Short termism still dominates shareholder and investor behaviour

short termism is rational when there's no light at the end of the tunnelThose who follow my blogs will know that I have criticised investors and shareholders for the short termism that has dominated their behaviour and thinking for many years.

It is a mindset that was highlighted in 2015 by Bank of England economists Andrew Haldane and Richard Davies, who argued that corporate and investor impatience was on the increase. Little has changed since then.

The emphasis has been on maximum return for investors’ money as soon as possible, and has also dictated high levels of CEO remuneration, but, as I have previously argued, these are not helpful for businesses that want to be around in the medium and longer term, after non-shareholding executives have moved on.

This particularly affects businesses’ ability to invest in R & D and in planning for growth and forces them to focus on immediate profits to pay dividends, which may not necessarily be in the best interests of their sustainability in the future.

As Haldane said in a BBC interview “companies risk “eating themselves” as shareholders and management were gripped by a form of short-termism.

Is short termism a reasonable position because of Brexit uncertainty?

Since the UK decision in 2016 to leave the EU, the ongoing Brexit negotiations have added an extra layer of uncertainty to business forward planning.

According to the CBI, in the year or so since the Brexit decision, businesses have been seen higher import costs, falling financial markets, weakening consumer spending and ongoing uncertainty. Its January 2018 economic review reported: “This is clearly hitting plans for capital spending in the year ahead, with around 40 per cent of businesses citing a negative impact from Brexit on their investment plans.”

In December last year the Daily Mail’s online publication This is Money, also told a similar story: “Investors have pulled nearly £4.3 billion from UK funds over the past 18 months.”

Immediately after last year’s election, the IoD (Institute of Directors) also reported a 34% reduction in confidence in the economy among its members.

“It is hard to overstate what a dramatic impact the current political uncertainty is having on business leaders, and the consequences could – if not addressed immediately – be disastrous for the UK economy,” said Stephen Martin, director general of the IoD said at the time.

In the face of rising political volatility and uncertainty about growth, both globally and nationally, it is difficult for institutional investors to know what to do for the best.

It pains me to say it, but in the light of all this, short termism among shareholders and investors may be a rational strategy, despite the longer-term consequences for businesses. At least until we can see light at the end of the tunnel.

The relationship between banks and SMEs would appear to have fundamentally changed

are banks still sharks?Perceptions are hard to shift once they take root and the SME perception of mainstream banks’ willingness to lend to them is a case in point.

Is this a lending issue or a trust issue?

According to Richard Davies, the commercial banking director at TSB writing in the Daily Telegraph in January this year: SMEs are “a group that has been under-served, under-valued and over-charged for two decades – neglected by the big banks”.

He argues that SME confidence in their ability to raise finance is low such that many no longer talk to their bank and attributes this to both the after-effects of the 2008 financial crisis and the fact that the big banks have removed the personal relationship between banks and local clients, opting for an impersonal one size fits all service rather than catering to the diverse needs of local SMEs.

According to, a trade association which was founded in July 2017 to represent the finance and banking industry, the value of new loans to SMEs in the final quarter of 2017 in Great Britain was approximately 11 per cent lower than in the same quarter of 2016.

The question is whether SMEs are applying for loans and then being refused or whether many are no longer applying for loans.

The 2008 financial crisis and the Brexit decision have both contributed to greater uncertainty over the future which has resulted in businesses of all sizes holding back on their investment decisions. This would suggest fewer loan applications as would a reduced confidence in any ability to repay loans.

However, there is also some evidence that SMEs are both aware of and approaching alternative sources for finance.

The rapid rise in loans by alternative lenders such as peer-to-peer lender Funding Circle would suggest they are no longer the alternative but the first choice. It will be interesting to see what happens to them if the banks turn the taps on.

Asset finance providers also have been reporting a growing recognition and awareness among SMEs about alternative sources of finance. “We have seen an increase in alternative funding solutions,” says Conor Devine, Principal at GDP Partnership.”

It is a view supported by the OECD (Organisation for Economic Co-operation and Development) which in its February report observed: “Small and medium-sized enterprises (SMEs) are increasingly turning to alternative sources of financing, while new bank lending is declining in a number of countries.”

