Is Creative Destruction being stifled by risk aversion?

businessman smashing through a wall

creative destruction

In his 1942 work, Capitalism, Socialism and Democracy, the economist Joseph Schumpeter introduced the idea of Creative Destruction as an essential ingredient for sustaining long-term economic growth.

In a nutshell, it is the entrepreneur and his or her innovation that acts as a brake on, or actually destroys, established companies, thus protecting an economy’s health by allowing new companies and ideas to rise.

Schumpeter’s thesis was that while healthy capitalism is about constant change, inevitably the drive for maximum productive performance, if successful, will tend to kill competition and thus the system contains the seeds of its own destruction. Therefore, the entrepreneur and innovation are essential to capitalism’s healthy survival.

Managing capitalism in a global marketplace

Over time, ever since the Great Depression of the 1930s both political action and economic theory, have been evolving, prompted in part by the distressing consequences to many individuals when things “go wrong” in countries’ economies.

So, for example, Keynes’ solution to the Depression was that governments should step in with deficit financing, stimulating projects that could be started quickly to provide people with work and pay, which would stimulate economic activity and be paid off by increased tax payments. Equally governments, such as in the US, moved to regulate excessive risk-taking and speculation in the financial sectors to prevent a recurrence.

Gradually Governments took more responsibility for people’s welfare, in health, education and for stimulating employment. This has contributed to a shift in the balance of power from the employer to the worker.

A failure to manage the resulting imbalances and the consequences for national economies eventually led to disenchantment with the mixed economy and a return to completely unregulated free market capitalism, aka Neoliberalism, as promoted by Margaret Thatcher in the UK and by Ronald Reagan in the US.

After the 2008 Financial crash and the difficulty countries have had in recovering the question in the mature economies of the 21st Century, therefore, is what place capitalism has in our current and future society, especially in a now-global marketplace.

The businessman is no longer an entrepreneur or hero

Businesses constantly complain about the time absorbed and constraints imposed by “Government red tape”.  But we would argue regulation has moved further from things like Health and Safety regulation and employment protection into trying to regulate in a way that prevents risk.

Consequently, businesses are focusing on dealing with red tape and bureaucracy rather than on doing things, or getting out and selling. Dealing with red tape is disproportionately expensive in time and money for the SME compared with the larger companies and therefore inhibits their capacity for growth. Even in the larger companies there has been a rise in the professional manager whose chief aim is to look for safe returns and short term decision-making that protects her/his bonus and job. There is a lot of dysfunctional activity going on but not the kind that encourages risk taking.

Is state legislation helping businesses or compounding this problem?

It is only human to want to prevent further toxic economic shocks to people’s economic stability and wellbeing but if Schumpeter is right unless the correct balance is stuck it could well lead to the demise of capitalism.

It might be an unpalatable fact but knowledge is best gained by experimenting and learning from failure. The quicker and more failure, the quicker and greater success.

BCC Annual Conference 2017 to ponder the future for UK business

speaker at conferenceThe pre-Brexit challenges facing UK SMEs, which predominantly focused on uncertainty about their future, have been compounded by further uncertainty about their future once the country has left the EU.

No business is happy with uncertainty when it needs to make decisions about investment, growth and employment. But that, unfortunately, is the current situation and likely to remain so for some time yet.

Businesses face the challenge of making decisions about where their future markets are likely to be and whether they should invest in growth or not. Another worry is not knowing what the terms of any deals might be in the future and how this might affect arrangements already made.

So, at the moment, many UK businesses are stuck in a spiral of genteel decline; they are making profits but not investing in their future, neither in people nor in equipment, new markets nor product development.

Already, employers are struggling to recruit the people they need, according to a survey of 1000 employers, released last week by the Chartered Institute of Personnel Development and the Adecco Group. The numbers of EU nationals coming into the country to work has been slowing and employers fear that some existing EU employees are considering returning to their home countries or working elsewhere.  Manufacturing, healthcare, retail and hospitality have been among the worst hit, the survey found.

Without investment in the latest technology and in research and development the danger is that UK businesses will lose their competitive edge in fields where they are currently leading.

