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Commentary
Celebrating Jane Barker
Jane Barker was a truly exceptional individual. Up until her death last week, Jane had worked for over 20 years as a researcher for the Transport and General Workers Union and, latterly, Unite. Jane was passionate about the rights of people who are economically vulnerable and have little power, and she dedicated her life to fighting for them.
I first met Jane when she tracked me down as someone who might help with a case she was working on. What struck me, along with the passion, was the quality of her intelligence. I was constantly impressed by what she already knew about the arcane world of finance and accounting, and by what she was able to find out with her forensic skills. A few years back Jane attended the corporate finance programme at London Business School. As expected, she was in her element here. She relished the networking, and she devoured the theory, which then re-emerged at appropriate intervals in her work.
We can all learn something from Jane’s work demeanour. She was deeply and unconditionally loyal to everyone in the labour movement or whom she believed shared its values. So you would never find Jane discussing union politics or taking issue with this or that policy; she just would not engage with that. But it also meant that it was hard to resist a request from Jane. In the face of Jane’s energy and bathed in the steady light of her admiration, undeserved as it often was, there was nowhere to hide.
In union work, a lot of time is spent on the battlefront, fighting this fire or that campaign. But Jane also had a strategic vision. She understood that for the labour market to work fairly the worker needs to be as well-informed as the employer, and have access to the same quality of advice and analysis. This is what she was striving to achieve in her work. A life spent in the service of a cause you are passionate about is a good life, and Jane left us with such a strong memory that it is actually quite hard to believe she has gone. In my view, Jane’s legacy is this - properly understanding the economic world is the key to protecting those who are the most vulnerable in it. That was her idea.
Chris Higson, 7 June 2011
The Perfect Storm – Firm Vulnerability During Recessions
On May 27th, I addressed the KPMG CFO Forum in Athens. My theme was, just which firms are vulnerable in a deep recession, and what if anything can be done about it? For the Greek audience, this is of course highly topical. If Greece accepts the austerity programme that the IMF and others are demanding of it, its economy is forecast to shrink by 4% in 2010 and 2.6% in 2011.
If this happens, which firms will suffer? The best way to think about vulnerability is in terms of cash flow. The wellhead of cash in any business is the cash it generates from selling its products. A large part of that cash goes straight out of the door as operating expenses, and some is paid out as tax and to service existing debt. This is the flow. But the business also has a stock of assets in its balance sheet; cash and assets that could be turned into cash.
In normal times there is always a significant proportion of firms whose sales are declining. If they anticipate this, they can adjust their cost base, and reduce their asset base in an orderly way. We frequently observed that firms in decline are cash positive on the way down.
It is the disorderly and an unplanned nature of a recession that is so destructive. In terms of cash flow, the key issues are the hit to sales but the firms suffers, and the adjustment to costs that it is able to make in response. To a significant extent, both of these are outside the firm's control. Your recessionary elasticity of demand, and your operating leverage, that is the extent to which your costs are fixed in the short term, are both largely outside your control. They are pretty much a function of what industry you are in, and what business model you've chosen. So we have seen building, automobiles, restaurants take enormous hits to sales, while food, discount retailing, telecoms are prone quite resilient.
Equally important, of course, is the strength of the firm's balance sheet. Again, there is a vulnerability here that firms can do nothing about. It is a sad fact of life that, in recession, asset markets closed and credit markets closed. You wanted to release cash by selling assets, and you wanted to borrow from your bank. But you find that neither the asset broker nor the bank is answering the phone. A compounding factor has been the corporate culture we have observed the last decade of running a lean balance sheet. In balance sheet terms, it is fair to say that in recession we see survival of the fattest, not survival of the fittest.
So what can firms do? It is the element of surprise that is so destructive in many recessions. One advantage that Greek firms have this time round is advance notice. With time to prepare, the business needs to focus on costs, and on embarking upon those adjustments that take time to implement, most notably those involving labour costs. The business needs to focus on realising assets, then hoarding the resulting cash and cutting discretionary balance sheet outflows. The support of government and of investors is crucial at times like this, and that needs to be nurtured. These actions or focus on financial strength. Of course, some funds will find themselves relatively strong in financial terms. For them, the recession is a strategic opportunity. The strong, the agile and the innovative will come out ahead from this recession. The earthquake of a deep recession can trigger permanent shifts in competitive advantage.
Chris Higson, 1 June 2010
Kraft/Cadbury – does it matter?
The UK went into a short period of national mourning a couple of weeks ago when it was announced that Kraft would acquire Cadbury. Kraft is a not-much-loved US food giant. Cadbury has a 135-year history and philanthropic roots. It is well-managed, wasn’t bust and didn’t apparently need fixing. And of course it makes chocolate, which is a necessity of life in the UK.
For a nation, does it matter who owns its industry? Let's assume that the aim of a government is to achieve the best path of per capita national income now and in the future – so that’s what ‘matters’.
The UK has been extremely successful at attracting direct, green-field, foreign investment. The UK motor industry is now more or less foreign-owned, but these foreign owners have shown us how to make high-quality vehicles that people want to buy, they have created a lot of high-value jobs, and they source a lot of their design and R&D from the UK. Of course everyone would rather have the German motor industry, but you’d need to turn the clock back 100 years for that. Short of that, the UK motor industry is in a better place than might have been.
But compared to its competitors the UK is also uniquely open to foreign takeover of existing businesses. This is much more dangerous and, at the moment, the UK is particularly exposed.
Peter Mandelson [Mansion House, 1 March 2010] was right to argue for throwing some more grit into the takeover process. He argued for revisiting the Takeover Code and for looking at the voting threshold for a change of ownership. There is also a case for greater transparency on advisors’ fees and incentives. There is a case for requiring fuller public disclosure of the acquirer’s intentions, off the assumptions that lie behind its valuation of the target, and the advisors’ fairness report on that.
But we need to be clear about the limits to what is possible. For the UK, there is no going back to the ownership structures that protect companies in many other countries. And I, for one, would argue strongly against reintroducing a protectionist public-interest test to guard British companies.
We know that acquisitions often destroy value for acquiring shareholders, and it may turn out that Kraft has overpaid for Cadbury. But, equally, it may not. Either way, the focus on corporate governance in this debate is something of a distraction. Even if an acquisition is in the long-term interests of all the shareholders, it doesn’t follow that is in the public interest. The tough challenge for the UK is how to maximise UK national income in an open global economy. Solving the short-termism/corporate governance problem won’t make that problem go away.
For good practical and political reasons, the UK will conclude that it cannot intervene in takeovers on public-interest grounds. But this should not be on the basis that the public interest is indefinable. We know pretty well from research evidence how to measure the public interest/national income impact of direct investment in terms of employment, skills, R&D spillovers, and other externalities. These impacts also arise in cross-border acquisitions.
When the parent company and the head office are no longer domiciled here, the organisation’s loyalties inevitably change and it becomes less susceptible to political influence. This can have negative consequences for the future location of employment and investment. There may be a significant loss of tax revenues after foreign acquisition. I believe there is currently a knowledge gap here and a need for an evidence-based, open, discussion of these effects. At that point government can take an informed view on just where and when foreign ownership matters.
Chris Higson, 2 March 2010
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