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

More Questions K2 Partners Business Blog

The 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?

Skilled Workers K2 Partners Business Blog

The 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.

Employee productivity and how it is changing

Breaking the wall K2 Partners Business Blog

The standard definition of productivity for a business is “A measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs.”

It is usually calculated by dividing the output for defined periods by the total costs (capital, energy, material, personnel).

That has served well for businesses involved in manufacture of a defined product and, to an extent, for those in the service sector.

The productivity calculation is changing thanks to technology

While it was straightforward to assign a value to the inputs of labour when production relied on people doing the work the equation needs to be adjusted with the increasing use of automation for all or part of the manufacturing process.

While capital, energy and material may still have a quantifiable cost that can be measured the role of personnel changes significantly.

While, of course, efficiency and optimising output are still essential to maximising productivity, how does labour fit into the calculation, when human beings are no longer performing those repetitive tasks on the production line?

The manufacturing model is changing where by the traditional manual role has largely been replaced by the management of equipment and systems.  This may involve programming equipment to set up the process, monitoring it while running and intervening only when something is wrong or in the event of a breakdown.

The new manufacturing roles require technical knowledge, materials management skills, quality control, administration and planning production. The blue collar worker is now a skilled and often highly trained engineer who no longer needs supervising by a traditional manager.

Even such basic jobs as road sweeping are no longer about a person with a sweeping brush and dustcart. They are now more likely to involve someone operating a mechanised sweeper, which may need more training and skill. Modern tractors and farm equipment take technology to a new level.

While automation can eliminate back-breaking labour and improve productivity in manufacturing, it still needs people with the training and knowledge to operate machines, maintain and fix them and to understand how to get the best performance out of them.

This may result in the need for fewer employees in a business, but with a higher level of skill and education and therefore higher levels of pay. A consequence is less need for middle management.

Therefore, when calculating business productivity where automation is playing a part, the costs of the various inputs, including personnel, and their relative importance will need to be rebalanced.

SMEs – don’t be caught out by April’s Road Tax changes

Road Tax April 2017 K2 Partners Business Blog

The Treasury is looking for ways to significantly increase taxes and one recent initiative was to change the duty on cars.

New Road Tax rates (aka Vehicle Excise Duties/VED) will come into force in April for all new cars registered on or after 1 April 2017.

In the first year, the changes, which were announced in the July 2015 budget, will only apply to new cars but the likelihood is that when the new system is fully in place in 2018 there will be further changes perhaps not only covering newly-registered cars.

What will the Road Tax changes mean?

Different rates will apply to cars with a purchase price below £40,000 and for those costing £40,000-plus. The tax applies to all new cars.

According to the HMRC website “First Year Rates (FYRs) for Road Tax (VED) will vary according to the carbon dioxide (CO2) emissions of the vehicle. A flat Standard Rate (SR) of £140 will apply in all subsequent years. except for zero-emission cars for which the SR will be £0.

“For cars above the £40,000 cut-off there will be a supplement of £310 on the SR for the first five years, after which Road Tax will revert to the SR of £140.”

You can find a full list of the rates here.

Primarily a revenue generating exercise for the Government, the new rates could have a significant impact on SMEs, whether they are buying new cars outright, or via asset finance or are leasing them.

Among those affected will be private hire and taxi businesses, many of which are owner-drivers. Given the high mileage that they do if they are successful businesses their cars are likely to need replacing more frequently, especially as all such vehicles are subject to annual local authority checks for licensing to ensure they are roadworthy and in sufficiently good condition to carry passengers.

But any SME that maintains a fleet of cars, perhaps for their sales force or for employees whose position requires them to visit customers and clients, may face significant increases in costs, especially if the company, rather than the individual user, is responsible for paying the Road Tax.

Lease hire agreements usually include the funders renewal of road tax as part of the service.  It is likely that the extra Road Tax costs will be passed on to the lessee as part of their monthly payments.

Where next for High Street retail?

Christmas High Street sceneAs the figures for pre-Christmas trading are appearing a clear divide is emerging in performance between non-food and food sales performance.

This is supported by Next reporting that sales fell by 0.4% compared to 2015.

However, as predicted, Marks & Spencer and John Lewis also reported increased sales in non-food items.

Discount retail posted the biggest gains.  B & M, which offers a range of household, DIY, furniture, clothing and other items, has reported a 7.2% rise in like for like sales during the three months up to December 24.

Perhaps predictably, however, online buying continued its inexorable upward trend by +19% according to BDO.

High Street shopping remained relatively quiet until the last week before Christmas, with analysts suggesting a variety of explanations ranging from Christmas falling at a weekend, giving a full week for “last minute” shopping, to consumers being more careful about their spending, to the Black Friday hangover and inevitably to the rise of online shopping.

Overall, retail analysts at BDO are predicting a slight fall overall in High Street retail trade in Dec 2016 after a significant fall of 5.3% in Dec 2015.

Less discretionary spending and more on “essentials”?

Interestingly, the food retailers have generally experienced increased sales in the pre- and post-Christmas period. Again, it was the discount end that did best with Aldi reporting sales up by +15%, and Lidl by +10%.

But of the “big four” supermarkets that have so far reported, sales were also up, at Sainsbury by .1%, largely fuelled by its Argos operation, at Tesco by 1.8%, at Morrison by .2%. Marks & Spencer, too, reported increased food sales, up by.6%.

Can retailers relax a little in 2017?

Despite the slightly more positive Christmas picture compared with 2015, this year retailers will still face several pressures as higher import prices thanks to a devaluing £Sterling feed through and hit both their costs and consumers’ income.

Food prices are expected to rise but so also are clothing, a great deal of which is manufactured outside the UK. What happens to oil prices will also play its part in increased transport costs and the price of petrol at the pumps reducing discretionary spending.

Two significant costs that may also affect High Street retail are the effect of Quarter day rents due at the end of December and the impact of business rate revaluations due to come into effect in April. While the latter may benefit smaller independents if may hit the larger stores hard. Given also the ongoing Brexit uncertainty inhibiting investment, will we see another BHS-style High Street name collapsing?

Corporate Governance review needs your responses

word cloud corporate governanceIt has received very little publicity but in November 2016 the Government published a green paper outlining proposals for a review of corporate governance.

The green paper provides information on the current situation. It includes proposals for changes and is being used by the Government to stimulate debate, consult with the wider community and gather contributions and suggestions.

The deadline for responses is Friday, February 17, and the paper includes a useful list of questions, as well as information on three ways to respond, either by email, through a website or as hard copy.

The paper covers three main themes, executive pay and its regulation, strengthening the voices of employees, customers and suppliers at board level and the current anomaly whereby large privately-held businesses are subject to lower standards than public companies.

A fourth section has been included asking for suggestions for other ideas or themes that could be explored to strengthen UK corporate governance.

In her introduction to the green paper the Prime Minister emphasises the pledge she has repeatedly made to strengthen the economy and UK business “for everyone, not just the privileged few”.

She argues that for people to retain faith in the economic system “big business must earn and keep the trust and confidence of their customers, employees and the wider public.”

Ethical behaviour is a must for all businesses

Ultimately no business, whether it is a SME or a large corporation, can hope to prosper and grow long term without earning the trust of its employees, customers and suppliers and even the wider community.

While the focus of this green paper is on larger concerns, it contains food for thought for all types of business.

The treatment of employees, fair levels of pay for both workers and senior executives, how the business relates to and contributes to the community in which it is located and how it treats its customers all contribute to its reputation.

While the larger business may seem to have the power to get away with sometimes questionable behaviour this is not a risk SMEs can afford to take if they want to survive and prosper.