Martin Sorrell says U.S.-China 'cold war' is bogging down business, dismisses Big Tech break-up

Published Tue, Sep 29 202011:56 AM EDTUpdated Tue, Sep 29 20202:25 PM EDT

Alex Sherman @in/alex-sherman @sherman4949

Key Points

S4 Capital CEO Martin Sorrell argues Facebook and Google shouldn't be broken up and advertising boycotts "don't really achieve much."
Sorrell says controlled companies are better long-term investments than those with CEOs that don't own stock because founders typically have more skin in the game.
Sorrell questions strategies around investment diversification, saying his dad taught him it makes more sense to put money in companies you understand and work for.

A View from the Top is a Q & A series exclusively available on CNBC Pro . Alex Sherman will regularly speak with a business leader about decision-making, investing and industry news. Sir Martin Sorrell is probably the most famous active executive in all of advertising. In 2018, he shocked the media world by quitting WPP , the advertising agency he founded when he took a controlling stake in 1985. His departure was clouded by a board investigation around potential personal misconduct, though Sorrell says he'd already decided to leave. Just weeks later, Sorrell founded S4 Capital , a digital-focused marketing firm that now competes directly against WPP. The Financial Times detailed allegations from anonymous subordinates who criticized Sorrell's management styles. But when asked if he's changed the way he treats employees, Sorrell simply said, "No." At 75, Sorrell said he plans to work until he drops dead. His mission is to grow S4 Capital into the type of global advertising behemoth WPP became in the 1990s and 2000s. But he acknowledged his global aspirations have become more difficult in the midst of the Trump administration's business war with the Chinese government. "It is making it extremely difficult to run a global business when you have the two biggest economies in the world fighting one another," Sorrell said. "Effectively, we have a Cold War. And it's growing in its intensity." Here's the full Q & A: (This interview has been lightly edited for length and clarity.) Alex Sherman, CNBC: I was just listening to an interview you were doing where you mentioned that as an investor, you actually look for companies whose leaders have control over the company because you feel like they have more skin in the game. I think I believe the phrase you used was 'they wake up and they go to sleep thinking about the company.' Sir Martin Sorrell, S4 Capital CEO and founder : They have their heart in their stomach. It's a broader point, Alex, which is about the separation of ownership and control. I think maybe it's because I was too influenced by a book at university, where I struggled with economics at Cambridge. It was written by a guy called Robin Marris -- "Economic Theory of Managerial Capitalism." He was a left wing economist, a Marxist, actually. And he just pointed out the separation of ownership and control. I think uniting manager and owner is really important. For example, at WPP, the board owned no stock in the company. So when they get up in the morning, they don't have their heart in their mouth. They're managers. That's not a criticism. It's a fact. And I think that you should have something at stake. So the people at S4, we own between us about 40 percent of the company. If the company does well over the long term, we do well. If they do badly, we suffer. And I think you should put your money where your mouth is. Given that answer, is there a point where perhaps a founder gets so wealthy or successful that the person actually stops having that motivation? Is there a potential downside to having too much control? Well, if you've got a lunatic in control, yes. But if not, no. The normal uncontrolled listed company, the CEO usually lasts about five years. Certainly pre-Covid, you could build a business -- top-line GDP growth was two, three or four percent. Very little inflation, very little pricing power. So you reduced your cost, you bought that stock back, and you grew the company EPS by five or 10 percent. And that was a perfectly respectable thing to do and a respectable legacy. Covid blew that out of the water. Look at the results of companies in Q2. What Covid has done is really sorted that out in terms of transformation. That steady model, that status quo, is gone. And I think what's now happening is people running companies are taking a much more transformational approach. You see that at a consumer level. You see it in the media, as you know, with your experience in the media. And most importantly, you see that in enterprise. People running companies can't hide anymore. They can't say, well, we don't want to transform the company. We don't disrupt the company because we will disrupt that steady-state model. It's been disrupted. So change agents inside companies are becoming more and more powerful, and they're giving a lot more oxygen now to do what they want to do. I guess what I'm getting at, though, is, is it possible that the CEO who has to answer to his