A Third Way for firms

This review was featured in the International Herald Tribune (World wide edition), 11 December 2005

Reviewed by Robert Youngblood

The so-called Third Way may have vanished down the same international rabbit hole as Scandinavian Socialism and the “small is beautiful” concept of the 1970s, but that doesn’t give Donald Kalff much pause. The American corporate model, with its emphasis on shareholder value, has swept the world, but he is leading a rearguard action, and European businesses are his battleground.

Kalff, who worked at Shell and KLM and now lectures at the Leiden University School of Management in the Netherlands, is pushing a corporate Third Way, which he calls the European Enterprise Model. It is a company that puts shareholders on no more than equal standing with management, other employees and the social environment. While it could work elsewhere in the world, he maintains that it is especially appropriate for continental Europe.

Kalff maintains that the spread of the American model is bases on flawed assessments, and he opens his argument by saying that the U.S. successes in the late 1990s were wildly overstated. “Contrary to what many prefer to believe, the differences in macroeconomic performance in comparison with Europe were small or nonexistent,” he writes, citing evidence ranging from the broad – how much better the European Union would have looked had it truly been a single economic region when the comparisons we made – to the marginal, like how U.S. unemployment data ignore the growing prison population.

Indicting U.S. corporate behavior, he focuses on the dot-com crash and especially the spate of corruption scandals exemplified by Enron, which he argues was the logical result of an American corporate culture that focuses on building per-share profit at any costs.

Only more than halfway through his book does Kalff arrive at his proposed alternative. Having concluded that the greatest flaw in the U.S. corporate model is the evaporation of trust within companies, he wants his European Enterprise Model to be one that is run in a harmonious manner.

Although the company is not focused on per-share profit, this new business is no socialist model. Kalff’s criterion for success is free cash flow, or the value of future revenue minus future costs, modified for risk. An expanding free cash flow, he argues, will allow the company financial independence and the opportunity to expand, something he calls value-based management.

Nor is Kalff recycling the postwar Japanese or German models for the specifically rules out lifetime employment or union involvement in most strategic planning. Instead, he wants to liberate companies from short-term fixation on profit at the expense of evolution, independence and harmony.

Best explained are his plans for harmony: with their company freed from the tyranny of stock market expectations, executives can expect longer and more productive tenures at each stage of their growth in the company. “This turns managers into entrepreneurs,” Kalff argues. Business units will work together better, not having to fight other units for precious funds or attention amid a fixation on instant results. Takeovers, with their emphasis on conquest and forced assimilation, will fade in favor of alliances seeking not the marginal gains of costs but rather the development of technological or production advances.

Investor opportunities in Kalff’s brave new world are limited. Corporations looking for funding, he advises, should limit their dependence on banks and venture capital firms, and even on relatives and other private citizens. The payback, he maintains, will come in the form of longer, more even runs of profit – earnings that will allow the company to wrest back control, if not equity, from those investors.

His model will succeed in Europe, Kalff argues, mainly because it will foster a milieu that unleashes creativity and cooperation. But to do so, the model must already be in place. It seems like he is leaving it to investors to push for such a change, but given the lack of short-term gain, the impetus to do so is far from clear.

Finally, there is the question of whether a company based on free cash flow, embracing a free flow of ideas and devoted to its products as well as its market is really going to be all that last more decent. For all the mentions of Enron in this book, only the publication date spares Kalff from having to explain how so prototypically European a company as Parmalat failed so spectacularly.