The integrity of leaders is subjected to scrutiny when negotiating their remuneration

The Swiss have just turned down a proposal in a referendum to limit executive pay to no more than 12 times the salary of the lowest paid worker in the same company. This is the second time the Swiss have voted on issues of executive remuneration.  In March by contrast they voted to curb big bonuses and to ban so-called “golden handshakes and goodbyes”.

John Lewis Partnership – a chain of department stores owned by its employees – recently announced a new rule that no boss can earn more than 75 times the lowest paid partner, as they refer to employees. Indeed the Partnership’s managing director Andy Street argued that this was reasonable on the grounds that it compares favourably with many FTSE 100 companies where the gap is wider.

Clearly he, like most employed directors, doesn’t get the point. 

It is no wonder that public anger is growing at the ever-widening remuneration gulf between those at the top and the rest.

Most people, including employees and the public, have a sense of fairness. They know the difference between a reasonable and unreasonable pay and bonus package. Indeed most people recognise the need to reward effort, ability and outstanding performance. But managers, however senior should be incentivised and rewarded for their contribution to a company’s medium and long term performance, not for manipulating short-term profits to boost their bonus. 

Perhaps applying the Swiss 12:1 ratio to executive salaries and imposing a requirement to commute anything above into equity may help promote executives as leaders by restoring some lost integrity. 

What do others think?

Does the latest banking revelation have an impact on the insolvency profession?

The treatment of SMEs in the aftermath of the 2008 credit crunch by RBS, one of the UK’s two main lenders to small businesses has come under scrutiny this week.

An investigation, by businessman and government adviser Lawrence Tomlinson, has claimed that RBS may have “engineered” firms into RBS’s turnaround division Global Restructuring Group (GRG) so that RBS could generate enhanced revenue at the expense of their SME clients.

Tomlinson claims there was a “systematic abuse” of corporate clients by RBS that allowed them to charge significant fees before appointing administrators who immediately sold the clients’ business assets back to RBS’s property division West Register.

It is assumed that West Register has been required to generate its own profits for RBS by increasing the value of those assets it acquired from clients. This would suggest that the assets were bought at a very low value before they appreciated in value for the benefit of RBS.

The whole sorry saga is now being investigated by the Financial Conduct Authority and the Prudential Regulation Authority following a referral by Business Secretary Vince Cable.

While the focus has so far been on banks, the saga raises the question as to whether there has been a conflict of interests among some insolvency practitioners (IPs), who following an introduction by RBS to clients then sold the clients’ assets back to RBS under an Administration Pre-pack procedure.

While such realisations may have been legal the practice stinks and reminds me of the activities of HBOS’s Impaired Assets division in Reading which resulted in senior managers being charged with conspiracy to corrupt, fraudulent trading, money laundering and blackmail. Fortunately none of the IPs involved in that saga was charged, but it would seem that their role was not investigated.

All this suggests that the directors in these situations are not getting independent advice.

It would also seem there is a need to review the relationship between banks and their panel IPs?

Zombie companies have a number of options for achieving growth

Zombie companies will at some time need to confront three fundamental problems before they can achieve growth: 1. how to fund growth; 2. how to repay debt; and 3. how to service interest when rates rise.

Provided that a zombie company can generate profits on an EBITDA basis (earnings before interest, taxes, depreciation, and amortization), it has a number of options for resolving these problems as a pre-requisite for growth.

Options include negotiating a partial debt write-off, a pre-pack sale via Administration or a Company Voluntary Arrangement (CVA).

From the suppliers’ viewpoint a growing business offers the prospect of increased profits from increased supplies. From the existing lenders’ viewpoint profitable growth means that non-performing debts can be repaid. From a new investor’s viewpoint, new money can be used to fund growth rather than replace existing debt. From the company’s viewpoint growth inspires confidence in the future prospects of the business. 

Given the benefits, it makes sense for zombie companies to get help from restructuring experts who are familiar with these options.

Zombies are not dead

We hear a lot about the dead weight of zombie companies and how they should be put out of their misery.

