118. Gerry Murphy, Tesco & Burberry Chair - How boards add strategic value

Thank you, Oliver. That is an extraordinary list of organizations to have sat on the boards of. I was running out of breath there.

I think I would pick maybe one from each of three experiences. At Excel, back in the late 90s, the business had grown out of the road transport division of British Rail. It had a mix of things from commodity transport to value-added IT systems-driven supply chain services. It was clear that the company couldn't do everything, and we had to focus on either asset-based large-scale trucks and sheds or value-added system-driven logistics. We chose the latter, and it took several years to clean up the business and extricate ourselves from decent businesses that we shouldn't continue doing because we weren't going to be competitive. So the first lesson is understanding what you're good at and what you have a right to succeed at, which often means turning your back on perfectly good businesses or your heritage. Similarly, at Tate & Lyle, we decided to double down on science-based food ingredients and move away from bulk foods and commodity sweeteners. It's a theme that has repeated in my career: figure out what you're good at, what you want to be famous for, and what you have a right to be successful at. At ITV, I inherited a position in pay TV that depended on the UK government switching off the analog TV signal to create spectrum for a digital signal monetized through a conditional access set-top box. But the decision was delayed by 10 years due to political expediency, and the company had bet on a public policy shift over which it had no control. So lesson two: don't bet the ranch on things over which you have no or limited control. At Kingfisher, I was CEO for five years. The business was doing well, especially in the UK, but the underlying cause of outperformance was a macro tailwind from cheap debt and mortgages after 911, not great strategy or execution. When the tailwind unwound, we had to curtail an ambitious expansion plan. So the lesson was to be objective in analyzing success or failure, unpicking management action from extraneous factors. These three lessons have informed my subsequent decisions.

There wasn't enough analysis of different risk outcomes. The government had announced its intention to switch off the analog signal, but that meant millions with old TVs would have to buy set-top boxes, which involved major league politics. People are voters, and getting them to adopt new technologies is challenging. It was underestimated how sticky old habits would prove. The analog signal was eventually turned off, but many years later than expected. In the meantime, the digital signal was too weak for full coverage and high quality, making it uncompetitive. This taught me that anything needing government license or decision comes with much higher risk. Trying to work out the behavior of governments in a political environment is a whole different level of uncertainty. I've been scarred as an investor and am wary of government exposure of any scale.

The approach I've taken in recent years is to adopt the private equity time frame, going out 10 years and starting with the industry. Look at what shape the industry might be in 10 years and how it might respond to mega trends visible now, such as geopolitics, climate, and technology. Create plausible scenarios for each, and together you can take an intuitively probabilistic view that the world will land somewhere between base case and extreme scenarios. This helps in asking the right questions to get the business resilient for these mega trends. It's not mathematically probabilistic, but having a realistic sense of where things could go is valuable. For example, in food business, look at regulation on high-calorie foods based on public health agendas.

Different businesses will be more or less exposed, but any business with a big global supply chain footprint will have to take into account geopolitics and climate effects on their supply chain, likely related issues. For example, Trump imposing tariffs, but the direction is towards a post-WTO world where free trade globalization is in reverse, and supply reliability from different parts of the world is unrealistic. On a 10-year view, boards will need to reconfigure supply chains between imports from unreliable sources to more reliable ones. Eisenhower said plans are useless, but planning is indispensable. Similarly on climate, where food is grown and consumed raises questions about long-term viability, like airlifting green beans from Chile for UK supermarkets. These are practical observations about plausible scenarios boards should think about.

If you take some of the mega trends that we've just been talking about, climate and sustainability is not silent as structural for sure. I think at this stage it's possible to assume that much of the geopolitical tension on a 10-year view is likely to be pretty structural. I did say at the outset that I expect that the US will work out its tariff situation with Canada, Mexico in fairly short order. I think that's a stick or a transactional issue. But you got to say that the West continuing to outsource its manufacturing to low-cost countries in Asia is probably in secular reverse. And this is about building in resilience. It's not about being entirely dependent on any one model. I think companies, boards will have to develop alternative sources to give themselves resilience, not complete insulation or isolation from the issues, but to give themselves resilience against some of these frankly quite likely developments. There won't be simple silver bullet answers to any of these questions. That's not the point. The point is that you keep them on the radar screen. You keep looking at them. You don't take things for granted. The strategy isn't a one-time exercise. It's a continuous process that you keep on the table, frankly, all the time. And it's more than a once a year exercise. This is real living, breathing oversight of the future of a business, which I think is what boards are for.