skeptical board or has a threat of activist shareholders, may actually be more obsessed with the business than the comfortable billionaire control founder? They get obsessed with the short term. That's a problem. Usually those people have options, which are heads I win, tails you lose. Warren Buffett wrote many, many years ago you wouldn't give an institutional call on your stock for ten years at no cost. Why do you do that with management? So I think what has to happen is the people have to invest in their companies. My dad used to say that portfolio investment was a mug's game and was a gamble and what you were best off doing was investing in the company you knew best, the company that you worked at. Now, that goes against the conventional risk analysis. Yes, all you eggs in one basket. You have to get up in the morning with your heart in your mouth. As an advertising executive, you get to see quite a few industries as an investor coming out of the pandemic quarantines, where would you put your money right now? And you can't answer S4. Well, I can. I'll answer S4. Because I've put over 60 million pounds into S4. But, yes, obviously health care, maybe financial services, particularly the new platforms — obviously online shopping, online education, online financial services, in-home games and entertainment. I think those are what I call the V-shaped sectors. The U-shaped are the more diversified FMCG (Fast-moving consumer goods) — it depends whether it's a more diverse FMCG or a more focused one. So a company like L'Oreal , or Colgate , have advantages because they're much more focused than a P & G or a Unilever. P & G has done very well because it sold its food business some years ago, whereas Unilever kept its food business. And then you go beyond that and you get to the L-shaped recoveries — and that's around travel and hospitality, which will have a much more difficult time in dealing with the implications of Covid. I'm not saying they're going to be permanently disadvantaged, but they're going to be disadvantaged for the long term. So I would say take health care, financial services, some home entertainment and gaming, online shopping, online education, online communication. Those are the areas of the future. Let's talk about travel and hospitality, since you brought that up. From a marketing perspective, what is the right message for those industries right now, or is there simply no right message and they're just doomed to wait for vaccines? Well, they're not doomed to it. They can prepare for it. I mean, we have a few travel and hospitality clients, and interestingly, they're showing signs of stirring, having been caught in a Q2 status. They're starting in Q3 to pick up -- not hugely, but they're starting. But I think there is a fundamental problem. I was on a call. There were three companies. One was the CEO of a global hospitality company who said, 'of course, we'll go back to booking hotels.' And the head of the airline said, 'of course, we'll go back to booking tickets.' And then the head of a big global fast food company said, 'my travel budget was reduced to zero and I'm not going to let it go back to more than 50 percent of what it was.' You could hear a pin drop. If I look at our people, we have about 2,700 people in the company -- shortly to be 3,000 because of the BMW win . But if I look at those people, the average age of the media people is around 25, the average age of the content people -- the monks, as we call them -- is around 30. The information we're getting from them is they want to spend two, three or four days in the office, not a full week. They want more flexibility in commuting time. They want more dispersed working. They want more dispersed living. They want to live in different cities, not congested. By the way, we knew about this pre-Covid. This kind of just accelerated these trends in a very significant way. So life is changing. Going back to travel and hospitality, I listened to a very interesting webinar early on in the lockdown with Brian Chesky of Airbnb. He started Airbnb in the last crisis -- the 2008 great financial crisis. And here he was going public, or attempting to public and refinancing. And this was a lot like the great financial crisis, worse. And yet he was adapting his business model. He was talking about national travel versus international travel and changes in the pattern of consumption very early on. It's about flexibility and thinking. It's like us, you know, with S4 -- the last two weeks in March were pretty highly pressurized. That was when the real pause happened. It quickly started coming out. We bottomed in April and have been growing every month. I mean, we had a remarkable run and we continue to strengthen sequentially from May, June, July and August. Are you back to pre-pandemic levels now? Yes. We're back to where we were in January and February. But, you know, the interesting thing was, in April, we saw three big things happen. One was animation, which went vertical. You ask the Hollywood studios, animation went vertical. Robotic productions -- we bought up a production company in Hollywood