But there is a long way to go according to Mike Cherry, national chairman of the FSB (Federation of Small Business) who recently said that only one in 10 small firms was applying for external finance.

Trust takes years to build and is easily damaged.

Whether or not the banks really are more willing to lend to SMEs is still unclear, but it seems that the relationship has changed with many not even speaking to their bank in the first instance. Instead SMEs are looking elsewhere for their funding requirements. Will the search for banking services follow?

Could Australia’s new insolvency legislation, SafeHarbour, be a model for the UK?

According to research published in October 2010 comparing procedures in the UK, The Netherlands, Germany and Italy for restructuring insolvent companies: “The UK has a cultural, legal and professional environment that is highly supportive of reconstruction. The UK system offers a wide range of legal routes available, with courts acting flexibly.”

In May 2016, the UK Government launched a three-month consultation on revisions to the insolvency regulations, including proposals for a three-month moratorium before creditors could take enforcement action, measures to protect essential supplies so that businesses could continue trading and prevent them from being “held hostage” by suppliers and a mechanism preventing both secured and unsecured creditors from dissenting to a proposed rescue plan.

Legislation is already in place for companies to obtain sponsorship from an insolvency practitioner (IP) for a moratorium via the courts, initially for 28 days when considering a CVA (Company Voluntary Arrangement) with scope to apply for extensions.

Interestingly the Australian Government has recently introduced SafeHarbour. Enacted as part of a Treasury Laws Amendment in September 2017, SafeHarbour provides for a balance between protecting creditors and “encouraging directors to be more innovative and take greater risks”.

The basics of SafeHarbour

SafeHarbour, Australia's insolvency legislationDirectors can enter SafeHarbour after developing courses of action likely to produce a better outcome for their company.

However, they must demonstrate that they are fully aware of the company’s financial position with up to date financial records and provide evidence that they have taken steps to prevent misconduct. They must also ensure employee entitlements have been paid and have fulfilled tax reporting requirements.

Crucially, the directors must take advice from a qualified turnaround and restructuring adviser, who, in the Australian model, does not need to be an IP.

Is SafeHarbour a possible model for UK?

While SafeHarbour’s measures might appear similar to those of a UK CVA moratorium, the latter are generally not used since the advice to IPs from their lawyers has been that that sponsoring a moratorium imposes huge potential liability on them personally. Here, IPs prefer to be appointed as Administrators since this is seen as the safer option.

In the UK, rescue and turnaround advisers are already deemed to be acting as shadow directors with all the directors’ duties this entails. The protection of a SafeHarbour might provide them with a protection window to prepare and put forward proposals to creditors for consensual restructuring or a CVA. The window is needed because ransom action and winding-up petitions are increasingly used by creditors, in practice on advice from creditors’ advisers, to pursue agendas aimed at frustrating genuine turnarounds.

It is useful to study the seemingly lighter touch of the Australian SafeHarbour legislation, which could be a useful model for the UK to follow, as it would address the limitations in current practice in the UK.

Thanks for this blog are due to Australian turnaround practitioner Eddie Griffith for his excellent and helpful input into the details of SafeHarbour.

Why do you need regular Management Accounts?

regular management accounts reviews are your business map and compassWhen setting out on a car journey you need a destination, map, and ought to check the traffic and weather reports, so you can choose the optimal route. You also need to have enough fuel and money to buy more if needed. Indeed, there are many aspects of the planning that are taken for granted for regular trips that you will think about for a holiday or long journey.

Along the way, you will check where you are on the map, monitor traffic and weather conditions and make changes accordingly. You will also monitor your fuel and refuel as necessary. You might even monitor fuel efficiency and adjust your speed to reduce consumption.

This analogy can be applied to running a business. It can be difficult enough to keep a business on track to meet its goals and forecasts, even without the external effects of ups and downs in the economy and, currently, the uncertainty being caused by the ongoing Brexit negotiations.

Therefore, a business needs to be able to assess at regular intervals how it is performing as well as being able to spot early warning signs that something may be going wrong or veering off track. This is where monthly Management Accounts are so useful.