Well, look, it's different things in different places. In both of my current companies, we're trying to start with the likely effect of the application of AI to the way our consumers behave. That's the first true north. How will our customers and consumers behave with the advent of different technology, different devices? How is it going to affect their day-to-day behavior? I've got a 5-year-old grandson in New York who will speak to Alexa to see if it's going to rain today, whether he can play football or not. Now, just think of him and his generation as consumers. I think they will be completely different to even current Gen Z consumers. So, we've got to think about that in terms of the way that our consuming publics are likely to evolve. We got to think about the way that we use data in our businesses and whether we're at a competitive advantage or disadvantage. A business like Tesco, for example, with over 80% of its trade now done through its club card, app or membership basically has extraordinary data and with very high frequency data on what more than four-fifths of its business represents. So that's a very significant data resource and we've got to work out how we apply AI to protect it but also to exploit it for the benefit of our customers and our shareholders. So I think it's actually quite important to get something like AI down from an abstract conceptual proposition into something much more concrete. And we had an exercise recently at one of my companies where we basically took a 24-hour day and we looked at the way that AI is impacting on the business today in all kinds of ways. Some in the details, some more fundamental. And I think just understanding what's happening even today is actually quite a big step forward for most boards. And that was a revelation that there is actually so much AI being already applied to our business and once you understand that then you get a much better prospect of trying to extrapolate from it.

Yeah. And I think one of the realities is that especially for big companies that have traditionally had the resources to do lots of things themselves that we're dealing with a world that's moving so fast that the opportunity cost of trying to build everything from within is overwhelming. The time cost involved in trying to build everything from scratch has never been greater such as the speed of change. So it does require just thinking about things differently. Again, maybe back to the original conversation, figuring out really what we're good at and developing algorithms is probably not what most businesses are good at and there are people who do it for a living and do it better. So, just working out the kind of partnerships and dynamics that will work best in different situations, I think is actually going to be a really important part of most boards' agenda.

Yeah, I agree.

In an ideal world, a CEO succession is a planned thing and it often works well when there is an agreed end date for someone's tenure, a retirement, usually somebody who served a company well and has indicated that they want to move on at a certain age or in a certain time period where the board can actually plan for it. In that sort of scenario, a well-run company which includes the outgoing CEO as a critical component will have developed at least one and maybe more internal options for succession. I think it's always a good test of a CEO's legacy to look at the bench strength that they leave behind and really good CEOs will often leave a number of plausible candidates in their wake for succession. And in that happy scenario, the board has the luxury of comparing somebody or maybe even more than one person that they know really well with whomever an external search identifies as a plausible and interesting candidate. And that's a really effective dynamic process that can be very rewarding whether or not the internal candidate is ultimately chosen. I've experienced that a few times and I've experienced the opposite where the exit is unplanned either because the CEO gets a job they prefer somewhere else or other events suggest that the board has to make a change. In either case, it's always better to have succession lined up internally just like in the planned scenario. If it's unplanned, it usually isn't as neat. Often times good internal succession candidates might not be ready just yet in the event of an unplanned succession but again in a well-run company the board should have some choices at least some people against whom to benchmark external candidates. I've always taken the view that an external candidate should be head and shoulders above any internal option for the board to justify the risk of the inevitable unknowns from an external candidate versus the much clearer view they'll have of an internal person their strengths and of course their points for development.

Yeah. And the test that a board should apply to a new CEO is their fitness for the next 5 to 10 years journey as far as a board can determine that. If it's a crisis, obviously there's a different overlay, but for the most part, boards are hiring against a view of the future and asking themselves, is person A or person B equipped to take us forward? No matter what they've done in the past I think the view has to be forward-looking at the sort of level we're talking about generally competence isn't the issue ambition is not the issue the track record is generally visible on both sides it is really about trying to picture the candidate internal or external in the world as it appears going forward not wherever it's been in the recent past and that can obviously be quite challenging for an internal candidate they're often part of an existing well they're always part of an existing management team, they often have their fingerprints all over current strategy and current direction. And the question that boards ask and it's a tough question is what would you do different to your current boss? And that can be challenging because as I say there's obviously quite a lot of co-ownership and people don't want to seem to criticize their current boss but it's not about being critical. It's about trying to understand what the future need not to be critical of how a business has got to a particular place. That can be very challenging and I think a good board selection process will effectively put a new candidate and an incumbent candidate in a position where they basically have to pitch their credentials against the future view of the business. Now clearly the expectation would be different as between somebody coming in from the outside who doesn't know the internals of the business and somebody who does but it's good process and often times changes the orientation of the board as the process evolves. So a prospective CEO can paint a different picture without being seen to criticize their predecessor if they say well look the world that I see in the next 5 to 10 years is different from the world that we've seen of the last 5 to 10 years and therefore the approach that I would take will be different. And that's not to say what we've done historically is wrong. Absolutely. Yeah. And it can be a very powerful learning experience for the board. I've been through a few of these things as you said and I don't think I've ever wasted 10 minutes with an external candidate where I've learned nothing. But I think this can be a very powerful learning experience. It's a rare privilege to be in a room with very capable people who bring their experience, their energy, their enthusiasm, their vision to your business. That's a very powerful and stimulating learning experience. And even if they're not the right candidate on a given day, I've always learned something from that experience.

