THE FINAL part of our look back at the predictions made by Financial Director’s then-editor, Andrew Sawers, 15 years ago. He finds that the dotcommers have not had the impact on the FTSE 100 listings that he predicted back in 1999…
Companies: rise and fall
• Only six of the 20 largest companies in the FTSE-100 today will still be in the top 20 in 2014
• 17 FTSE-100 companies will be organisations that do not exist in any form today
• Ironically, the rise of fast-growing, hugely successful businesses will raise the cost of capital for all companies. Dullards will find it more difficult to secure finance
• Bad companies will fail quickly. Good companies that hit difficult times will have to be supported by their trading partners as much as by their banks
We had expected more to come out of the dotcom boom that was then in full swing, and imagined that more completely new companies would emerge – a string of Amazon-style operators or providers of new technology infrastructure and services.
As far as the FTSE-100 is concerned, this was not to be: every single constituent of the index has a history that predates the making of our predictions in 1999. Moreover, of the top 20 FTSE-100 companies, 12 are still in the top 20, two are still in the top 50, two have drifted into the FTSE-250, two (SmithKline Beecham and NatWest) have merged with other top 20 companies, and two have suffered spectacular collapse: Halifax and Marconi.
What we had not anticipated was the extent to which the FTSE 100 index of 2014 would be shaped by fast-growing companies such as easyJet, foreign businesses such as India’s Vedanta Resources or Greece’s Coca-Cola Hellenic Bottling, and M&A and demerger activity such as that seen at Melrose Industries, Resolution and Glencore Xstrata.
As for the cost of capital, there is some evidence to suggest that it has fallen, partly because of a lower risk-free rate as well as a lower risk premium than during the fast-growth dotcom era. Corporate collapse is a disturbingly common phenomenon among retailers in particular, often because their suppliers call a halt to extending further credit.
Tax and companies
• The top rate of personal income tax will be 25%, as will the corporation tax rate
• National Insurance will be abolished/integrated with income tax
• The framework for business will be unashamedly “shareholder”, not “stakeholder”
Not having predicted the credit crunch, the government’s desperate need for tax revenue wasn’t predicted, so our ‘pie in the sky’ dreams of a 25% top rate of income tax undershot by exactly half. The corporation tax rate has been cut from 30% to 24%, but any realistic hope of merging National Insurance with income tax – despite the ultimate benefits in terms of simplification and administration costs – are as far away from being realised as ever.
The financial crisis did a lot of harm to the reputation of capitalism itself, never mind the impact on the perception of shareholder value creation. However, there is increasing acceptance that managing key stakeholder relationships and being socially responsible is actually good for business, not a cost to business. In that sense, at least, the impact of greater attention on stakeholders is ultimately to the benefit of investors in the long run – which is what shareholder value is really all about.
• Electronic payments systems and transaction handling mean real-time auditing becomes a reality
• The weakest of the Big Five audit firms dismembers itself into several constituent bits which, worldwide, get acquired by various of the remaining Big Four firms
• Small high-street practices have virtually all disappeared, as a handful of nationwide chains of business advisers take advantage of economies of scale in technology, marketing and regulatory compliance
Perhaps the single biggest advance in auditing was the general upgrading of financial controls in the wake of the Sarbanes-Oxley legislation of 2002. Auditing has certainly moved closer to a real-time process, with the bulk of the effort going into identification of key risk areas and testing of controls. The complexity of business models (not least in financial services), the wide range of data and the problems of rationalising or integrating multiple legacy systems all make the process considerably more complicated than the buzzwords might suggest.
True enough, the weakest of the Big Five did disappear – we just didn’t reckon that a Big Five firm like Arthur Andersen would shoot itself in both feet. The auditor faced legal and commercial disaster as a result of having been caught shredding Enron audit documents. Most of the firm was absorbed by Ernst & Young though the UK part of Andersen was taken over by Deloitte & Touche.
The recent collapse of RSM Tenon, the break-up in 2005 of Numerica and the failure of Vantis three years ago has probably brought to an end the vision we had of a small number of ‘consolidators’ in the profession. The Big Six had just reduced down to the Big Five shortly before our predictions, and then reduced further to the Big Four with Arthur Andersen’s collapse, but behind them is a very long, skinny tail of accountancy firms.
• The Big Four banks become the Big Three, one of which will be US-owned
• Building societies account for less than 2% of the savings market
• Corporate payments become almost instantaneous
No change in the nationality of the ownership of the Big Four banks, nor their number, though NatWest fell into RBS’s arms in 2000 while Lloyds Bank found itself in a shotgun marriage with HBoS in the midst of the financial crisis. Building societies, however, still have about 20% of retail deposits – a figure that has barely flickered in 15 years.
Same-day – in fact, near-instantaneous – payments are now possible within the UK thanks to the Faster Payments Service which launched in 2008. The European Commission’s Payment Services Directive now requires that bank payments across Europe be cleared by the next business day. Cheques, by the way, are clearly in long-term decline, but a decision by the Payments Council to abolish cheques by 2018 has been rescinded after a consumer backlash. Mobile phone payments will likely be the way plumbers, market stall holders and baby sitters get paid in the future.
• The electorate will vote against sterling membership of the euro in 2002
• A second attempt at holding an EMU referendum will be lost by the narrowest of margins. The vote will coincide with an economic and political crisis that will nearly result in the expulsion of Italy and Poland from EMU
• One British worker in seven will be paid a salary that is at least partly linked to £/euro
Tony Blair’s enthusiasm for the euro was never matched by that of his chancellor, Gordon Brown, and so the British public’s true taste for the euro has never been put to the test. Brown produced a series of five tests that would determine whether or not the UK was ready to join the euro. Perhaps not entirely coincidentally, the Treasury reports concluded in 2003 that the tests had not all been passed. In 2007, as prime minister, Brown ruled out joining the euro “for the foreseeable future”.
Today, our good fortune seems evident. Poland may not have been in the firing line in a euro crisis (it hasn’t joined yet) but our underlying assumption that a weak economy would be admitted because of political expediency certainly proved to be true as Greece hit the buffers in 2012, to be followed by Spain, Portugal and Italy.
Talk of the euro coming into the UK through the ‘back door’ turned out to be economic fantasy, but it must certainly be true that the travails of the eurozone member countries have had a bigger impact on the UK economy than if the single currency had never been created.
This is an edited version of an article that originally appeared in the February 2014 issue of Finance & Management