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Banks, Lenders & Investors Business Development & Marketing

Long term corporate survival can only be achieved by having the right values

corporate survival means eliminating industrial pollutionThere are signs that the Gordon Gekko culture of “greed is good” is dying and that corporate survival will depend on not only giving customers what they want but also being seen to have and act on a wide range of ethical values and behaviours.
In an environment of high employment and significant skill shortages in many sectors, the bargaining power of millennials and Generation X will only strengthen as the older generation of employees retires.
Equally, the power of consumers and customers choosing who to buy from is having a greater impact on corporates’ processes and practices.
In this context, CSR (Corporate Social Responsibility) policies will no longer be enough. Too many of them have been unmasked as marketing and PR exercises among the larger corporations and of little practical substance. SMEs often fare better, however, being closer to their localities and customer base, where their greater visibility puts them under pressure to be more accountable.
However, movements like Extinction Rebellion, highlighting the urgency of acting on environmental damage, as well as greater publicity about the treatment of whistleblowers who have unmasked the less than ethical behaviours of their employers (eg the Cambridge Analytica scandal), often at great cost to themselves, have focused attention on better ways of assessing corporate behaviour.
To address these concerns, ESG (Environmental, Social and Governance) is becoming more and more popular as way of assessing Sustainable Investment.
ESG incorporates measurements of how businesses respond to climate change, treat their workers, build trust and foster innovation and manage their supply chains. ESG is also becoming a key marker for investors decisions, according to a blog by npower, which claims that “a quarter of the world’s professionally-managed investment funds now only invest in companies that demonstrate solid ESG credentials”.
It quotes Nigel Topping, the head of the We Mean Business coalition of 889 companies with $17.6trn in market capitalisation: “If these challenges are tucked away and approached solely for compliance reasons, they are not being integrated. And if businesses aren’t incorporating them into financial decisions and long-term planning, then they are not being taken seriously – which leaves the business poorly prepared for the future.”
Businesses can adopt a process of continuous improvement on their energy efficiency, for example, by adopting the globally-recognised ISO 50001 standard, which can be verified and used to reassure customers, clients and investors.

Employee and consumer pressure means incorporating ethics for corporate survival

Investor, employee and consumer pressure is mounting for companies to incorporate the values that will help ensure corporate survival, despite some being at the expense of short term profits. This is somewhat at odds with many senior executives whose focus has been on reporting profits. The focus on profits has been understandable since they underpin most reward structures but this will need to change as ESG gains acceptance.
There are many recent examples of changes to corporate behaviour as a result of consumer pressure, most notably this year’s focus on plastic waste and environmental pollution.
Not surprisingly, the superstores and hospitality industries have been in the forefront. McDonalds has committed to completing a roll-out of bringing in paper straws in all its outlets by the end of the year.
Waitrose removed all its plastic straws from sale last year and has promised to reduce plastic whenever possible, while Iceland aims to be “plastic-free” by 2023.
Single-use plastic carrier bags are no longer to be had in virtually all the superstore chains and both Morrisons and Sainsbury are rolling out plastic-free fruit and veg areas across their stores.
But ethical behaviour is not focused solely on environmental concerns.
Just a few days ago the Chartered Institute of Credit Management (CICM) suspended another 18 businesses from the Prompt Payment Code for failing to pay 95% of all supplier invoices within 60 days. They included Screwfix, Galliford Try, and Severfield.
Employees and potential employees are also becoming more discriminating.
Research in the USA has revealed that:
* 75 percent of millennials would take a pay cut to work for a socially responsible company.
* 76 percent of millennials consider a company’s social and environmental commitments before deciding where to work.
* 64 percent of millennials won’t take a job if a potential employer doesn’t have strong corporate responsibility practices.
PriceWaterhouseCooper has also studied the millennial generation and found that “corporate social values become more important to millennials when choosing an employer once their basic needs, like adequate pay and working conditions, are met”. Their report concluded that “millennials want their work to have a purpose, to contribute something to the world and they want to be proud of their employer.”
There are moves afoot from the Government, too, to strengthen protection for those who discover unethical, or unlawful, behaviour in their workplaces and become “whistleblowers”.
Business minister Kelly Tolhurst has announced proposed new laws to ban the use of NDAs (non-disclosure agreements) that stop people disclosing information about their employer to the police, doctors or lawyers.
There remains the issue of excessive corporate executive remuneration to tackle. While there has been a significant increase in the numbers of shareholders who have questioned CEO and director level remuneration, so far, the High Pay Centre has found that every single vote at a FTSE 100 firm was approved between 2014 and 2018.
Clearly there is some way to go before the adoption of ESG by corporates becomes the norm, but the momentum is there and businesses should pay heed as their corporate survival will increasingly depend on it.