Dealing with the bigger issues, the 5 to 10 year issues. It is about bringing diverse perspectives from diverse experiences of business and life and geography to bear on big complex questions. Generally well-run companies don't need the non-exec to teach them how to run their operations. If they do there's something wrong. They got the wrong management together on board if that's where the discussion the dialogue takes place. So I think it is on the bigger questions the bigger issues where there is value in just thinking about things differently. I think I learned quite a while ago that non-executive directors who might each have their particular spike in terms of experience and their particular domain expertise so to speak, but frankly unless a non-executive director can contribute to frankly everything the board discusses of any consequence then they're unlikely to pull their weight. So I've become a very skeptical observer of the specialist director. You want people who are both knowledgeable and experienced but at the same time are curious and curiosity in a fast changing world is a very valuable commodity for management and for directors alike.

Well, let me just maybe challenge you on your setup. I think boards add most value looking at the bigger long-term issues facing a business but they absolutely have to be focused on near-term performance on operational delivery. I mean these things aren't optional. I think one gives you the right to focus on the other. Frankly without the near-term performance you don't have a long term worry about. So it is finding that balance between if you like it's not day-to-day oversight but it's the tracking the quarter-to-quarter performance of the business using a small number of meaningful and relevant KPIs some of which are historic and some of which are forward-looking leading indicators. So it's understanding the business enough to have a short agenda of discussion topics on near-term performance, a dashboard that is intuitive and works using the same information as management users. I mean that's the day job and one should never get away from that and the medium to long term is not a luxury is a necessity but you only get to deploy in the case where the operating performance is at least satisfactory. I think in terms of culture there a whole number of aspects to that boards these days are much much more engaged in understanding the dynamics inside a business experiencing it. There is no substitute in my view for spending time in the business. I don't mean in the boardroom I mean in the business.

I spend a lot of time in the companies which I chair frankly in factories in stores and warehouses. These aren't royal visits by the board or the chair. I usually try and go either unaccompanied or with somebody who is very close to the day-to-day operation. So, if I'm visiting a Tesco store, I will try and do it with the local regional manager rather than the CEO. Likewise, in brewery, if I'm going to the warehouse, I want to meet the warehouse manager, not the global supply chain director. And spending time with people in the staff room, drinking coffee, having lunch, a sandwich, or maybe going for a beer after work, you get a sense of people, of their interests, their concerns, and how they think about the business, how they think about their jobs, how they think about the company's contribution to what they do for better or worse, and what we can do better. Very powerful. And there's no substitute for what is an MBWA, management by walking about. It's this is not a new concept. And boards need to have enough time collectively and individually to have a feel for the business in these more casual, more normal, more real life settings. Most boards these days take very seriously workforce engagement measurements. These are generally done by people like Gallup and they're systematized. Companies will look at them several times a year. Boards generally spend quality time on understanding what these things are saying because they're really important. They can be there certainly current commentary. They can also be forward-looking indicators of the stability of a business of the health of the human capital in a business. The code requires a level of engagement of public company boards with the workforce. It is an administrative burden but to my mind is a very worthwhile exercise. I built one tomorrow for Burberry. We've got a worldwide workforce advisory forum. We get about 50 people from all over the world onto a team's call and we chat about two or three topics that are current and live in the business and it's everybody from some senior people in the head office to I mean quite literally the sales assistants in Asia or factory workers in Yorkshire who will frankly tell us what they think and if you do it often enough and do it in a friendly enough way people tell you what they think and it is really valuable. So to me culture critical for any board to understand organically. There is a link inevitably between management incentives and culture. One needs to understand the potential unintended consequences of certain kind of incentives. One could easily create perverse incentives that drive behavior in a certain way that is likely to be unhelpful. Most good boards are alive to these issues. I think it needs some experience to see them coming and take them very seriously.

Yes is the short answer to the first question. Frankly, if the board is looking for information that management doesn't have, then it's either looking for the wrong information or management should have it. And figuring that out is actually quite worthwhile all by itself. The board should get a subset of the information that management use to run the business on a day-to-day basis. These KPIs, they'll evolve over time, but absolutely it should be a derivative from the machine, not something created for the board. I'm fundamentally skeptical of any information that's created, especially for the board.