The components of monthly Management Accounts, as outlined in our blog of February 13, 2018, would ideally include an up to date Balance Sheet, a detailed Profit and Loss statement, a Trial Balance and summaries of Aged Debtors and Creditors.

These are the business equivalents that allow you to check where you are on your route map. They provide an indication of the state of your business, its continued health and its ability to reach its destination as defined by the goals you set and forecasts you prepared as part of your planning.

The Balance Sheet, for example, shows the company’s assets and liabilities and more importantly how much money is has in the bank, how much is due and how much is owed to suppliers and others such as HMRC. These are key to monitoring short-term cashflow, which needs to be well-managed if the company is to avoid running out of funds.

Regular Management Accounts are your early warning system

Ideally Management Accounts should be reviewed monthly, or at the very least quarterly.

They will tell you how well sales and margins are doing and how they compare with forecasts and targets. Organising them to provide detail can allow you to see performance by product line or by market segment, even by customer if you have some large accounts. You can also monitor costs which can also be reported in detail so in turn margins and profit contribution by product line or market segment can be monitored.

The information will allow you to adjust the business goals and forecasts as appropriate. If costs are rising, it may be time to review which suppliers you use, perhaps also staff overheads.

You might also monitor the cost of repairing and maintaining machinery or equipment and use this to assess when it should be replaced,

If there are financial anomalies, they may indicate fraud or other malpractices that need to be investigated and dealt with.

Above all, a regular review of Management Accounts will allow you to stay in control of your business and provide you with the information to make early decisions that move it forward in the best way possible.

How to protect your business reputation in a crisis

self protection in a crisisFew high-profile businesses will avoid encountering a problem that exposes them to scrutiny.

How that business and more pertinently its leaders then deals with the crisis may determine whether its customers remain loyal, and ultimately whether it can survive.

The recent problems KFC met after changing suppliers, which resulted in their having to close the majority of their UK units for a few days due to an absence of chicken, is a good example of how to respond well.

Firstly, they posted notices at the closed units apologising, but with a touch of humour, explaining that while the chickens may have crossed the road, they had not arrived at KFC.

Secondly, the company was open about the cause of the problem, a change to a different logistics company.

Thirdly, they took out full page advertisements in some national media, apologising and cheekily including a picture of their logo, but with the KFC changed to FCK, into which, of course, most people were able to insert the missing letter and to which the reaction was a smile.

If anything, the company will not have lost customers. In fact, it has been speculated that it may have gained some as occasional customers realised how much they would miss the product’s easy availability.

The KFC approach illustrates several elements a business needs to get right if it is to avoid reputational damage. It put customers first, apologised and gave an explanation, rather than an excuse.  Above all, it was brave enough to use humour in a way that people instantly connected with.

How to get it wrong when reacting to a crisis

By contrast, in the same week, MPs released the full version of an FCA (Financial Conduct Authority) investigation into the behaviour of RBS and its restructuring arm GRG, which has been accused of acting in its own profit-making interests at the expense of thousands of SMEs, many of which it is accused of having forced out of business rather than helping.

The report had been previously released in summary, in which various points from the full report had not been included or arguably had been “watered down”. RBS Chief Executive Ross McEwan was then interviewed by various news media and appeared before the parliamentary Treasury Select Committee.

The general consensus from commentators was of an inflexible and defensive tone and a failure to acknowledge discrepancies between the full and summary reports or any RBS responsibility for what happened.

While, as Ross McEwan has said, a system for SMEs to claim compensation had been put in place, the compensation process has been questioned by Mike Cherry, chairman of the FSB (Federation of Small Businesses), who said: “What really matters now is that GRG victims receive the compensation they’re due. Amid concerning reports about the scope of RBS’ £400 million compensation scheme for those affected, it’s encouraging to hear that we will receive quarterly updates on how the redress process is progressing.”

It may be understandable that companies want to minimise potential liability for past behaviour but a failure to take responsibility means that a line cannot be drawn between past mistakes and their rectification. All too often a morally bankrupt culture persists when executives seek to defend or cover up reprehensible behaviour. Lawyers might advise that you should never admit liability but too frequently executives forget lawyers are simply advisers giving advice from one perspective.

