Change is slow, and that’s good thing

Methuselah is a 4,849-year-old Great Basin bristlecone pine tree growing high in the White Mountains of Inyo County in eastern California.

An oft-heard refrain these days is a lament “Everything’s changing so fast!” and it would be easy to sign up to this notion.

Look how we totally rely on our smartphones these days, turning to them an average of 150 times a day. It makes one wonder what we did for entertainment, news and chat pre-2007. And yet, we’ve only had them for 10 years. It’s gone in a blink of an eye.

See how Uber and Airbnb have blasted into our market, totally disrupting and changing the way we move around the city, or stay in other cities (or have total strangers to stay with us). Uber only got going in Perth in 2014, and has over 20% of the market. Airbnb launched into Australia a couple of years earlier and has upwards of 30% across Australia these days.

And yet, even these stories prove that the best changes – the ones that stick – take time.

There had been smartphones well before 2017, and phones with access to the internet had been around for a while. The best marketing the iPhone did was to announce itself as the game changer, yet even the iPhone took a while to take off. Early versions’ battery life was poor, and not everyone liked using a finger to tap on a virtual keyboard through glass. The Blackberry ruled supreme, and had a built in keyboard. This was much closer to peoples’ existing experience, which was why it was named “the crackberry”. Its devotees were obsessed by it.

The iPhone 3 was the version that took off, launched as it was with the app store in 2009. It was this moment that saw the inexorable shift to the smartphone (which  really should have been termed the ‘app phone’, as phones had been smart before – it was the apps that made them different now). The creation of the cottage industry of app makers was the true revolution, and this underpinned the smart (sorry, app) phone’s rise. Soon Samsung and Google jumped on board.

Looking deeper into the Uber and Airbnb cases you can see that they did not exactly take off as over night successes either. Launched in 2007, it took til 2011 before Airbnb would launch in multiple cities and gain traction, on the back of some serious capital raises in 2010. Likewise, Uber, founded in 2009, took a couple of years and then a major seed round in 2011 before it could launch in various jurisdictions with UberX in 2012. Indeed, Uber was not the first ride-sharing service, and they held back looking at the rulings coming out regarding the legality or otherwise of this new form of transportation. (Others could argue that ride sharing had actually been created in the early 1900s, or even the 16th century, but that’s another story.)

The history of even these wildly successful game-changing disruptors started with relatively quiet 2 or 3 years where things were far from certain. They were learning, pivoting and inching their way to the best formula. When I meet tech founders who think they’ll take off immediately with hockey stick growth I tell them the real stories of hardship, years and years of struggle, before even the best break out. Are you up for that? Founding a startup may seem glamorous when you see the gazillionares adorn magazine covers, blaze around at Burning Man or stomp across tech conference floors delivering well honed keynotes in their black t-shirts, dark blue jeans and high end trainers. But they all had hard starts, and there were many failures, mistakes, missteps and sleepless nights. It’s not all glamour, believe me.

So I would argue that change is slow. Indeed, the best ideas always grow slowly, and that’s a good thing, because things that grow slowly tend to last a long time.

Just talk to a turtle (average age 100 years) or Methuselah, a Californian bristlecone pine tree that was seeded in 2,833 BC. She ain’t pretty, but she’s still here.

Slow is good. Slow and steady wins the race. It’s hard work. It’s not very glamorous. It’s a million small things you do, day after day after day, that get you there. There is no silver bullet. And that’s a good thing.

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Get them on the drip

When we were contemplating the best revenue model for aussiehome.com, the online real estate portal we established in 1999, we considered the following main alternatives:

  1. Subscriptions – real estates agents pay regular fees to list their properties
  2. Advertising – advertisers pay for display ads on the website
  3. eCommerce – home seekers can buy/rent directly off the website

Any other revenue model you can think of is just a variation of the 3 above. Note that for each option you have a different paying customer. And knowing who your customer is, and what problem you are solving for them, as I have discussed in these pages, is critically important.

In subscriptions, your client is the real estate agent, and the users of the site (home seekers) get to use it for free. What would agents want in return? Enough enquiries (and as we learned over time, a listing edge) to justify these fees.

Advertising income means your paying customers are your advertisers. In return for the promotional investment on your site they expect to see lots of views of their ads, and click throughs. Likely advertisers would be banks, mortgage brokers, home builders and any other home-related businesses.

The final one is pure ecommerce – taking on the whole industry, competing against real estate agents, and selling/renting properties directly off the site. Back in 1999, barely 3% of all properties in WA were sold privately (ie by the owner, not through an agent).  Fortunately, we discounted this 3rd option. We did not believe the world was ready for home owners to take a punt on a new website, chancing their arm with their largest financial asset (their house). 18 years later, this is still the case. Nearly everyone selling their property in 2017 does so through a licensed real estate agent, and REIWA member. ‘For sale by owner’ sites have floundered.

Selling ads, we thought, would be tough as we’d be up against Yahoo! and others and we’d need huge traffic to pull any decent ad dollars. This would mean raising a King’s ransom in funding, and blowing most of it on our own promotions. This seemed too risky. Another good decision this, as Google and Facebook would come along and scoop up nearly all of the digital ad money in Australia.

So, almost by a process of elimination, we plumped for subscriptions. Subscriptions is no easy solution though. Real estate agents, and most small business owners, resist paying ongoing fees. It adds to their costs, and makes their business riskier. They would be far happier paying for something large in one bulky purchase (as we found out, on such things as banner ads and websites).