But we take a slightly different view.  Yes a zombie company is regarded as one that is limping along only servicing interest on its debt, unable to fund growth.

However, a zombie status does not mean that a business is necessarily a failure and that the best thing creditors can do is to take the money and run.

Often, the reason a company has reached this point is that it has pursued aggressive growth based on debt during the so-called “good times” pre 2008 but the trading climate since then has changed out of all recognition.

All companies are at the mercy of market forces at all times, but we make the point that it does not necessarily follow that the services or products a business is offering are in themselves a bad idea.

What is needed is for the directors and management to recognise that there is a problem sooner rather than later.

Then they should get in expert help to assess the situation and advise them of their options and if necessary help implement changes to secure the future of their business.

A turnaround advisor is on the company’s side unlike the insolvency practitioner who, if appointed, works for creditors.

The turnaround advisor has an interest in helping the company survive and be prepared, including having adequate finance available, for growth when it comes.

Is it wise to rely so heavily on a recovery led by consumer spending?

There has been some recent data and a good deal of spin about the economic recovery becoming more secure and that it is time for businesses to start investing for growth.

While unemployment may be steadily decreasing, the housing market picking up and consumer spending rising a little it would, in our view, be wise to be cautious, not least because the Government seems to be relying a little too heavily on a consumer and SME-led recovery.

Firstly, there has been evidence that the jobs being “created” are part time and low-paid and that in any case wage increases are lagging far behind the rising cost of living. 

Secondly, on the evidence so far, households will be facing hefty utility and energy price rises in the region of 10% by the end of the year, despite Thames Water’s attempt to increase water rates next by 8% being rejected by the watchdog. 

Thirdly, there is also some evidence that increased consumer spending is yet again being financed by credit cards and personal debt, which has been rising steadily since mid-2012. 

Fourthly, there are still plenty of voices arguing that the ‘Help to Buy’ scheme is merely pushing up house prices and borrowing to “bubble” levels – a point reinforced by property website Rightmove, which revealed a 10% rise in property price in London in October and of an average 2.8% in asking prices in most parts of England. 

It would appear that measures to stimulate the economy are working, but can we be certain these are not a pre-election gimmick that conceals the truth? 

Regardless of short term statistics, consumer spending will continue to struggle while personal and SME levels of debt are so high and households continue to worry about making ends meet. In such a market SMEs as well as consumers might be wise to wait until after the election to confirm growth is sustainable before making big investments.

 In the meantime they would be well advised to continue paying close attention to cash flow, paying down any expensive debt or hoarding cash and if necessary restructuring to be as lean and fit as possible ready for the moment when the fat lady really does start singing, IF she does. What do others think?

 

Why isn’t more effort made to rescue failing businesses?

It is almost 30 years since legislation in the Insolvency Act 1986 introduced Administrations and Company Voluntary Arrangements (CVAs) as mechanisms intended to help with turning around failing businesses.

This legislation followed the 1982 Cork Report, which recommended procedures for trading out of insolvency.

Despite this and further legislation, however, there has not been any noticeable increase in rescue attempts where Insolvency Practitioners have been brought into companies in distress.

We explore why this should be and whether anything can be done to encourage more banks and IPs to embrace the rescue culture so that more businesses can be saved.

To see the full article please visit: Insolvency Today at http://bit.ly/17TpoJj or join the lively Insolvency Today LinkedIn discussion here http://linkd.in/1cBA6vD

Law firms need to get serious about their business plans and cash flow

Professional Indemnity insurance is advisable for most professional businesses but for law firms it is compulsory.

Renewal has been complicated by the fact that since 2012 insurers were required to disclose their credit ratings in order to become “qualified” by the SRA (Solicitors’ Regulatory Authority).

In the last year a number of qualified insurers have become insolvent and the financial situations of approaching 1,800 law firms are being closely monitored by the SRA. 

At the same time at least 185 law firms have failed to meet the deadline for re-insuring and if they fail to do so within 90 days under SRA regulations they must close down. Already one London firm, Harris Cartier Limited, has entered administration, the first of what may be many.

