John Kay – Think before you tear up an unwritten contract

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John Kay destroys the ideas behind shareholder value in one column. As he notes:

In my own work, I used the term architecture to describe competitive advantages derived from structures of implicit contracts with suppliers, employees and customers. Marks and Spencer exemplified the use of such relational contracts.

I had barely formulated this thesis, however, when the company began to put strain on these relationships, in the interests of shareholder value. If the success of M & S demonstrated the power of relational contracting, the company’s decline illustrated a process that swept across business – and above all the financial sector – from the 1980s. The substitution of transaction-oriented dealings for relationship contracting added to profitability in the short run; but in the long run it eroded relationships that had been the underlying source of much of that profitability.

But the whole is better than this part.

Highly recommended.