Steve Tappin Interviews Archie Norman

Steve: Archie Norman’s the CEO of Aurigo Asset Management, but most people know Archie from when he was at Asda, and he did the successful turnaround with Allan Leighton. He also mentored a new group of executives, Andy Hornby and Richard Baker included, who are now running FTSE 100s themselves. Archie’s going to share his secrets of being a CEO.

Good to see you again, Archie.

Archie Norman: Good to see you Steve.

Steve: Could we start with the credit crunch, which seems to be sort of front of mind of people at the moment? What’s your point of view about maybe the severity and how long it could last based on where we are today?

Archie Norman: I think every recession, every downturn, is different from the previous one. The anatomy is different, and the way this one’s come about is very different from anything we’ve seen for the last 20 years. If anything, it’s more like the early 1970s. There was a real property crash, house prices declining, loss of consumer confidence, big public sector deficit, so there’s no real hope for fiscal stimulus.

Everything says we’re going into a long-term change in markets in the UK anyway, and probably in the United States. This isn’t going to be over in a few months, it’s going to be years.

Steve: Okay. If that’s the case, what advice would you have for other CEOs at an operational level? How do you deal in this sort of [crosstalk 00:01:25]

Archie Norman: If you’re a manager, your job is to manage in good times and bad, there’s no point in getting depressed about it. You’ve got to say, "Right, we’re going downhill, so my job is to manage it going downhill." Great managers take advantage of bad the times to create competitive advantage. There’s not going to be ... there’s going to be some financial hits. It’s going to be tougher.

Steve: Yeah.

Archie Norman: I think the right thing to do is to take it on the up. You’ve got to get your people faced into it. It’s very important you don’t get this syndrome of the continuous surprise. It’s always getting worse, so get people to what I call, "panic early." Get to the bottom right at the outset. You’ve got losses, declare the losses. You’ve got luggage, luggage overboard. You know? Get people faced into the severity of it and then from there, they can see progress. What’s debilitating for an organization is to constantly have this sense, "Things are getting worse, things are getting worse. There’s another nasty surprise. Oh, we understated our write-offs." That’s really demoralizing.

Steve: Okay. Are there any other sort of operational things that you would do besides sort of really setting, you know, getting all the luggage out? Are there any sort of suggestions you have about how to ride through the downturn?

Archie Norman: Look, I think the downturn is like the upturn. It just means it’s more important than ever to get rights to hard basics of the business, so get to the customers and secure them.

Steve: Yeah.

Archie Norman: Get on the frontline, get your people motivated about it, don’t get them feeling that somehow because there’s a global recession they’re a failure. We can’t help that.

Steve: Yeah.

Archie Norman: We would ride the waves and obviously a lot of the things, hobbies that grow up in good times when there’s a bit of money around. The little sort of peccadillos, the sacred cows, they have to go. People want to see them go, because they know times are tough. They want to see the boardroom make the sacrifice as well as the frontline.

As I said, you’re faced into that early, much better if you’re going to take a hit, you’re going to take people out, take it at the beginning. Take one big hit, and then you can move on from there if you possibly can.

Steve: Okay. Yeah, that makes a lot of sense. What about in terms of the CEO, the personal leadership and they ... any advice for CO’s as they go through this, because some of the CO’s are from a younger generation and haven’t maybe seen anything like this.

Archie Norman: No, I think the great thing if you haven’t seen anything like this is don’t read the media, just assume this is life as it will now continue.

Steve: Right.

Archie Norman: Don’t assume this is going to be a few months and it will come right next year. I mean I hear what I hear when I listen to people [inaudible 00:04:09] about recession today, because they say, "Aw, when do you think we’ll come out of it?" Assume you’ll never come out of it, and trade that way, and you’ll probably get it right.

Steve: Yeah.

Archie Norman: Yeah. That’s your mentality, is don’t get depressed about it, get ahead, and just assume this is the way it is.

Steve: Okay.

Archie Norman: Your people want to see you lead through it. They’re going to look to the ... there the chief executive is, looking all depressed and wondering when we’re going to come out of it, then they’re not going to be re-inspired. They assume the chief executive thinks, "Right, this is the way it is now, guys. Here, I’m on the frontline with you, I’m going to be out with the customers, I’m going to be out visiting the branches," or whatever it is. Then you’ll lead them through it.