Subscriptions is also a long, slow row to hoe. In order to get properties on the site, you need enough agents to be paying to load them up. Only then will visitors have enough content to peruse, find your site useful and return.

This is the major problem with brand new two-sided market places. You have to build supply and demand simultaneously, and this is extremely difficult.

When you’re building a 2-sided marketplace from scratch, how can you get demand when you have little supply, and how can you get supply when you have little demand?

Uber solved this curly one by paying the first drivers to sign up in a city some income, irrespective of whether they had passengers. They realised that the minute the first passengers used the service, there had to be Uber drivers nearby. Uber knew this first experience had to work well, so their early adopters would rave about the service. They grew from there.

We did something similar. We gave away 3-month free trials to our early real estate agents, so they could plop all their listings on the site, for free, in order to get some supply up there. As soon as the first people looked on the site, there had to be hundreds of properties for sale and rent. Once a few agencies were supporting us, it became easier to get others to give us a go. Obviously, this does not produce any income, so we could not do this forever. After our first year, we stopped giving away  free trials.

Slowly, but surely, we started to earn monthly income. As agencies came off their free trials, they started to pay a fee. Not huge bikkies, but something. Once you get customers paying for your service, you are in business. They take it more seriously than a free offer. They update their listings, and then, something wonderful happens – they start to get enquiries. We could see the email enquiries coming directly off the site. (We could not see phone calls of course, but these were happening, so we were told.)

On top of this base of subscriptions income, we added some ecommerce (users could buy Landgate sales evidence online) and advertising (banner ads for agents, and display ads for mortgage brokers and the like). We then moved into web site design for our agencies (building their sites off our system), magazines and in time feed income so that our clients could be on up to a dozen sites through us. But it was the bedrock subs income that built the strong foundation.

As Seth Godin wrote recently, the ‘drip drip drip‘ of subscriptions is the most sustainable business model.

Newspapers have had to learn this. The NY Times put on 800,000 new paying subscribers since Trump was elected. Their shares are soaring, built off a base of 2.2 million subscribers, up more than 60% in the past year. Failing NY Times fake news indeed. Quite the reverse Mr President!

One thing that took me to Business News in 2013 was that their readers had been paying for subscriptions since 2002. By 2017, these subscribers were renewing at record levels, and subscriptions income was the largest single income source. A great local story of a media company taking a brave route, and prevailing.

Netflix entered Australia 2 years ago, and now 1 in 3 Australian households have a subscription. Quickflix, its Aussie competitor, started more than 10 years ago, never passed more than a few hundred thousand subscribers. Although prevailing against all other local competitors, they could not compete with the US-backed giant and shut down within months of Netflix’s entry.

Realestate.com.au’s valuation today is north of A$9 billion. I remember when it was worth $6 million, after the throes of the dotcom crash in Easter 2000. But it built itself up, and the ‘network effect’ of having pretty much every agency on board meant every agency had to be on board, and everyone went there to view properties. A complete 2-sided market of immense power, they could pretty much charge what they like. It now costs more than $1,500 a property to list on the site.

As my cofounder Nick used to say to me, “Charlie, get them on the drip.” How right he was.

Solve problem, have business

Many of us can make business seem a little bit more complicated than it is.

Setting up a business is really easy. I did it (for the 2nd time in my life) this week . I had thought of a name, which had an available web address, a line that encapsulated what I would do, and I asked my accountant to do all the legal work. I bought a new PC and monitor to set up my home office, asked my bank to create a new business bank account and Fiverr did my logo (on 3rd attempt, but I was happy with the outcome). I tested the name and logo with some people and was met with positive reaction.

I’m not fully launched yet, but I’m on my way. The website (which will be here) is still being built. However, I do have my first paying customer.

As I have written before, startups are easy, as you are buying things. Anyone can buy things. Buy a domain name, buy a logo, office, PC, some accounting services… but it’s much harder to sell things. Get money coming back in, the opposite direction.

When it comes down to it, how you are going to get money coming in is the most important question in business, because without it, you don’t have a business. You may have a not for profit, or a loss-making organisation, but it’s unlikely to become a self-sustaining business. These days, setting up a business is so cheap (my total set up costs have come to $3,200) that you can be “in business” very easily, but unless money is coming in somehow, it is not really a business at all.

I’ve met a few people along the way who are still struggling with this fact. They have a great website, lovely content, are pure and passionate in what they do, but they don’t have a business model (a way of having money come in). They’ve tried a few things, but to no avail or not in sufficient quantity to cover costs.

My advice to them is to stop thinking about what they want to do, and start focusing on the problem they are trying to solve for the customer. In business, the money flows in from the customer. In some cases, there are users and customers, different sets of people. One of them uses the service for free, the other pays for their use.

For example, when we started aussiehome.com way back in 1999, we thought we were building a web site for people like us, home buyers and renters. We were going to make property searching easier, by showing properties on maps on the web, 24/7, rather than forcing people to wait for the weekend papers. Fine, except the business model was a subscriptions one for real estate agents. They were our customers, the ones who paid us, not the users who used the site and found their properties for free.

So, in order to get the real estate agents to pay, we had to work out what problem(s) we were solving for them. It took us about 18 months (post launch) to figure this out. (I don’t advise doing this post launch, as we did.) The agents’ problem was not trying to get buyers to see their properties. Buyers seek out properties. They will use whatever means they can, including driving by favourite neighbourhoods, reading sign boards, ringing up agents, waiting for the weekend and local papers…

You can rarely force someone to buy a house they don’t want to live in. What real estate agents know is that if they get a good listing (property), and present and price it correctly, it will sell (most of the time), depending on market conditions. In boom times, properties fly off the shelves. In tougher times, they seem almost impossible to budge. The poor agent can exert little influence on the market. The market is the market, as they like to remind us.

