I’m Looking Backwards to Christmas, across the ICA

(with apologies to the late Spike Milligan)

The Institute of Chartered Accountants is running an advertisement intended to recruit new entrants which states that

80% of FTSE 100 Companies have an ICA member on their Board.

How does this look from the Comparative Competitive Strength point of view? Do ICA members actively contribute to performance that consistently exceeds expectations and generates world beating performance? Do they strengthen and reinforce outstanding business success and wealth generation? Or have they helped handicap the pursuit of excellence and been a contributory factor in potentially avoidable failures? Have they, perhaps, helped erode Capitalism by obscuring Common Sense?

Only a very few companies achieve the highest level, Free, of Comparative Competitive Strength (i.e. are the Very Best in the World in their field). A high proportion of these businesses are privately owned by shareholders or proprietors who are focused on the future, who know how to take decisions about long term risks, who are not scrabbling around for short term “prizes” without heed for the consequences, and who have the operational flexibility and sustainability to continue to prosper in hard times. It may be no coincidence that this is also the profile that seems to attract Warren Buffet. These are the companies that generate real wealth – solid sustainable human, intellectual, technological, physical, market, and financial assets and resources that deliver benefit to the future of the whole community. One of the keys to their success is their relentless focus on the future – what we call “Forward Facing Thinking”.

As we all can see, there is a continuing avalanche of business failures, of companies that are falling from the lowest level, Constrained, of Comparative Competitive Strength down into The Abyss. Do there really have to be so many? Have ICA members contributed, perhaps unwittingly, to the scale and severity of this bloodbath?

We have commented before in our “Excellence Quartet” blogs about the pernicious antics of the M&A “pirates” who, sometimes without permission, use their valuation of the assets of the purchased as collateral for the loans they need to complete their, often unwelcome, acquisition. A significant proportion of the continuing flood into The Abyss are companies that have been critically weakened by the debts incurred by such financial engineering. Many of these businesses were generators of real wealth and reservoirs of skills and knowledge vital to the future sustainability of our Nation State (such as nuclear power station design and manufacture). Far too many, especially in manufacturing and science based sectors, have been eviscerated by the decades of under-investment imposed by the muddled short term thinking and self-serving manipulation of numbers by their financial “experts” and bankers (now there’s a basis for comparison that might give the ICA serious pause for thought).

The ICA may trumpet the influence of their members. However, in the spectrum of real wealth generation (solid sustainable human, intellectual, technological, physical, market, and financial assets and resources that deliver benefit to the future of the whole community) they qualify to evaluate only one of those assets, the financial. Worse still the majority of their disciplines, and the primary basis upon which they seek to exercise influence on others, are based on looking backwards, “Backward Facing Reaction”. Sadly, too often they have been perceived “to know the price of everything and the value of nothing”.

The tragic and scandalous question is whether, in too many circumstances, that narrowness of view and understanding has been all prevailing and used (or abused) for the acquisition of personal power? Has that in turn led to over active collaboration in the City’s desperate “games culture” of financial engineering, reckless M&A, and the overall collapse of intellectual rigour in financial and business thinking that has brought us all to the brink through the Credit Crunch?

Sir John Rose of Rolls Royce, talking about the future needs of our economy in early November 2009, said there should be “less emphasis on social engineering and more on wealth creation”. We find ourselves “having a Heated Agreement” (to use the treasured words of the late Bill Carpenter, also of Rolls Royce) and paraphrasing those words as

“less emphasis on financial engineering and more on wealth creation”

Is ICA membership only about “What’s In It for Me?” Is, as the advert implies, the ICA focused only on dangling the prospect of power and authority for its members? Is this the moral and ethical leadership we look for and expect from our professional classes? Are the ICA really aligning themselves only with politicians, lawyers, bankers, financial advisors, estate agents and other perceived “professional” victims of public opprobrium? Or do the ICA want to be seen as professionals who are more vocational in flavour, like the engineers, the scientists, and the medics, most of whom seek to add to the overall well being of the nation, not just to find out the best way to grab more for themselves?

