Don’t Eat Your Seed Corn: Tenant Farmers Don’t Pick Up Rocks
noun: seedcorn
good-quality corn kept for seed.
(in finance) assets set aside for the generation of profit or other benefit in the future.
“Business leaders are motivated and rewarded to heat their houses by burning their furniture.” - Mark W. Johnson
In 2005, the infamous Glazer family acquired Manchester United Football Club through a leveraged buyout. This acquisition saddled the club with significant debt, serviced with interest payments. The club’s debt remains at $650 million, although due to the strength of the US dollar against the British pound, it has increased from £477.1m in December 2021 to £535.7m. The club were debt-free before the takeover!
The Glazers’ ownership has been heavily criticized by Manchester United fans (and players like Cristiano Ronaldo), who believe the debt burden has hampered the club’s ability to invest in players, infrastructure and the future. Former Man United captain Gary Neville — a player when the Glazers took over — called them “scavengers”. They indeed feasted on the club’s seedcorn.
The case of the Glazer family’s ownership of Manchester United Football Club serves as a compelling analogy for the world of corporate governance. Activist investors, vulture funds and certain CEOs succumb to the allure of short-term profits, disregarding their organisations’ future health and viability. Just as activist investors swoop in with a narrow focus on immediate gains, some leaders prioritise immediate financial success at the expense of sustainable growth. Similarly, some leaders are incentivised to deliver quick wins that appease shareholders and boost stock prices, often through cost-cutting measures, layoffs, or neglecting vital investments in R&D, productivity and/or employee development. Such approaches echo the age-old wisdom of ‘don’t eat your seedcorn’- for without reinvestment, growth is stunted, and an organisation’s long-term viability is at risk. The list of companies that have temporarily used fluctuations in their R&D and innovation seedcorn to improve their earnings is long.
Eating Seedcorn
Our recent guest and friend of The Innovation Show, Derek van Bever shared the case of Heinz through the late 1980s and early 1990s. CEO Tony O’Reilly focused on managing earnings through cuts in marketing and R&D, eventually trailing off revenue growth by the mid-1990s. In commenting on the costs of this devotion to the bottom line for Heinz and several of its industry peers, O’Reilly’s successor as CEO, Bill Johnson, confessed: “We weren’t supporting our brands, and we weren’t being innovative at all. . .. In terms of cost-cutting, the mistake for the industry, in retrospect, is that it did not take the cost out of the system. It took the cost out of the product.”
This distinction made by Johnson between taking costs out of the product instead of out of the system is salient to the second part of the title of this week’s Thursday Thought: Pick Up Rocks.
Picking Up Rocks
Hal Gregersen joined us recently on The Innovation Show and shared with me a profound saying: “Tenant farmers don’t pick up rocks.” Just as tenant farmers, who have short-term leases on the land they cultivate, lack the incentive to invest in long-term improvements like clearing the fields of rocks, some leaders with increasingly short tenures hesitate to make crucial investments in the future of their organisations. Rather than focus on initiatives that require time and resources to bear fruit, they often shutter them, earn a bonus on their efforts, and are out the gate before the lack of seedcorn becomes apparent. Consequently, the organisation becomes stuck in a cycle of short-term gains, missing out on the long-term benefits that arise from seedcorn investments and productivity programmes akin to picking up rocks.
In next week’s episode of The Innovation Show, Sven Smit recounts the case of Frans van Houten, who became Philips’ CEO in 2011. Looking to the future, he began divesting legacy assets, including its TV and audio businesses. After this portfolio restructuring (picking up rocks), Philips reinvigorated its growth engine by reallocating seedcorn to more promising businesses (oral care and healthcare were two priorities) and geographies.
Deallocating resources from a business unit is much more complex than allocating seedcorn to another (even more so when it is a new initiative). To do so effectively, you must run an ongoing “pick-up-rocks” programme to regenerate seedcorn for when you need it, all while never eating from your own supply!
Tomorrow’s episode of The Innovation Show completes a 3-part series fo entrepreneurs, startups and product leaders.
Drop us a line to be in the hat to win “ EMPOWERED: Ordinary People, Extraordinary Products”, tomorrow’s episode with Marty Cagan.
The winner of Bill Aulet’s “Disciplined Entrepreneurship” is Erik G, Erik, I will drop you a line to organise delivery.
