Sterling Performance

March 2010 marks the 10th anniversary of the dotcom bubble bursting. Yet what did that boom and bust teach us? Not enough to stop the financial sector imploding a few years later. Are company directors too stupid to learn lessons from such collapses or so sensible they have strategies to survive them?

The dotcoms that started in 2000 and are still around have probably never seen their shares at those millennium levels again.

The FTSE 100-index celebrates the anniversary 20 per cent below its dotcom peak while the Dow Jones is down 10 per cent.

Yet it’s now hard to find a businessman, never mind banker, who does not claim now to have foreseen the current financial crisis. The coming crash’s date and depth were open to debate, but the bursting of the last bubble was a dead cert.

So why does business not avoid these clearly coming crises? Here are four reasons:

1. Uncertainty over timing and degree: acting early can be riskier than being there when the crash comes. A fund manager wants to avoid holding shares after the market has turned down, but they don’t want to sell early and watch the market rise to perhaps double it’s volumes. Waiting to see the zenith and selling as shares slide makes more sense than exiting before the manager knows the market’s upside.
2. Not knowing what to do, even if the crash is accurately foreseen: Fund mangers can sell, but a manufacturer cannot quit its core business.
3. Bursting bubbles affect everyone: A CEO cannot be responsible for a recession, but he can happily blame it for the company’s failings. The reliance on relative performance for everything from directors’ remuneration to investment outcomes allows boards to ignore the macro economy, including those bursting bubbles.
4. Directors define their job as coping with crises, not averting them: They know some disasters will hit them — and not only the obvious ones — but they hope they know how to handle them. So the lesson of the dotcom collapse was not lost; the real lesson was that most businesses survived — just as they have with the current crises and previous recessions.

Executives who protect a company against every potential disaster miss every opportunity too. The dotcom crash was just the latest of many setbacks - bruising but not fatal. Good managers ride bubbles rather than run away from them.

(Pic: chefranden cc2.0)

I have been on the receiving end of many pitches from bankers, consultants and advisors. They all have essentially the same pitch: “we are the best, biggest, fastest growing, and so on.”

Then they put their foot in their mouth and shoot it by trying to impress me by bragging. What they say and what I hear are completely different things:

• We work with over 75 of the FTSE 100 companies: So your big clients get the A teams and I will be left with the B or even C team.
• We are the market leader: And if you are so big, will I get any attention? Or will I be better off with a small boutique that will really need my business?
• I graduated top from Harvard: So you know just about enough to get yourself and me into trouble. Have you any practical experience?
• We have won awards: Never trust a firm which chases awards instead of putting clients first, second and third in their priority list.
• Here is our brilliant approach to strategy/leadership/finance/marketing: Stop talking about yourself: starting talking about me and my needs.
• Here is our senior partner: Who I will not see again until you want to sell some follow on work. Who will really be working with me?
• We are top in the industry league tables: Banks have millions of league tables: best fund invested in Lithuanian infrastructure over seven years? Give me a break.

There is a better way to impress a prospect. Instead of boasting and talking about yourself, talk about the client. Ask smart questions. Show you are interested and hungry for the business. By asking insightful questions you demonstrate your capability far better than by boasting about it.

 If you want to establish your personal credentials, send a short biography ahead by email. It may even give us something of mutual interest to talk about as an ice breaker. In any event, it prevents the need for you to spend ten minutes talking about how wonderful you are. If you have good client references, put some of them up on your website.

People naturally want to talk about their favourite subject – themselves. Use this to your advantage and get the prospect to talk about their favourite subject – themselves. You will build rapport and credibility far faster than you will by boasting.

Two companies in the news illustrate how arbitrary the government’s decisions are over what is too important to fail and how lucky banks are to have been viewed as such.

Lloyds Banking group has just announced it lost £24bn on bad debts in 2009, heaping much of the blame on subsidiary Halifax Bank of Scotland’s commercial property lending arm for much of this.

CEO Eric Daniels had already announced he would forgo an annual bonus of £2.3m — a prudent move in the circumstances. Surely he must be breathing a sigh of relief that similar moves from Barclays, HSBC and RBS meant he didn’t have to do so in isolation.

Lloyds doesn’t have as big an investment arm as Barclays and so will probably be able to escape a huge bonus budget and the accompanying ire from customers. Even so, the UK taxpayer is still being asked to stomach a £200m bonus bill for Lloyds staff.