What real estate agents therefore want, is a great listing. List and last, as they say. In order to get the best listings, agents need ‘listing tools‘, the latest gizmo or script or shiny object that will set them apart from their competitors.

Once this penny dropped, we realised what our business was.

Give our agents listing tools, to make them more competitive over the next agent, and they might just win that great new listing. Price and present it properly, and the property will sell. Or not, depending on market conditions.  Pretty much. It was all about the listing, not the selling.

We then spent the best part of 10 years building listing tools for our agency clients; great websites that ran off our platform, the ability to list on a dozen real estate sites through single data entry and XML feeds, full colour gloss magazines, apps and social media advice… anything to give them the edge in that pre-listing interview with the owner.

So – what is business really? It’s all about solving problems for customers. If you can solve problems for them, then you create value. If you create value, they will pay. If they pay, you might be in business.

It all comes down to relentlessly focusing in on the customer problem, and hammering away at that in ruthless fashion.

Never ever fall in love with your own product or service (the worst salesman does that). Fall in love with solving your customers’ problems instead.

So, after all this, what is my new business, and what customer problem have I fallen in love with solving? Agh, you will just have to wait a little while longer before I reveal… although I have left a few hints on this website.

Photo credit: Steve Fettig, Flickr

Company Directors Course – 5. Board effectiveness

CDC - board effectiveness

The final day of the company directors course focussed on board effectiveness –  what is it? how can it be managed? what’s best practice? what are some of the traps? The first half involved long time board recruiter Mike Horabin sharing his vast knowledge and decades of hard won experience. The second half involved us being put into a live case study, where we each in turn acted out as a presenter to the board, an observer of the board, and being a director on the board on a separate agenda item. It was the high point of the week, and a strong conclusion to the proceedings. 

There are so many takeaways from this course, so here are just a few more to add to those already posted about the board’s responsibilities and decision-making, duties and the law, risk and strategy and accounts, solvency and finances

  1. Boards are charged with coming to sound conclusions, concentrating on the proper items in front of them, with concise, well prepared information. They need a good mix of people and skills, have leadership from within (Chair) and provide leadership to the company. Overall, they are there to add value.
  2. Good boards provide calm decisions in times of crisis, are not rushed or panicked.
  3. They are a pool of wisdom, and are there to guide, mentor and assist management.
  4. Individual characteristics of good board members include: integrity and honesty, relevant experience, strategic thinking, good communication skills, wise and battle scarred, inclusive, good team player, adaptable, willing to change their views, courageous enough to ask difficult questions, are independent, decisive and have good instincts.
  5. High performance boards can have tough conversations but still reach decisions and be productive; they respect each other, trust and share in an open environment.
  6. The ‘magnificent 7‘ things a board needs to do are: lead with the right culture, develop the best strategy & pick the best CEO (then these others become easier ->), manage risk, monitor performance, ensure compliance & maintain good shareholder relations.
  7. The chair’s role is crucial – they are elected by the board, their relationship with CEO is pivotal, and they can only continue if they have the backing of the board.
  8. The Board should manage their own secession; most of the time they should try to get a new member on board before the other departs, and then have their position ratified at an AGM; they can come on as casual for a few months beforehand.
  9. Board committees must have clear terms of reference, time frame, its own Chair (good training ground for future chairs) and make recommendations to the main board.
  10. If you don’t agree with the way decisions are going in the main board meeting, by all means meet other board members, but make your points and do a paper to the next meeting if needs be. Talk to the chair; don’t thump tables, and if the decision goes against you, abide by it. Don’t form factions.
  11. Develop a “Matters reserve list” which shows which matters require sign off from Board, with the implication that all else can be handled by the CEO and management. Review this regularly.
  12. A board calendar should outline what needs to be dealt with throughout the year – monthly, quarterly, six-monthly and annually. Board meetings should last 2-3 hours, but can be half days, and in some indigenous organisations might last 2 days.
  13. Culture is crucial and central; it’s not fluffy, it’s hard nosed, but a good corporate culture can lead to so many good outcomes. “Culture is how people in the organisation behave when no one’s watching.”
  14. If Chairs disagree on the direction of the discussion, or how consensus is forming, ask a question. Monitor how bad news gets to the board – is it disguised? embellished? hidden? slow? Ultimately, boards need the bad news quickly.
  15. Papers to the boards are legal documents, as are your notes on them if they are kept and a legal case starts. After that you cannot destroy them, they are evidence. Minutes should be published within 48 hours of each meeting.
  16. Finally, take time to reflect as a board and as individuals, with each other – what can we do better? how did the meetings go? how good were the papers? were our decisions correct/best? have we added enough value? what can be improved?

Overall, the company directors course was a high value 5 days, and brought home the complexity and skill in group decision-making around the board table, how to search for answers, the importance of asking the right/tough questions. It’s made me reflect on how challenging it can be, but how vital it is to do well. It’s made me realise that this is something I want to do, in time, and something where I think I can contribute.

Over the next 3-5 years and beyond organisations are going to be challenged like never before with the rapid changes in technology, cyber security, digital disruption, the sharing economy, robotics, driverless cars, connected devices, the Internet of Things and much more besides. Who knows what jobs will exist for our children in 10 or 20 years time? Probably they have not even been thought of yet. Whole industries will disappear, and new ones will be created. Businesses that cannot stay relevant will fade away. Others will start up.