Steve: Okay. How do you balance then the short-term with not cutting things at a key to winning in the long term?

Archie Norman: That’s one of those thousand little judgements you have to make. You have to know what’s ... this is the time where you’re forced to decide what’s critical, and what’s an indulgence. The most important thing is protect your good people, and don’t stop doing things. People go into a recession thinking, "I’m just going to stop. I’ll stop promoting people, I’ll stop recruiting people, et cetera."

The development of capability in your company has got to continue, so I’ve still got to be recruiting good people. I’ve still got to be dealing with the under performers. I’m still going to be promoting my smart guys coming through, because their careers can’t stop because of this recession. They want to feel we’re making progress.

But there are things, there will be things in every company, which actually when times are tough, turn out to be non-essential.

Steve: Yeah.

Archie Norman: As I said, the main thing is, find those early. Don’t wait half way through.

Steve: Yup.

Archie Norman: Find those early and then people feel they’re climbing uphill, they’re climbing forward. There’s a sense of progression.

Steve: Yeah.

Archie Norman: Give people a roadmap. People want to know how we’re going to work through ... people will follow you anywhere, if they believe, that when they’ve been through the trenches, there’s going to be some sunny uplands afterwards. Paint a picture, how we’re going to get through it.

Steve: Yeah. Do you think that there’s also as you go into a downturn, there’s distressed opportunities in terms of companies and maybe people [crosstalk 00:06:26]

Archie Norman: I think there are, but I think it’s a bit of a delusion. What happens when things go badly, when the water level falls, then you see the shipwrecks come out. Often, because they’re a lot cheaper than they were before, you think, "That’s a bargain, well that’s cheap." Actually it’s the new world, values have fallen, they have fallen.

Steve: Yeah.

Archie Norman: It may be cheap, but there’s a reason why it’s cheap. I think you’ll find that most people who trade successfully in the downturn ... are people [inaudible 00:06:59] hoover up the failures, they’re people who concentrate on growing their market share. This is time to get organic, really drive your market share. Be the people who are still pushing forward, and still motivated, who are still aggressive, as you go through the recession.

Steve: Okay, brilliant. There’s a lot of focus at the moment on alternative capital, you know, sovereign wealth funds coming in to companies like Barkley’s and also PE firms. There’s recently Bradford and Bingley and we’re looking at a PE option. What’s your view on alternative capital? I suppose in particular given your focus on private equity, how will private equity firms go through the downturn? Will they continue to take over companies, or will they take strategic stakes?

Archie Norman: I think in this time, capital is needed and you don’t worry too much about what source it comes from. Actually, private equity capital isn’t so very different from public capital. Sovereign wealth capital, Dubai, or Qatar is, Singapore, at the end of the day, it’s capital, and there going to be an interested shareholder. There’s nothing that sinister about that. Thank goodness they’re there, because they’re propping up our banking system.

I think for private equity this is a change. Private equity we forget, most private equity companies have a big portfolio. Actually, they’ve got a big investment in this recession, and they’re experiencing that. Private equity partners are living it. They’re watching their portfolio with probably increasing dismay as it goes down in value. They’re living through it, and then they’ve got the uninvested funds behind them, and deploying those funds is also becoming much more difficult.

A lot of uninvested funds today are pretty idle. They’re sitting on their hands, and in times of high uncertainty, private equity will do that. They hope there will be a moment in which they can move in when values are very low. History relates that private equity makes its money coming out of a downturn. We will see, but the issue today obviously is you can’t get debt finance.

Steve: Yes.

Archie Norman: The reason you see people investing in private equity financial institutions, house builds and so on, is because they’ve already got leverage. Bradford and Bingley’s already highly leveraged, so you invest in Bradford and Bingley, you don’t have to go out and find any more debts, they’ve got enough debt as it is.

Steve: Yeah. A lot of PLC CO’s have been very wary about private equity because the change of ownership and potentially the change in management. Do you think the PE firms could become more like strategic investors, and take sort of more like partial significant stakes?

Archie Norman: Yes, I think there’s a convergence between public equity and private...