Sterling Performance

The criticism of Ernst & Young’s role in auditing Lehman Brothers’ accounts is worrying. Enron’s collapse brought down Arthur Andersen, reducing the Big Five global accounting firms to an even Bigger Four. The banking crisis cannot be allowed to reduce companies’ choice yet further.

Ernst & Young oversaw the accounts that shuffled $50bn of transactions off the US bank’s balance sheet to make Lehman look less leveraged. The audit firm says the move was both legal and met GAAP accounting standards, but that may not stop the bank’s creditors demanding recompense.

When a company collapses there is no point suing it or its directors: creditors go after the advisers and professional firms who are still standing and have deep pockets. The report released by the US bankruptcy judge detailing Ernst & Young’s role is the smoking gun sought by creditors planning class-actions.

And however good a defence Ernst & Young has, it is the potential impact on its reputation that could do the damage. That’s what did for Andersen. Lehman chose a Big Four firm because a big bank wants its accounts endorsed by firm a with a reputation at least as good as its own. If E&Y’s standing suffers, why will any top-company chairman select this firm rather than rivals?

Ernst & Young is already the smallest of the Big Four auditors, with 25 FTSE-100 companies compared with PricewaterhouseCoopers’ 41, KPMG’s 25 and Deloittes’ 21. But it carries more weight among the next 250 largest UK companies, with a 20 per cent share — and this quartet of accountants has not only a British monopoly but global audit domination. All four are international and no other firms have broken into their market.

So the company seeking a new auditor has nowhere else to go unless it is prepared to look outside the Big Four — and only one FTSE-100 company has dared do that. If the monopoly comes down to a Big Three, then the company chairman considering changing accountants will have a choice of only two other firms - one of which might be retained by the company’s main competitor or be the firm sacked in the last change.

Ernst & Young obviously hopes the Lehman link will leave it unscathed but it is scares like this that show the importance of having a wider choice of audit firms.

An anti-trust break-up of the big firms would be drastic. Barring clients from using their auditors for other accounting work might make them select smaller firms. Encouraging the creation of new firms and changing the ownership rules would help. But something needs to be done in case another firm goes the way of Andersen.

The Government has just announced a significant funding initiative to help secure the future of Vauxhall and Opel. Parent company General Motors Europe (GME) will receive a loan guarantee of £270m to help prop up the ailing motor manufacturer’s operations in the UK.

Although a spokesman  for the Department for Business Innovation and Skills (BIS) was reluctant to go into the conditions GME had to fulfil to receive this loan guarantee, he did confirm that the negotiations for it have been going on since November 2008, indicating the complexity of the deal.

In a prepared statement, BIS Secretary Lord Mandelson said:  “I always said the Government would stand foursquare behind Vauxhall and with this announcement today we have kept our word. These are excellent plants employing a first rate workforce. We need Vauxhall to thrive as part of Britain’s automotive manufacturing base and following our negotiations with GM Europe I am confident it will do so”.

The BIS spokesman said it was hoped the loan would allow GME to continue restructuring its operations in the UK and mainland Europe.

This was echoed by a spokeswoman for the Society of Motor Manufacturers and Traders (SMMT), who congratulated the government for supporting the auto industry. (more…)

The recent recession was so distinct and devastating, it even spawned its own lingo. The Christian Science Monitor has a neat summation of 10 new words that emerged from the last 18 months of crisis:

1. Insource — doing work you used to pay others to do (like cleaning your flat).
2. Staycation — holidaying at home because you can’t afford to buy the family a trip abroad.
3. Recessionista — avid consumer who might in the past have been known as a ‘fashionista’ but who now shops at Primark or buys “vintage”. Also known as ‘frugalista’.
4. Decruited — to be fired before you start work. (Also known as ‘pre-fired or uninstalled).
5. Povo — an Aussie saying to make light of your poverty. CS offers the following usage guide : “We’re living sans internet now that my povo roommate won’t chip anymore. It’s like the 1980s round here.”
6. Mancession — because the downturn hit men much harder than women.
7. Madoff’d — to get Ponzi’d or to get royally ripped off.
8. Funemployed — to be happily out of work.
9. Intaxication — haven’t heard this one before, but it’s the joy of receiving a tax refund.
10. Permatemp — the title for anyone who is permanently in temporary work (more likely because of circumstance than by design, when you call yourself a ‘freelance’).

The Big Picture adds “Recession Porn” — a fixation on gloomy charts and sites full of depressing stats.

In the UK, credit crunch became shorthand for the financial meltdown and economic mayhem that ensued. And, while it’s not slang, we’re now as familiar with “quantitative easing” as we became with metatarsal once Beckham injured his (second.) We may never bail out water with the same enthusiasm again. But what other words has the recession spawned?

A surprising suggestion has emerged from the Association of Graduate Recruiters’ manifesto — lift the cap on university fees to let them charge what they like. Apparently this is what employers want.

