Managing Change, Corporate Revival and Privatization in the British Public Sector

Ronald Goodall

I am rather hesitant in admitting that, since my school days, King Henry Vill of England has been one of my favourite monarchs. I hesitated in making this admission today because I recognized only recently that extreme male chauvinism and disregard for the usual benefits accruing to a wife, currently codified under our family law reform, were evidenced by the king's resolution of his marital difficulties, three divorces and two executions by beheading!

However, during his reign, Henry VIII founded the Royal Navy, revised parliamentary institutions and gave the Bible, now translated into English, to the people. One of the king's closest advisers was Thomas Cromwell. A commoner who became a lawyer, Thomas Cromwell is credited with creating government departments operating outside the royal household. Unfortunately, Thomas Cromwell was accused of treason, taken to the Tower of London and executed by beheading.

Responsibilities for government passed from kings to prime ministers. One of Britain's most famous prime ministers was Sir Winston Churchill. During World War 11, one of Churchill's most able ministers was Max Aitken, Lord Beaverbrook. Canadian-born and a successful businessman in Canada and Britain, Lord Beaverbrook played a crucial role in Britain's war effort.

The precedent had been established and in recent years another British prime minister turned to another Canadian for assistance. Our speaker today is Margaret Thatcher's industrial trouble-shooter, a man who needs "the stimulus of a challenge."

As for the other precedent of beheading lawyers and close advisers, our speaker was quoted by the Financial Post as saying, "Margaret Thatcher is the kind of person who speaks her mind and lets you get on with the job. But if you fail, she'll hand you your head."

J. Graham Day was born in Halifax, Nova Scotia, the son of an Englishman who emigrated in the early 1920s. He was educated at Queen Elizabeth High School and Dalhousie University in Halifax. He graduated with a law degree, was called to the bar of the Supreme Court of Nova Scotia and practised law until joining Canadian Pacific in 1964.

During his seven years with Canadian Pacific, Mr. Day was engaged in a wide range of commercial and industrial matters: rail, air, road and marine transport; hotels and catering; telecommunications and property interests. He acted as counsel in national labour negotiations and conciliation proceedings. During his stay with Canadian Pacific, the story is told that a new CP ship was lying unfinished as unions argued over job jurisdiction. The strikers arrived one morning to find the argument settled. The CP ship had gone. Mr. Day had the ship towed and sailed to southern Ireland for completion.

He resigned from CP to accept an appointment by Edward Heath's Conservative government as chief executive of Cammell Laird Shipbuilders Limited, which was then 50 per cent owned by the British government. Cammell Laird was returned to profitability. Mr. Day was then appointed deputy chairman and chief executive of the organizing committee for British Shipbuilders to plan the public ownership of shipbuilding, ship repairing and marine engine building companies. He declined to renew his contract a year later because of delays in the nationalization legislation.

He returned to Canada as professor in the graduate business school at Dalhousie University and as director of the Canadian Marine Transportation Centre (a government/private industry-financed research unit). After four years with Dalhousie he joined Dome Petroleum as a vice-president and as president and CEO of Les Chantiers Davie, Lauzon, Quebec.

In early 1983, he returned to British Shipbuilders as chairman and chief executive and managed the privatization of the warship building and ship repairing companies. In March 1986, he was invited by Margaret Thatcher's Conservative government to become the chairman and chief executive of BL PLC, another state-owned company being an amalgamation of the companies that produced the Austin, Morris and Triumph cars, the Land-Rover vehicle and Leyland trucks.

Mr. Day was awarded an honourary doctorate of laws by Dalhousie University in 1987. He is a Freeman of the City of London and a Liveryman of the Worshipful Company of Shipwrights.

Ladies and gentlemen, it is my great pleasure to present J. Graham Day, Chairman and Chief Executive, The Rover Group PLC, who will address us on "Managing Change, Corporate Revival and Privatization in the British Public Sector.'

Graham Day

I appreciate very much this opportunity to speak to The

Empire Club of Canada. As a consequence, l find myself in the possibly unique position of one born, raised and educated in Canada, resident and working in Britain on behalf of Her Majesty's Government, and speaking in Canada today to a Canadian, or predominantly Canadian, audience about and possibly for British business. I should point out that it is the combination that is unique, not that I may presume to speak, in passing, for British business. Indeed, for probably the most important third of my working life I have considered myself to be a British businessman in most respects.

I chose my topic in order to try to give you a little flavour of an aspect of business life in the Britain of the 1980s. The policy for governments' disposing of state-owned businesses, now universally known as "privatization," was an early initiative of the first Thatcher government in Britain in 1979. I suspect that most Canadians with any interest in privatization, asked for examples of the process in action, would respond by referring to one or more of the large international British stock flotations such as British Airways, British Telecom or British Gas. There are, however, many more less well-known British names which, particularly during the last four years, have made the transition from the public to the private sector.

