Are you undermining your business by ignoring equal pay?

equal pay how far have we progressed since this old suffragette posterDespite years of campaigning and even legislation it seems that many businesses are still ignoring the rights of women to have equal pay for work of equal value.

Tomorrow, April 4, marks the deadline for the UK Government’s legal requirement for businesses and public sector organisations employing more than 250 people to publish their gender pay rates.

As of April 1, approximately 7,000 of the estimated 9,000 businesses and organisations required to do so had complied and the results so far have made depressing reading.

According to the ONS, the median pay gap between men and women revealed so far is 18.4% in favour of men and the mean (average) gap is 17.4%.  The median gap, based on the difference between those employees in the middle of the range, is thought to be more accurate because the mean can be skewed by a small proportion of very highly paid employees.

The Equal Pay Act 1970 prohibited any less favourable treatment between men and women in terms of pay and conditions of employment and was replaced in 2010 by the Equality Act.

Yet it seems that many employers have continued to consistently ignore the law or found ways to circumvent it.

According to the ONS top of the list for ignoring equal pay are in businesses in the Finance and Insurance, Power, Education, Professional and Academic, Manufacturing and Communications sectors.

Perhaps given greater impetus by the #MeToo movement following the revelations of the Harvey Weinstein and other similar scandals, this may be a moment where the situation can no longer be ignored. High profile voices, such as the resignation of the BBC’s China correspondent Carrie Gracie in protest against her own pay disparity compared with male colleagues, have also put the situation under the spotlight.

Equal pay is about respect and valuing employees

Any number of excuses will be put forward for the disparity, such as the effect on career progression of women taking time out for pregnancy or the preponderance of women in relatively low-skilled or part time work.

However, as I have argued many times, crucial to a successful business is showing respect for employees.

There is plenty of evidence that those who feel valued, who are consulted about business developments or who are given opportunities for further training to improve their skills and progress their careers can make all the difference to productivity and to a business achieving its goals.

It makes no sense at all, especially in times of near-full employment, for a business to ignore or undervalue half the potential pool of recruits, i.e. women, who could be available.

Perhaps, 100 years after the birth of the suffragist movement began, we have finally reached a tipping point where there will be some real action on equal pay for work of equal value.

Should SMEs maintain a fall-back list of suppliers?

who are your business suppliersThe recent problems that beset KFC when it switched suppliers raises the question of how vulnerable SMEs are when a supplier fails to deliver on time.

This is not only an issue for those businesses within the food industry that may be dependent on timely delivery of fresh ingredients.

Many businesses don’t hold stock or raw materials and depend on prompt deliveries as part of their production processes. Equally, it can be crucial when something, such as an IT failure, occurs unexpectedly that they can call on IT support promptly to fix the problem.

One of the ways in which businesses can avoid having too much capital tied up is to operate a “just in time” or “lean production” model for supplies or raw materials, components and other stock. This can also save premises costs by needing less space and save on the staff and management costs of having to administer stock.

However, this can make them vulnerable if a delivery fails to arrive on time, perhaps making it impossible to fulfil a client’s order to an agreed deadline. A smaller business is likely to be more vulnerable in a situation like this, not least to the reputational damage it might incur of being unreliable, and therefore to a loss of future orders.

The same situation could apply where IT support is outsourced but the supplier is unable to respond to a call for help quickly enough so that the affected business risks losing several hours – or days – of working time.

Another area where SMEs are likely to be vulnerable is where an existing supplier decides to increase their prices. Again, SMEs may not have the reserves to be able to meet the new charges and in fact may have quoted a sales price based on the current cost of materials or components where manufacture or delivery to the customer involves a a long lead time.

In the KFC case, it emerged that where previously it was being supplied from several depots located around the country, its new deliveries would be coming from one central depot to outlets across the whole country.

This, too, can make a business particularly vulnerable.

It makes sense for SMEs to have a contingency plan that includes alternative sources for any supplies on which its ability to fulfil orders may depend.

It also puts the business in a stronger bargaining position when it comes to negotiating the price of supplies.