I would like to be the ‘digital guy’ who sits on various Boards, thinks strategically, and assists organisations make the transition from old way of doing things to the new. It’s exciting, and challenging, and something where I can probably add value. What can you add value on? Are boards something you might be interested in? If so, I highly recommend the AICD company directors course.

… and now I have to do my exams and pass this thing!

Company Directors Course – 4. Finances and Solvency

CDC - accounts

The 4th day of the company directors course was all about “the books”, and what directors need to know about them, what they need to ask, and why. For many this was the day they dreaded, but I’ve never found accounting all that bad, in that the principles (once learnt) are fairly straightforward and much of the rest is plain logic. It’s a bit of detective work, sifting through the evidence to uncover what the real story is, where the concerns are. It can be fun when you discover the truth, like solving a puzzle. OK, I sound a bit geeky, but it is made all the easier when you have an expert and calm trainer (as we did today), who is well experienced and could build up everything from first principles, so you could see how it all hangs together. I learned a lot, and I felt it filled in some gaps I did not know I had.

Directors need to be aware that they bear the ultimate responsibility for the financial performance and position of the company, so they should be asking questions if they suspect anything is not completely understood, right and proper.

Again, this is not an exhaustive list, but from memory, here are some important matters to consider as a director in regards to an organisation’s accounts & finances …

  1. The Accounts are an indicator only, like a light on your car dashboard. Some lights will not be flickering, some may never become a concern, but at times as you drive along they may indicate something. It’s very easy in hindsight to spot problems in a mangled heap of law suits and company implosion, but even in these cases a sensible director might have been querying things many years before the problems became endemic, and in some cases, ruinous.
  2. The 3 main account documents are: the Profit and Loss (P+L), the Balance Sheet, and the Statement of Cash Flows.
  3. The P+L shows you how they organisation has performed in $ terms over a past period (year, quarter or month). It looks backwards. It starts with a statement of income from sales to customers (Revenue) and deducts the direct cost of those sales (cost of good sold, COGS, such as direct labour and raw materials) to calculate Gross Profit.
  4. For a retail store, COGS would be calculated as Opening Stock of Goods plus Purchases (= available for sale) minus Closing Stock (stock still left over).
  5. Your Gross Profit divided by Sales is your ‘margin‘, and in most trading entities, it would be expected this would be positive and worth about 30% of sales or more. The higher the gross profit margin (GPM) the more margin you have, and the more profitable you are.
  6. After Gross Profit is deducted expenses, to get an Earnings Before Interest and Tax (EBIT). Often EBIT is used to compare organisations as it is not affected by how a company funds its operations (payment of interest on loans) or by specific tax rules.
  7. Various other deductions are then made, such as depreciation (to make sure you are accounting for your plant and machinery losing value over time), tax and interest, and you’ll end up with Net Profit after Tax (NPAT), the bottom line. Net Profit, if positive, can be used to pay dividends and/or plough back into the company (as reserves, a source of future funds).
  8. The Balance Sheet will give directors a statement of the financial position of the company at one moment in time (the date on the balance sheet). Notice the difference here – the P+L is over a period of time, and the balance sheet is a snapshot at one point in time. It’s as if everything in the business is frozen and added up, including all the assets the business owns (Assets: such as property, cash, receivables, equipment), all the debt it owes (Liabilities, such as bank loans, payables, overdraft, employee provisions/leave) and the amount of money in the business that is left over (Equity). Assets = Liabilities + Equity, or Assets – Liabilities = Equity.
  9. Equity can be made up of the initial share capital invested, plus any subsequent share raisings, plus any accumulated reserves and retained profits earned over time, less dividends paid.
  10. Various ratios can help you decipher what is going on, although you’d want to know why the ratios are changing, not only that they are changing. For example, ‘return on assets’ may be rising because you are generating more profit from your assets (Good!) but it might also be because you had to write off some useless assets (Bad!).
  11. The third important document is the Statement of Cash Flows, and from various cases today it was clear that the P+L might look great, so too the Balance Sheet position, but once you look at where the business is actually earning its cash from, and where it is spending it, a very different picture may emerge. All 3 documents are required for a better overall understanding.
  12. One classic case here was a WA-based winery (which later went insolvent, had to be broken up and sold off). The P+L looked fine for the 5 years presented, but digging deeper it was clear that by the 5th year in question the only reason it made a positive NPAT at all was due to some revaluation of the vine trees (upwards), which had been done (perfectly legally as per accounting standards) over the previous two years. This had come on to the books as ‘other revenue’. Meanwhile the balance sheet looked OK, albeit with some higher debt levels and some share issuing, but otherwise things looked ‘not great’, but ‘under control’. However, looking at the statement of cash flows, it was clear they were not earning positive cash inflows from their actual business at all, and that a combination of more borrowing (debt), share issuing (diluting shareholders) and asset sales (flogging off what was seemingly not bolted down) were the main reason they still had cash in the bank at all. All major ratios were trending down, and in fact the liquidity ratio (ability to pay immediate debts) had been well below acceptable levels 3 years earlier, and continued to be thus.
  13. There were certainly warning signs up to 6 years before the business eventually went into administration. This brings up one of the most sober points for directors – trading while insolvent, or trading close to insolvency. Solvency is “being able to pay debts when they fall due” and so has a timing element to it. As long as the business can pay debts as they fall due, then you are OK.
  14. How would a director know if the business might be sailing close to the wind on insolvency or not? Early warning signs may include – a reduction in cash balances, an increase in creditors (the business may be trying to buy time with suppliers), a low liquidity ratio (below 0.75 is generally a worry), net cash receipts from customers is less than cash paid to staff and suppliers, cash income from sales is less than reported book sales, an overdraft being used and rising over time, various other devices are being used to keep cash up (asset sales, share issuing, increases in debt) and dividend payments being funded from borrowing or anything other than operating cash profits. All the directors have to do is raise some questions about all this, and in the case of the winery above, questions could have been asked many years before the business failed.
  15. The insolvency issue is fundamental, as directors must not allow the business to continue trading if they suspect the business cannot pay its debts as they fall due. If the business continues to trade, the directors could be held personally liable for any more debts incurred. This is illegal! ‘Hoping things will turn around’ and ‘we’ll trade out of it’ are not valid excuses. You fail in your fiduciary duty as a director to the company if you allow the business to trade while insolvent. Pure and simple. If you suspect this, you have to have this recorded (e.g. minuted), and stop trading. But well before then, you should have picked up the warning signs and asked important questions, such as ‘why are we paying a dividend while making a trading loss?‘ or ‘how are we paying for ongoing business expansion when our receipts from customers are less than what we pay our suppliers and staff?‘ or ‘our liquidity ratio is at 0.4, and an acceptable level is 0.75 or higher, how are we going to revert back to an acceptable level?’…
  16. There are far more issues to do with accounts than these few points above – for example, there are many more accounts than the 3 main ones above, and dozens of ratios. Last point – beware the fine print. Read the notes to the accounts – there should be explanations for any asset impairment, or revaluation or anything like this that can have a material impact on results. Remember, if you’re not sure, ASK!