The AGR’s Manifesto, “Talent Opportunity, Prosperity“, calls for university fee caps (which stand at just over £3,000)  to be phased out and suggests employers of graduates receive tax breaks in the UK. But the most surprising suggestion — made on behalf of 750 employers — is the AGR’s call for universities to be allowed to charge what they like for degrees.

The argument is that this would halt the ‘devaluation’ of university education and drive up standards so that employers get fewer graduates with higher calibre degrees. At the moment, the pressure to get a degree is such that students are wasting their money on degrees from “below average institutions”, the AGR argues. Meanwhile, employers are less sure of the value of one degree compared to another.

So what’s the thinking here: if a degree education becomes more expensive, fewer but more determined people will undertake it and the overall quality of graduates will rise? “Below average” institutions will fall away and leave us with the brightest and the best universities and people?  Surely the AGR cannot be suggesting that degree-level education is the privilege of the few, the bright — and the rich.

Admittedly, the recession has left a glut of graduates in search of jobs. Its findings earlier this year, that there are some 49 grads per job vacancy in the UK, argue for some kind of action. And there’s sense in a lot of what the AGR suggests — for example, its call for the government to scrap its 50 percent entry target for universities, an obsession that leaves those without degrees at a serious disadvantage when it comes to getting good jobs.

Even some fee rises are justifiable, especially in the face of public sector cuts. But with no upper limit, some universities become out of reach to all but the moneyed or those willing to take on a mountain of debt. Is that really what employers want?

Carl Gilleard, quoted in the Times Higher Education, acknowledges that the idea may be an unpopular one but is vital for “national prosperity and productivity”.

What do you think?

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)

Nick Hine, partner at law firm Thomas Eggar, responds to your employment law questions:

A couple of days ago, my employer came up and said he wanted to have a without prejudice conversation with me.  During this conversation he basically said that I didn’t fit in the organisation anymore and offered me a package to go.  If I were to challenge this and to make a claim against my employer, would I be allowed to bring this conversation up in a tribunal or any other court proceedings?

– Name Withheld

The without prejudice rule was set up to encourage parties to settle disputes. Where there is a genuine dispute and parties meet to discuss the dispute on a without prejudice basis then the without prejudice rule means the contents of those discussions or correspondence cannot be disclosed.

This means that parties can talk freely about the dispute in question with the view of trying to resolve it without fear that those discussions or correspondence could be raised in any Court or Tribunal proceedings.

One of the conditions of such conversations is that there must be a genuine dispute which is being resolved. In the current situation you haven’t said you are definitely in dispute with what your employer has said.

Therefore what your employer has proposed may not have the protection of without prejudice status you may be free from the limitations that implies.

Employers need to be careful when they have without prejudice conversations with their employees to ensure that the conditions for without prejudice protection are present.

Otherwise employees may be able to raise this in any subsequent Court or Tribunal proceedings.

In the current situation you should be able to therefore raise the offer as evidence of the fact that the employer wanted to get rid of you and had made you an offer to leave the organisation.

No-one says sorry so sincerely as the Japanese, but is Toyota adding to the damage by being so profuse in its apologies?

Corporate confessions of failure are becoming increasingly common, but perhaps companies are more concerned than their customers with their image and reputations.

In the past few months, Eurostar has had to apologise for disrupting its cross-channel travel to the Continent, the threat of one British Airways strike has been followed by another, and last year, Maclaren had to face complaints that its pushchairs trapped children’s fingers. Every week some supermarket recalls a food product that might include scraps of glass or metal. The mantra of “the customer is always right” has been turned into a creed that “the client must be compensated”.

Yet while manufacturers constantly recall products, consumers don’t apparently remember which: there is little evidence of sales falling because of the foreign bodies found in food unless the company chooses to create its own bad publicity.

Within weeks, travellers are back on Eurostar’s trains and the passengers who swore they’d never fly BA again –just as they said they would not after the T5 luggage fiasco — are back with their favourite airline. How many people have moved their savings accounts, nevermind their overdrafts, in protest at the mismanagement that resulted in government bank rescues?

The fact is that customer crises blow over,  overtaken by the next corporation with a consumer catastrophe — unless the company exacerbates them.

Overdoing the apologies is one good way to keep bad news in the headlines. Directors may like to cast themselves as victims or heroes — working round the clock to restore service — but the more their company’s name is associated with the failure, the more they risk publicising their problems to not only the customers who have been affected but to the millions who have not.

If corporations concede that it takes a steady drip of advertising to encourage consumers to buy, they must accept that a continuous trickle of negative news will discourage them. Turning off the tap is the first step in stemming the problem: replacing it with a flow of positive publicity can come later.

Corporate communications directors should tell their chief executives that not all publicity is good publicity. Toyota president Akio Toyoda’s admission that the company’s tradition of  “First, safety; second, quality; and third, volume… became confused” was too good a soundbite to be heard only by a committee of Washington politicians –  it was broadcast round the world to every potential car buyer. Confessing that quality control had failed is a not a message to tell the customers.

Customer memories are short, but if they are told often enough not to buy, even the toughest consumer inertia can be overcome. Toyota risks turning kow-towing into hari-kari.