called Caramel Pictures, and we laughed at the time. Last year we laughed. We bought more robots than people. That proved to be prophetic. And the third area was conversion of live events to online events. That has become a huge revenue stream for us. So it's like the Chesky conversation. It's difficult because this pandemic is unlike any other recession I've seen. But you have to be very flexible and adaptable in terms of your revenue streams. Obviously, you're famous for your time at WPP, which, you know, didn't end under the best of circumstances. I'm curious, what lessons did you learn? The best of circumstances for whom? Them or me? Well, I don't know, either. Maybe you have come out happier, although maybe you weren't happier at the time, two years ago? I chose to go. I mean, the reports were a bit of misinformed on that. That's what happened. And maybe it was for the best. But let's be quite clear that I have a point to make. Do you feel like you learned any lessons from that, that you've been able to carry over as a leader at S4? Yes, be extremely careful who you choose as chairman. Is there anything more toward your sort of style of leadership that you've learned? As you referenced, there were several reports when you left talking to people who said fairly pointed things about you: "brutal, inhuman," etc. You know, it's interesting. Not one of them actually had the courage to come out and say who they were. Well, it's a lot easier to make those statements if you don't put your name to it. You are in an industry that specializes in that -- the refusal to comment, or commenting off the record. So I guess it happened, and maybe it proved to be for the better. Have you changed at all, or do you basically feel like you're sort of the same person now that you were five years ago? We all change. We all learn from experiences, good or bad, and we will all change as a result. Every day you make good decisions and bad decisions. The trick is making sure you make more good ones than bad ones. Everyone makes mistakes, Alex. Do you feel like you are treating people differently than you used to? No. [Laughs]. OK, that's fair. I know your mantra at S4 is faster, better, cheaper. You emphasize your company's focus on data and technology. I spoke to your buddy Mark Read (current WPP CEO, who replaced Sorrell) a couple of weeks ago. He said the same thing to me, that he's focusing on data and technology. So, I'm curious, what is it about S4 that will position itself differently and do something differently from these other firms that are also saying they focus on the same thing now? They didn't used to, but now they are. Very simple answer: results. Maybe I should modify and say results and share price performance. Why is it that WPP's market value is halved in the last two years? Well, one argument is that their structure no longer makes any sense. It could be the way that that structure is run. There's a lot of commentary about simplifying. Simplification is the hobgoblin of small minds. And if you manage a company, particularly a people business, it's going to be complicated. It's going to be messy. You can't simplify it. Let me give you an example. If you slam two businesses together, and you don't plan it properly, or you do it quickly and not over a period of time, you're going to have significant breakage of people and breakage of clients as a result. It's very difficult. These are people businesses, which are very fragile. And even if it is, what's the way you do it? So, for example, if you have a traditional asset, and you introduce a digital asset to it, and you say to the digital management, I'm going to put you in charge and rebrand that company with the digital name first and the traditional name last -- even if the traditional one is more famous -- you are asking for a bit of trouble, certainly short term to medium term. Coming to instant decisions and making instant simplified decisions may simply end in friction and problems. Life is more complicated than that. If it was as simple as the simplifier suggests, everybody would do it. It isn't. It's about the detail. It's also about the level of overhead. We call them CBOs -- the chief breakfast officers. A lot of these companies have a lot of people at the center who move...well, they don't move pieces of paper anymore. They move emails around. And there's a lot of structure at the center precisely at the time wen that's the last thing you need. You have a history of growing through acquisition both at WPP and at S4. I'm curious, what is next? We call them mergers. We think that integration is key. So, for example, we have two main practices: one around content, Mediamonks, and one around data, analytics and digital media -- MightyHive. We've added seven units to content, we've added seven units to data. We've integrated them fully around the Mediamonks brand and the MightyHive brand. Now we're bringing those two brands together in a unified way because we think the unitary structure is absolutely key. Just to be sure that I understand -- when you say content, is that just another word for