Hits the nail on the head.
The sharp fall in BT’s shares last week hurt many small UK investors who have held the stock since the telecommunications group’s privatisation in 1984. And the collapse in Pearson’s price the week before hurt many at the Financial Times (including me) who still own shares from the years when the education company owned us. Investors punished BT and Pearson, which sold the FT to Nikkei in 2015, for surprising them with two very different versions of bad news: accounting irregularities in BT’s Italian business and Pearson’s belated realisation that college students in North America, its biggest market, were no longer buying its books.
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The real lapse by the leaders of both companies was not surprising the market but surprising themselves. BT and Pearson’s chief executives should have been alert to the dangers their companies faced. They should have been getting out more, talking to salespeople, engaging with customers and asking tougher questions.
It can be hard to spot fraud but the shenanigans in BT’s Italian business, involving false invoices and third-party loans, among other things, had been going on for years. The company seems to have known its Italian business needed attention. In May 2016, shortly before a whistleblower alerted it to the scale of the problem, BT said in its annual report: “We have continued to monitor our operations in Italy and progress has been made to improve the control environment.” Yet Gavin Patterson, BT’s chief executive, visited the BT Italia offices in Milan only twice in the three years he has been in the role.
While Pearson’s case does not involve fraud, its fundamental problem was plain to see. The company said that the 30 per cent collapse in its net revenues during the final quarter of last year was caused by a decline in North American college enrolment, students increasingly renting their course books, but mostly “due to an inventory correction in the channel reflecting the cumulative impact of these factors in prior years”.
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Translated into plain English, Pearson’s text books had been piling up in the shops because students had not been buying them. Why was its sales team continuing to send books to stores that were not shifting them? Because incredibly, sales staff were rewarded until recently for the gross orders bookshops placed with them, regardless of how many books were returned unsold.
As my colleague Matthew Vincent wrote: “A bookshop could return whatever it did not want, but the salesperson got paid more for supplying too much.”
Pearson said it would accelerate its move away from print to digital course material, reduce its ebook rental prices and launch a pilot programme of renting out print books, which it says students increasingly want.
I cannot be too sanctimonious about Pearson’s failure to act earlier on these trends, because I failed to act earlier, too. I had been worried for some time about announcements from John Fallon, Pearson’s chief executive, with their focus on internal reorganisation. Concerned about the paucity of mentions of customers and what they wanted, I sold half my remaining shares. But then, stung by a sudden jump in the share price and sore at how much better I could have done, I held on to the rest (my wife owns Pearson shares, too).
I should have acted on my instincts. Instinct is a neglected area of business. The current concentration on data can be helpful. Read properly, data can show where products are not shifting, or that some parts of the business are doing disappointedly worse than others — or suspiciously better. But crunching data can be damaging if it prevents chief executives from getting out, talking and probing, and asking for more detail when things just do not smell right.
Had Mr Patterson made two visits a year to the Italian business rather than two in three years, talking to those at the top and lower down, visiting customers and subjecting himself to interviews with local media, he might have sensed how much was amiss.
Similarly, if Pearson’s leadership had spent more time in campus bookshops and US college libraries, talking to the store managers and students, perhaps they would have learnt sooner that the company was offering too many of yesterday’s products.
Running a big company is tough. Mistakes, when they come, are brutally punished. But the more chief executives get out, the less likely they are to present unpleasant surprises to their shareholders — or themselves.
michael.skapinker@ft.com
Twitter: @Skapinker