What businesses will want to hear

The British Chambers of Commerce (BCC) annual conference is at the QEII Conference Centre in Westminster on February 28 and there are three topics for debate. These are:

  • Growing Business in the Regions and Nations
  • Brexit: Turning Uncertainty into Opportunity
  • Keeping the UK Competitive – vision 2030

While businesses from SMEs to larger corporates will be keen to hear more on the priorities in the Brexit negotiations, given that the deadline for triggering Article 50 is not until the end of March there is unlikely to be much information on this.

The chronic and long-standing imbalance between London and the rest of the country is also likely to be a significant concern to the BCC membership, who are present in every county throughout the country, and they will want reassurance from BCC National that their concerns will be represented and their voices heard.

Skills shortages, training, and perhaps what will happen about business’ ability to recruit from within the EU and elsewhere may well be high on the wish list as part of the discussion in the final debate of the afternoon on UK competitiveness.

Disaster recovery – does your SME have a business continuity plan?

diaster and contingency planning diagramVery often when a small business is bidding for new business with a larger client it will be faced with answering a long list of compliance related questions before the SME can become an approved supplier.

Answering all these questions is usually a condition of the SME being eligible to bid for the work, even though many of the provisions covered may not be legally required. Sometimes, also, the compliance list forms part of the larger contractor’s Corporate Social Responsibility (CSR) strategy.

Much of this is about offloading responsibility and liability when something goes wrong but it is also perfectly reasonable for companies to want to preserve their own business continuity and this is, or should be, as important to the SME as to a larger company.

It is important to consider what you would do if…..

So much of business now relies on technology in one form or another that it makes sense to have a fall-back position to cover a variety of IT-related issues.

There are plenty of advisory services and example templates available to help with compiling a proper Disaster Recovery Plan (DCR) or Business Continuity Plan (BCP) but many of them are either expensive or needlessly complicated.

The origin of such plans relates to situations where there is either a loss of communication, such as emails or voice, or a loss or the corruption of critical information, such as data. The aim of such plans is to ensure there are provisions in place that minimise disruption and ensure operations can continue until a problem has been resolved or data recovered.

So, the essential elements to cover are to define all the situations that can potentially break down, define a clear set of actions for resolving them, to identify the relevant people to be contacted and who is responsible for overseeing the actions, as well as the people who will be responsible for fixing the problem, and to set a time frame within which the situation should be resolved. Contingency fall-backs for each situation are also crucial.

So, for example, if access to data is unavailable for any reason, the fall-back provisions would include a back-up file, such as an external hard drive, cloud storage, or even physical, paper records that have been kept up to date.

If there has been damage to the business’ physical premises and perhaps IT hardware, the plan should include a key person to inform clients, suppliers and employees of the alternative arrangements in place, such as employees working from home and relevant contact details.  Contingencies or fall-backs for such a situation would also be having laptops available already set up for company use with the information that employees would need to be able to carry on with their work from another location.

Having business continuity or disaster recovery plans in place is not only about complying with “tick box” conditions when a SME is bidding for a contract, they are a sensible precaution that enables the SME to carry on operating whatever happens as well as providing a useful training exercise so that employees are informed and understand their roles and responsibilities in the overall structure of the business.

What are the threats to UK farming in a post-Brexit world?

tractor and seed drill on field at sunsetThe UK farming industry uses 70% of the land in the UK and its efforts make the country 76% self-sufficient in home grown food.

It employs an estimated 400,000 people and the total income from farming in 2015 (the most recent figures available) was £3,769 million, contributing around £10.7 billion to the UK economy.

As a business farming cannot be short term and many decisions are made looking five years ahead.

But farming as a business is not now and never has been easy because of the many pressures farmers face, both natural and man-made. It is weather-dependent, with seasonal peaks and troughs and at the same time subject to well-known pricing pressures from the food producers and the large food retailers further up the supply chain.

There is no doubt that the UK’s decision to leave the EU is likely to have a significant impact on farming as a business.

Firstly, UK farmers have been used to a subsidy under the Common Agricultural Policy (CAP) that contributes an estimated 55% of farmers’ incomes, a total of £3 billion in 2015, according to data published in the Financial Times in late 2016.