creative or is there something more to that? It's the creation, production and distribution of content. Do you feel like you need to merge more globally, or is the play now to buy something larger in a country you're already in? Maybe the US? As we go into 2021, which we think is going to be very strong year because GDP -- look at the Goldman forecast, look at the OECD forecasts. They're talking about a 6% or 7% percent jump with the world economy, 5% or 6% in the U.S. So that that is huge, obviously driven by the collapse or the same figure downwards in 2020. At a macro level, will have the Tokyo Olympics and will have the European Cup next year instead of this year when they were postponed. So it'll be strong. At a micro level, we're coming off the back of a very significant win (BMW), and we think there is more in the hopper before the end of the year. So the priorities for us for next year will be firstly organic growth. We've set this target of 20 squared -- 20 x 20 -- that's 20 clients generating more than 20 million dollars of revenue. We have three at the moment, including BMW. We think we will have two more by the end of the year. So we'll go in to next year with five whoppers, as we call them, of these 20 squared clients. And so the priority is on integrating that growth and organizing that growth, because BMW, on its own, is 10 percent of our revenues -- basically a European piece of business around BMW Mini. So, it'll be integration and focusing on organic growth. Then, secondly, mergers. Thirdly, integrating the company. So those are the three priorities for 2020. We're going into our planning process now for budgeting for next year and updating our three-year plan. For 2019 to 2021, we said we double the size of the company. And I think for 2021 to 2023, we will again double the size of the company over three years, organically excluding mergers or deals. We see the US House Antitrust Subcommittee preparing something we think about Google's search dominance. They're also looking at Facebook, they had Mark Zuckerberg testify. Do you feel like there should be some sort of regulation that curbs Facebook and Google's dominance over digital advertising? No. Facebook is not a trillion dollar company yet, it may become so. Google is a trillion dollar company. I think all those companies, I think they tend to get an unfair rap, obviously because of their size and their dominance. They are strong companies. When you get to a trillion dollars, obviously you draw a lot of attention. But I think also these companies are exercising more responsibility. With power comes responsibility. I don't think GDPR, which is a good example of regulation here in Europe, in the EU, achieved anything other than making those companies more powerful because the small and medium-sized companies who are disadvantaged by the the growth of the bureaucracy -- it was the law of unintended consequences. They lost out, and they said, 'we're not going to come to Europe, we're not going to compete because it's too expensive to do it.' So I think you have to be very careful. And by the way, if you just split these companies up, I don't think it would make that much difference. [NYU professor] Scott Galloway -- and he's in favor of splitting up the four horseman, as he calls them -- he says if you split up AWS from Amazon, AWS would quickly become bigger than Amazon. So, you know, look at Jack Ma. Jack Ma has three companies. He has the platform, Alibaba, he has Ant Financial, which is now floated off, and he has the logistics platform. So he had three businesses and they were not combined is one. I don't think you get much from doing it. I would say this: Facebook, for example, and Google... Google has stopped political advertising, Facebook will stop it in front of the election. They have 35,000 people looking at the editorial. They've changed the algorithm. They've stopped extreme groups like the Boogaloo group. They don't get credit for that. Maybe it just goes with the territory. But, the WFA [World Federation of Advertisers], I saw they'd negotiated with Facebook and Twitter an agreement in relation to the monitoring of standards and the monitoring of content. I haven't seen the detail on that. But that's the way to do it. You know, I think what you do is you go to these platforms and you say, this is what I'm worried about. I don't think doing these these boycotts really achieve much. It's a bit like dealing with the Chinese. You don't slap them in the face in public. What you do is you talk to them privately. You take them through what your beefs are, what your concerns are, and try and negotiate. And what if they don't respond in the way that you want them to respond? Well, you don't have to do it publicly. I don't have to ring up Alex and tell him I'm about to boycott Facebook and cause a brouhaha. I don't think that achieves much. You always have the right to withdraw your trade if you are unhappy. Clients have the right to do that. But I think the argument there, at least in terms of small and medium sized businesses, is they feel like they can't. They feel like their