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Banks, Lenders & Investors Finance General

Is there a link between unethical personal behaviour and corporate behaviour?

infidelity and corporate behaviourCan and should investors expect the corporate behaviour of CEOs to be ethical if their behaviour in private is less so?
Releasing the names of those people who had registered their interest in having an extra marital affair following a hack of the Ashley Madison data base caused much vicarious interest. While it no doubt embarrassed those who were exposed and possibly excited some divorce lawyers, it raised the question as to whether someone who deceives their marital partner is more likely to deceive their business or their business partners and shareholders.
It prompted research in the USA by authors John Griffin, Samuel Kruger and Gonzalo Maturana, who then published their work Do personal ethics influence Corporate ethics?
They had cross matched some of the names revealed with corporate information available from Lexis Nexis and other sources, and against the US’ Financial Industry Regulatory Authority’s BrokerCheck and the results revealed a correlation between those financial advisers exposed for marital infidelity and those with a record of serious misconduct revealing that they were twice as likely to have committed an offence.
A similar correlation was revealed when they checked revealed names for chief executives and chief financial officers.

Is ethical behaviour the same whatever the context?

The authors argued that there is plenty of research that shows that the behaviour of CEOs influences others in a company: “other employees perform better if they think the top management is trustworthy and ethical”.
I recall being asked by owners of a nightclub in Greek Street to investigate its lack of profits with view to improving them. I quickly discovered that significant amounts of cash were disappearing from the tills. It turned out that the owners were popping in to take cash, the managers knowing this were also taking cash and so were the staff. Everyone was at it and it was clear that the business was morally and culturally bankrupt with no one interested in it being successful. Theft had become part of the culture where knowledge that others were stealing made it OK. I closed it down and sold the premises on the grounds that a cultural transformation was required based on changing all staff and the behaviour of the owners.
There is a debate to be had about whether some behaviour is acceptable in the corporate context that would not be acceptable in private or social life.
Businesses are largely results and profit-driven and these days investors expect results in a much shorter time than they would have in the past. While outright cheating, deception or breaking the law would not be condoned, aggressive pursuit of corporate goals is arguably a much greyer area.
According to the website ethical systems.org “Research suggests that people’s moral compasses are malleable and that various factors influence them. People do differ in their levels of personal integrity, but everyone is susceptible to environmental influences.”
It argues that the behaviour of leaders can therefore have a critical influence on the behaviour of those they are leading. My example of the nightclub supports this.
It makes sense, therefore, that leaders should demonstrate a balance between a focus on outcomes and goals and the means by which they are achieved and that it is important to also focus on people’s efforts to improve and to reward them.
There is also the argument that if a business is receiving bad publicity for the way in which it treats customers and addresses their customer complaints such that it is perceived to be entirely profit-driven and paying scant attention to the quality of service then ultimately the business will be damaged.
So logically, if such behaviour is damaging the bottom line, then the return to investors will also be damaged, and it therefore makes sense for investors to pay attention to the ethics of CEOs both in their private and their corporate behaviour.

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Accounting & Bookkeeping Banks, Lenders & Investors Finance Turnaround

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.
 

