Travel and Tourism: a key UK economic sector, but potentially volatile

travel and tourism no more overseas holidays?As with any consumer-dependent sector of the economy, travel and tourism is susceptible to changing trends in consumer behaviour, to their disposable income and inflation, and of course to the weather.

The travel and tourism industry involves many businesses, from the small, independent SMEs running camping and caravan sites, holiday cottages, B & Bs and independent hotels in traditional seaside resorts, to adventure sites, amusement parks and beachside cafes, as well as the small independent travel agencies offering bespoke holidays and mainstream travel agencies offering packages.

Attitudes to holidays and disposable income

There has been a trend among UK consumers to opt for the “staycation”, holidaying at home rather than going abroad for a couple of weeks.

There have also been signs that the larger travel companies offering packages overseas have been struggling this year, with both Thomas Cook and Tui reporting declining bookings.

This has been more noticeable since the referendum vote in 2016 to leave the EU and can, at least partly, be attributed to the resulting substantial drop in the value of £Sterling. It has made it more expensive to travel outside the UK and more expensive to live with higher prices in the shops such as for food and goods as well as other basic needs like the recently announced above inflation 3.2% rise in rail costs.

Coupled with this has been a sluggish rise in wage growth that has barely kept up with inflation, despite record “full” employment, where many of the jobs created have been barely above living wage levels or involving zero hours or part time contracts.

All of this has an impact on disposable income and discretionary spending and as a consequence how much is available for holidays.

Difficulties in travelling abroad

Airlines and major airports have had significant bad publicity in recent months, making the prospect of travelling abroad an ordeal and far less attractive.

Ryanair, particularly flying into and out of Stansted airport, has had major problems with many flights being cancelled. These have been attributed variously to an electrical storm over Croydon on one occasion, to not enough air traffic controllers in Europe and strikes by its pilots in several European countries. The result has been flight cancellations at very short notice with thousands of stranded passengers suffering from delayed travel to or from holiday destinations and lengthy queues often of several hours to reclaim baggage.

This has been compounded by inadequate customer support and by Ryanair’s refusal to compensate many customers on the grounds of its exemption under Ts and Cs when circumstances are beyond its control.

Air traffic control strikes in France have also disrupted travel.

Inadequate staffing at the major airports, such as Heathrow, not to mention several IT failures, this year have also caused significant delays for travellers. This has led to one airline, BA, calling for improvements to the average wait of two hours for arrivees at major London airport hubs to get through border control.

Holiday attractions in the UK – and the weather

While the post-Brexit referendum exchange rate has made the UK a more attractive holiday destination for overseas visitors, it must be said that this year’s summer of unbroken sunshine has been a blessing for the UK travel and tourism sector.

One county in East Anglia, Suffolk, reported earlier this month that the sector had taken a record of £2 billion for the first time ever.

Suffolk, like many parts of the UK from Scotland down to Cornwall, has many features making it attractive for both overseas tourists and “staycationers”.  There are many places where visitors can find carefully-preserved historic buildings in attractive market towns and cities, so-called heritage sites, nature reserves and attractive countryside as well as our beautiful cities like London, Edinburgh, Bath or York. In UK there is something for holidaymakers of all tastes, although the weather can be a deciding factor.

It is admittedly more difficult to promote the UK as a sunny and warm holiday destination in the face of our usual summer drizzle, grey skies and variable temperatures.

Certainly, our recent sunny weather has been blamed by Thomas Cook and Tui for fewer travellers and lower profits.  Thomas Cook usually makes all its annual profits during the summer and this year’s slowdown in bookings has eaten to its overall profit rise.

Profits at Tui fell 18% to €193m (£174m) in the three months to the end of June, also attributed to the UK heatwave, but also to flight delays and cancellations during air traffic control strikes in France, along with the timing of Easter and the weaker pound in the UK.

A survey by Seasonal Businesses in Travel, which represents more than 200 outbound British travel companies, has predicted that post-Brexit completion European holiday prices are set to rise by 31 per cent, putting more than 250,000 UK jobs at risk.

Perhaps for those offering holidays in Turkey there is some respite following the recent 20% collapse in the Turkish Lira. Foreign exchange bureaux have reported running out of currency, indicating a mass exodus to Turkey.