No, they're different and I think they are more or less appropriate at different stages in a company's life cycle. There are situations where there is just a value anomaly where public markets for whatever reason won't value a company properly on its fundamentals and in which case private ownership is a better place to be on a sort of day-to-day basis. I really like the alignment that you get in private equity situations between management's incentives and the shareholder outcomes. It's much more leveraged, can be literally leveraged, than in public companies and it's very effective and when you have a capable management team totally aligned to creating shareholder value and delivering the right strategy it's very powerful where it's less effective is where it can be overdone it can be oversimplified and it can be value destructive but for the most part I think it's a very powerful and positive thing I also referred to the fact that private equity investors are generally more focused on the long term because of the need to exit and sell the business on within in a given time frame. Public companies I think generally do better at management of human capital. They are generally more attuned to longer-term cultural needs of the business. They're better attuned to the more broadly based definition of stakeholders than private equity companies. But each can learn from the other for sure.

Well, there are two aspects to it. There's a qualitative aspect and there's a quantitative aspect. In terms of qualitative, there is none really. One should try to align management incentives with long-term shareholder value creation. And it's really quite important to work out what that means. And it means different things in different places. There's a quantitative aspect to it which is very difficult in a listed environment. Frankly in this part of the world we're not competitive as public companies for the most part with private equity or with other markets particularly the US and that's an issue.

It is public and it is limiting. I think we are overgoverned in relation to compensation in this part of the world and it's a competitive disadvantage. We can see it all the time when we're trying to recruit from other markets, particularly from the US or from big private companies in other jurisdictions where people can get on their lives without the intense scrutiny on their personal finances. It's just not very attractive.

Again, there's no one-size-fits-all, but I think it would be by its nature long-term with a relatively serious skew towards the long term compared to short-term fixed compensation is highly variable and more skewed toward the long term, I think, is generally the right approach.

Look, if you take fixed remuneration, which is typically salary and things like pension benefits with variable, the variable has two components. There's an annual incentive and then there is a long-term incentive. I would have thought something like a 6 or 7 to 1 ratio between one being the fixed pay and six or seven being the variable pay. And within that, I would skew the variable toward the longer term.

I don't read that many business books or boardroom books. I prefer the brevity of shorter articles. I think we discussed one before we came on by Standards Lab. How to be a good board chair at HBS a few years ago. That's as good a prey as any of some of the kind of general lessons. If I was to pick one book, proper book that I really learned a lot from, it's Walter Isacson's biography of Steve Jobs, who was an extraordinary person. But the dynamics between a creative genius, a big business, technology, boards, and governance, I think is absolutely fascinating. And to take the lessons as you find them, but a really engaging read about an amazing chapter.

Oh, grandstanding. Just being heard for the sake of being heard.

Private Ned sessions before and after each board meeting as a matter of routine. They don't offend anybody.

I think I mentioned that plans are useless. Planning is indispensable. Eisenhower.

I thought about this one quite a lot. One of my earlier chairs when I was CEO was Christopher Bland who was a phenomenal chairman at the time. He was at time your chairman of BT and the BBC as well as being my chair at XL. And Christopher said to me, I don't do plumbing. And what he meant was a chair it doesn't get involved in the weeds. He said there are two or three things that really matter at any point in time and the chair and the CEO need to be absolutely aligned on those two or three things. And I thought that was a very valuable lesson. I tried to practice it on both sides of the equation.

I'm not sure if it's advice, but different points of view on a management situation that wasn't working. A senior manager in a position where it simply was where they were struggling. After a short time, it tends not to get better and it's almost always better to deal with it sooner rather than later. And often times inertia, loyalty, personal relationships get in the way, but things if they're going wrong really after a short period of time tend not to improve. So deal with it quickly and decisively and humanely.

Again, I think we mentioned it earlier. I have come to the view that specialists on boards are suboptimal. I want generalists with some specialist knowledge and there's a nuance thing but it's quite different.

Oh, I'm not going to give you that war story. I would say I get things wrong in the boardroom all the time. And the whole point is that it is a continuous learning experience. Another of my early career mentors said to me, the secret of management is to surround yourself by people who are smarter than you are. And one of the privileges of being a board member or a board chair especially is the one that's surrounded by very smart people. So one can learn from them all the time.

Oh just lots and lots of scar tissue and it comes from getting it wrong. Maybe not quite as often as getting it right and learning from it.

Business is ultimately as I was told by my supervisor when I did my MBA 40 years ago or more. Business is about people. It's not a science. And almost all the big decisions that you will make as a chair or as a CEO are about people. I think the second one I would take is that strategy is not a process. It's a state of mind and it's something that has to be alive and evolving all the time. And thirdly, that what we do should be stimulating and interesting and fun and it should feed our curiosity. And if the curiosity goes, we should stop doing it.