business is too tied to Facebook. But I have to disagree with that, Alex. That is a complete, if I can say so, misunderstanding. Google, Facebook, and Amazon derive 60% to 70%, at least, of their advertising revenues from small and medium-sized businesses. If you listen to Jack Ma on Alibaba, what does he say? He says Alibaba is the engine for growth of small businesses. Who delivers employment and employment prospects in the economy in spades? Small and medium-sized businesses. These platforms give small and medium-sized businesses the opportunity to expand. Many of these companies can't afford television advertising. This is a platform that enables them. It may not be perfect, but it gives them the opportunity to expand their business and grow their business in a way that they could never conceive of before. And so I totally disagree with that. Wait, aren't you agreeing with me, though? Because I think their argument is that Facebook is their business. Like, 'we can't be boycotting Facebook. We need Facebook! So, we don't have a card to play here if we disagree with how their doing business.' I thought you were saying or implying that there was something unfair that Facebook or Google did. No, I just think that the argument for them is these platforms have so much power now because we all need them so much that we don't really have any leverage here. Well, then I'm not agreeing with you, because I think they do have leverage because they are so important in the context of these platforms -- the small size businesses. That's the leverage that Facebook and Google have from a public policy standpoint. You're saying that if they all ganged up together, it would be enough that they could make a difference now? Yeah. And also, these platforms give small and medium-sized businesses a window on the commercial world that they never had before. And, by the way, I think one of the mistakes that the platforms made was not stressing that enough. If Google and Facebook and Amazon came out and said, look, we are ... just like Jack Ma. I remember I was in Nigeria, in Lagos, and I went there just after Jack Ma had been there, and I saw a tape of his conference, and he just banged the drum continuously about how important Alibaba was to the small businessman, not only in China, but ultimately outside China, too. That Alibaba would enable the small and medium sized business to expand in China, which is a massive market, the second biggest in the world, and beyond, as Alibaba extended its influence beyond China. Let's talk about the traditional media company. There are parallels between S4 and WPP with what's going on broadly. You've got these companies like WarnerMedia, NBCUniversal, ViacomCBS, all trying to alter their legacy businesses on the fly to compete with these newer companies that are focused more on the way people are consuming entertainment now. What do you think are the fates of these traditional companies that are trying to do this? Will it be successful? Can they survive? Well, they're up against it. If you look at the newspaper and magazine companies, particularly those that continue to reduce the paper versions. If you think about the process, you're cutting down trees and you're distributing newsprint -- neither economically viable nor environmentally intelligent either. It's the old way of doing things. You look at media consumption. For example, this week in the U.K., I think I saw an article which said streamers now are watching more than free-to-air TV. So the number of hours that consumers are spending on streaming devices is greater than free to air television. So the odds are stacked against you. If you're just like the traditional advertising holding companies, the odds are stacked a bit against them -- like the banks after the great financial crisis. There's a good bank and there's a bad one. So there are good media properties and bad media ones. Now, even Rupert Murdoch is taking this action in relation to the platforms -- trying to get to charge them for for editorial content. So the answer to your question is that it's extremely difficult to pivot an analog company into a digital company. It's much easier to start with a clean sheet of paper than it is to go in with a book. So if that's the case, what happens? These are large companies. Well, they have to morph. I mean, after all, this is all consumer-led at the end of the day. And that's what the problem with regulation is. You can be like King Canute and believe you can push back the waves, but by regulation. But, it's very difficult to go against it. So I think you have to do two things. And what we tried to do when I was at WPP. When I left, I think it was something like 40% of the business was digital. Obviously it's very difficult to distinguish between analog and digital, particularly as they get mixed up. But that's what we're doing. So we went from zero, let's say, at the beginning of the millennium to 40%. It's a slow process. The problem is the market is moving at a faster rate, and that's what makes it exceptionally difficult. So you have these old assets that you have to