Company Directors Course – 3. Risk and Strategy

CDC - risk and strategy

Day 3 of the company directors course, and we had a superb facilitator, Peter Fitzpatrick, who has loads of experience, and even better, is a well versed and highly competent at providing it. He kept us engaged all day. Quite a skill. We’re 60% of the way through, and it’s a weekend, so I can take a pause to reflect on another full day with lots of learning.

Risk and Strategy are two of the most important matters a Board will focus on. Risks come in all shapes and sizes, seemingly from anywhere, and you can never exclude all risk altogether. It’s more about how aware the company is about their risk environment, what appetite they have for it, and can they act when a risk suddenly blows up in their face? As for strategy, it’s the essential role of directors to look 3 to 5 years ahead and keep the company moving in the right direction, whatever that is.

Here are my takeaways in regards to risk and strategy:

  1. There are positives with risk – they can make you look after your company better, your people, save money.
  2. It’s important to keep asking questions – never assume – rather than making statements.
  3. A board refresh will be important from time to time, so you don’t get stuck in the same way of thinking.
  4. There are various ways to manage risk, and boards have a duty of care and oversight role.
  5. The company’s risk appetite needs to be defined, with KPIs (such as ‘our maximum gearing ratio will be x%’ or our ‘days creditors will be y‘)
  6. Crisis management plans needs to be prepared, with various scenarios, and from time to time, rehearsed.
  7. A diagram/overview can place all valid risks in one chart, which can be updated, and have a risk register with more details on what they are and how to mitigate and deal with each.
  8. Have a full set of risk documents, stored, updated, and understood.
  9. On strategy, first look at Simon Sinek’s ‘The Why’ – people buy the why, not the what or how. Do you know your ‘why‘?
  10. 60% of workers are disengaged with strategy and the workplace – engage them, communicate, involve them, inspire them.
  11. Developing a strategy is 1 of the 7 key roles a board does.
  12. 4 Russian brothers can be useful: Moreov, Lessov, Ridov, Tossin (!)
  13. Allow a good time for strategy day with enough preparation. November can be a good month to hold a strat day.
  14. What’s your main game? Don’t stray from this. What are you (or can you be) best at?
  15. A good external facilitator is required for strat days.
  16. Have KPIs, get everyone’s commitment and hold people accountable.

Company Directors Course – 2. Duties and the Law

CDC the law

Day Two of the Company Directors Course was about the duties and responsibilities of Directors, and the legal environment. It was a drier day in many respects than day one, not only because the wintry rain abated. Much of the day was spent delving into such matters as the fiduciary duties of directors, recent test cases such as AWA (1992) and James Hardie (2012) and the complex issue of contract law, privacy and the rest …

It’s not for nothing that many boards require or expect Directors to have done the AICD’s company directors course. As I work my way through it, the mind boggling array of detail and complexity that a single director and board can get into only makes the point that no one should treat lightly onto any Board of any description. The undertaking is a major one, and gets more and more complex and risky the larger and more public the company. ‘I did not know‘ is no defence. Nor is ‘someone did not tell me‘. Anything that happens in the company can impact back on its Directors, for it is they that the shareholders have entrusted the power of overview and governance in the first place. It is they that carry the ultimate responsibility and where the buck stops. The ‘company’, albeit a separate entity, is not a person and cannot make decisions, but people can, and the people who have ultimate control are the Directors. Everyone in the company essentially works at their behest.

Having said that, a Director acting in good conscience, honestly and dutifully, who is well informed and asks reasonable questions, is well prepared, attends and is involved, should not have any issues and may very well have a long and distinguished board career. It’s not that businesses go down, many do, it’s that a ‘hypothetical reasonable person‘ parachuted into that same board seat would have done everything they could have done (within reason) to know what was going on, and make informed decisions. Did you?

