Saturday, 29 March 2008

A Risk Management culture for the long term

I should declare two interests. First my wife has less than 200 shares in the company and second from 1982 to 1990 I was General Manager of Spirax-Sarco's Japan Branch.

Spirax-Sarco was first amongst equals in low pressure steam controls in 1982, with strong competition from German, Japanese and American competitors. Now 25 years later it is the undisputed world leader. During those 25 years it has made but two major acquisitions - the first was to buy its orginal parent Sarco Inc in the USA and secondly to buy the Watson-Bredel company with its range of peristaltic pumps. Its major divestment was to sell off the Drayton radiator valve company in order to concentrate on its core business. Over the period it has more than trebled its sales to £417 miliion and quadrupled its profits. Most of the growth has been internally generated as it expanded into new markets - it has its own or associated companies in 33 markets - and through new products, most of which have been developed in the last 15 years, all focused on managing steam systems.

It has been led by a series of outstanding executives, including the founder Lionel Northcroft and on April 1st 2008 a new CEO takes over, the third engineer drawn from outside the company (he joined in 2003), whilst there have been two accountants who have come up from within.

The foundations of its success has been its application knowledge which , from my experience in Japan was clearly a completely novel way to sell for the Japanese users of steam systems. The knowledge was provided free of charge to help customers design better systems in order to deliver improved product quality for whatever was using steam for process and reduce energy costs. The Spirax correspondence course on steam system design has been take by over 1 million students - it is available free of charge in almost every major language.

What does all this have to do with risk management?


First the company has been disciplined and has not made rash acquisitions. It has stuck to the knitting, would that British Leyland had.

Second it has managed the succession of its leaders very effectively and has ensured that no one can hijack the direction of the company, not for Spirax the fate of GEC.

Thirdly it has used its knowledge to successfully develop markets such as Korea and China so that now Asia accounts for twice the profit from North America and closer to home Continental Europe twice the profit from the UK. This spread of markets has allowed it to manage exchange risks and market downturns in various economies and to deliver an increase in dividends per share for each of the last 15 years.

Fourth, because of its dividend performance and strong management record it has 50% of its shares held by 10 different investment funds, many of which have had the shares for over 20 years. This has given the management stability, but they have earned it.

Fifth being involved with energy saving whilst climate change moves up the agenda, something recognised by Spirax at least 20 years ago, creates a culture, shared by the staff globally , of a company ( I use that in both meanings of the word) addressing to the best of its ability one of the key problems of the world community. Spirax does not lose many people to its competitors.

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