morph or get rid of. Take the hit. And you have these new assets that use some of the some of the IP of the old assets, but in a new way. It's very, very difficult. And the market, of course, the stock market is very impatient. What the stock market looks for, the prime driver, is growth. And this is the difference between the Saatchi and WPP models that I'm well aware of, because I worked with both, and the S4 model. The S4 model is a growth model. You know, when I left WPP, I said what are the areas of growth? They were in first-party data, digital advertising, and they were in analytics and programmatic. I said, 'let's focus on those.' Let's focus on where the growth is -- pushing on an open door, not pushing on a closed door, because the market rewards top line growth with margin. Let's talk about TikTok, the topic du jour these days. Do you have an opinion on what's happening? Is this is this fair or is this right? Well, listen, I don't know whether TikTok or Huawei is an engine of the Chinese government or not. I'm not the best person to ask ask about that. TikTok is very interesting. This is the only platform that has really challenged the five -- Google, Facebook, Amazon, Tencent and Alibaba. TikTok is supposedly at $7 billion of ad revenues. Google is about $165 billion, Facebook's about $65 billion, Amazon is about $15 to $20 billion, Alibaba an Tencent are in China, and TikTok is in China. In fact, Kevin Mayer was there to try to build advertising revenue outside of China. So I don't know the answer as to whether the political fears that the Americans have are justified or not. All I know is it is making it extremely difficult to run a global business when you have the two biggest economies in the world fighting one another. And we effectively -- I know President Xi said at the UN General Assembly that he doesn't want to have a Cold War with anybody, but effectively, we have a Cold War. And it's growing in its intensity. We have sanctions against people, we have sanctions against companies. And we'll have to see whether the Chinese retaliate in relation to TikTok and Huawei or whether a deal can be sorted out with TikTok. It is not good for globalization. It is not good for the world economy. It is not good for free trade. And if you're trying to run a company, as we are where we're trying to build a business globally, it makes it much more complicated. I think we'll end up with two systems, at least. I was looking at an article on Yandex and the bank they're bidding for in Russia, which implies we'll have a third system. We'll have a Russian technology system, we'll have a Chinese technology system, and we'll have an American one. And that fragmentation means that it's going to be much more complicated. How does an American company operate in China if the two governments are increasingly -- and I don't think it's going to change very much, even if Biden was to be the US president. I think what we're seeing in the election is that the analysts think that taking an aggressive position against China is a vote winner, whether you're a Republican or whether you're a Democrat. Now whether that translates into the same policy if Biden was the president, I don't know. I think Biden would tend to be more multilateral in his approach -- that he would try and secure the help of the Germans or the French or the Italians or the Spaniards or the British to align to put pressure on China. Maybe that will be the difference rather than the unilateral approach that we see with President Trump. I don't know. I'm not well enough informed to know whether that's the case. At Davos this year, earlier in the year --- there was nothing about pandemics, by the way -- but all the press was about climate change. Actually, at the event, it wasn't about climate change. That was the external conversation. The private conversation was worry about China. You know, how do we get some rapprochement? Because the Chinese are not going to go away. It's the second largest economy. It may become the biggest economy. It will grow this year. It will grow by 1% this year, according to the stats, and next year it will have a very strong year. I was talking to one client today. They have business in China. It is going through the roof. True luxury, but going through the roof. So the Chinese economy is recovering. They were first in and maybe the first out. One more question about TikTok. Are you guys doing any particularly interesting campaigns with them that stand out to you? Yes. I wouldn't say they're a major, but they've become a force. And we're really interested, obviously, in what happens. If the deal can be worked out, we will be further interested. Obviously if the deal can't be worked out, it will become a China-only platform. You're seventy five years old. Obviously, you just started a new company. So you're not going anywhere, presumably. But is your plan to work indefinitely? Until I drop. As my son said, I will be found in seat 1A., A lthough maybe not anymore with the pandemic. Maybe you'll decide you want to curb your travel budget. Yeah, I'll just keel over at home.