In search of great performance

Phil Ruthven examines Australia’s best-performing companies and finds ownership does not always determine excellence.

Australia’s best-performing businesses largely follow similar success guidelines to average more than 35 per cent return on shareholder funds (ROSF) after tax over any five-year period. And they only drop out of this elite list when they are taken over, abandon the success guidelines with new CEOs or board members, or have been found to have dodgy accounting (rare, but it happens).

However, when one looks at a much larger group of companies, as IBISWorld does each year, the picture is worrying. In its latest analysis of 1,467 large companies that accounted for more than 38 per cent of the nation’s $4.8 trillion revenue in 2015, IBISWorld found that 22 per cent ran at a loss over that period.

The revenue of these accounted for a seventh of the $1.8 trillion of the 1,467 companies. Fortunately many of them will return to profitability, and will be replaced by others that will run at a loss. It seems that around a fifth of our large companies run at losses over any five-year period. These losses drag the average ROSF performance down to 4.5 per cent, not much better than the long bond rate average of 3.5 per cent over the same period.

The better news from the latest analysis was that the 1,155 companies that ran profitably had an average ROSF of 15 per cent, which is good by international standards.

Top 100

Some spectacularly good news was discovered by separating out the 100 best companies over the five-year period to 2015. In selecting these high-flyers, any company with overly thin capitalisation (equity < 5 per cent of total assets) was discarded, removing six companies that were showing stratospheric profitability. The remaining “best” 100 had an average ROSF of 57 per cent, one of the highest ever recorded, despite slow economic growth, a fluctuating  exchange rate, and a lack of competent government leadership by Labor and Coalition parties. They accounted for just 4 per cent of the revenue of the 1,467 companies.

The results by industry clustering are shown above (Figure 1).

Thirteen of the nation’s 19 industry divisions performed well. The six that didn’t in this latest analyses were: education and training; arts and recreation; personal and other services; hospitality; utilities; and agriculture.

However, if the list had been extended to the best-performing 200 companies, all 19 divisions would have been represented and all averaging a ROSF above 24 per cent – that being world’s best practice. Now that is impressive.

It also reminds us of the old adage: there is no such thing as a bad industry, only bad management within that industry. To have all of our industry divisions represented with the world’s best practice players from our best 200 companies is very encouraging.

We need more of our boards to understand what leads to such success, instead of settling for a good result rather than a great result.

The most common characteristic of these successful companies is that they were focused on just one of the 509 classes of industry in the economy.

Returning to the 100 best performers, 95 were focused on just one class while the other five were theme conglomerates (two or more classes, but in the same industry division); with none in the classic conglomerate category (diversified across two or more of the nation’s 19 industry divisions).

Most could give a tick to the key success guidelines listed below (Figure 2). Interestingly, while the industry of involvement did not matter when it comes to being very profitable as we showed earlier, neither does ownership. Of the best 100 in the five years to 2015, 53 were foreign owned (averaging 60 per cent ROSF), and 47 were Australian owned (averaging 53 per cent); both outstanding. And when it came to ownership type, 68 were private companies (averaging 57 per cent ROSF), 29 were listed (55 per cent), and three were government owned (55 per cent).

We need more of our boards to understand what leads to such success.

The best 100 companies had combined revenues of $72 billion, ranging from over $4 billion (such as Apple, CSL and T Corp) to well below $100 million (such as Bakers Delight, Harry The Hirer and Cigweld).

So who were the 10 with the highest ROSF over the latest five years? They were: Philip Morris (189 per cent); Fedex Australia (120 per cent); British American Tobacco (107 per cent); Wood Group Australia (104 per cent); AIRR (101 per cent); Jan De Nul (101 per cent); GSM Holdings (99 per cent); Urbis (97 per cent); Hays Specialist Recruitment (95 per cent); and Winslow Constructors (91 per cent). It is an eclectic mix.

Just about getting into the best 100 were: Ferrero Australia and Ainsworth Game Technology (both on 35 per cent), and Omya Australia and Smith & Nephew (both on 36 per cent).

There is little excuse for bad performance, even in the complex and sometimes scary world we now operate in. Yes, there are “acts of God” from time to time, but not every year. And it doesn’t matter what type of ownership we have, whether the business is locally or internationally owned, or what industry it is in. Good and great performance can be found everywhere.

What the best enterprises are doing
  1. They stick to one business at a time and do not diversify.
  2. They aim to dominate1 segment(s) of their industry or market.
  3. They are forever innovative, valuing the business’s IP.
  4. They outsource non-core activities to enable growth.
  5. They don’t own “hard” assets.
  6. They have good and professional financial management.
  7. They plan from the outside-in not the inside-out.
  8. They anticipate any new industry lifecycle changes.
  9. They develop strategic alliances.
  10. They develop unique organisational cultures.
  11. They value leadership first and management second.