Wealth creation is driven by a focus on the future, not the past. It is centred in Forward Facing Thinking, not Backward Facing Reaction. We hope that ICA members might want to competently add real value by helping to generate real wealth, and not just manipulate numbers and words to serve either their own interests or those of close colleagues. If so, they will need to develop the ability to evaluate the future as rationally as the past and to articulate their understanding on a broader business basis than the judgement laden and perilously temporal fabrications of financial analysis. There has not been any truly objective tool to do this until recently. More often than not, the chosen solution has been a massive and time consuming investment in strategy management consultancy – perhaps even by a major accountancy company (more ICA members?) and, by definition, never truly objective!.

So how would it be if ICA members had access to a powerful and genuinely objective evaluation of how a leadership and management culture compares with the very best performers in the world, where its main constraints lie and what choices it must make to secure the future? Would it be better still if that assessment delivers these outcomes better, faster and cheaper than any other route?

• Cheaper? – now there’s a word with nasty ambiguities – we mean something that takes much less of business leaders’ valuable time, as well also as being comparatively inexpensive.

Wouldn’t that just be an opportunity to help create wealth, instead of risking being seen to be party to its dissipation? Could it be their chance to strengthen Capitalism with Common Sense.

You can find out more about the Comparative Competitive Strength point of view on our website here or contact us here.

Capitalism or .... Common Sense is brought to you by Steve Goodman & Tony Ericson, partners in ChangeWORLD & Achievement Coaching International. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish a new article on one of these blogs every month or so using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs at - Exceeding Expectations - You're having a laugh ... seriously - Business Bloop of the Month Award .

Loan to Lenders ratio

The big finance and business story on the Lloyds/RBS bailout and its consequences has rather overshadowed the intriguing story about Yell’s planned £500m rights issue.

Yell, the publisher of Yellow Pages and yell.com is heavily indebted, to the tune of £3.8bn. It urgently needed the rights issue and an extension of debt maturities to avoid the risk of a covenant breach.

However what really caught our attention is that Yell’s debt involves over 1,000 lending commitments! Can you believe that, over 1,000 for a business with current market capitalisation of just £390m! However when you consider how the sum per lender looks so much smaller than the total indebtedness perhaps the rest of us are missing a trick here.

There are a number of financial ratios used in the lending to assess the viability of a lending proposition, loan to valuation, multiples of earnings etc. Yell seem to have come up with a new one here, loan to lenders ratio. For example if you could achieve the same number of lenders as Yell on a mortgage of £100,000 you would only owe £100 per lender, hardly worth any of them asking you repay it!

Or, taking the average unsecured loan figure (credit cards, overdraft etc) in the UK of £3,000 this same ratio means you would only owe £3 per lender. However carrying around 1,000 credit cards each with a credit limit of £3 would be a challenge.

What also surprised us is that there was very little comment on the number of lenders, other than to give the figure of 1,000, in any of the articles we have read on this story. Are we only ones to think this is all a bit odd, that it doesn’t make sense? Did the lenders themselves not notice how the room was getting a bit crowded and was this such a good idea?

What about Yell itself. Did they wake up to just how many there were when they started the negotiations on the rights issue? If they actually deliberately accumulated this number of different loan commitments what possible rational reason was there for doing so? It not only complicated the rights issue process. - “ …. collecting their acceptances has been a huge logistical exercise” (John Davis Yell Financial Director) – it threatened to derail the issue completely and with it the company.

So this may be an example of capitalism at work, but does it make sense? Simple is always better but of course complicated demonstrates how clever you are. A final thought though.

Amazingly Yell have managed to gain 95% acceptance from their lenders of the terms they needed to allow the rights issue to proceed. Whoever achieved this is wasted in a publisher of directories and should be transferred immediately to sort out the Israeli/Palestinian problem. Move over Tony and let someone who really knows how to negotiate the impossible from the improbable take over!

Capitalism or .... Common Sense is brought to you by Steve Goodman & Tony Ericson, partners in ChangeWORLD &Achievement Coaching International. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. We publish a new article on one of these blogs every month or so using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs at -Exceeding Expectations - You're having a laugh ... seriously - Business Bloop of the Month Award .