Keeping an up to date list of alternatives, not only for price comparison but also for availability of stock and reliability of deliveries makes economic sense particularly for a small business.

The pros and cons of Brexit for British farming

where next for British farmingWhile Britain is not self-sufficient in food, 60% of the country’s food supplies does come from British farms.

In terms of the country’s economic output farming accounts for just 1%, but from the farmers’ perspective the EU is its biggest market. Food and farming provide about 475,000 jobs in the UK.

Having said that, it is argued that much of the UK’s farming would not be viable without the subsidies provided by the CAP (Common Agriculture Policy), first introduced in 1973 when the UK joined the then European Economic Community.

Indeed in 2016, Government payments to agriculture totalled £3.1bn, more than half of overall British farm income, and yet in that year 26% of farms failed to break even.

There are those who argue that the subsidy has acted as a brake on innovation, preventing some farmers from getting out of the business and others from entering it. It has also, allegedly, inhibited what some see as necessary structural change and diversification.

Could Brexit provide a much-needed shake-up in British farming?

The negatives for farming of the decision to leave the EU have been well-rehearsed. Already there have been reports that the negative attitude to EU migrant labour has had an impact particularly on fruit and vegetable farmers’ ability to recruit enough seasonal workers to pick and pack crops when they are ripe, forcing them to leave produce rotting in the fields.

At the same time, farming faces constant pressure when selling in to the food production supply chain and to the supermarkets whose purchasing power keep prices down, almost to the point of being unable to make a profit on their efforts.

Equally, farmers argue that their current tariff free trade with the EU needs to be preserved if they are to survive.

There have been some initiatives to diversify the rural economy, to the extent that it is now not uncommon to see redundant barns on farms converted in to business centres for SMEs, some farmers have capitalised on the movement for fresh, chemical free and organically grown produce and plenty have set up their own farm shops. But the inadequacy of rural infrastructure, from reliable broadband to inadequate rural roads acts as a brake on such initiatives.

Similarly, there are other vested interests, such as those who want to preserve “the countryside” and regularly oppose planning applications for a change of use to rural buildings, that act as an inhibitor to innovation.

One thing is for sure and this is that there needs to be a new vision and more joined-up thinking about the countryside, especially as the CAP will be scaled down and eventually discontinued in the transition to Brexit.

The Government produced a Command Paper in late February with proposals on what next for the rural environment and its economy. Given its impact the consultation period seems limited with input required before May ahead of a new Agriculture Bill.

Under the proposals, up to £150m in support payments could be shifted from the richest farmers to environmental schemes after Brexit.  There are also suggestions for various ways of phasing out the CAP.

The aim, according to Environment Minister Michael Grove, will be to shift the balance between the environment, its protection and farming. But it also includes proposals for a national food plan, something that the NFU (National Farmers’ Union) has welcomed and incentives to farmers to pilot schemes to improve both animal welfare and to trial new technology.

Perhaps this is one case where Brexit will provide an opportunity for some innovative thinking that is arguably sorely needed.

An interesting insight into the psychology of accepting too much work

too much work and a heavy loadI have warned in previous blogs about the dangers of over-trading and the effects it can have on an otherwise profitable business.

Over-trading is when a company is growing its sales faster than it can finance or fulfil them, in other words, taking on additional orders when it can’t afford to service or fulfil them.

The impact on cash flow is often concealed by the growing profits from growing sales.

The assumption that you cannot turn down business and must accept all orders is normally based on a rational fear of either leaner times in the future or that your customers will go elsewhere.

However, the American author and trader psychologist Rande Howell has an interesting perspective on the causes of and motivation for over-trading.

He outlines this in his book, Mindful Trading: Mastering your emotions and the inner game, and on his website mystateofmind.com.

While acknowledging that there is a fear element, the decision-maker’s fear of missing out, he attributes this to their mindset as a hunter.

The business leader, or trader as he refers to them, has a bias to act and therefore to chase after sales.

This can lead to taking action out of boredom because the mindset is about making things happen. Inaction, and the suspicion that opportunities are passing by, is therefore uncomfortable but it can also lead to acting on impulse rather than reason.

