How Tata Steel Netherlands is creating economic value

www.fd.nl – Large Dutch companies have proved eminently susceptible to the temptations of the Anglo-Saxon business model. KLM, prior to its alliance with Air France, offered itself in vain to British Airways, Shell is now a company under English law, Akzo Nobel sacrificed Organon to the City.

The only major Dutch company that did, and successfully, resist this lure and developed a customized model is Tata Steel Netherlands. Once known as the Royal Hoogovens, merged into Corus in 1999, then Corus was acquired by Tata Steel in 2007.

Comparison of the two models reveals the following.

In the Anglo-Saxon world model, the corporation is supposed to serve the interests of shareholders. To provide flexibility for shareholders, a stock market listing is desirable. Boosting earnings per share, preferably at an annually increasing rate, serves as a mantra. The belief that as a result the stock price and thus shareholder returns will rise is cherished, despite the fact that this causal link has never been proven.

At the time of the creation of Corus, the then management of Hoogovens managed to force the introduction of an enlightened structure regime for Corus Netherlands, keeping the supervisory board independent and the management board independent. In this way, in accordance with provisions of Dutch corporate law, the interests of the company and not the shareholders could remain central. In doing so, the board was supported by a central works council that acted as a strategic partner.

It is slowly beginning to dawn on us that the positioning of the corporation as an instrument of shareholders is at the expense of the economic value that corporations are supposed to create and even causes value destruction on a significant scale. In the United States, where this model is embraced in its purest form, major publicly traded companies barely increased their investments from 2008. Return on capital employed has declined, export growth has stagnated and the share of new products in total sales has barely grown.

Tata Steel Netherlands escaped this fate. The current owner considers its IJmuiden branch a jewel in the proverbial crown, and for good reasons.

Tata Steel Netherlands generates, year after year, significant cash flow. Enough to invest more in research and development than, say, ThyssenKrupp. Also sufficient to finance past and future significant investment programs from its own resources. And also enough to pay the owner a reasonable dividend. This is in stark contrast to the successive remediation programs of most competitors.

Tata IJmuiden provides a spectacular example of what a management board, supervisory board and works council can collectively do thanks to the freedom to develop a viable business model and thus create the economic value that is the basis for the continuity of the company.

The time is ripe for more flexibility in choosing a business model.