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Banks, Lenders & Investors Finance General Turnaround

What is the purpose of a company?

company purpose and directionSomething to reflect on over the festive period is a debate we have been hearing more and more about recently, challenging the purpose of a company as a corporate entity.
It may seem obvious at first sight but there are actually several questions to be considered.
The assumption that companies exist to make money may appear to be self-evident, but for whom and for what purpose?
Is it simply for the benefit of its shareholders? But what about its other stakeholders?
What about employees, many of whom may have worked for the company for far longer than shareholders have held shares? Indeed, many employees may also expect the company to be able to pay their pension in the future.
Where also do lenders and creditors stand especially in the UK where their interests are paramount in insolvency proceedings?
The local community and environment are also becoming important stakeholders with ever more focus on corporate social responsibility, health and sustainability related legislation.
In the EU there has been some effort to harmonise company behaviour across different countries, such as in the Directive, Solvency II, which aims to unify a single EU insurance market and protect the public from bail-outs.

Do cultural differences affect the purpose of a company?

Despite attempts to harmonise legislation, there are cultural differences that are likely to prevail. For example, in Southern Europe much legislation is primarily for the benefit of employees.
Most regulators seem to focus predominantly on trying to prevent risk-taking, particularly by banks, which are essentially companies that primarily make their money out of risking capital.
In the UK, there has been a growing culture of shareholders taking money out and leaving companies leveraged to the hilt risking jobs, pensions and creditors.
Another reason behind the large number of new companies being formed is as an employment vehicle for their shareholder/directors. This might be sensible given the personal liabilities of being a sole trader versus the protection of the corporate veil. But was this intended?
It is understandable that ever more regulation imposes ever more responsibility and increasing personal liability on directors to discharge their duty to the various stakeholders of a company.
So what exactly is, or should, a company be for? and for whose benefit?

Categories
Business Development & Marketing Finance General Rescue, Restructuring & Recovery Turnaround

Christmas is an opportunity to say "thank you"

thank youEveryone responds well to praise and in particular it makes staff feel valued. This in turn makes them want to work for you.
Simple things like thanking someone for a job well done is important as is making a point of thanking them when they put themselves out for the business. Often managers ask staff to stay late, or to do something special on top their normal job which if recognised by a personal ‘thank you’ means they are likely to help out in the future.
Saying “thank you” is good, but writing it is much better and Christmas provides a great opportunity to write to each member of staff or at least your team members with a personal message.
We should all remember that staff mobility is an indication of how they feel about their employer.
Good employers retain good staff through respect and empathising with them; this is not simply about money.
Bad employers, end up with those members of staff who can’t get a job elsewhere.
It is not just staff who need recognition but their families as well. Get it right and partners will be supportive, even when they are put out. Get it wrong…. well?
I heard a few days ago about a recently qualified accountant with a top accounting practice who had booked and paid for his holiday but at the last minute was asked to work. No doubt the work was necessary and the demand reasonable but his partner was also affected, she went on holiday alone. The firm in question not only failed to recompense their employee but also failed to understand the anger expressed by his partner.
Corporate culture is key to motivating staff where some cultures lack empathy and even reinforce sociopathic behaviour, like some accounting firms.
Have a great Christmas, and do make a point of thanking those who you want to work for you next year. Their families will make sure they come back to work.

Categories
Business Development & Marketing General Turnaround

Trust and loyalty are essential for a business

A lot has been said about customers’ loss of trust in banks, supermarkets and other large corporations but there is another aspect of trust that is essential for a business.
There is need for a mutual trust based on the relationship between staff and their employer, normally its directors as the key decision makers.
A good example is what happened at the onset of the global financial meltdown, when many businesses were able to survive only because their employees agreed to cuts in hours or pay.
Much of the employees’ motivation would, of course, have been based on a fear of unemployment or redundancy if they did not agree. The mutuality of the relationship would suggest some element of compensation for the sacrifice beyond simply retaining a job.
Furthermore if the relationship is abused such as by holding down wages when profits return, how will employees react when their fear of not getting another job is no longer keeping them?
Trust and loyalty are as important in times of growth as in times of crisis.
Business owners need to understand their staff and acknowledge those who made sacrifices; equally employees need to feel valued and be able to trust their employer.
While money can be one way of thanking staff for their sacrifice or ‘going the extra mile’ there are plenty of other ways from a staff party to holiday vouchers, hampers or simply improved facilities and fresh flowers in the office.
It would be great to hear some interesting examples of how employees have been rewarded for their loyalty.