Is it time that the culture of law firms is changed so that they see themselves as businesses like any other, requiring a proper business plan with a forecast to support the plan. Such plans might also benefit from input by other experts such as accountants and marketing specialists where lawyers have tended to do it all themselves.

Given the lengthy time between taking on a client, completing often complex legal proceedings and the point at which the job is complete some law firms may need the help with running their business and if necessary restructuring it if they are to ensure they are not forced into closure by failing to put in place the systems that any other business would regard as normal.

Read the fine print

We are hearing stories of lenders applying enormously high rates of interest, as high as 59%, on asset-based loans to businesses or in one case, 26% per month.

It is possible that the influence of lenders like Wonga have persuaded people that rates up to 5000% for unsecured loans are the acceptable “new normal” and this has influenced the asset based lenders, especially for bridging or short-term finance, to significantly increase their rates or apply huge fees.

Some SMEs are desperate for money, perhaps because they want to take advantage of the improving economy to develop or more often due to creditor pressure, and as a consequence are neither thinking straight nor considering restructuring as an alternative when agreeing to such loans that are normally secured against personal assets.

While annual rates quoted on a loan may seem reasonable, it is only close scrutiny of the paperwork that reveals penal rates such as the example of 26% per month that may apply to a covenant breach, despite any security.

Our advice is to look very carefully at the detail when considering an asset-based bank loan and to shop around for alternative sources of finance.  There are plenty of options out there and you can find them in our free, downloadable guide:  http://www.k2finance.co.uk

Economic recovery and funding growth

A recent survey by the FSB reported that 47% of its members had been refused loans in the last three months to September and 56% felt that banks did not care about SMEs.

At the same time, the Chief Executive of the British Bankers’ Association warned that requiring banks to improve their leverage ratio (money lent out in relation to capital reserves) could “do more harm than good”. Contrast this with Sir John Vickers, who was involved in drawing up post-crisis reforms to the banking sector and his arguing that the suggested ratios are still way too low and risky.

And, banks are still facing an estimated £10 billion in potential payouts to businesses mis-sold interest rate protection and hedging products.

No wonder that banks aren’t lending to SMEs.

In the meantime large business are estimated to be sitting on £700 million of cash reserves in readiness for funding development and growth.

What are small businesses supposed to do?

Firstly, there are other sources of finance besides the banks and K2 has a free, comprehensive guide to the options. You can find it at http://www.k2finance.co.uk

Secondly, and more importantly given the prospect of over trading as the recovery gathers pace, now is the time to ensure that the business model is right to fund growth and avoid running out of cash.

Advice from restructuring professionals is not exclusive to when a company is insolvent.  Their experience and solutions can also be used to help SMEs grow.

Turning around SMEs for growth

Signs of an economic recovery seem to be feeding through into increased confidence among chief financial officers of some of the UK’s largest companies, according to the latest quarterly survey from Deloitte, which has put the appetite for risk at a six-year high.

The findings, reported in Monday’s business section of the Telegraph, found that 54% of financial officers believed it was a good time to take risk onto their companies’ balance sheets.

This is all well and good, given that many of these companies have been sitting on an estimated stash of £700 billion in cash, but what about the SME sector?

There has been no sign of any improvement in lending to this sector as we have heard repeatedly in recent weeks, yet they are seen as essential to a sustained economic recovery.

So what can they do if they don’t have either the reserves or the borrowing capability to take to take advantage of the signs of recovery?

Many SMEs have been hanging on, managing cash flow and paying down debt wherever possible but if they are to grow they need to make sure they are in the best possible shape and this may be exactly the time when a restructuring expert should be called in to take a thorough look at their business model and whether it is possible to free up some of the cash currently going to creditors.

Quick, skilled teamwork by turnaround professionals does not have to be used only when a company is insolvent.  The techniques can also be used to put SMEs into the best position to plan for growth. But they need a consensual approach involving all stakeholders as we say in this article in the Turnaround Supplement just published by the Daily Telegraph here.