29 April 2012

That was week ending 27th April 2012

Well that was a week wasn’t it!  What with the Murdochs at the Leveson Inquiry, a technical double dip recession and the collapse of the Dutch government, it was a week in which business, the economy and politics became inextricably and messily entangled. It’s hard to know where to start, but here goes.

Flat Earth Society

The previous week I sat down with a group of East Midlands’ business people and the regional agent for the Bank of England. “Our best quarter ever” and “optimistic about 2012” were just some of the positive views expressed, significantly more positive than the Bank of England man had expected.
Then we learn that the economy contracted by 0.2% and we are technically in double dip recession. Would this have come as a surprise to those people at that meeting? Well probably not, because what they also all agreed on was that there are and will continue to be winners and losers out there. Therefore the net overall improvement, if any improvement at all, will be small.
So whether the economy is 0.2% up or down makes little real difference. The economy continues broadly flat with nothing significant in prospect to change that any time soon. We have been telling our clients for some time that they should develop their strategy on this basis, but that does not mean that they cannot grow. What it does mean is that without growth in the wider economy they have to win market share and that often requires a different business model, strategy and attitude.
The group at the meeting agreed and that the key difference between the winners and losers was “attitude”. Those who believe the earth (and the economy) is flat are afraid to venture far and try anything new. Those who believe the earth is round know there are opportunities out there, even if they can’t see them yet over the horizon and are prepared to venture out after them.

Yes but …

We do need to get the economy as a whole to grow and a roughly equal balance of winners and losers is not going to do what’s needed. We think there are three key challenges to overcome, where government has a key role to play.
First there are two types of small business with potential to grow, the relatively new business with innovative products and services and the established business that fought its way through recession, often at considerable cost to profits and balance sheet but is now able to grow again. However the financing requirements for both types of business are all about the future, whilst conventional lenders’ criteria are based on past performance and current balance sheets.
These two perspectives are fundamentally incompatible so it should be no surprise that banks are not providing sufficient finance to fuel growth for smaller businesses. “The banks are not lending, there’s no demand” arguments are getting us nowhere and we need new radical thinking with government providing the catalyst.
The second challenge is how to unlock the mountains of cash currently being hoarded by many businesses, both big and small.  This is about “risk” or at least the perception of risk. Psychologically business people need to feel the prospect of reward from investment to be significantly greater than the risk. Right now many can see the risks but not the reward. But just look at the effect the changes to the “patent box” tax regime had on investment intentions at GSK and others. This approach should be used across the business tax spectrum, especially where it would encourage employment.
Third, government should switch on more spending on infrastructure related projects and the OECD now appear to agree. This may need more radical thinking on transferring spending from other areas plus, as the OECD suggest, some easing of the time frame for deficit reduction. Not easy as the transfer would likely come from areas such as welfare and local services. However the boost to the economy and employment would be significant in a relatively short period of time.
If effective strategies were implemented to overcome these three challenges we believe we would see the economy growing within 12 months. Anybody got any better ideas?

Shareholders are revolting

The story on Barclays CEO Bob Diamond’s pay package continued. Nearly a third voted against the remuneration report or abstained. Chairman Marcus Agius appears to think it is all about communication. "Evidently we have not done a good enough job in articulating our case: on some matters we should have communicated earlier and more clearly". However just how you tell shareholders " we are paying ourselves three times a much as your total dividends" without making them think enough is enough is beyond us.
It is too early to say if finally the big institutional shareholders are really going to hold their directors’ feet to the fire and insist reward must reflect performance. However for all the politicians’ huffing and puffing and the sheer exasperation of the rest of us the resolution of over the top reward for mostly mediocre performance was only ever going to come from shareholder pressure. If Barclay’s directors have to buckle maybe this will be the catalyst for change.

Thought for the week

We are grateful to Sally Anderson of Sally Anderson Executive Support Services for this quote from Rosa Parks. On first read it seems a bit “motherpie and applehood” but then it grows on you.  See what you think.

“Stand for something or you will fall for anything.  Today’s mighty oak is yesterday’s nut that held its ground”.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

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