Categories
Business Development & Marketing Finance General Rescue, Restructuring & Recovery

No magic lantern, just commonsense

This week the successful online e-commerce company Alibaba will make a pitch to investors as it prepares to launch as a public company on the US stock market.
Jack Ma, the founder of the highly profitable 15 year-old company, issued a letter to investors along with the company’s prospectus. In it he described the company as an ecosystem with a long term vision.
The letter contained some striking points. One of them is that shareholders would effectively be third in order of importance in the company’s strategy.
In first place came customers, who for Alibaba are the small businesses using the platform to sell their products and the consumers who buy them. In second were employees. His reasoning is that to give customers what they need the company needs happy, diligent and satisfied employees. Without these two the company cannot fulfil its duty to create long-term value for its shareholders, which is why he put them in the third place.
In last weekend’s Sunday Telegraph Business Review I contributed an article on how small businesses need to prepare for growth and I believe there are lessons in Jack Ma’s letter from which SMEs can learn.
No business can grow unless it is providing what its customers need and, as Jack Ma says, that depends on committed employees. It ought to be commonsense.
These two aspects are central to demonstrating that a company is a viable prospect when it is seeking finance to grow as they will form a significant element for any pre-investment valuation.
If a company cannot demonstrate a demand for whatever it supplies how will it convince lenders that it will be able to repay the money it has borrowed or provide a sustainable return to investors?
I would welcome contributions from others who have similar stories that are aimed at reassuring investors before they part with their money.

Categories
Banks, Lenders & Investors General Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Employee Equity can Improve the Chances of a Successful Restructuring

Businesses and the UK economy are under pressure from inflation thanks to increased taxes, such as VAT, and commodity prices and also pressure due to declining sales thanks to the reduction in consumer spending.
The current situation is as there has been a considerable amount of wage restraint in the marketplace with employees more concerned about keeping their job than earning more. This fear of job loss however does not apply to all staff, where retaining certain key employees is crucial as their loss would have an adverse impact on the business.
This is a common problem for restructuring advisers who need to solve it when dealing with companies in financial difficulties. When a business is in financial difficulty management often seeks to reduce staff costs such as by asking employees to take a pay cut in order to help the company survive and to keep their jobs.
Many attempts at restructuring insolvent companies fail due to flawed restructuring strategies and an inability to get the support of staff for a realistic solution. In the case of the Rover car company the opportunity was there to restructure the company using the £500 million dowry from BMW. But management failure and a lack of ownership of the problem by staff and their union representatives contributed to the company failing five years later when all employees lost their jobs.
Employees tend to be more concerned about the survival and future viability of their jobs than most other stakeholders. Banks and lenders tend only to be interested in the security of their outstanding loan, and shareholders often sell their shares or just ‘hang on and hope’ without further investment.
Involving employees in the development of a restructuring plan instead of imposing decisions on them can bring about solutions such as real cost savings and flexibility.
This notion of giving employees a greater say in their future exists in other countries, notably in Germany where employees’ representatives sit on the board of directors, and in the USA where unions like the Teamsters often hold shares in their member companies and are actively involved in strategic decision making.

Categories
Banks, Lenders & Investors General Rescue, Restructuring & Recovery Turnaround

Business Survival Depends on Stakeholder Co-operation and Collaboration

The support and co-operation of its stakeholders can be crucial to the success or failure of the efforts by a business in difficulty to restructure and survive.
Stakeholders are all those people who have an interest in the business and are likely to be affected by its activities and most crucially by its failure, and they include shareholders, investors, creditors, the bank, suppliers, landlords, employees (and their union representatives) and customers or clients.
Plainly, when a business is in difficulty and has called in a rescue adviser to review its activities, costs, business model and viability, any actions it may need to take as a result will be more likely to succeed if its stakeholders both understand the situation and support the proposed solutions.
While there is one key interest that all hold in common, which is that all have an interest in the business surviving if they want to continue to receive income from it, it is probable that the interests of some stakeholders will conflict with those of others.
Employees will be most concerned about keeping their jobs and their co-operation in any restructuring is likely to depend on whether they feel the management is considering their concerns as well as involving them in the changes that may need to be made.  If there are unions involved getting them on board can be the key to persuading employees to co-operate.
Creditors and investors, on the other hand, may just want to be paid what they are owed and whether they are prepared to forgo or renegotiate payments or finance in the short term will depend on how much confidence they have in its future. 
The bank’s primary concern is to ensure loans are secure, safe and will be paid and will want to be kept informed as well as being given evidence that the business has been properly looked at by a specialist adviser, shown to be viable and any proposals are realistic and have a good chance of achieving the desired results.
It is crucial that the rescue adviser is involved in the management of the stakeholders thus ensuring that their concerns are understood. This will go a long way to ensuring stakeholders’ co-operation.