Partly because it is an important element of what I do for the British government and partly because achievement is important to all of us, I seek to measure my own contribution to the furthering of a policy which I support wholeheartedly. Earlier this year, Price Waterhouse, the accountants, prepared a report which provided details on the major privatizations effected during Mrs. Thatcher's governments from 1979 to July 1987. There were 33. Of these I have been responsible for about a third. Significantly, of those privatized by way of contract, i.e., not by direct flotation, my efforts count for over half. In addition, I made about six other smaller sales in this period and since July 1987 The Rover Group, in order to concentrate on its core passenger and special vehicles business, has sold a further I I businesses, three of which were foreign holdings.

I refer to this first of all to indicate that the British government's policy of privatization continues to be alive and flourishing, and second to say that the act of sale or flotation of state businesses, privatization, is but the last step in the chain of policy implementation.

Long before the fact of privatization, many of the businesses, and all of those with which I have been associated, have required varying degrees of change in order to revive their fortunes and prospects.

With a friend and former colleague from Canadian Pacific, Peter Mills - now vice-president and general counsel of Woodbridge Company, the Thomson holding company - from 1971 for four years we carried out what I believe to be the first successful attempt in the British state sector to change and revive a business. Following years of mounting losses, in one year the business in question, Cammell Laird Shipbuilders, was returned to modest and continuing profitability on the back of product redirection, moves toward greater efficiency and a fresh commercial focus. Later, in 1985 I returned that business to the private sector. Now 90 per cent of its employees are shareholders. It is profitable and has an order book stretching at least three years ahead.

At the time I perceived the national culture, or mind set, predominantly to be one of "collectivism." In other words, a view that government could do for people what they could not or would not do for themselves. Such a culture tended to reject, among other things, industrial change and moves toward business revitalization. This rejection was despite the blindingly clear messages which were coming from the world marketplace. For the one or two instances where change was not only attempted but achieved and the businesses revitalized, there were dozens where the concept of change and the need for revitalization were talked out rather than acted out.

By the time Mrs. Thatcher moved into No. 10 Downing Street in 1979, following the strikes and shortages of what, courtesy of Shakespeare, is now known as "the winter of discontent," the situation in and the cost to the Exchequer of the state businesses in general and the state industrial sector in particular were enormous. The Conservatives' pre-election platform of denationalization, progressively translated into the post-election program of privatization, became during the Conservatives' second term an increasingly popular policy politically, which popularity continues. And of course the concept of privatization has been copied worldwide.

The success in political terms through, for example, wider share ownership and the fairly immediate benefits for taxpayers overall by virtue of progressively lower tax rates, accrue from the fact of privatization. The longer term benefits lie in the revitalization of the businesses and hence their ability to contribute to the economy. This revitalization and the changes which have taken place had first to be conceived and then managed before the businesses were suitable for flotation or sale.

Effective management of change probably is the most difficult task which faces any manager. Change is threatening to employees, frequently destabilizes commercial relationships, including with customers and, internally, at least initially, has few advocates. Sadly, too often change is driven only by financial necessity. If the external environment is not conducive to the encouragement of competition and excellence the task becomes even more difficult.

Returning to Britain in 1983, after a six-year absence, it was hard to believe that one was working in the same country. Some signs of the collectivist culture were still there - to some extent they still are - but general recognition of the need to change, to adapt, was obvious everywhere. And this recognition was and is resulting in action.

Structural changes helped. For example, relationships between employers and trade unions were placed in a legislative context which imposed duties on the unions, required of them a real degree of responsibility and devolved considerable rights to individual trade union members. In passing, let me observe that further industrial relations legislative developments are currently before the British House of Commons. Further, the government not only had committed itself to getting inflation under control, all governments do, the Conservative government under Margaret Thatcher did just that, and promptly too. In the public sector of the economy, finally there was an appreciation on the part of employees at all levels that the fact of state ownership no longer provided a safety net for the inefficient and the noncommercial. In other words, competitiveness had become the watchword for all British business - private and public sector alike.

The policy of privatization provided a cutting edge. Obviously, without clear performance improvement and some reasonable prospects, state businesses would have no attractions to any investor, institutional or private. Mrs. Thatcher was and is determined that the state shall not remain in the ownership of businesses.

One of the many initiatives taken by government to give effect to their policy of privatization was to replace, where necessary, custodial-type public sector business bosses with managers professionally committed to doing what had to be done commercially and who were attitudinally attuned to the principle of returning state business to private ownership. A number of the leaders of state businesses when Mrs. Thatcher was first elected had been chafing for years under clumsy state controls. They were keen for change and able to drive it through. Others, less keen and able, were replaced with a wide mix of new management having in common only the two attributes: managerial professionalism and commitment to privatization.