Howell also points out that there is a biological imperative in this behaviour in that the brain rewards success by releasing dopamine, the “feel good” chemical. Add to this Testosterone, which is associated with risk-taking and you have the elements of a behavioural pattern that can lead to over-confidence and unconsidered behaviour.

The danger of acting on impulse rather sticking to the business plan

As I have said before a well-organised business ought to schedule work and know when an order can be easily fulfilled.

When planning for growth, the business should look carefully at its finances and have a clear idea of its capacity.

I have also advocated in the past my view that those businesses with more demand than capacity should, instead of building more factories or taking on more staff, consider selling their existing capacity instead of selling more services or products.

This can be done in two ways, either by pricing to manage demand or fixing prices but managing expectations. No one minds waiting if the quality justifies the wait, at least until a competitor offers a similar quality at a similar price but quicker. This sale of capacity allows you to focus on quality of both product and service and avoids taking on more fixed costs in a febrile market.

Honesty and self-awareness, what Howell calls mindful trading, can help to combat the psychological components that lead to risk-taking and can strengthen the confidence in sticking patiently to the growth plan.

What is a company audit and why is it important?

audit seal of approvalFollowing the collapse of Carillion in January this year with over £900 million of debts, a £590 million pension fund deficit and uncalculated £millions in uncompleted contracts several investigations were announced into what went wrong.

Among these is a probe, by the independent accountancy regulator, the Financial Reporting Council (FRC), into the company’s audits for the years 2014, 2015 and 2016 by auditors KPMG, to identify any breaches of regulatory requirements “in particular the ethical and technical standards” required of auditors. This week the FRC also announced inquiries into two of the company’s former financial directors.

This is not surprising given that Carillion was one of the UK Government’s largest contractors for outsourced services and building projects, but it is often the case that where businesses collapse one of the spotlights invariably falls on the auditors.

Why focus on auditors when things go wrong?

The Institute of Chartered Accountants in England and Wales (ICAEW) is one of the bodies appointed to approve and register auditors, as required by law, and defines the purpose of the audit as follows:

“to provide an independent opinion to the shareholders on the truth and fairness of the {company’s] financial statements, whether they have been properly prepared in accordance with the Companies Act and to report by exception to the shareholders on the other requirements of company law”.

Audit reports are filed with Companies House and used by suppliers and other interested parties to make decisions about their trading relationship with the company concerned, not least how much credit to extend.

Auditors therefore are the public scrutineers and should be held to account if they are found to be complicit in any deceit through concealing problems that ought to be highlighted.

Who is required to have a statutory audit?

While there are some exemptions covered below, in principle, any public body or business above a defined turnover and size, as well as any business of whatever size that comes under FCA regulation, such as those involved in banking and insurance, must have audited accounts.

In addition, a business, whatever its size, must have an audit if shareholders who own at least 10% of its shares request one at least one month before the end of the financial year for which the audit is being requested.

Who is exempt from a statutory audit?

Subject to the above, businesses and organisations qualify for exemption if they can satisfy at least two of the following three conditions: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million and/or 50 or fewer employees on average.

Who can carry out an audit?

Accountancy companies containing suitably qualified individuals and which are registered with a recognised supervisory body, such as the ICAEW, are empowered to carry out audits.

To qualify they must be and be seen to be independent, to comply with auditing standards and ensure that all their employees are “fit and proper persons” competent and qualified to carry out the work.

Equally important is the code of ethics to which auditors must conform, which includes behaving with integrity, and being objective, only accepting work the member or firm is qualified to do and maintaining standards of professional knowledge. The auditor must also maintain confidentiality and must not use information about a company it is auditing for their own professional gain.

Another requirement for auditors is for them to demonstrate that they do not have any conflict of interests with the company they are auditing. This can be an issue for large complex companies but essentially the auditor ought not to have any relationship or be doing any work that might be used to influence the outcome of an audit.

Plainly, it is important for there to be some proper scrutiny of a business’ accounting and handling of its finances, for the sake of creditors and those people who have a stake in its survival and this is why the role of auditor in the event of a collapse is inevitably going to be a focus of investigation.

 

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 UKFinance.org, 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?