Sincere regret, humility and genuine concern for those damaged also goes a long way to helping reassure others about taking responsibility as does demonstrable action to address the causes.

Is it really true that there is no such thing as bad publicity?

Why Stakeholders’ co-operation is vital to successful business restructuring

Restructuring needs supportRestructuring a business can involve significant changes that can have an impact on all its stakeholders.

Usually, restructuring is associated with both financial restructuring and reorganising operations because a business is no longer viable. It may be that it is experiencing cash flow problems and heading for or deemed to be insolvent.

The wise business will act as early as possible once problems are identified and may call in a restructuring and turnaround adviser who will conduct a deep and thorough review covering its processes, products or services, its accounts and forecasts and its business model before suggesting a strategy that will allow it to continue trading and recover its position.

This may involve closing loss-making product or service lines, outsourcing some processes, renegotiating terms with suppliers, possibly reducing the workforce or the hours worked and, in some instances, changing the business model. The financial restructuring may involve rescheduling debts and in extreme cases using a formal process like a CVA (Company Voluntary Arrangement).

Who are the stakeholders in business restructuring?

Stakeholders are people and organisations whose interests are affected by the restructuring, or those who can influence them.

They therefore include a wide community including banks, creditors, credit insurers, directors, employees, owners (shareholders), landlords, new investors, suppliers, unions, and arguably customers. In some instances, the government, public and press might also be regarded as stakeholders, as is the case when the company is a large employer or a critical service provider.

For a restructuring to be successful the response and support of these people and organisations is likely to be critical to both approval of proposals and future success.

Directors need to speak with a united voice and be transparent with everyone if they are to get the trust of stakeholders for their proposals. They also need to find a balance between humility, taking responsibility for past failings, while at the same time providing leadership and direction for the proposed changes. If the company is facing insolvency as directors also need to subordinate their own self interests in favour of those of creditors and the company.

Rescheduling debts normally needs the approval of each and every creditor although a minority of dissenting or ransom creditors can be bound by using a CVA.

More important is to ensure ongoing supplies and support will be necessary. This support includes employees who might be poached or look for alternative employment, suppliers who might be wary of extending further credit, trade insurers, asset-based lenders who finance critical equipment, even customers who can take their business elsewhere.

The support of employees should not be taken for granted. While they may be fearful of losing their jobs and may be asked to accept some alterations to their remuneration, hours of work or the work they do, negotiating this can be fraught with complications since you will not want to demotivate them in the process. Notwithstanding the potential loss of morale and survivors’ guilt felt by those who keep their jobs when others are made redundant, employment legislation needs to be observed if costly tribunals are to be avoided. This is where employees’ union(s) or representatives can be useful and should be brought into the discussions as early as possible. Employees’ co-operation and support can make all the difference to success or failure.

The critical argument that should enlist the support of all stakeholders is that it is in their interests to support the business through the process of restructuring, however uncomfortable it might be in the short term.

The justification is likely to be survival, recovery and eventual growth of the business for the benefit of everyone in the medium and long term.

How do we fix the UK’s IT skills shortage?

women and IT skills shortageThe shortage of people in the UK with IT skills is hardly news. For several years now, the sector has been relying on international workers to fill the gap.

However, the continuing uncertainty over the outcome of the Brexit negotiations has been compounding the recruitment problem as some overseas workers leave the UK and fewer are willing to come to the country.

Surveys in the tech sector have found that 50% of respondents have reported the skills shortage as a serious problem, of whom 25% said recruitment was a major challenge.

It has been calculated that UK digital sector will need nearly 300,000 new recruits by 2020 if it is to reach its full potential.

Are there any short-term fixes for the IT skills shortage?

Given the implications for business growth and development, the problem is becoming urgent.

However, increasing the numbers of well-qualified UK IT professionals is likely to take some time.

The most immediate actions businesses can take may be to look at some of their current processes and the skills profile of their existing employees.