When these various appointments at the top of the state businesses were confirmed or changed, the next step was to agree what had to be done to revitalize the businesses, how long it would take and how much it would cost. Once this was settled, the managers were left to get on with the job. Of course the businesses were monitored against the agreed objectives, but there was no interference, no party political considerations intruded and a proper, recognizable responsibility-authority relationship was developed and normal managerial accountability was put in place.

Managerial performance was critical both in attitude and function. This distinguished the new management from the old. No longer was there the intended ambiguity which sought to blur politics, social engineering and business management. Now, business is business. The dominant political position is that politics is to stay out of business. The government's position is that social considerations, other than those of good corporate and private citizenship, are for government.

These clarified relationships naturally forced change - change to meet commercial criteria. As change was wrought, so businesses were revitalized. The pace of change differed with each business. Some could be and were readied for privatization virtually in months, others took years. Some still remain in a preparatory state.

A good current example of change and revitalization in a British state business which is still in its preparatory, pre-privatization stage is my own company, The Rover Group. Rover is somewhat different from most of the other remaining British state business holdings. It is not nationalized; its affairs are not governed by an Act of Parliament. It is a Companies Act company. Rover shares are listed on the London Stock Exchange and there are some 60,000 private shareholders. Indeed, despite the so-called October ,'meltdown," the share price stands currently at approximately double its 1987 low, and before October was some 3'/z times that low! However, the British government owns some 99 per cent of the issued shares. The government is determined to privatize and I am there to help achieve that goal.

For a number of years escalating losses were the standard fare for the Group previously known as British Leyland, and 1986 was no exception. Asked by Mrs. Thatcher to "go in and change things," I joined in May of that year. Although the 1986 results were awful, by the end of the year we had a plan up, running and starting to show results. By selling off 16 non-core businesses, we raised about Can$300 million in cash and in two critical situations stemmed cash hemorrhages. To give some idea of the scale of the disposals, they accounted for approximately one-third of 1986 total revenue or some Can$2.4 billion out of Can$7.5 billion. The management structure and some personnel were changed and the focus of the business shifted to the marketplace from that of engineering for engineering's sake. It is early days yet and the 1987 results are not all in, but the preliminary indications are good.

Despite, by virtue of the disposals, the reduction in sources of revenue generation, our revenue from the core businesses alone will be almost up to 1986 levels at over Can$7 billion, an improvement of almost 22 per cent. Exports now account for one-third of total sales and at Can$2.5 billion are up 36 per cent over 1986. In unit terms exports are up about 25 per cent. Back of these figures is a more telling story. The 1986 comparators included commercial vehicle production. When this is stripped out to compare the performance of the retained core businesses only, export revenue is up 69 per cent generated by a 27 per cent increase in unit sales.

All in all, Rover for 1987 will have had its best financial performance for nine years. Its Land-Rover subsidiary, which will celebrate its 40th birthday next April, will have had its best results ever. We have already announced that the Group will show an operating profit before interest and taxation, the first for quite a while. During 1988 we will start to plan for the return of the Group to full private ownership. I have indicated to the Prime Minister, and publicly, that I believe this to be possible in the life of the current parliament, say by 1992.

Once upon a time between 1983 and 1986, in my last British government job, l was, by virtue of my position, a member of a seemingly vast organization called The Nationalized Industries Chairmen's Group. Now, in the wake of the various privatizations to date, that particular club is a very pale shadow of its former self and its ultimate demise is clearly in the cards. I said at the outset that during my early days working in Britain in the 1970s that I perceived the general state of mind to have been one of collectivism. If that were true, and in my opinion it is, as an overall assessment it is no longer true. Individualism has replaced collectivism. People now know what the state can and can't do and, under the present government, what the state will and won't do. This concentrates the mind powerfully.

While I have focused on change, revitalization in and the privatization of British state business, the impact of this and related policies has reached well beyond the public sector. Currently Britain is enjoying its strongest economic performance since the Great Depression. The growing prosperity is resulting not only from the revitalization of British business at home, but also the contribution being made by growing British investment overseas. The other side of that coin is the growth in inward investment in Britain. Britain is now the leading investment base for companies moving into the EEC from outside with, for example, over one-third of U.S. investment in the Community being located in the U.K. and almost a third of Japanese EEC investment. Change has taken place and continues in British business, in state-owned, former state-owned and in both new and long-standing private sector businesses. Business and attitudes toward business in Britain are revitalized. But don't take my word for it - ask the Americans and the Japanese.

The appreciation of the audience was expressed by Blake C. Goldring, a Director of The Club.