On the same day Portsmouth Football Club has announced it is going into administration over a debt of a mere £60m. Far from anyone swooping in to save the company, it is being penalised with a nine-point deduction which will almost certainly see the team relegated from the Premiership to the lower tier Championship League. This is through no fault of the company’s star performers, the players who have actually suffered delays in pay as a result of the club’s financial strife.

Considering the talent for which these player are paid for is evident on the pitch, it’s ironic that they are being penalised while star bankers, whose talent is debatable are given huge payoffs.

You might argue that there is a great deal of difference between a huge national bank and a – it must be said – football club of middle standing, in terms of significance. But, the citizens of Portsmouth, for whom the club is a big cultural icon, might disagree. For them it is just as much of a blow.

Lloyds, like other banks were bailed out not only to save them, but also to save the reputation of the UK banking system as a whole. By the same token isn’t the reputation of the UK Premier League, which is a sizeable export to the rest of the world, also damaged if one of its clubs is allowed to sink into financial ruin?

Compared to Lloyds which still relies on the cushion of taxpayer support to survive, Portsmouth will have its opportunities to make the money needed to get back on its feet taken away, by being moved into a less lucrative league. It’s already had to sell off star players to recoup losses.

Perhaps Lloyds should take a similar line with its star performers, instead of rewarding them.

In touchy situations, people resort to calm, rational explanations, thinking that they are the essence of good communication.  All too often, though, this can get them just the opposite of what they want.

Here are a few examples of when explanations backfire and why:

• It makes angry people angrier I didn’t realize the project was late.  There were two different emails about the due date. One said Tuesday and the other said Friday.  Besides, I never got any numbers from marketing.

When someone is irritated with you, explaining that the whole thing is a misunderstanding, or worse yet someone else’s fault, is guaranteed to turn irritation into anger.   People who are already upset don’t care about your point of view.  They want you to care about theirs.   Understanding this is the actual essence of good communication.

In emotional situations, facts don’t matter. Explanations are heard as: If you listen closely you will see that I am RIGHT and you are WRONG.

Life offers a cruel choice: you can be right or happy, not both.  This is because most people would rather kill you than admit they are wrong.

Instead of arguing about technicalities, or trying to implicate others, ask: What would you like me to do? This will shift the discussion from who is to blame to who needs to do what to solve the problem.  In this discussion, it may come out that you have done everything you need to do, and that the guys in marketing are the ones who have to get off their backsides.

• Explaining can turn your no into a reluctant yes

When someone asks you to do something that you don’t want to do and you say no, the next question will likely be: Why not? If you answer that question, you will discover that the no has been forgotten, and the discussion is now about whether or not your reasons for refusing are valid.

Before you explain why you can’t do something, be sure that it is clear you are not going to do it.  If the other person persists in asking for reasons, either be vague or ask directly if the intention is to revise your goals and objectives.

• Explaining why you need something can prevent you from getting it

Since our daughter was born, we’ve had to move into a larger flat.  Our expenses have gone way up, but my salary is still the same.

Sometimes people are afraid to come out and ask for something because they think it’s too forward.  Instead they resort to a tactic that is far more objectionable — they explain why they need something, hoping the other person will take the hint and give it to them without their having to ask.

When you ask someone for something and get it, you incur an obligation to return the favour.  If you merely state your need, you are suggesting that it is up to the other person to give you your due, and perhaps that your due is a bit overdue.

Not only is there no obligation to return a favour, there is an implied rebuke for not acting quickly enough.

The lack of obligation and the rebuke are usually not intended, but they will be perceived just the same.  Needless to say, this approach does not supply the other person much motivation to help you.

If you want something, the best way to get it is to ask directly.

Next time you are in a tough situation at work and you feel the need to explain yourself, stop and think.  There may be a better way.

The long winter of pay and bonus stagnation is set to lift according to two reports from the CIPD and CMI, but the trade-off may be increased redundancies to pay for it.

The CIPD annual Reward Survey found 53 per cent of the 800 respondents expected salary spend to increase in 2010, while 15 per cent said it would shrink and 21 per cent said it would stay level.

The response towards bonus packages was positive, but there was an increased focus on aligning reward with business strategy and making it internally fair.

CIPD reward adviser Charles Cotton told BNET UK that this did not necessarily mean the pre-crunch bonus culture was coming back and employees could not expect big payouts regardless of their impact on the business.

