Channel 4’s purchase of the Great British Bake Off raises big economic questions: what exactly is a firm, and what are a firms’ assets?
As you all know, Mary, Mel and Sue will not be joining the show when it moves channel, which has prompted everyone to claim that Channel 4 have spent £75m on a tent and a fat scouser – something they could have got in Millets Liverpool’s branch for rather less.
This highlights a general fact – that firms are often not merely collections of physical assets, intellectual property and explicit contracts. Their value often lies in key employees, and if these leave they can take a lot of corporate value with them. If viewers boycott the new GBBO because there’s no Bezza, then the GBBO is indeed not as valuable as Channel 4 thought.
There’s nothing new in this. Back in 1994 shareholders in Saatchi and Saatchi got the hump with Maurice Saatchi and sacked him as chairman. He left to form a new advertising agency, taking a lot of Saatchi and Saatchi’s clients with him; the company never recovered. Shareholders thought they could control a valuable firm. But in fact a lot of the firm’s value was de facto controlled by Lord Saatchi. Channel 4 might have made the same mistake.
As Luigi Zingales pointed out in a classic paper (pdf), this changes how we should think about the firm. De facto decision rights – the things that give a company value beyond the value of explicit contracts - don’t necessarily lie at the top of the organization with shareholders, but might be scattered throughout the organization. This affects how companies can raise finance and how it should be valued: as Channel 4 might discover, it implies that assets can be less valuable than thought.
In truth, sensible people – the sort who aren’t TV executives – have known this all along. Private equity firms, among others, often devote lots of effort to retaining and incentivizing management at the companies it buys into: it’s odd that Channel 4 never thought of this. And one solution to the problem of powerful workers is to give them ownership, or the prospect thereof; law and accountancy firms, where people really are the main assets, are typically owned by worker-partners and not by outside shareholders.
So far, so obvious. But here’s a problem. Sometimes, we don’t know where power lies. Is the GBBO like Top Gear which slumped when Jeremy Clarkson left? Or is it like the One Show or The Voice, which coped well with changes of judges and presenters? (Taggart even kept going long after the death of the actor playing the title role). The fact is, we can’t be sure. Of course, TV presenters and key employees in many firms like to think they are vital to the enterprises’ success. But the graveyards are full of men who thought they were indispensable.
This suggests that the valuation of many smaller companies, or parts thereof, might be even more uncertain than thought.
Warren Buffett has his own solution to this uncertainty – to invest only in companies which are so structurally sound as to be not dependent upon particular individuals:
If you've got a good enough business, if you have a monopoly newspaper, if you have a network television station — I'm talking of the past — you know, your idiot nephew could run it. And if you've got a really good business, it doesn't make any difference.
Sometimes, though, you cannot avoid the uncertainty. And then you have a problem, as Channel 4 might discover.