There may be processes, particularly in manufacturing, that can be automated or others that could be outsourced. This would free some of the existing workforce for re-training and re-deployment. Of course, the results would not be immediate, but it could yield hitherto unsuspected benefits.

There may also be people in the existing workforce not currently employed for their IT skills but with some knowledge already that can be built on. Equally, offering employees further training has other benefits and not least their feeling valued and more secure in their employment.

Long-term solutions

Research has shown that women are under-represented in the IT sector. By challenging stereotypes businesses can encourage more girls to consider this as a future career. This should therefore start in schools.

Employers can help with this by getting more involved with universities, training colleges and local schools, perhaps simply at the level of encouraging school visits, holding in-school workshops and activities and by publicising the range of their activities in the workplace that need IT skills.

Inviting promising students into their businesses for work experience and to help with projects to give them a wider range of IT experiences may also help.

Sponsoring graduates or technical courses is another initiative worth considering.

Developing an apprenticeship scheme is something that more businesses need to do. This need not be limited to school leavers but can be offered to graduates, people looking to change career and indeed those who have retired but want to return to work.

Businesses may argue that they do not have the time or capacity to get involved in these initiatives, but there is a balance to be struck between the present and the future and if the shortage is impeding on their plans for development and growth then it makes sense to invest time, money and effort now rather than watch competitors take over.

Are managers redundant?

managers redundant to corporate structureAll four of the UK’s big superstore chains, Sainsbury, Tesco, Morrisons and Asda, have announced plans to make significant changes to their staffing structures, mainly affecting store managers.

Department store, Debenhams, has also announced plans to cut its store managers by a quarter.

All the retailers said they were facing a more challenging environment, not only because of intense competition from budget retailers, Aldi and Lidl, but also because consumers were becoming more price conscious as well as changing their buying behaviour.

Sainsbury’s hope to save £500 million over three years, but, in common with the other retailers mentioned, also said the changes will introduce “a more efficient and effective structure”.

Stripping out layers of management is nothing new. It has been used as a favourite cost-cutting tool by businesses in the past, most notably in the 1990s.

In some instances, no one notices when a layer of management is removed, but in others it can leave a void, especially in those where staff have not been empowered to make decisions.

Removing layers of management can improve productivity

One of the most significant organisational differences between SMEs and large corporations is their flexibility and ability to communicate throughout the organisation.

On the whole, SMEs have fewer layers of management and this enables them to adapt more quickly to change and to discuss and communicate plans to all their employees. This flexibility can attributed to everyone feeling part of a team, and where necessary doing each other’s job. There is often no need to defer to a manager for a decision.

Larger organisations, on the other hand, tend to have much more complex structures with more rigid procedures. Communication normally passes from the top down, from senior management through numerous layers to the workforce. Where decisions have to be made this is still down to managers or decision-making committees. Everyone simply follows procedures.

This makes it hard for initiative and feedback up through the layers of management. The focus is on lean structures and optimal efficiency. However, this runs the risk of suppressing initiative and reducing scope for employee consultation. As a result, larger businesses are often unable to react swiftly in a world where the pace of change is accelerating.  

A flatter structure assumes even more rigid procedures albeit ones increasingly being overseen by workers instead of managers.

The challenge is to improve productivity while at the same time empowering staff by giving them scope for taking their own initiative. Or is the next step automation and self-service retailing?

Conflict of interests for insolvency practitioners doing restructuring & turnaround work

conflict of interestsWhen a business is either in financial difficulty or heading that way, I would always advise getting expert help and the earlier the better.

Leave it too late, to when the business is formally insolvent, and the opportunity to restructure and survive becomes much more constrained.

But insolvency, whether actual or approaching, is characterised by a cash flow problem and advice doesn’t come cheap.

This is because advisers need in-depth knowledge and experience in a wide variety of disciplines. They include experience of business processes and finances including the ability to analyse accounts, cash flow forecasts as well as know the various legal compliance issues including HR and redundancy, insolvency law and litigation. They also need to be familiar with options for restructuring and negotiating them with stakeholders including banks, shareholders, HMRC, creditors and enforcement officers.

While restructuring and turnaround advisers and insolvency practitioners generally have this knowledge and experience, their approaches are very different.

