Pearson, the educational publishing group and former Financial Times owner, announced the departure of its chief executive and its chief financial officer in the space of 29 days — having achieved the departure of 60 per cent of its equity value in under five years. In so doing, it has arguably become a textbook example of a business that failed to manage both digital disruption and market expectations. A textbook it would doubtless offer in expensive print format. To students seeking digital content. Via old-fashioned bookshops. On a sale or return basis. Through salespeople incentivised on gross, not net, sales.
Too many shareholders chose to ignore these and other failings, which were well documented by a news sector from which the group withdrew in 2015. Investors’ failure to challenge management forms another chapter in the textbook. Some at least noted Thursday’s gloomy profit outlook as finance chief Coram Williams follows boss John Fallon out of the door — Pearson shares fell another 5 per cent.
But four lessons must heeded by the next leadership team if the book is to have a meaningful ending.
1. Provide realistic guidance
Pearson has warned on profit six times in seven years, and 2019’s adjusted number only scrapes in at the bottom of its guided £590m to £640m range. Analysts find the latest 2020 earnings guidance is up to 20 per cent below the level they had been led to expect. New CFO Sally Johnson must stop underestimating the collapse of US textbook sales and restore credibility.
2. Invest in opportunities not buybacks
Mr Fallon says the company is “well placed to benefit from [digital] trends to achieve future, sustainable growth”. But he highlighted the sale of Pearson’s Penguin Random House stake and a £350m share buyback. As one analyst wrote, “his argument might have more weight if he invested the proceeds in the business rather than buying back the company’s shares”.
3. Keep pace with digital disruption
The soon to depart chief also says the speed of digital disruption in the US has been hard to predict, as the company has had no direct contact with consumers. But it is the responsibility of managers to know out what is happening in their market. Pearson’s “heavy declines in print offset by modest growth in digital” show it is still way behind the curve and needs better market intelligence.
4. Have a clear succession plan
Pearson says it may not be able to appoint a new chief executive until the end of this year and glosses over the fact that Ms Johnson, successor to the CFO, had decided to leave before she was offered the new job. A lack of coherent succession planning risks strategic hiatus and deters effective shareholder challenge.
Pearson needs to ensure these mistakes become ancient history, but are learnt from — not filed under 939 in the Dewey decimal system on a dusty bookshop shelf.