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Mar 22nd 2014 | From the print edition
ONE of the most extraordinary corporate centres in America. This is how Trian
Partners, a disgruntled shareholder of PepsiCo, described the headquarters of
the snacks-to-soft-drinks company in a recent letter to its board. Set amid
lakes and fountains in 100 acres of wealthy Westchester County, New York,
PepsiCo s HQ features seven interconnected three-storey office buildings
designed in the 1960s by Edward Durell Stone, a pioneering American modernist
architect. Its crown jewel is the Donald M. Kendall Sculpture Gardens, named
after a former chief executive, which has works by artists such as Alexander
Calder, Henry Moore and Auguste Rodin. Mr Kendall reportedly intended the
garden to reflect his vision for the company by creating an atmosphere of
stability, creativity and experimentation .
Two years ago PepsiCo began a $243m upgrade of the complex to make space for
more staff and create a more collaborative and innovative work environment .
Trian, run by Nelson Peltz, a veteran activist investor, thinks shareholders
would be better served by selling it and shedding many of its 1,100 workers, as
part of a broader cost-cutting and productivity-boosting strategy that would
see PepsiCo split in two.
The raiders of the 1980s, who made fortunes by seizing and shaping up flabby
conglomerates, were supposed to have put an end to corporate extravagance and
administrative bloat. But PepsiCo is not alone in now being accused of these. A
recent report by Sanford C. Bernstein, a research firm, reckoned that
Coca-Cola, which is spending $100m on upgrading its home in Atlanta, has
overheads (general, administrative and sales costs minus advertising spending)
that are 30% of sales, almost as high as PepsiCo s 32%. Activist investors such
as Trian, which also has its guns trained on DuPont, a chemicals firm, may find
inspiration in other examples highlighted by Bernstein. Procter & Gamble s
overheads ratio is far higher than that of its consumer-goods archrival,
Unilever; so is Est e Lauder s compared with that of L Or al, another big
cosmetics firm (see chart).
It is hard to think of many big companies that could not benefit from taking a
fresh look at their overheads. One, perhaps, is Mars, a family-run confectioner
with a tiny, frugal HQ in suburban Virginia. Another is Berkshire Hathaway. In
this year s letter to shareholders, sent last month, the conglomerate s boss,
Warren Buffett, broke a long-standing no pictures policy to show off his
head-office team, just 24 strong. Mr Buffett s last big acquisition, of Heinz,
was made in partnership with 3G, a Brazilian private-equity firm whose boss,
Jorge Paulo Lemann, has a passion for cost-saving. Heinz had already undergone
a round of cuts under pressure from Mr Peltz. But 3G found plenty more to trim,
as it applied its zero-based budgeting approach, in which all spending must
be justified from first principles each year. Swathes of managerial jobs were
axed, as was the company s aviation department , which ran its corporate
planes. Mr Buffett is impressed: hitherto he has mostly bought well-run firms
that he could largely leave alone, but now he wants to do more deals like the
Heinz one.
Of course there are many reasons, other than differing levels of bloat, why
businesses vary greatly in which functions are performed centrally, and in how
many people and other resources are needed at head office. But there is
evidence that companies have piled on the pounds in recent years. A study by
Sven Kunisch, a management professor at the University of St Gallen in
Switzerland, and others looked at the head offices of 761 big companies in
Europe and America between 2007 and 2010. By the end of the period, a quarter
of them had more than 600 staff at HQ, whereas another quarter had fewer than
63. Two-thirds of the firms said they had made significant changes during the
period, generally strengthening centralised control over their divisions. Some
44% of the firms had increased the headcount at HQ, whereas only 28% trimmed.
Of the 21 countries in which the head offices were located, only ones based in
Denmark and Greece reduced staff numbers on average. All this at a time, in the
wake of the financial crisis, when companies were striving to protect their
profit margins by cutting jobs elsewhere in the workforce.
All aboard the mother ship
What might explain the return of head-office bloat? The crusade for leaner,
more focused companies, which began in the 1980s, ran out of steam after the
turn of the century. And three other issues moved up bosses agendas, each
seemingly justifying extra staff at HQ: globalisation meant that the mother
ship had more far-flung operations to oversee; new digital technology made it
easier, in theory, to centralise control and oversight; and, starting with
America s Sarbanes-Oxley act in 2002, deregulation gave way to a growing
regulatory burden, bringing with it a bigger head-office compliance operation.
Various events, from the September 11th 2001 terror attacks to the financial
crisis, may have made bosses view the world as an increasingly complicated and
uncertain place. It would not be surprising if many of them responded in the
same way as Jeffrey Immelt, the boss of GE: in his latest annual letter to
shareholders, he confessed that We attempted to manage volatility through
layers and reviewers. Like many companies we were guilty of countering
complexity with complexity...more inspectors, multiple reviewers. The result
was a higher cost structure, an artificial sense of risk management, and we
were insulating our people from the heat of the market. Mr Immelt has now
decided to reverse course. GE has launched a new simplification strategy, with
a goal of cutting overheads to 12% of sales from 16%, including a 45% reduction
in the cost of the corporate headquarters, by 2016. Other bosses would be wise
to do the same, or expect to have Mr Peltz and his fellow activists on their
case.