Here are my takeaways from day 2 on the subjects of the duties/responsibilities of Directors and the legal environment in which they operate:

  1. There is common law and statutory law – common law is what is laid down by a judge from a court judgement, and as such sets precedents. Statutory law is pronounced through Acts of Parliament, and as such gives bodies like ASIC the powers to prosecute and attach penalties on companies. Both laws work side by side.
  2. Directors have a fiduciary duty, meaning their duties are owed to the company itself and mainly revolve about being honest, trustworthy, careful, diligent and acting in good faith.
  3. The Directors duty is to the company, and not one single group of stakeholders. ‘What is best for the company?’ should be in the forefront of their minds as they deliberate.
  4. Sometimes one group’s rights get ahead of the queue – for example, if the company is insolvent (cannot pay its immediate bills) then satisfying creditors becomes the most important concern. Once they are sorted, then the company may be able to continue trading (and as such, directors have the done the right thing by the company – shareholders, staff, and others may continue to benefit).
  5. Sometimes ‘shadow directors’ can be determined to be directors: for example, a consultant may sit on board meetings, give advice, and their deeds and actions may determine what a company ends up doing, bringing action back to that consultant if so deemed. Consultants are not automatically shadow directors, but in some cases act as if they are directors, and so could find themselves being treated as a director by the courts.
  6. To ‘act in good faith’ essentially means you have no conflict of interest (you, or a friend/family do not personally benefit from a decision the board deliberates on) and do not improperly use the information available to you as a Director (such as trading its shares – as Steve Vizard was alleged to have done while on the board of Telstra… which also begs the question, what was Steve Vizard, comedian, late night TV host, doing on the board of Telstra?!)
  7. A director should ask questions, be knowledgeable, have a well developed world view and exercise judgement.
  8. The ‘business judgement rule‘ absolves directors if they have taken decisions with the available facts and fully thought through their strategies in a planned, methodical, well documented manner. As mentioned, sometimes things go wrong, the main point is – would your decision look good in 10 minutes time, or 10 days, or 10 years? Would it look good if discussed in an article in Business News?
  9. Trading while insolvent is illegal. If directors suspect the company is near or in (or likely to be in) an insolvent position (i.e. not able to pay its bills as they fall) then the company should not continue to ‘trade out of the situation’ hence incurring more costs and possible debts. The directors could be held personally liable for those increases in costs/debts, plus other penalties including prison.
  10. An important recent case involves the collapse of Centro Property Group, where a long term liability (debt due to be repaid in more than 12 months) had not been rolled over and hence became a current liability (due within 12 months) post balance date. The directors either did not notice (or bother with) the potential problem should this liability not be rolled over for another year. When the banks took a tougher line and refused roll it over (as the GFC unfolded), it became an immediate debt and the company did not have enough immediate funds to meet the demand. It was $1.5 billion and not a trivial matter. Collapse ensued. 8 directors were held to have breached their duties. The directors should have asked the right question – what happens if this is not rolled over? what’s the likelihood? what’s the contingency? has anything changed (such as the GFC!)?
  11. Directors and Officers (D+O) insurance will reduce risk for directors (and help defray legal fees), but not if they have acted improperly. Nothing protects you against that. D+O insurance is best kept for up to 7 years after a director leaves the board, as the statute of limitations is that long.
  12. Reputational damage can be immense should a company breach a law. Good reputations help companies attract and retain the best people, help build a strong brand which can provide long term value.
  13. Reputations can be dashed through PR disasters such as last year’s VW emissions scandal or the BP Deep Horizon oil spill of 2010.
  14. Contract law is fraught with complications, and boards should review all standard contracts and have clear policies around who can agree to what and how much.
  15. IP law, competition and consumer law, privacy law, work health and safety law, environmental law and anti-discrimination law all impacts on companies.
  16. Directors have to be ahead of the game on the legal environment, state and federal, and have all the information they need to make reasonable decisions and ensure they are ‘more than’ complying with all the relevant laws in all the jurisdictions in which they operate.

Company Directors Course – 1. Board decision making

CDC day one

I’m back at school again, this time on the student side, for the first time in 18 years. Day one of the AICD Company Directors Course has just ended, and I’m going to blog my thoughts and take aways each day, so this will be the first of 5 such posts… 

The CDC course involves 10 modules, each takes half a day, so we covered the first 2 modules today – an introduction to the roles and responsibilities of directors and then group decision making.

It’s fast paced and you have to engage. There’s a lot of pre-reading (I reckon 20-25 hours should be set aside to read all the material and case studies beforehand), and I’m glad I did all the reading, as it gave me a head start and strong overall understanding before I walked in this morning. I could apply my reading to the cases immediately. You could tell some had done all their reading, and some had not. Like a sewer, what you get out of it depends on what you put in. My suggestion is to do the pre-reading work, over a few weeks beforehand and take notes as you read, which helps you stay awake while reading, remember it, and then you can re-read your notes just before the session, and it all comes flooding back.