Insolvency practitioners are appointed by creditors and work for their interests, while restructuring and turnaround advisers are appointed by the company and primarily work for its interests.

When a company is insolvent all board advisers essentially become shadow directors and as such their advice should be in the creditors’ best interests, however this does not mean the company should be liquidated, which is the normal outcome that follows the appointment of an insolvency practitioner.

Consensual restructuring with the approval of creditors should offer them a far better outcome providing the underlying causes of the financial situation are addressed – hence the need for turnaround alongside any financial restructuring.

The crucial difference between the two is that the restructuring and turnaround adviser will have your company’s best interests at heart. Their fees ought to be success based and linked to their ability to save your business and their rates are generally far less than those for insolvency practitioners. Call them in early enough and let them carry out an in-depth investigation of all aspects of your business and they will identify what, if any, parts are unprofitable and should be discontinued as well as ways of restructuring debt that can save the company, albeit in a modified form.

Although a business in difficulty can enlist the services of an insolvency practitioner as an adviser, their focus and experience are more likely to have been on recovering creditors’ money at the earliest opportunity. They may not, therefore, be open to options that could lengthen the time it would take for creditors to be satisfied and their focus is more likely to be on realising the value of your business’ assets and preventing further losses, therefore the likely outcome is liquidating the assets of the company rather than saving it.

While insolvency practitioners claim to do restructuring and turnaround work I believe this is a conflict of interests since they cannot serve two masters: creditors and the company. If they do restructuring and turnaround work, they should not take formal insolvency appointments.

It would be better, therefore, for restructuring and turnaround advisers to be entirely separate from insolvency practitioners.

What are the main ingredients to include in monthly Management Accounts?

Ingredients in Management AccountsRegularly reviewing your Management Accounts is one of the most helpful ways for you to monitor the performance of your business.

It is essential to monitor the right metrics so you know how the business is doing and can make adjustments as appropriate.

There is no legal requirement for a company to produce Management Accounts on a regular basis but waiting for the Annual Accounts is too late if you want to make the ongoing adjustments necessary to improve productivity.

The frequency, quality and type of information they contain is therefore crucial.

Ideally, Management Accounts should be produced monthly and should contain an up to date Balance Sheet, a detailed Profit and Loss statement, a Trial Balance and summaries of Aged Debtors and Creditors.

The Balance Sheet shows the company’s assets and liabilities and how much money the business owes to suppliers at any one point in time as well as how much money it has in the bank. Central to this is the cashflow, which needs to be well-managed.

The Profit and Loss (P&L) statement ought to report both monthly and year to date figures. Overall it is a measure of the business’ health although some companies make profits but poor cash flow by not getting paid. The P&L can also be used for much more by reporting sales by market or product sector and their associated cost of those sales and direct costs to monitor margins. It might also group overheads into logical cost areas. so you can monitor the fixed cost elements of your business.

Maintaining a spreadsheet of the monthly P&L is also useful to show trends and monitor the success of marketing initiatives. This spreadsheet in particular is a key tool for establishing a culture of continuous productivity improvement.

The Trial Balance is a useful reference for looking behind the numbers. Essentially all entries in the accounts are allocated to a Nominal Code where the Trial Balance is a list of all the Nominal Codes with a value of all entries against that code. The Balance Sheet and P&L consolidated the values for a number of codes to produce a meaningful report. As an example there may be several different sales codes where the P&L may report only one. I use this example as I have suggested earlier that the P&L report several sales codes since it is easier to monitor the P&L than the Trial Balance.

Another aspect of the Trial Balance is to monitor errors in the accounts since it relies on the double-entry accounting system. If the total debits equal the total credits, the Trial Balance is considered to be balanced.

The Aged Debtors and Aged Creditors are also useful. While I suggest a summary schedule is used to avoid having too many pages of information, the detail reports by customer/ supplier show the individual sales and purchase invoices so you can monitor which ones are outstanding.

The Management Accounts can be a great source of management information but need engagement with your accountant or accounts controller to set up the reports in the first place. If you have the right information you can make the right decisions, it’s all about having the right ingredients.