While the Chancellor has said that the Treasury would replace any shortfall in EU funding to farmers that might arise between now and the end of the decade, there has been no word on what would happen after 2020.

This leads to a second threat, which is the pressures that farming faces from competitors both in and outside the EU after Brexit. There has been press commentary on a US trade deal that will expose UK to the lower standards for US farm products that allow hormone-treated animals and GM crops while European farming will presumably remain heavily subsidised giving it a competitive advantage over the UK.

Thirdly, many farming sectors rely heavily on seasonal labour for harvesting fruit and vegetables and in the Eastern Region, for example, labour from the EU has been crucial for the crop picking and packing period. Given that one of the primary issues on the minds of both those who voted to leave the EU and on the Government has been numbers of immigrants in the UK and in the absence of sufficient numbers of UK workers, the prospects of losing access to those workers is a major concern for farmers.

A final pressure that has been a well-rehearsed bone of contention for a number of years but has been given added impact by the devaluation of £Sterling since the referendum. With large retailers already passing on higher prices to shoppers from imported foods, the likelihood is that they will use their buying power to continue to squeeze farmers in order to keep their prices as low as possible.

Given all these pressures the challenges to the viability of UK farming are considerable.

Corporate Social Responsibility can boost your business

Corporate Social Responsibility and profitabilityThere are numerous definitions of Corporate Social Responsibility (CSR) and increasingly it is something that businesses from SMEs to large corporates cannot afford to ignore.

Generally, CSR is seen as something that will benefit a business’ reputation if it has clear policies about its efforts to reduce its impact on the environment, to contribute to the local community where it operates, to do its bit for charity and to have an ethical employment policy.

The CSR emphasis tends to be on “green” and charitable initiatives, but it is obviously not enough to set up policies, it should also act on them and publish its results. Essentially CSR is about doing business in a way that is sustainable for itself, the community and the wider environment.

How far should a business go and can CSR improve profitability?

There is an argument that encouraging every single employee to participate in a business CSR can also have an impact on their behaviour outside of the work place.  If, for example, the business makes every effort to minimise packaging and to recycle everything it can and makes it easy by placing recycling bins where employees can easily use them, the argument is that they will consider using the same practices at home.

Similarly, challenging suppliers to operate in a sustainable way will reinforce sustainable activities not only for them but also for the business that is using them. This is where SMEs often need a CSR Policy since larger clients often require their suppliers to have one.

The effects on profitability may be harder to quantify, but as customers become more selective and concerned about the ethics of the businesses from which they buy, there is likely to be an advantage to the business in terms of a better reputation and increases in orders and sales. Indeed not having a CSR policy may be a bar to becoming a supplier to some corporate clients.

At the moment, businesses are operating in a very uncertain economic world thanks to the decision of the UK to leave the EU, the time negotiations are expected to take and the volatility of £Sterling which is affecting both import and export prices.

Signs of a more protectionist and anti-global mood in the US and some European countries are also making business conditions more difficult.

So, anything that can help a business to reduce its costs is likely to be welcome and therefore CSR environmental initiatives, such as reducing waste and excess packaging, switching to energy-efficient forms of heating, or switching to more fuel-efficient delivery routes can also have an impact on reducing business overheads and improving both efficiency and profitability.

CSR is more than simply an exercise in improving business reputation.  It can have real, tangible benefits.

One of the three themes in the Government’s Green Paper on corporate governance is to investigate ways of strengthening the voices of employees, customers and suppliers at board level. The consultation period for this ends on 17th February.

Depending on the measures subsequently introduced on this it is possible that a company’s commitment to CSR may become even more important.

There are still more questions than answers on Brexit for UK SMEs

businessman on uncertain road aheadThe Supreme Court ruling against the Government that meant Parliament had to be allowed to vote on both triggering the process has at least moved things forward a little.

Last week saw a majority of MPs voting to support triggering Article 50, the formal start of the process of the UK’s leaving the EU. There are hundreds of amendments proposed at Committee stage but it is likely that the legislation will be passed by mid-February and the process begun by the end of March.