Travel and tourism is always likely to be a volatile sector, but at the moment the signs are that the potential for more staycations will continue, and, if the airlines and airports can sort out their issues, possibly more holiday makers will come to the UK from abroad.

The new Corporate Governance Code offers lessons for SMEs

Corporate Governance Code should include worker consultationThe mission of the FRC (Financial Reporting Council) is stated as being “to promote transparency and integrity in business”, a message that we should all reinforce.

This, it claims, is at the heart of the revisions to its Corporate Governance Code published last month.

One of the main changes to the Code is a requirement for boards to understand and address the issues of all stakeholders, not just shareholders, and to consider the longer-term impact of their decisions.

This includes consultation on board appointments, not just with shareholders but also involvement of the workforce, where they recommend that either a director be appointed from the workforce, a workforce advisory panel be set up, or at least a non-executive director be designated to represent the workers.

It also recommends that there should be a mechanism for the workforce to raise concerns in confidence or anonymously with arrangements for “proportionate and independent” investigation where necessary. This, I believe, can best be covered by having a whistleblower policy which ought by now to be a standard policy in all staff handbooks.

The newly-published Code, which is effective from January 2019, has been broadly welcomed by the IoD (Institute of Directors) and the CBI (Confederation of British Industry) particularly the greater emphasis on the longer-term impact of decisions and on the importance of the workforce as stakeholders.

The TUC’s General Secretary, Frances O’Grady, however cautioned: “While it’s good this new code recognises the importance of workforce engagement, the real test is whether companies give workers more of a say in how they are run” regretting that the requirements were not made compulsory.

What can SMEs learn from the new Corporate Governance Code?

The Corporate Governance Code applies only to Premium Listed businesses, which is defined by the London Stock Exchange as those businesses meeting “the UK’s highest standards of regulation and corporate governance”. It adds that this status enables them to enjoy a lower cost of capital.

Nevertheless, the principles enshrined by the new Code are worthwhile for all businesses including SMEs to consider and incorporate into their culture.

Firstly, it should be obvious that clients and customers are more likely to use and remain loyal to a business that is clearly trustworthy and ethical and therefore business reputation is key to survival and growth.

Secondly, I have commented frequently that the way a business treats its employees can be crucial to its success or failure.

Too often, however, they are not seen as stakeholders with an interest in the business’ survival and who with their hands-on knowledge can help it to make improvements to systems and processes and therefore to productivity and profits.

As mentioned in my recent blog on why whistleblowers can be a force for good, employees are often in a position to identify malpractice and wrongdoing although this requires getting the culture right as all too often they are reluctant to speak out for fear of the consequences for their jobs.

Employee motivation is something that can also make a huge difference to a business’ success. If they feel that they are respected and their input is valuable they are more likely to engage by making recommendations for improvement and also to stay with the company. This can be crucial at a time when there is, as now, a significant skills shortage at all levels of business.

Finally, longer-term thinking in business has been in short supply in the aftermath of both the 2008 Financial Crisis and particularly since the decision on Brexit. This has had a negative effect on investment and so the focus on the longer term in the Code is surely to be welcomed.

Codes of Corporate Governance, therefore, have relevance not only for Premium Listed companies but for all businesses. They are, after all, about integrity and sustainability.

After TSB is HSBC the next bank with an IT problem?

HSBC branch in UKA recent experience with one of my many long-standing bank accounts with HSBC leads me to question, yet again, how well banks’ automated processes are designed to serve human beings.

While I have advocated IT and its benefits through time savings and efficiencies for a business, I have also questioned whether we are being naïve about its capabilities, most recently in my blog on June 21, when TSB was one of several organisations struggling with IT issues during a system upgrade.

Four months ago, HSBC requested that I provided evidence of my identity details for one of my several company bank accounts with them. I assumed this was one of its regular Money-Laundering checks.

I supplied the usual necessary information – a copy of my passport and a recent utilities bill.

This week, I received a cheque in the post for several thousand pounds being the balance in the account, an account through which my company has traded regularly for approximately 15 years. With it was a letter informing me that HSBC was closing the account.

This account has always been in credit and I as the sole director, along with my shareholders and account administrator have not changed since opening the account and are UK domiciled and based. We are not operating from some dodgy address in Colombia.

In its wisdom it appears that the HSBC computer said “no”

Despite my having several accounts for different businesses with HSBC, some of them for many years, and none breaching any covenants, the computer has made its “judgement” on this particular company.