My main take aways from today are:

  1. Directorships are not for the faint hearted – know what you’re getting yourself in for. Be clear on your responsibilities (to the shareholders) and what you are bringing to the table. Doing the wrong thing can land you in jail (think Adler and Williams from HIH).
  2. Actively participate, but don’t do so overly; add quality to the discussion, and consider how the best boards could be run, and best decisions be made.
  3. Some of the most important decisions a board make involve selecting the best CEO and formulating the best strategy, keeping the management and CEO to account
  4. Boards need to fly at 35,000 feet taking a view from above, and leave the CEO and management to work on ground level on the business; communication between them is critical – how much is enough/too much? how would you know?
  5. Sometimes boards need to fly down to ground level to help (e.g. in a crisis) and then they need to get out of the way again above the clouds when the crisis has been averted.  (Think Kevin Rudd, who was seemingly good in the GFC but then could not let go once it was past.)
  6. You should not get too comfortable on the board; after a few years, a refresh is needed. You can only be truly independent if you are relatively new and have no ties to the organisation (not a major shareholder or supplier).
  7. Group decision making is complex, but should be better than individual decision-making if the board is diverse, has enough information, takes enough time and analyses all sides and thinks what’s in the best long term interests of the shareholders.
  8. There are various tools that can assist decision making (Bono’s 6 hats, decision trees, PEST analysis, etc).
  9. Sometimes short term priorities blur long term thinking.
  10. A good Chair, who can draw out and use the talents of every board member, is crucial – they are like a conductor of an orchestra, and are ultimately responsible.
  11. Groupthink, where everyone just agrees and goes along with a (usually dominant) CEO of Chair is very dangerous; a managed bubbling of various ideas is healthy.
  12. Always consider what other options are possible, why others have not done this, what other information may be required.
  13. Voting is not a good idea; a good Chair will move the Board to a consensus, where all views have been expressed, and everyone can agree on the course of action, how success will be measured. If someone wants their opposition noted, note it.
  14. Reflect on past decisions and what it means for future ones.
  15. Before taking a decision, agree on how the decision shall be made (process).
  16. Will your decisions look good in the cold light of day? the next month? in 10 years’ time?

There will be many more takeaways; but these are off the top of my head (my notes are left back at AICD in the city).

See you tomorrow 🙂

If Brexit happens, what then?

Brexit

The phony war is over, the real war has begun. On Friday, the first official day of campaigning started with those that favour UK leaving or remaining in the European Union making their opening arguments.

Prime Minister Cameron, coming off a difficult week thanks to the Panama Papers and findings around his father’s money, is arguing for the country to remain “in a reformed, modern EU”. His adversary, Boris Johnson, Mayor of London, and fellow Tory, speaks about “a glorious alternative” where Britain takes back control of its own destiny.

The UK referendum is still 2 months away (June 23rd) and polls show it is on a knife edge ~ the latest one showing a tie or there being one point in it. Considered wisdom seems to be that the most likely result is a small majority to remain in the EU, but this is not guaranteed at all, and even if this happens, things will have to change. A ‘leave’ vote could precipitate a change in Prime Minister, and then 2 years of negotiation of hundreds of trade agreements and arrangements.

What is the EU?

12 years after the end of the second world war, the Treaty of Rome was signed by 6 countries (Belgium, France, Italy, Luxembourg, the Netherlands and West Germany) which led to the creation, on 1 January 1958, of the EEC (the European Economic Community). The UK was not a part of this, and requested to join (along with Norway, Ireland and Denamrk) twice during the 1960s, only to be blocked by then French President de Gaulle (who feared growing US influence through a UK admission). With a new President (Pompidou) in France in 1967, the admissions were agreed, but Norway subsequently voted in a referendum not to join. Years of negotiation then took place, and on 1 January 1973 the UK, Denmark and Ireland joined to become 9 countries in the EEC. In 1975, UK held a referendum on whether to stay in, and by a vote of 2 to 1 voted ‘Yes’ to the EEC (or ‘common market’ as it was referred to in UK).

The 70s

I remember the admission to the EEC and that referendum. The choice (for my 10 year old intellect) seemed to be about ‘joining Europe’ in order to ensure peace and friendship with our European allies, along with wider access to goods and services (before this time we only ever had grapes if we were on holidays “on the continent”). After admission, the range of fruit in supermarkets exploded. Good times. I’d only ever known apples and oranges before this.

The 80s

Greece, Portugal and Spain joined in the 1980s, and by then I was at university studying economics. Pretty much everything I read about the EEC was in favour. The massive benefits of open trade, reduced barriers, free movement of labour, closer monetary integration… in a single market of 350 million made sense to me, and I was all for it. Intellectually it made sense, and we were benefiting from a massive market, with free and open access of labour, goods and services.

The 90s

In 1993, the community became known as the EU (European Union) with more developments around monetary union and a single currency (the Euro) which came into effect (virtually) on 1 January 1999. It had always been a goal of European proponents in the 1960s (and even in the 1920s) to a closer and closer economic integration, with a single European wide interest rate and a single currency. The Deutschmark, the Franc, the Lire… 22 currencies in all disappeared in 2002, all rolled into one.

Meanwhile, the UK had started to lag behind all this ‘integration’. Never signing up for economic integration, and never for the Euro, the British pound remained outside the Eurozone. Various sputtering attempts were made to keep in line with the European Monetary System (EMS), with Black Friday and other events demonstrating the difficulties for the Pound (a petro currency) being forced to move the same way as various others. Meanwhile, the centre right Conservative party contained members of parliament vehemently opposed to the growing powers of the EU (the so-called Eurosceptics) and in the early 2000s, a new party, UKIP, was formed to contest elections on an anti-Europe (and often anti-immigrant) hard right platform. By 2014, it had attracted the largest vote in the European elections in the UK. Oh the irony.

Today

Fast forward to 2016.