Thursday also saw the publication of a white paper outlining the main points of what the Government proposes to negotiate.

But negotiation will still be a lengthy process, an arguably optimistic minimum of two years, and that means considerable continued uncertainty for UK businesses of all sizes, from SMEs to the larger corporate sector.

What have we learned from the White Paper?

There will have to be several separate pieces of UK legislation in addition to the formally negotiated treaty detailing the relationship between the UK and EU for trading relations.

These will include a Great Repeal Bill to transfer current UK-adopted EU legislation on such things as workers’ protection and rights into UK law. So for UK SMEs no changes to current employment law, for the moment at least.

Similarly, there will have to be legislation on immigration and on customs arrangements.

The White paper also states that “there may be a phased process of implementation”, to give companies and individuals time to plan and prepare”.

In other developments

This can only be a snapshot in an unpredictable situation but in the last week the Bank of England has revised its prediction for UK growth in 2017 up slightly to 2% while the National Institute for Economic and Social Research (NIESR) puts its forecast figure at 1.7%.

Inflation has started to kick in. Manufacturing input costs as measured monthly by the Markit/CIPS Purchasing Managers’ Index showed the biggest increase in January to manufacturing input costs since records began in 1992 – up by 12% at 55.9, well above the 50 benchmark that separates growth from contraction. This has forced manufacturers to increase prices significantly and will impact on UK SME’s purchasing costs.

In the meantime, there have been a couple of encouraging developments that might help businesses to make their case more forcefully as the Brexit negotiations get under way.

Firstly, during the Article 50 Second Reading debate former Chancellor George Osborne criticised the Government for putting more emphasis on immigration than on the needs of business.

Secondly, it is a positive sign that, given the numbers of EU workers on whom UK SMEs depend in the face of a skills shortage, the All-Parliamentary Party Group (APPG) for Migration has launched an official inquiry to investigate immigration “with a focus on the concerns of small and medium-sized enterprises”.

And finally, a comment piece in the Independent by James Moore argued that “the only people who can take the Government to task over Brexit are the business lobby”. He argued that businesses need to make the case forcefully and repeatedly “that the Government’s current approach to it will destroy jobs, harm the UK’s economic prospects and make everyone poorer” and to push hard for the “least worst option” in the negotiations.

Clearly, there is a long way to go before there is clarity for UK SMEs but there are at least some voices pushing the business case to the Government.

What next for business insolvencies in 2017

solvent or insolventCompany insolvencies for the whole of 2016 rose slightly, subject to a caveat from the Insolvency Service.

The latest results, published on Friday, 27th January, showed an annual increase of 12.6% on the year before, but the service said that this was “due to 1,796 connected personal service companies (PSCs) entering creditors’ voluntary liquidation (CVL) in Q4 following changes to claimable expense rules.”

Excluding these actually meant that insolvencies for 2016 had risen by 0.3% compared to 2015. The rise was driven by a rise of 1.1% in CVLs and a 0.7% rise in compulsory liquidations. All other types of insolvencies fell.

What was the problem with payment via PSCs?

It was estimated that the Government was losing around £400m of tax revenue because of the PSC set-up governing expense rules for freelancers and contractors.

The regulations were changed in the Spring 2016 Budget to eliminate a loophole in the HMRC IR35 provisions that enabled such workers to take their payments as dividends and a minimum wage from specially set up personal service companies thus enabling them to minimise their tax payments.

It was a system widely used by everyone from entertainers, IT contractors and public sector employees.  The government argued that they were not contractors at all but “disguised employees”.

The most vulnerable sectors in the UK economy and the outlook for 2017

Sector breakdowns for insolvencies published by the Insolvency Service lag behind by one quarter so the most recently available information is up to the end of Q3, September 2016.

In the 12 months to the end of Q3 2016 the construction sector suffered the highest number of new insolvencies, although the figure was down slightly at 0.05% on the 12 months ending in Q2 (June 2016). Next highest was wholesale and retail trade & repair of motor vehicles and motorcycles sector.