How many other HSBC business clients have fallen foul of this kind of automated checking process?

Is there a problem with the HSBCs IT system? Or perhaps with the parameters they set for carrying out such checks? Or for making such “judgements”.

Or is this an early symptom of impending wider problems with their IT system?

It is ridiculous that banks do not have fall-back positions, perhaps even allowing staff to intervene and override the computer’s decision since it is not acceptable to automatically close accounts with clients after a long and perfectly satisfactory history.

Whatever the explanation it is hardly helpful for SME business customers for whom such an outcome could potentially cause considerable disruption to their daily operations.

And in a highly competitive banking sector, perhaps HSBC should revisit its system to make it more user friendly, for both clients and staff.

Picture credit: Alan Longbottom

SMEs, cash flow forecasting and resilience

cash flow forecasting in stormy weatherThe CEO of a business finance provider, Richard Pepler, of Optimum Finance Ltd was recently reported by the publication Business Matters Magazine to have suggested that entrepreneurs should take a business competency test similar to the driving test before being allowed to set up and run a company.

In fairness this was in the context of his stressing that cash flow forecasting and up to date management accounts were essential documents for a business to produce and monitor regularly.

This makes sense given that a recent survey of SMEs by American Express revealed that 46% of “senior decision makers” had reported that cash flow issues were distracting them from focusing on elements of business growth such as product development and marketing.

As my regular readers will know, I, too, emphasise that regular preparation and scrutiny of management accounts and cash management schedules are fundamental to business survival, resilience and business growth.

Why cash flow forecasting and control are more crucial than ever now

The latest Markit/CIPS service purchasing managers’ index for the services sector showed a reading of 53.5 in July, down from 55.1 in June – the slowest rate in three months.  It has reportedly also slowed down in the Eurozone services sector.

This should sound a warning note given that despite the UK decision in June 2016 to leave the EU, the services sector has remained resilient so far when compared to manufacturing, which has been much more volatile.

This year, at a time traditionally called the “silly season” by the media when politicians are on holiday, there appears to have been no let-up in the flood of Brexit-related noise from both sides of the divide.

In just the last few days we have had Mark Carney, Governor of the Bank of England warning that the chances of a “no deal” Brexit are uncomfortably high and Overseas Trade Minister Liam Fox putting the odds of this happening at 60:40.

The pro Brexit side seeks to play down the fears of lorry parks outside Dover, food and medicine shortages etc as absurd, with Sir Bernard Jenkins this week comparing such warnings to the fears over the Millennium Bug that turned out to have been fruitless and Jacob Rees Mogg asserting that the UK would thrive by trading under World Trade Organisation (WTO) rules while the EU would lose out.

With a global trade war in the background as well, is it any wonder that organisations like the FSB (Federation of Small Businesses) and the IoD (Institute of Directors) are complaining about an “information void” that is making contingency planning near-impossible. An IoD survey of 800 business leaders showed fewer than a third had made any Brexit contingency planning because of the uncertainty.

In my view it is precisely at times of extreme uncertainty that SMEs most need to be building their cash reserves and closely monitoring their Management Accounts.  I recommend that holding a surplus of cash offers a safeguard against any unexpected and unwelcome surprises as well as having the resources for what may be some stunning opportunities.

Now, more than ever, businesses need to build resilience into their finances and protect themselves from potential economic storms if they hope to thrive and eventually grow sustainably.

August 2018 Key Indicator: is consumer spending undergoing a massive change?

consumer spending - a devastated landscape?The UK economy is generally described as a consumer economy.  This means that its health is significantly dependent on and measured by how households spend or save their income.

The effects of changes in consumer spending behaviour can be dramatic for businesses as my July 2018 Key Indicator on the retail sector demonstrated.

But consumer spending behaviour is not simply directed by a change in habits and tastes.  In this month’s Key Indicator, I look at those factors that affect how much disposable income is available and how this influences spending decisions.

The majority of consumer income is earned as salary or wages from employment.

This may be topped up by benefits, such as the tax credit system for households with children, where family income is low. This was restricted to being payable for the first two children only, following various adjustments to state benefit rules since the 2008 financial crash and the introduction by the Government of various “austerity” measures as part of efforts towards economic recovery.

For the retired, household income generally comes primarily from state and occupational pensions.

