Corporate citizens of the world owe fealty to us all; Multinationals need to lay down roots wherever they grow

May 30, 2014 7:50 pm

Corporate citizens of the world owe fealty to us all

By Andrew Hill

Multinationals need to lay down roots wherever they grow

The head of a British multinational declared this week that he opposed the idea of companies that exist “somewhere in the ether”. It may be “odd to be British, but it’s even odder to say you’re nobody”, this chief executive said. “Who in the world would applaud you for saying that you are rootless?” The answer was, until recently: most business leaders and investors – the very people who were listening to him address a private session at the Inclusive Capitalism conference in London.

Global companies in the past 30 years have done all they can to shrug off the uncomfortable trappings of nationality, tax domicile and regulatory jurisdiction in pursuit of profit and efficiency.

Such a quest goes against nature. Sailors used to consider a sighting of The Flying Dutchman – a phantom ship condemned never to make port – a ghastly omen. But companies have made a virtue of their loose moorings and changeable identities.

They switch headquarters depending on the tax situation – as advertising group WPP did, from London to Dublin and back again. They wave the national flag to win local subsidies or support for new investment, then hide it when trying to sell their products. Sometimes they dangle the implicit threat to decamp if local regulation or legislation does not suit them, as HSBC did when the UK banking regime became uncomfortable, or use deals to arbitrage the advantages of different bases, as Fiat of Italy has done following its takeover of Chrysler. Meanwhile, brand managers play up specific national characteristics (French style, British quality, German engineering) in advertising; or deftly carry on business behind names that offer few clues as to national identity, such as Accenture, Infosys or Diageo.

To trade successfully in as many markets as possible, companies have become chameleons. In the process, they have twisted the original hippie slogan for sustainable living – “think global, act local” – into that ugliest of management terms: “glocal”.

This global orthodoxy has undoubtedly yielded benefits for companies, their investors and their customers. But, as the British chief executive’s remarks suggest, public tolerance for such shape-shifting has its limits – and Pfizer’s failed attempt to take over AstraZeneca has marked out the boundaries. The public and politicians saw through Pfizer’s plan to form an even bigger global pharmaceutical group, based in large part on fiscal expediency. One unlovable, nominally American dealmaker wanted to buy a rival that The Economist calculated to be only about 12 per cent “British”, based on factors such as employees’ nationalities and where it sells its wares. The failed Pfizer-AstraZeneca deal also shows that, for a multinational company, trying to re-establish community ties means more than picking a flag. In fact, nationality – which whips up debate about protectionism and national champions – is an unhelpful way to measure the depth of a company’s commitment to where it lives.

The clever modern company ‘has to fall in love with every jurisdiction in which it has a disproportionate amount of resources’

– Roger Martin, Rotman School of Management

The chairman of another British company says he prefers to emphasise the national heritage of his group, which gives him the freedom to hunt for contracts and investments anywhere in the world. Binding his company too closely to the UK would, he pointed out, also give the impression to non-Brits that they would never reach the top of the corporate hierarchy. As recent research has shown, the upper echelons of the largest companies are still largely dominated by executives from companies’ “home” countries. Such lack of diversity could hinder original and innovative thinking.

Roger Martin of Toronto’s Rotman School of Management sums up what companies have lost as they have gone global, recalling the tawdry way in which Boeing – long based in Seattle – in effect put the decision on where to locate its headquarters out to auction to the highest municipal bidder in the early 2000s. Professor Martin writes in his 2011 book, Fixing the Game, that the aircraft maker finally settled on Chicago, which had held out the biggest incentives.

In abandoning the communities they once served, he says, companies make it inevitable that their executives will join instead an international community of shareholder-value-driven managers and short-term investors – a league that prefers life at 35,000ft to operating at ground level.

Multinationals cannot easily be unravelled. Many vibrant companies start as “micro-multinationals”, raised as international businesses from birth, on a diet of the web and globalisation. Some big companies have started to recognise the risks. As Prof Martin puts it, the clever modern company “has to fall in love with every jurisdiction in which it has a disproportionate amount of resources”. The likes of Unilever and Nestlé say they are committed to developing mutually beneficial relationships with the places where they source their raw materials, a strategy that represents an advance on old-style corporate social responsibility by linking the core business to long-term goals for society and the planet. Still, the temptation to up anchor and set sail again is hard to resist.

Companies such as IBM and Cemex, the Mexican cement and building materials company, now aim to become “globally integrated enterprises”, extensive networks that sprout offshoots in whichever country is best suited to a given activity. But if they use this model merely to relocate operations more frequently, based on considerations of tax, cost and efficiency, they will never build the local links that underpin long-term success.

Lawrence Summers, former US Treasury secretary, told the same Inclusive Capitalism conference that “business has always felt a responsibility to its location because it’s had a stake in the success of the place where it is headquartered and the place where its workers live.” The challenge is to replicate that bond in a world where national borders are permeable and businesses can burst out of the walls that once confined them.

International companies may never again be able or willing to settle on a single place they call home. But they need to find new ways to put down roots in all the places they touch – or risk losing not only their cultural bearings but the public trust on which they depend.