These, together with administrative and support service activities, accommodation and food service activities and manufacturing remain the most vulnerable sectors of the UK economy.

This week, business recovery practice, Begbies Traynor’s latest Red Flag research revealed that more than 275,000 companies were showing signs of “significant” financial distress at the end of last year.  In the final quarter of 2016 it found 276,518 businesses were experiencing ‘significant’ financial distress – that’s up 3% compared with the same time in 2015 and of these 91% were SMEs, almost a quarter of them in London.

There are signs that the volatility of £sterling and its effects on import prices for food, oil and raw materials are already stoking up inflation with no likelihood of any reduction in pressure on prices while Brexit uncertainty is ongoing and the likelihood is that there will continue to be an increase in insolvencies in throughout 2017.

Are CEOs worth their pay?

man contemplating moneyRising inequality and increasingly insecure employment in the 21stCentury has focused attention on what has come to be seen as a disproportionate level of CEO pay in many companies.

Recently the world’s largest fund manager, BlackRock, added its voice to the debate warning the chairs of the UK’s biggest companies to stop making large payments to CEOs when they leave and in lieu of pensions and said it would only approve directors’ pay increases if employee wages were also increased.

The question focuses attention on how CEO remuneration is assessed, by whom and over how long a period should their performance be measured.

It is no longer deemed good enough to justify CEO rewards by the need to pay competitively against their peers in order to retain them. Short-term thinking in providing high returns to investors and shareholders as a measure of a CEO’s effectiveness has also come under increasing scrutiny as such returns may not be in the best interests of a company’s longevity.

What skills does a good CEO need?

The effective CEO must be able to think strategically in the short, medium and longer term interests of the business they are leading and identify achievable goals.  They must be able to communicate, motivate and delegate to people effectively.

Giving and receiving feedback to and from all levels of the organisation will help them to really know what is going on, not only about productivity and profitability, but also to understand their staff and in particular motivation and morale, which may be crucial to business success.

In a fast-moving economic world, the CEO must also be flexible and agile, knowing when they need to learn and willing to do so. Complacency is not an option. Critical thinking is crucial.

Interestingly, in 2015, when PwC asked CEOs about the capabilities they felt were important a significant number mentioned humility, the ability to maintain a modest opinion of their own importance and capabilities which seems to be forgotten when it comes to pay levels.

How should CEO pay be decided and by whom?

Generally, in large companies the board of directors will approve CEO remuneration annually, often based on assessment by the company’s remuneration committee. The board’s recommendations will usually then be approved at the company’s AGM, or not, given the growing prevalence of shareholder rebellions.

A major difficulty is that any assessment will be largely results-based.  Have profits increased significantly or in line with a stated target? Have the goals for the year been achieved? What is the level of dividend payable to shareholders and how has it changed since the previous assessment?

But this is a largely top-down approach that can lead to a very short term view and includes no consideration of views, conditions and remuneration of employees, seeing them largely as a cost that should be kept under control rather than as active contributors to the health and longevity of the business.

These are all issues that are being examined in the Government’s Green Paper on Corporate Governance published in November 2016. It has arguably been prompted by the disaffection of those large numbers of people characterised as “the left behind” or “just about managing” that led to the majority vote for Brexit. There is still time to contribute to the consultation for which the deadline is 17th February.

Why is HS2 important to UK freight transport infrastructure?

rail transport for container freightAs legislation reaches the final hurdles for the new rail line HS2 to be approved we look more closely at the supposed benefits.

The Bill reached the Report stage in the House of Lords on Tuesday, January 24, with a number of concerns being raised about the effect on local roads and communities during its construction, among them the potential for increased road traffic because of the need to transport waste material away from the sites.

This raises the question of what might be the actual benefits for freight transport of the new line.

The economic arguments or the benefits for businesses in the West, and eventually East Midlands in being better connected to the South have been well rehearsed during the interminable consultation process.

Once the legislation is passed there will still be a long way to go, with phase 1 (Birmingham, West Midlands) expected to be completed in around 2026 and phase 2 (extension to Manchester and Leeds) expected to open in 2032-33.