There are 28 countries in the EU, enjoying the central 4 Fs (freedoms) – freedom of movement of money, products, services and people. The EU now covers 500m people, and a $18tr economy has been struggling. We’ve had periods where Greece, Portugal, Ireland and others have had to be helped to remain in the EU, post the GFC and the repercussions that ensued.

UK industry and the EU are now inextricably linked. 45% of UK exports are to EU.

In the 2015 Conservative manifesto, there was a promise to  hold an “IN OUT” national referendum on the issue of EU, if the Conservatives won the election outright, which they did. This ploy was designed to pull away UKIP supporters, and to some degree it worked. To the amazement of many, including all the polls, Cameron’s party duly won the election outright.

So on June 23rd there is a referendum on this issue. The polls are close. A leave vote gives the UK government the right to negotiate a leave agreement over 2 years. No one the size of the UK has ever left the EU, so this is a unique situation.

Assume UK leave…

The post leave vote position is very uncertain, and solutions would be found, but it would be very complex.

There are alternative models – such as a European Economic Area, which has Norway in it – and the EEA has bilateral agreements with EU but all EU regulations without seat at the table. This is unlikely to be acceptable to UK, having voted to leave mainly because of the subjugation of powers to Brussels.

The EFTA (Euopean Free Trade Area) model with countries like Switzerland exist, but again this open border model is not going to suitable be for UK.

So it would be a new model for UK if they leave.

It has been argued that 40% financial services business would move to EU; as UK is used as a place to get into Europe due to their being in the EU. The City of London has become a global financial services centre as a result.

Large new tariff barriers would be in place (the EU has massive common external tariffs around its borders), and all these need to be reorganized. There would be hundreds to renegotiate. It could be done, but it would take time.

Among the larger countries, UK has the strongest economy in the EU currently, so as the EU is client to UK (UK imports more from EU than it exports) so there would be a compulsion to put in place trade agreements. France and Germany alone make up over 20% of UK exports and imports. A new agreement with China and US and EU would all need rearranging with UK.

The U.K. has Commonwealth, so will not be alone and might increase trade there. The $10tr economy of Commonwealth (53 countries) is predicted to rise, whereas the $18tr EU economy is stagnating presently and has less upside.

Mood for change?

Older people are more for leaving than younger, but apart from that this the question is splitting people in the UK on every level. Everyone has an opinion. It’s not split on north south or rich poor, it is divisive all round.

Conservatives are for staying except for some high profile ministers. Labour are for staying. SNP for staying. The Telegraph and Mail newspapers are for leaving, Guardian for remaining; The Times is undecided. Big businesses are for remaining, smaller business are for leaving.

Referendums don’t often vote for change; most people in Australia want an Aussie head of state, yet when given the opportunity arose in 1999 they firmly voted against it. Same too with day light saving.

Could it be that when the Brits get in the voting booth, they will stick ‘with the devil they know’? As the Scots did in 2014? Is it that the ‘heart says go, but the head says remain’ and in the end the head will prevail? Maybe.

On the EU side, Europeans feel a mixture of dismay, irritation and growing apprehension around Brexit.  If UK leaves, Spain would probably next. If the UK stays, Holland and others may demand the same exceptions that UK has won.

And for Australia, there will be implications. Australia and UK are major trade partners, and Aussie and British firms have subsidiaries in each others’ countries. People move between them, and Australia is a #1 destination for non European emigration from the UK.

Either way, the EU is not going to be the same, and will evolve in some shape or another in the next few years.

It’s about the team, not the individual

Pull together as a team

OK, I know I got the whole Chris Gayle sexism thing off my chest recently, but when one of my junior cricketers yesterday was telling me how good Gayle’s recent 12-ball 50 was (… hopefully his final innings at the Big Bash), I had to take issue.

Did his team win that game, I asked?

Err… dunno, but wow, what hitting, I mean, a 12-ball 50! he replied in awe.

But did the team win? Did the innings set up a win, or take them over the line? I said again.

The 11 year old looked at me, puzzled. He was (I think) trying to remember who won that game, and was confused as to why I had not said something like Yeah, great innings wasn’t it?

No, his team lost, I said, so what good was that innings apart from being a celebration of his individual, perhaps wasted, talent? He played 17 balls in total, but there are 120 in the innings, and if he’d faced 40 or 50 of them, do you think his side would have won? 

Now today (this boy was about to go out and open the innings for us), I want you to play for the team. It’s what I always want from my players. The opener’s job is to lay a platform for the rest of the team. To have wickets in hand for the final assault, when overs are running out. OK?

Gayle is an opener. He likes to stand and blast away. Sometimes he comes off, more than often he does not, because he plays with a high degree of risk. He has two shots – one a lofted drive down the ground (which he’ll bring out if the ball is anywhere near him), and the other, a push from the same position for a single if the ball is not in his arc. Or he leaves it alone. Invariably his sides lose. Why? Because his innings are always about him. If he cared about the team, he’d still be playing for his country, the West Indies (where he made his reputation). If he cared about winning games, he’d make sure that when he ‘got in’ and things were coming off, he carried on to post a winning score, or get his side over the line. Not just walk off after a meaningless, somewhat self indulgent thwhack which made headlines for him, but did not allow his team to win an important game.

He’s played for Sydney Thunder in the Big Bash for a few years. They’ve come last for 3 years running, then second last last year. This year they won the tournament, but Gayle had since moved to a Melbourne team, who did not make it to the finals.

Is there a pattern here?

Probably.

Play for the team. Play for the organisation. Play for your family. Play for your community. If we all do that, then we all enjoy much better outcomes.