Household income may also be topped up by interest and dividends from any savings but recently these have been low, none the least due to the unprecedented low levels of interest rates.

The factors that affect disposable income and therefore consumer spending

There have been several worrying indicators that consumer spending has been sluggish throughout 2018, and this has a significant impact on the health of an economy like the UK’s.

The most recent figures published by the Office for National Statistics (ONS) on household consumption are for the first quarter of the year, from January to March. Although there is always a time lag in publication they are indicative of a longer-term trend.

Consumption remained subdued at 0.2% in Quarter 1 2018 according to the ONS and in 2017 annual growth in household consumption remained at its weakest since 2012. The ONS reports that this is “consistent with the slowdown in output for consumer-focused services industries, which has been on a declining trend since late 2016.”

The factors that are likely to have affected this are the weak growth in real wages, with household incomes squeezed by rising import prices following the past depreciation of £Sterling following the 2016 Referendum vote to leave the EU.

According to the ICAEW (Institute of Chartered Accountants in England and Wales) sluggish wage growth at on average 2% in the face of a near- 3% inflation rate is also a major factor in the squeeze on household incomes.  This is despite unemployment being at its lowest level since the early 1970s and therefore the existence of a skills shortage in some sectors. But it is outweighed by the existence of such things as tax and benefit reforms, the growth of the “gig economy” and zero hours contracts that have changed the employment landscape for both businesses and employees and in turn reduced the reported level of unemployment statistics.

Kamal Ahmed, the BBC’s economics editor says he looks at two statistics when examining people’s finances.  These are firstly whether they are net borrowers or net lenders, and secondly at their savings ratio.

Net borrowers are either borrowing, or spending their savings, to make ends meet.  Net lenders are those “lending” money to the economy in the form of pension contributions, savings and investments”.

The savings ratio is the proportion of people’s disposable income that they save. Here again there are worrying signs in the most recent ONS data. The savings ratio is currently at 4.1%, the third lowest since records began in 1963.

As I reported in my blog on Tuesday (July 31) the most recent statistics from the Insolvency Service, on the second quarter of the year, April to June 2018, also revealed a worrying indicator on individual and household finances. This was that numbers of individual insolvencies had reached their highest level since the first quarter of 2012 and had increased by 4.4% compared with January to March 2018. Again, this has been an upward trend for several months.

According to the ONS British Households spent on average £900 per year more than they received in income in 2017 and there are signs that people are increasing their borrowing. There are three main sources for personal lending which are all growing: credit cards, finance for capital items like cars, and payday loans. Most of this debt is not to buy luxuries but simply to make ends meet since so many people live paycheck to paycheck.

The implications for SMEs of a potential change in consumer spending habits

Clearly the retail sector is the first to feel the effects of changes in consumer spending and arguably the shift to online purchases has not only been because of the convenience but also because buying goods online can often be less expensive.

Equally the rise of the budget food stores, such as Aldi and Lidl, suggest a shift in food shopping habits to make household incomes stretch further.

There may also be signs of a shift in the travel and tourism sector based on fewer people taking holidays abroad and instead having “staycation”. This is something I shall be exploring in a focus on the sector later this month although there may be other factors at play here as well.

Clearly, though, the pressures outlined in this blog on household incomes would suggest that unless things change to improve our national economic prospects there may be a longer-term shift in consumer spending habits.

Those businesses that rely on consumption should not assume this is a temporary blip.

Given the changing circumstances it will be essential for those of you in this sector to review and adjust your business models, your marketing plans and your products and services in order to safeguard your business for the future.

Stop press: it remains to be seen what effect today’s Bank of England Interest rate increase, from 0.5% to 0.75%, will have on consumer spending but it is likely to affect all those with variable or tracker rate mortgages making disposable household income even tighter.

Insolvencies: business failures slowing but individual insolvencies climbing

individual insolvencies rise signalling storm clouds overheadI generally concentrate on the quarterly insolvency statistics for businesses since my blogs are designed to help SMEs.

However, there has been a worrying trend in the numbers of individual insolvencies and in the latest quarter’s figures, from April to June 2018, released by the Insolvency Service they had reached their highest level since the first quarter of 2012.

This could have implications for businesses, especially those that depend heavily on consumer spending.