The new high speed line may eventually reduce passenger journey times somewhat and increase the passenger transport capacity. The Department for Transport has argued that once complete there will be almost 15,000 seats an hour on trains between London and the cities of Birmingham, Manchester and Leeds – treble the current capacity.

However, crucially in our view, not much has been said about the importance of additional freight transport on the line. Arguably this is more important to the UK economy especially if we are to increase productivity and output.

Environmental and capacity benefits of UK freight transport

Moving goods and materials by road is less efficient and more costly than by rail.

UK roads are near capacity and choked with HGVs at some times of the day, particularly during peak commuting times. It only takes a couple of accidents or breakdowns for a region’s main road arteries to be brought to a slow crawl or even to a standstill.  This adds to the costs for businesses relying on deliveries within specified times, with knock-on effects if it delays orders to their customers.

Shifting container transportation to the rail network would allow far more goods to be efficiently shifted over long distances than can be managed by road, with the added benefits of a cleaner environment by reducing fuel emissions from lorries.

However, there are concerns about whether the plans for the new HS2 rail lines have additional freight capacity built into the equation.

Last November, Chris MacRae, the Freight Transport Association’s Head of Rail Policy, said: “There is no mechanism in place to guarantee additional capacity released by HS2 is available for freight.”

He argued that adding additional passenger services could be counter-productive and squeeze the capacity for freight transport on the lines. The FTA argues that freight will only benefit from rail capacity released by HS2 if the Government ensures it doesn’t have to compete with passenger operators through the existing train path bidding process.

UK Businesses will need every bit of help they can get if they are to compete effectively in a post-Brexit and increasingly protectionist global market and this should include a more efficient, more cost effective and faster freight transport system.

How long will it take to achieve a properly skilled UK workforce?

working with engineering apprenticesThe UK’s skills shortages in key sectors like engineering, construction and technology are well known and becoming more pressing in the context of imminent Brexit with its likely impact on the ability to recruit skilled workers both from within and outside the EU.

This weekend it was announced that technology investor Sherry Coutu is launching a new app to link schoolchildren with local employers — in an effort to tackle the skills crisis that is holding growing companies back.

Around 15,000 fast-growing businesses and 500 students are believed to have already signed up to the free service, named Workfinder, which will help schoolchildren to find work experience and to apply for apprenticeships.

Sherry Coutu is the co-founder of the Scale-Up Institute, chair of the Financial Strategy Advisory Group for the University of Cambridge and Founders4Schools, and is a non-executive director for the London Stock Exchange Group and Zoopla.

To be fair, the UK Government has also produced initiatives, firstly setting a target of achieving three million new apprenticeships by 2020, to be paid for by a levy on businesses with a payroll of more than £3 million starting from April 2017.

On Monday, the Prime Minister also launched a consultation, in the form of a Green Paper, marking a proposed new industrial strategy of Government intervention to provide regionally-targeted support for innovation and skills development through high-quality practical skills training relevant to local business needs. Businesses will be consulted on the proposals and the deadline for responses is April 17.

For a properly skilled UK workforce businesses need to get involved

Upskilling to a properly skilled UK workforce will not happen overnight and it needs real, practical, positive contributions from businesses, as well as Government. This highlights a major reason for the lack of skills, businesses expecting to recruit fully trained employees, although they may have a point.

Take this example from London, where a survey from the London Chamber of Commerce and Industry (LCCI) revealed that more than a third of London businesses cited the cost, an estimated £15,000 to £24,000 per year, as a disincentive to taking on apprentices, nor had the HR capacity to handle them.

There is also plenty of anecdotal local evidence of the difficulties young people have each year in finding work experience placements.

As automation eliminates more and more blue collar jobs, increasing the need for more highly-skilled workers, we would argue that sitting back and waiting for “someone else” to do something is no longer good enough.

While it is undeniable that businesses cannot grow if they cannot find the skilled people they need, consultations take time the UK doesn’t have.  Businesses can speed things up by being pro-active in encouraging and enthusing young people via work experience and by offering good-quality training now.

And Government needs to play its part by providing appropriate incentives and support as well as understanding that their imposition of a minimum wage promotes automation. We voted for them.