Catalyst

Dow dismissals - To lose one may be regarded as a misfortune, to lose two looks like carelessness (apologies to Oscar Wilde).
What is it with Dow Chemical and high profile dismissals? Should the latest jaw-dropper force a root and branch overhaul of board governance?
Dow is unique. It is the only chemical major that has sacked two CEOs/chairmen in the last 25 years. The mercurial Zoltan Merszei – father of the company’s current CFO Geoffrey Merszei – generated enough antagonism among fellow board members to guarantee his ejection back in 1980. And Mike Parker fell on a sword, readily provided by colleagues, in 2002.
And now – exit stage right two career-long old Dow hands accused of plotting behind the boss’s back.
Not that long ago, Dow Chemical was a meritorious-based class apart from competitors hide-bound by either hierarchy, nationality or class, or all three. Happy days.
What has been disturbing about Dow for over a decade now is the absence of team spirit at the highest level. Board members passed over for the top spot have failed to conceal their enmity towards successive victors.
Even from the perspective (read distance) of a European-based sector journalist, intra-board jealousies at Dow Chemical have been allowed to fester. Just how corrosive they have become is now becoming a little clearer.
Was the ‘independent’ Board of Directors unaware, unable or unwilling to tackle the issue?
And what happened to effective corporate governance when one person - currently Andrew Liveris - embodies the triumvirate of CEO, President and chairman
Just taking Stern Stewart’s economic value added (EVA) measure – Dow was failing to added value during Bill Stavropoulos’ first stint at the top during the 1990s. And last March was rated at ‘par’ (ie defined as a company earning near its cost of capital and generating essentially zero EVA, regardless of growth rate).
This alone may not be enough to support the argument that private equity check out Dow. The 2005 10-K and stockholder summary was entitled ‘greater than the sum of its parts’ and yes Dow has an outstanding portfolio. It also has a low market valuation, which can only be justified if leadership and strategy simultaneously fails to convince. Regrettably, convincing the closest colleagues appears to have been the toughest job.

The unbearable transience of everything.

McKinsey’s Richard Foster and Sarah Kaplan in Creative Destruction (1) note that US companies established and entering the S&P 90 in the 1920s and 1930s could expect to remain on the list for over 65 years. By the late 1990s, the turnover rate of the S&P 500 was around 10% implying an average lifetime on the list of just 10 years.

Foster and Kaplan - writing in 2001 - forecast, “no more than a third of today’s major corporations will survive in an economically important way over the next twenty-five years.”

About a third of the chemical industry’s top 30 revenue generators have gone submarine since 1980; essentially taken-out in what economist Joseph Schumpeter dubbed “the perennial gale of creative destruction” in his seminal 1942 Capitalism Socialism and Democracy (2).

Few have surpassed either the articulate verve or insight that Schumpeter brings to a strategic issue that - 65 years on - preoccupies the corridors of corporate America and Europe. Industrial mutation, the process that “incessantly revolutionizes the economic structure from within (Schumpeter’s italics), incessantly destroying the old ones, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

If you accept that sustained corporate success is the exception, the fact that five of 1980’s top chemical industry revenue generators still dominate the top 10 league is in itself pretty exceptional. Half of 1980’s top 10 -Dow (founded 1897), BASF (1865), Shell (1927), Du Pont (1802) and Bayer (1865) - retain their position in today’s top 10. Exxon forebear Standard Oil (New Jersey) pioneered early petrochemical production in the late 1920s and the 1999 merger with Mobil added 25% to chemical sales underpinning its ascent into the top five chemical revenue-spinners.

Some of these organisations appear to have the knack for developing business models and organisational skills (in BASF’s case across a broad - almost sprawling - portfolio), of nurturing businesses that - at first blush - undermine the very businesses on which their success was built.

Consider this. “But in capitalist reality as distinguished from its textbook picture, it is not (price) competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization - competition which commands a decisive cost or quality advantage which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”

Schumpeter has, albeit by default, perfectly characterised the dilemma facing established chemical companies. His analysis is apposite to the whole panoply of chemical businesses — commodity or speciality producers. Embracing creative destruction, pro-active portfolio management, creating and breaking paradigms rather than tenaciously hanging on to existing ones is the too often ignored responsibility of management.

Sources:

Creative Destruction - Why companies that are built to last underperform the market — and how to successfully transform them by Richard Foster and Sarah Kaplan, published 2001 by Doubleday.

Capitalism Socialism and Democracy, J.A. Schumpeter (first published in Britain in 1943), Unwin University Books. Chapter V11 The Process of Creative Destruction in Part 11 Can Capitalism Survive?