Company insolvencies for Q2 2018

While company insolvencies are still higher than they were in the same quarter in 2017 decreases in compulsory liquidations, administrations and underlying creditors’ voluntary liquidations meant that the underlying numbers of insolvencies had decreased.

Total company insolvencies for April to June decreased by 12.4% compared to the first quarter of 2018 while the underlying number of insolvencies decreased by 2.0%. However, insolvencies were still 12% higher than for the same quarter in 2017.

The construction industry and the wholesale and retail trades still top the list of failing companies as has been the trend for some months.

During the first half of 2018 there were 196 CVAs which is hardly any increase on the 171 CVAs in the same period of 2017. I suspect a large proportion of these were accounted for by retail businesses looking to reduce their rent as evidenced by the high-profile examples we have been reading about in the press.

Individual insolvencies for Q2 2018

The numbers for individuals getting into financial difficulties are noteworthy, because they have been steadily increasing since 2015 and sooner or later are likely to impact on SMEs as mentioned above.

IVAs (Individual Voluntary Arrangements) reached a record high between April and June and individual insolvencies increased by 4.4% in this quarter when compared with January to March 2018.

It may be that a combination of factors is at play here, in that prices have been rising since the EU referendum vote as the value of £Sterling against other currencies has plummeted, making imports more expensive, while wage growth has been slow and the proliferation of low-skill, low-wage employment or uncertain zero-hours contracts has put pressure on individual finances. Also access to credit is becoming more difficult as regulation has begun to restrict loans to those who cannot prove their ability to repay debt.

This month’s key Indicator will explore all this in more detail when the focus will be consumer spending and potential changes in spending and saving habits.

I hope it will provide useful insights for you as SMEs.

 

Leaders: Can you imagine turning off your phone when on holiday?

enjoy this tropical sunset more by turning off your phoneIt is well-known that a third of SME business owners take fewer than 10 days off per year and on average work at least 50-plus hours per week compared with the average of 37 hours for employees.

Even those who do manage to take a holiday often keep in touch with their offices and would not dream of turning off the phone.

This is hardly likely to please your family or whomever you are holidaying with, but have you thought about the damage it may be doing to you and your business?

 

Why you should consider turning off your phone on holiday

The most obvious reason is that you need time to relax and recharge your mental batteries. You are hardly likely to be able to do this if you are constantly attuned to the possibility that you need to be available to answer questions by phone or email.

Many business owners also suffer from a need to be constantly in control of every aspect of their operation and find it hard to delegate to others in their organisation. This means that too many are working in their business rather than on it and may be missing out on opportunities and ideas for growing and developing the business.

This focus on maintenance instead of strategy can lead to stagnation instead of growth.

This relates to the main reason why you should consider turning off your phone. You can relax properly. An uncluttered brain thinks subconsciously and can bring a perspective to problems. It affords you the time to reflect and through the process of reflecting on past successes and failures you come up with new ideas for the future.

You really ought to have the systems in place and sufficient back up to allow yourself to switch your phone off without anxiety. You should be able to reassure yourself that the business will continue without you, albeit only for a few weeks.

If however it really is impossible to be completely cut off from your business while on holiday, there are several things you can do to better manage that contact and carve out time to relax, refresh and reflect.

You can engage a call handling service that you can brief properly so that they can handle your calls in a way that only critical ones are passed on. Another option is for you to receive a daily report with details of anything that needs your urgent attention. You might schedule a daily 15-30 minute time slot to deal with anything that emerges knowing you can switch you phone off outside here calls.

If using a virtual assistant/ call handling service is not right for your circumstances you can identify someone to whom you can delegate to operate a similar system.  It may be that this will also help to identify areas that can be perfectly well handled by another member of your team in the longer term and free you from the need to control everything as well as from the fear of letting go of at least some control.

If you are planning a holiday and are willing to risk turning off your phone for most of the time it is wise to make some simple preparations such as informing all clients that you will be away and giving them the name of a person to contact with anything urgent in your absence. You will also need to explain to that person what they need to know about any current issues clients are facing.

Consider such preparations as business continuity planning just in case you need to take time off. What happens if you are ill?

If you really want to, you can resolve to take your break and relax reassured that it will be in the best interests of your business to do so.

Apply the insights from business anthropology to your company

business anthropology and the evolution of human behaviourHaving introduced business anthropology in a blog last month, now is a good time to start applying what you have learned.