Key performers would do well, which leaves the question of whether employees who are not stars, but nonetheless are critical in keeping the company afloat, will be left out. Cotton advised it was essential these employees’ efforts were recognised in their basic pay. (more…)

The Greek crisis raises a simple question: can you have monetary union without political and fiscal union? It is a question no one in Brussels is too keen to answer openly.

This crisis has been entirely predictable, and I predicted it in a 1996 paper “Banking on the Euro”. I was not alone. In 2000 the Government Institute for Economic Research Finland (VATT) published a report on this subject. I will spare you the economics voodoo cut to the heart of the argument.

An EU-US contrast makes the point: the United States have political and monetary union. This means they have stabilisers which help when one state goes through hard times.

Eurozone states have one main stabiliser (asset prices) and that is bad news for the economy, home owners and banks.

1. Federal taxation and spending eases the burden: federal taxes go down, but spending stays high, giving the struggling  state a classic Keynesian boost, funded by the other states. So will Germany be prepared to throw money at Greece (and then at Portugal, Ireland, Spain and Italy if necessary)? It does not look too attractive if you are a German taxpayer. (more…)
   Jo Owen is a serial entrepreneur, author and business speaker. Got a leadership idea for Jo to tackle?

February 14^th marks the Chinese New Year – the year of the Tiger. It is now clear that it is also the century of China. Here are six statistics to make the point:

1. China became the world’s largest exporter in 2009, with 10 per cent of world trade, compared to 9 per cent each for the US and Germany.
2. China beat the USA to become the world’s largest auto maker, producing 13.8m cars in 2009. The UK produced under one million cars in 2009. Two Chinese companies, SAIC and Nanjing Motor bought the rump of Rover. 
3. China is the largest foreign holder of US government debt: Uncle Sam owes the Dragon over $800bn. This creates an uneasy balance of mutually assured financial destruction between debtor and creditor.
4. China is the largest investor in Africa. Chinese trade with Africa has gone from $10m a year twenty years ago to $100bn a year now. The Chinese offer a no strings attached approach to trade and investment, which is a welcome antidote to the strictures of the IMF. China gets the raw materials it needs, and plenty of support when it comes to getting its way at the Copenhagen climate talks. 
5. China had the world’s second largest economy in 2008: $8trn versus the USA at $14.2trn on a Purchasing Power Parity basis. The UK is a mere $2.2trn and going backwards compared to the dragon. 
6. China is the world’s largest producer of carbon emissions, with 21 per cent of the world total versus 20 per cent for the USA and 2 per cent for the UK. China blames this on the need to produce so many goods for western consumers.

In some ways this is a return to the historical order. The Middle Kingdom was always a huge slug of the world’s population and GDP. It really did not need anything from Europe, which meant we could not pay for the tea, china, silk and luxury goods we wanted from China in the nineteenth century.

The Brits got round this by becoming the world’s largest exporter of narcotics, via the East India Company shipping Indian opium. When the Chinese got uppity we burned down Beijing (1860, second Opium War), not long after we had burned down Washington DC in 1814. Getting back into narcotics and burning down Beijing and Washington may not work quite as well for us this time around.

Perhaps Mike Geoghegan, the boss of HSBC is leading the way for us. He has decided to run the bank from Hong Kong, starting from this month.  This seems right for a bank which started on the Bund in Shanghai in 1865.

Whether it is trade or politics, it is clear we now live in a new bi-polar world order. On Valentine’s day, we are going to have to start learning to love the new world order.

(Pic: jimmiehomeschoolmom cc2.0)

David “two brains” Willetts has been lending both of his brains to exploring a new political split: not between left and right, but between old and young. In his new book “The Pinch” he lays out in scary detail the problem I outlined last year in my post “Generation Poor Y Me”. He argues that the baby boomers are systematically ripping off the younger generation. Here are some highlights:

•  Housing: The over 45s have more than six times as much property wealth as the under 45s: £5.8trn versus £0.9trn.The rapid inflation of property prices is a huge windfall to the baby boomers and a burden to the younger generations. The young can not get onto the housing ladder, so are forced to stay at home (”boomerang kids”) prompting derision from the older generation.
• Environment: baby boomers will let the next generation deal with the challenge of global warming, thank you.
• Education: University education used to be free. Now graduates emerge with a degree and an average of £23,000 of debt, which may change their attitudes to the value of government greatly.
• Pensions: baby boomers have the index linked pensions; the new generation must pay their own way.
• Taxes: the explosion of government debt is spending by today’s generation. We will kindly let the next generation pay our debts off for us. The government is spending £4 for every £3 of income it receives. Try that with your family budget and see how long you can last.