(Photo: ivolkoff, CC2.0)

I recently re-watched a December 2009 interview of Paul Argenti (corporate communications professor at Tuck University) following the release of his book dedicated to Web 2.0’s effect on communications.

I’ve pulled out some points from the interview. A lot of what Argenti describes here is similar to what I have written in these columns and elsewhere:

1. Most execs are out of sync. It’s easy to dismiss what you don’t know as being a fad or meaningless.
   
2. Yet a true revolution in corporate communications is unfolding with regard to how our corporate relationships are impacted in all areas: press and public relations, investors, analysts, partners and clients, employees and job seekers etc. What is funny, Argenti says, is that despite point one, none of the interviewed execs denies this fact.
3. This revolution has less to do with tools than strategy.
   
4. Video and vlogging (video blogging) are transforming everything we do in corporate communications.
5. Web 2.0 enables active vs. reactive communications.
6. Negative feedback is definitely what execs are afraid of, but it is already broadly available beyond social media. Social media is not the cause of negative feedback or brand disloyalty and cannot be held responsible for the quality of a product or the fact that a service hasn’t been rendered properly.

I would also add some advice for PRs on getting a better grasp of how to use social media.

Don’t:

• Misjudge the importance of a sentence or a comment. Even more than in the printed press, every word counts in social media.
• Misunderstand the human factor behind crisis management in social media. Some believe that fiddling with comments is enough, whereas human conversations will work wonders.
• Think being present on social media is enough. You need to engage.
• Talk digital vs. do digital — you need to understand what the Web makes available to all.
• Ignore positive feedback including that which can be generated by internal blogging communities and partnerships,
• Forget to implement the right processes and spell them out clearly, including disclosure practices.

Nick Hine, partner at law firm Thomas Eggar, responds to your employment law questions:

For the last year, one of my team has been off on maternity leave. She was a capable worker who was missed at first, but we had a temporary replacement to fill the breach. My permanent employee is now planning to come back part time three days a week, which means I stand to lose some resources in the team.  Do I have to agree this?

– Name witheld.

An employee on return from maternity leave has a statutory right to request to work flexibly to help look after their child. 

It is not a right though, there is simply a statutory framework in place through which an eligible employee can request to work flexibly.

The request can be made by an adult to care for a child or another adult, but they must have at least 26 weeks continuous service and they should not have made a request to work flexibly in the past year.

The nature of this request could involve hours of work, when they arrive and leave and where they work.

Any eligible employee who wants to change their working conditions in these ways must make their request in writing. 

An employer must meet with the employee within 28 days of receiving the request to discuss the application and within 14 days after the date of that meeting write to the employee to either agree to the new proposed work pattern and set a start date, or to provide grounds for rejecting the application. 

If you reject the application then your employee has a right of appeal and must do so within 14 days of the original application being refused.

You must arrange an appeal meeting within 14 days of receiving that notice and then 14 days after that appeal meeting you must notify the employee of your decision.

There are effectively eight grounds for rejecting a request and these include:

• Burden of additional costs.
• Detrimental effect on ability to meet customer demand.
• Inability to re-organise work amongst existing staff.
• Inability to recruit additional staff.
• Detrimental impact on the employee’s quality of work.
• Detrimental impact on the employee’s performance.
• Insufficiency of work during the periods the employee proposes to work.
• Planned structural changes that would render the employee’s proposed pattern unworkable. 

If you refuse a request then your employee can make a complaint to an Employment Tribunal potentially for sex discrimination and also for constructive unfair dismissal if they resign as a result.

The Employment Tribunal would expect you to have properly considered the request and so if any employer refuses any application they must have a sound reason for doing so. This area is quite complex and I would suggest you take advice if these circumstances arise.

Can you be too old for an MBA after 30? B-school student Aswini Anburajan suggests so in this FT blog. While admitting that the average age of at Judge Business School in Cambridge is 30, Anburajan cautions against waiting till any older to pick up an MBA because apparently recruiters now want younger, more “groomable” candidates for positions.

My understanding of MBAs was that they were of most value to people who’d achieved a certain level of seniority in one, or several positions. That experience could be brought to bear on the course and would not only enlighten you, but would help to enliven the course and keep it in step with what’s going on in business.

To many who undertake business courses, it’s an opportunity to break away from a particular career path and acquire wider understanding. In other words, an almost-fresh start. So wouldn’t that make you as groomable at 40 as at 25? What’s more, one of the greatest benefits cited by business degree-holders is the people they met on their course. Imagine how much more a diverse age and experience range would add to that benefit.

There are courses, too (the Sloane fellowship, for one) where experience is a pre-requisite. And older MBAs are different candidates and graduates, too — more expensive, potentially, as they’ll have more business experience to add to their theoretical knowledge. But it’s not just pay, as Anburajan makes clear: she expects “more responsibility”. And, if she’s spent her 20s at work, you could argue she deserves it.

Business experience or groomability. Ideally, recruiters want both, but if you can only have one, which will it be, managers?