To remind you, business anthropology looks at the relationships and interactions between people working with each other. It looks at the relationships and motivations of individuals and teams and how you might ‘press the right buttons’ to improve productivity.

Great insights cam be gained by observing people and how they behave with others. This can be difficult for leaders as it involves watching and listening objectively and not interfering while carrying out their research. It raises their level of awareness.

It can also be used to look at clients and consumers whether looking at their interactions with your products and staff, or at your staff and how they deal with customers, rather like a secret shopper.

Essentially business anthropology insights can be used to make improvements to your business.

There are three areas where you might consider applying such insights. These are in changing the corporate culture, refining relationships with customers and clients, and in developing new or improving existing products/services.

Business anthropology and corporate culture

In a situation where the age profile of the workforce may be changing as new, younger employees join your business and have to learn to interact with older employees it may be that you should pay some attention to understanding the differences in approach and work style of the two groups and introducing ways of encouraging greater integration.

There will be many more areas to look at but the approach begins with awareness of a need to change and is implemented through engagement with those affected.

Business anthropology and customers

This is about listening for unmet needs, pain points and challenges.  It is also about how your employees interact with customers.

It can be helpful to go through the process of buying and using a product yourself and this can often feed in to developing a new product or service.

An illustration of this is from 1999 when Procter & Gamble, suppliers of cleaning products, engaged anthropologists who watched people cleaning their floors. They noticed that the process also involved a significant amount of time spent cleaning the mop itself.  The result was the development of the Swiffer, floor cleaning equipment that came with a handle/applicator and a collection of disposable pads to attach and use for wet or dry cleaning.  This remains one of the company’s most popular products.

It worked because the observation of the process identified a “pain point” and provided an adaptable solution that cut down on the amount of time needed to clean a floor.

Please let me know if you have applied business anthropology methods to your business and what insights you gleaned from your observations.

Why whistleblowers can be a force for good in your business

not whistleblowersMany people are afraid to speak out when they discover wrongdoing or questionable behaviour in their workplaces for fear of the damage they may do to their careers and employment prospects since all too often they are often regarded as outcasts.

The recent high-profile revelations by whistleblowers in the Cambridge Analytica and Brexit campaign organisations have shown that, in these days of ubiquitous social media, those who were brave enough to speak out became the target of some high-profile abuse and attacks, some of them personal.

But if your business is one where a culture of speaking out is either frowned on or not encouraged it may well be missing out on information that could help it to improve not only its operations but also its values and reputation.

Make your business safe for whistleblowers

Employees are often in a better position to see when something is going wrong than its board members are.

So how can you ensure that you are alerted to behaviour or practices that could damage your business?

You need to make it clear that revelations of malpractice or ineptitude are welcomed and that your business culture is transparent and open to people being able to voice concerns in a responsible and effective manner.

Malpractice can cover a wide range of situations from bullying, theft, bribery, fraud and corruption to endangering people’s health and safety to misuse of company property as well as any attempts to conceal such misdeeds.

Ineptitude becomes a whistleblowing matter if it has an adverse impact on people and the business or if it relates to breaches of company policies.

It is therefore good practice to have a clearly-defined whistleblowing policy and to let everyone know it is safe to raise any concerns they might have and that allegations will be treated as having been made in good faith.

The policy should clearly state the procedures that should be followed when anyone identifies something that they feel ought to be reported. It should also set out the procedures for managers to deal with the matter and cover confidentiality and protection for everyone involved.

Confidentiality is an issue that is also covered by privacy law. Those making allegations should be encouraged to put their name on record although disclosure needs to be managed carefully. You should also identify an investigating director within your business with whom concerns can safely be raised.

If the whistleblower feels that they need it, it should be made clear that your business is happy for them to be accompanied by a trades union or other representative at all meetings and hearings.

The investigating director should be required to fully investigate the allegations and prepare a written report of the allegations, their findings and their recommendations, preferably with the involvement of your HR department.

The whistleblower must be kept informed of progress as should the person about whom allegations are made, especially if they are an employee.

If necessary, it may be appropriate to involve relevant outside authorities, such as the HSE or the company’s auditors and if necessary the police.