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Business Development & Marketing General

Post truth, fake news and business integrity

The Weekly Fake News Newspaper Convincing potential customers and clients that your business is both trustworthy and ethical, delivering what they want, and what you promise, has never been easy.
But it has become much harder in the “post truth” and fake news world, where cynicism has become the default position on any statement.
It is all too easy for politicians to dismiss any news report they dislike or see as critical as “fake” as seems to have been the default position in both the pre-Brexit referendum in the UK and in the recent US Presidential election.
Unfortunately, the repercussions have been far wider than those particular issues not least because there have also been a number of scandals in the business world, such as the behaviour of VW over the true level of CO2 emissions from various car models.
Not surprisingly any public pronouncement by anyone in politics or business is now often viewed with scepticism and cynicism.
There is a second factor that is making life more difficult for SMEs.
The age of Twitter, texting, instant messaging and social media in general have arguably resulted in shorter attention spans so that people, especially but not only the younger element, have neither the time nor the willingness to either read anything in depth or longer than a few lines.
Add to this the impatience for instant returns on any investment by shareholders and investors and it is clear that the challenges facing business are mounting up.
Yet businesses still need to survive and grow regardless of the above and of the uncertain climate that will prevail once the Government triggers the process of leaving the EU later this month and for the two years at least that the negotiations will take.

So what can SMEs do?

The most obvious approach is to keep calm and carry on. Continue with the marketing but perhaps shift the emphasis a little in ways that demonstrate that the staff and the business can be trusted, which is helped by not making exaggerated claims.
The genuine, ethical business, especially the smaller and well-known local SMEs, should counter scepticism by emphasising their history of good service with recommendations from actual customers and clients, even of their suppliers if appropriate.
Try blogging or providing downloadable fact sheets or examples to provide additional insights and information without expectation of reward in ways that reinforce integrity. Consider collaborating, even with competitors, but remember people tend to be measured by the company they keep. Many small initiatives can add up to a powerful message and be surprisingly productive for all involved.
Being open and honest about products and services, and providing a high quality and level of support helps build and maintain a reputation for integrity that takes years to establish and can be damaged quickly if standards slip without promptly addressing the problem.
While it may be fashionable to believe nothing anyone says, actions speak louder than words, but more importantly words and actions go hand in hand and should reinforce each other.

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County Court, Legal & Litigation General

Corporate Governance review needs your responses

word cloud corporate governanceIt has received very little publicity but in November 2016 the Government published a green paper outlining proposals for a review of corporate governance.
The green paper provides information on the current situation. It includes proposals for changes and is being used by the Government to stimulate debate, consult with the wider community and gather contributions and suggestions.
The deadline for responses is Friday, February 17, and the paper includes a useful list of questions, as well as information on three ways to respond, either by email, through a website or as hard copy.
The paper covers three main themes, executive pay and its regulation, strengthening the voices of employees, customers and suppliers at board level and the current anomaly whereby large privately-held businesses are subject to lower standards than public companies.
A fourth section has been included asking for suggestions for other ideas or themes that could be explored to strengthen UK corporate governance.
In her introduction to the green paper the Prime Minister emphasises the pledge she has repeatedly made to strengthen the economy and UK business “for everyone, not just the privileged few”.
She argues that for people to retain faith in the economic system “big business must earn and keep the trust and confidence of their customers, employees and the wider public.”

Ethical behaviour is a must for all businesses

Ultimately no business, whether it is a SME or a large corporation, can hope to prosper and grow long term without earning the trust of its employees, customers and suppliers and even the wider community.
While the focus of this green paper is on larger concerns, it contains food for thought for all types of business.
The treatment of employees, fair levels of pay for both workers and senior executives, how the business relates to and contributes to the community in which it is located and how it treats its customers all contribute to its reputation.
While the larger business may seem to have the power to get away with sometimes questionable behaviour this is not a risk SMEs can afford to take if they want to survive and prosper.