Against all this the baby boomers have some pretty thin arguments:

•  ”We went to the moon, invented the internet and iPods”. Not true for 99 per cent of us who were not walking on the moon and were not inventing iPods.
• “We have paid our taxes so we deserve a good retirement”. The data shows we have not paid nearly enough for all the care and pensions we expect.
• “We worked hard”. Not true: annual working hours are at an all time low: around 1600 hours compared to 3,200 hours in the Industrial Revolution. With later entry and earlier exit from the workforce the baby boomers may be the idlest generation in all history.
• “We had our ideals, our hopes and dreams”. True maybe, but ideals do not pay the bills and have not stopped the baby boomers with their rip off.

David Willetts is a conservative MP. He knows the electoral arithmetic. The ageing baby boomers are keen voters and are set to become 24 per cent of the electorate. No sane politician will take away their free bus passes, free television licences, free health care, winter heating subsidies, pensions and all the other perks of retirees. The Pinch is not going to go away, it is going to get much worse as the baby boomers take a sudden interest in the welfare of pensioners – themselves.

If you want a depressing but insightful read on the way to work, The Pinch is a good start.

(Pic: revolution cycle cc2.0)

Should companies be part of the state welfare system or left to get on with making goods or supplying services? Not content with collecting taxes from corporations, governments expect them to implement social policies too. The latest imposition on UK employers is to make them give fathers six months’ paternity leave.

Perhaps this is part of the price of progress. No-one envies the Victorian days of six-day weeks without holidays. It is the role of a civilized state to set rules for the improvement of society and those will include conditions at work. But when commerce is the engine of an economy, it is dangerous to overload the motor so much it risks stalling. (more…)

Even though the UK’s economy is growing again, surely the best prospects for British companies are in other countries entirely.

The fall in sterling is making exports easier.  Despite last week’s gain’s against the euro, a weak pound has effectively cut the prices of UK goods sold in dollars by almost 20 percent and euro-denominated exports by more than 25 per cent since the credit crisis began (September 2007).

With other major countries emerging from recession before Britain, foreign markets are stronger even without that price advantage for UK companies.

Even Far Eastern economies with slowing growth are still expanding faster than the British market. Without the UK’s debt burden (a cause of sterling’s devaluation), many overseas governments still have expanding public-sector budgets — and orders for bidders to win.

For all the financial crisis, UK companies are caught in a virtuous circle. The low interest rates depressing the pound are also helping both corporate borrowers at home and their domestic customers.

True, sterling’s fall must make imports more expensive, increasing some companies’ costs, but inflation remains low. Normally, in financial crises, interest rates rise steeply, adding to the underlying troubles, with inflation usually high, too.

Never mind how much worse Britain’s recent recession would have been without the mitigating effect of low interest rates and inflation, exporting ought to be aiding the UK economy and ensuring UK company revenues keep growing.

Exporting requires effort, even with help from the currency markets, but wise managers will be reviewing the resources of their overseas sales departments, concentrating their marketing on foreign customers and looking for new markets abroad.

And even though manufacturing now accounts for only one-sixth of the British economy, the service sector can participate –  whether through invisible exports by the City and professional firms such as architects, or through the extra tourists visiting Britain to spend their currency in hotels and shops.

But currencies fluctuate and a change in government or financial policy could see the pound recover, forcing businesses to seek growth in home markets again. That is no reason for ignoring the current boost to exports, however: selling into foreign markets provides diversification that gives companies an alternative market when one gets difficult.

Yet Kraft’s purchase of Cadbury following foreign acquisitions of Boots, Pilkington, ICI and other UK businesses, suggests Britain is better at exporting companies than goods and services. It is the same cheap pound that now makes takeovers by foreign bidders so attractive, even if the capital receipts help finance Britain’s trade gap now the financial sector is earning less.

Should we worry? So long as the foreign owners keep open their British plants then they too benefit from lower sterling and remain exporters of chocolate, glass, chemicals or whatever — perhaps even to their new parent’s home country. Overseas ownership, like overseas sales and international managers, is all part of the same process of globalisation.

(Photo: cjc4454, CC2.0)