While the company culture should be one of trust such that employees who report a matter as a whistleblower should be believed, you should also be aware of their agenda. The investigation may reveal that the whistleblower is in fact the problem which is one reason why the investigations should be discreet and the confidentiality of all parties preserved. If a whistleblower does turn out to be the problem or they are using the procedure to pursue their own agenda then they should be dealt with under the company’s disciplinary procedure.

Whistleblowing is, however, essential when some people are wilfully blind to behaviour that ought to be addressed. An open and constructive approach to confronting and dealing with such behaviours is essential to a company’s values, culture and reputation.

A properly constructed whistleblower policy can encourage people to act in the best interests of your company and ultimately ensure your business reputation is not compromised.

How do you resolve a boardroom conflict?

boardroom conflict like two rhinos going head to headIt is not unusual when I am called in to advise a SME in distress on restructuring its business that I find that there is a conflict among directors.

Perhaps it is no surprise that in today’s trading environment there should be disagreements at board level about how to proceed, particularly during financial difficulties when people are under stress.

However, a successful turnaround plan depends not only on my thorough investigation of the state of a business, in terms of the numbers and the business model, it also needs the support of the board, suppliers as creditors and other stakeholders, not least the employees.

While a conflict among directors has the potential to undermine, damage and disrupt a business at any time, this is more so in a tight corner when leadership and a united team is needed to execute a turnaround plan.

Tools that can help to resolve a boardroom conflict

While every business, and every conflict, is likely to be unique there are some tools that can help when seeking an acceptable resolution.

Does your company have a shareholders’ agreement or articles of association that lay out an orderly board process when dealing with disputes? Does it have a staff handbook that deals with behaviours that can get in the way of conflict resolution such as bullying and abuse? Are you familiar with board governance and protocols for dealing with issues and majority decisions?

A suitably drafted shareholders’ agreement can be particularly useful to set out those decisions that can be taken by directors and those that require shareholder consent. They can also be used to set out circumstances that require directors to refer matters to shareholders such as when directors disagree.

Does the business have a chairperson who is familiar with governance and their duties as well as knowing and understanding the characters of those involved in the conflict? They need a level of self-awareness in addition to people and communication skills and ought to remain neutral when meetings become heated.

Has the dispute been subjected to a Root Cause Analysis (RCA) to identify where and how the dispute has arisen?  The origins of a dispute in a RCA can be classified as coming from a physical cause, such as a machinery breakdown; human causes, such as personality clashes, not everyone pulling their weight or perhaps making mistakes; organisational causes, such as hidden flaws in a system or process that are likely to lead to misunderstandings; or financial and strategic disagreements such as over investments or the direction of the business.

Whatever the root causes, their appearance may well need engagement by shareholders or even secured lenders concerned about how the company is being managed. It can be important to distinguish between frustration and under-performance or whether there is a fundamental disagreement since the process and outcomes will be very different.

Conflicts of interest among directors are also an issue and should be transparent since directors often have several roles with different stakes in the outcome, whether as employees, minority shareholders, majority shareholders, creditors, guarantors, opportunist, or they are passionate about the business at a level that can make them blind to reality. Whatever their other roles, as directors they have a primary duty to the company including its shareholders and employees when the business is solvent, and to its creditors when it is insolvent including when there is the slightest prospect of creditors not being paid.

Most conflicts can be resolved through listening, understanding, empathising, negotiating and compromise to reach a consensus, and this is where external advisers such as a restructuring adviser can help.

Deadlock situations such as between two directors who each own 50% of the shares tend to be the most difficult to resolve. This is where trusted parties such as friends representing each director can be useful to help the disputing parties distinguish between emotion and practicalities. Some form of mediation or dispute resolution process is also often necessary to manage the process as well as find a resolution.

The courts also offer a useful backstop although it will be necessary to show that alternative dispute resolution options have been explored before seeking judgement.

As an aside, deadlock situations can be avoided by having a simple agreement at the beginning of the relationship. One I introduced years ago as a 50/50 shareholder setting up a business was with a co-director where at the time we both attended the same church. We agreed with the vicar that if ever we had a dispute we would seek and be bound by his adjudication. The vicar understandably didn’t want to take sides but agreed for his part to appoint an appropriate expert who would pursue a process and if necessary recommend a resolution. We agreed that this would be binding on us since we both trusted the vicar and his desire to ensure a fair outcome in the event of a dispute. Fortunately, we never had to call on his wisdom to rule ‘the Judgement of Solomon’.