Categories
General HR, Redundancy & Trade Unions Rescue, Restructuring & Recovery Turnaround

Working With Trades Unions to Promote Consensual Turnarounds

I have approached a number of UK trades unions with a view to forging a collaborative approach to dealing with companies in financial difficulties. 
In my view, currently, employees are rarely involved in the decision-making when a company’s survival is threatened, but a successful business turnaround relies very much on the support of its employees.
Unlike formal insolvency procedures, turnarounds are consensual. Leadership, teamwork and communication are key to implementing change. Engaging with staff and involving them in the business introduces accountability and responsibility to a business and is crucial to its success. This is even more so with a turnaround where change is necessary.
Historically turnarounds have been co-ordinated by banks as secured creditors, or by new investors who drive change from a purely financial perspective, oriented towards achieving single stakeholder objectives.  What gets measured, gets managed. 
Many stakeholders have compromised their credibility with employees by this pursuit of short-term objectives of repayment of their investments with little interest in a company’s survival.  
So who is really interested in the employees let alone securing their employment for the future?
The trades unions are still believed to be the true representatives of employees’ interests and while the relationship between management and union representatives has in some instances become polarised this is not helpful when trying to save a fragile business. It is rather like the surgeon fighting with his medical team when a patient’s life hangs in the balance on the operating table.
This new initiative to collaborate with trades unions is based on developing a mutual respect and understanding of each other’s objectives outside the constraints of a turnaround situation.
Union input can be valuable when considering the thorny problem of how to reduce staff costs, where hard choices might have to be made between cutting numbers, wages, hours, or benefits. Their involvement helps remove fear among staff by reassuring them that their interests have been taken into account when developing the turnaround plan.

Categories
General Insolvency Rescue, Restructuring & Recovery Turnaround

Redundancy Costs Due to Staff Reduction Can Leave a Company Insolvent

Companies struggling to survive a severe economic downturn like the current one often consider ways to reduce their overheads.
Generally one of the biggest costs on a business is the payroll and looking to redundancies as a way to reduce them is a common response to a recession.
The reasons used for making employees redundant are generally economic, technical or organisational. This can be that new technology or a new system has made a job unnecessary, the company needs to cut costs or that the business is closing down or moving.
However, making staff redundant is closely regulated and there are rules for the steps that a business must follow if it chooses to go down this route. These can be extremely expensive and if not managed properly could actually leave the company insolvent rather than achieving the desired objective.
Firstly, many companies consult employment specialists to ensure that it complies with the rules and carries out the process correctly and this in itself can involve paying substantial fees.
If an employer is making fewer than 20 employees redundant in one establishment it must consult individually. 
For more than 20 employees being made redundant within a 90-day period it becomes a collective redundancy and the employer has a duty to consult with representatives of the potentially affected employees. If the employer does not consult then the employees can apply to an Employment Tribunal claim for a protective award. This is an award of up to 90 days’ pay.
Rules about employees’ redundancy entitlements are laid down by the Government. The calculation is based on how long the employee has been continuously employed, their age and their weeks of entitlement up to a certain limit (£380 per week current allowance).
Failure to carry out a redundancy operation can also result in employees taking the employer to a Tribunal with a claim of unfair dismissal. In certain circumstances this can also add to the employer’s costs, not only if the Tribunal rules in favour of the employee but also, in some specific circumstances Tribunals now have the power to award costs of up to £10,000. 
A better option for cost reduction before going down the redundancy route could be to call in a business rescue adviser to carry out a thorough review of the business to assess the business viability, look at its accounts and business model, identify any underlying weaknesses and suggest a restructuring plan.