those kind of situations?
John:Well, in my experience being open about them, there was an occasion I remember when I'm running a small consultancy business and someone came to me and said I have to tell you we are screwing up on this particular project.
John:And I said I know you're screwing up on that project and I've been waiting for you to come and tell me. And now we're going to talk about how we're going to do what we're going to do about it and how we're going to reframe the product, the project and your role in that. And I felt at the end of that discussion that I've really grown up as a manager and I can do that. And he said two or three years later to me that that conversation was one of the great moments of his life, and I think it's being able to talk about things with the people who you work with in these terms that is essential to managing disagreement. It's not you, as chief executive, trying to think and convince everyone that you've got it right and blaming them for not following your instructions sufficiently carefully, which is what a lot of managers I see doing.
Senthil:In your experience, what are one or two essential skills required for business leaders?
John:I think we use the word entrepreneur when we talk about business, and in the US, entrepreneur has come to have a rather strange meaning of the guy who sees things that other people can't and not only has a great vision that other people don't share, but is able to impose it on a whole variety of others. Actually, successful companies we're talking about. That isn't how they work. The great products and the great organization are built sort of bottom up from the capabilities of people. I spent a time as director of what was at the time the largest mortgage lender in the world Halifax in the UK and I was really impressed with two things that particularly strike me thinking back on that. One was that this organization was one in which quite ordinary people became very effective producers of value for their customers and for the business. The success of the business did not at all depend on the vision of some brilliant people at the top. That wasn't how it worked, and in the end the business collapsed in a way that is all too common in financial services when it engaged in diversifications of things that people actually knew almost nothing about.
John:The thing that struck me was that the most junior people in the organization would talk about the company in the second person plural we us. The contrast could hardly be more striking. With Oxford University, I was also working at the time where I could talk to the vice-chancellor and the vice-chancellor would talk about the university as if it were some organization with which he was loosely connected, and we couldn't persuade the university to do that. It was this identification. Now, it wasn't that one was a great hierarchy and the other wasn't. That wasn't the difference. The real difference was that in Halifax, people's identification was very clearly with the organization. With Oxford, people benefit from the reputation. That's why they're there.
Senthil:Finally, can you recommend a book or two to our listeners?
John:Probably the business book which made most impact on me in the last decade was Dick Richard Rumelt's Good Strategy Bad Strategy. That's a cynical view of the business of strategy, and I think it's one of the few books on business I've read which I don't really want to keep on reading rather than feel I have to read. There's also a book which influenced me a lot, 30 years ago now probably, when I read it. It was called Robert Solomon's and it was Ethics and Excellence, and it encapsulated the kind of Aristotelian philosophy. There's even a book which I wouldn't take as I recommend as strongly called If Aristotle Ran General Motors.
John:But that's what we're talking about. A way of thinking about it is ethics that emerges from the idea of virtue, ethics that virtue lies in being good at a whole range of incommensurable things. That was Aristotle's view of what ethical behavior meant in Athens and he described that effectively, and I think that kind of approach to thinking about business is the ethical aspect of what I've been talking about. The purpose of management is to build great businesses.
Senthil:Excellent! John, Thank you so much for joining me today and sharing your perspective. It was my honor to talk to you today and we very much look forward to the next part of the book. Do you have any dates finalized?
John:Thanks very much. I'm reluctant to do that at the moment because that I wa s describing. We've had a variety of personal issues and problems that have got in the way of my actually completing that, but I'm very keen to get on and get that work done. I hope it will appear probably next spring.