Monthly Archives: August 2017

Increased commitments of time and energy

Building a strong board of directors never seems to get easier. High-profile board failures, the boom in activist investing, and the disruptive forces of technology are only a few of the reasons effective board governance is becoming more important.

Start with oversight, a role of the board that, most directors would agree, is no longer its sole function. Directors are now required to engage more deeply on strategy, digital, M&A, risk, talent, IT, and even marketing. Factor in complexities relating to board composition, culture, and time spent—not to mention social, ethical, and environmental responsibilities—and the degree of difficulty continues to rise.

To help CEOs and board chairs, as well as executives and directors, build strong boards, this CEO guide synthesizes multiple sources to make quick sense of complex issues in corporate governance, while focusing on four areas that are essential for building a better board. (For a quick read of these topics, see the summary infographic, “Four essentials for building a stronger board of directors.”)

McKinsey Global Surveys indicate the best boards go beyond fiduciary responsibilities to take a more active role in constructively challenging and providing input on a broader range of matters. Since some of these are also the province of executives, finding the right place to draw the line between governance and management is as important for senior executives as it is for directors. Strong collaboration between the CEO and board chair can help define a broad and forward-looking board agenda, one that, rather than pressuring management to maximize short-term shareholder value, instead helps the company thrive for years.

Contribute the ‘outside view’ to strategy. McKinsey’s recent board survey shows that strategy is, on average, the area boards give most of their attention. Yet directors still want to increase time spent on strategy (Exhibit 1). The board member’s role in strategy is to provide the overall strategic framework, to contribute an outside view that challenges the strategic alternatives presented by management,1and, ultimately, to approve the chosen strategy. CEOs should help make sure their own boards are playing this valuable role.

Defamation lawsuit over shoplifting poster

A Sydney woman has lost a defamation case against a business owner who posted a photo of her with the word “Thief!” in a Mount Druitt discount store.

The poster appeared at the counter of One Stop Bargains, a two-dollar shop on Mount Druitt Road, in July 2016.

The word “Thief!” was written in capital letters above and below the woman’s photograph, which was taken from CCTV footage of her in the make-up section of the store.

The woman denied stealing from the shop and demanded that the poster be taken down before launching defamation proceedings in the NSW District Court.

Judge Judith Gibson said CCTV footage from inside the shop was incomplete but showed the woman “looking at items in the make-up section” and “picking up small cylindrical items which look like lipsticks”.

The woman placed one hand in her pocket while giving a “very long and furtive stare” in the direction of the shop assistant behind the counter.

“The plaintiff is seen putting her hand into her pocket in a suspicious manner throughout the CCTV footage,” Judge Gibson said.

The woman told the court she lived “three to five minutes’ walk” from the shop and went there every day. On the day in question – July 1, 2016 – she attended the shop with two of her children.

She said she bought two $1.50 lollipops, two 50¢ ice-blocks and a $4 lipstick. But the 21-year-old shop assistant, whose family own the business, gave evidence she did not buy any lipsticks although she stood at the lipstick counter for some time.

The woman denied in the witness box that she placed anything in her pocket during the shopping expedition. Asked the same question in writing before the trial, she answered “I can’t recall.”

The case faced a number of legal hurdles, including that the man who was sued for defamation was not the owner of the shop, but the father of the owner. The father said he was not responsible for the poster.

Judge Gibson also found the poster was not, as the woman had claimed, placed in the shop window, although it was placed at the front of the shop, “namely at the counter directly in front of the glass windows”.

“As no action has been brought in relation to publication of the poster elsewhere in the shop, this claim fails,” Judge Gibson said.

Judge Gibson nevertheless considered whether the defences pleaded by the defendant, including truth, would have been successful.

A criminal prosecution against the woman for theft did not proceed and the charge was withdrawn on the day of the hearing.

But Judge Gibson said she was satisfied on the balance of probabilities that “the evidence displayed that the plaintiff did in fact steal items from the shop”. This was a “complete defence” to the poster.

Slater & Gordon principal lawyer Andy Munro, who acted for the defendant, said the shop owner had been “quite careful before preparing the poster”, including checking store inventory and the CCTV footage.

“While an individual’s rights to privacy must always be balanced against potential intrusion by the use of CCTV, the use of cameras in stores is a kind of deterrence, and this decision recognises that business owners have a right to protect themselves from legitimate shoplifters,” Mr Munro said.

How to stretch without breaking

The urge to improve is innate in most companies, where better service, stronger performance, and faster operations are inextricably tied to earnings, bonuses, and shareholder returns. The impetus is so strong, in fact, that the practice of setting stretch targets for a company’s performance has become emblematic for the grit and aggressiveness expected of a modern executive. Managers take pride in seeking to achieve the unthinkable.

Franklin survived a legal stoush with the Smorgons and breast cancer

“He had a reputation for being litigious he had unlimited funds and it was a personal affront,” Franklin told the EY Entrepreneurial Winning Women Lunch at the National Gallery of Victoria last week. “It was probably one of my first terrifying experiences, I’ve had many since unfortunately.”

 

Starting out in a cafe

Franklin’s legal stoush with the Smorgon family was just the first of many challenges she has faced since starting the Heat Group with five employees working out of a cafe to the 140 staff she employs today.

The Heat Group turns over around $130 million and distributes some of the world’s biggest cosmetic brands as well as its own brands, ulta3, Billie Goat, MUD Makeup Design, OZK.O eyewear and TBX with a Heat Group product sold every 2.7 seconds.

Franklin started the business in 2000 after quitting as managing director of Smorgon’s consumer goods company Creative Brands.

The Heat Group turns over around $130 million and distributes some of the world’s biggest cosmetic brands as well as its own brands, ulta3, Billie Goat, MUD Makeup Design, OZK.O eyewear and TBX with a Heat Group product sold every 2.7 seconds.

Franklin started the business in 2000 after quitting as managing director of Smorgon’s consumer goods company Creative Brands.

 

“After being in corporate life for 20 years I made a decision that I wanted skin in the game and to start my own company,” Franklin says. “What really helped me was that prior to that I had really respected the importance of networking and I made networking part of my strategic plan which meant I deliberately went out and sought people who would help me in my career.”

Good people were key when Franklin was served with a writ by Smorgon after winning a lucrative competitive tender to distribute Procter & Gamble in Australia.

“What I didn’t know when I was tendering for the Procter & Gamble business was that [Smorgon’s Creative Brands] were tendering against me and when I won it Graham Smorgon chose to sue me and accused me of using confidential information to win the tender,” Franklin says.

“I’m an ethical person and my ethics and integrity have got me into a lot of trouble over the years where I have refused to back down on things. I was terrified but I made a decision I would be very focused and I would again surround myself with great people and I got the best lawyer and barrister that I could and went through the process and won the case.”

He had a reputation for being litigious he had unlimited funds and it was a personal affront.

Gillian Franklin

Franklin says despite the win she wouldn’t wish the experience on anyone.

But she says she came away with some important lessons.

“Know your information, be true to yourself, don’t give up and don’t ever compromise on your ethics,” she says.

Home office users can save money with cloud computing

Why move to the cloud? There are plenty of good reasons, but mainly it makes good business sense. You can call it efficiency, or call it doing more with less. But whichever spin you prefer, cloud computing lets you focus on what’s important: your business.

Cloud computing can be used for almost all types of applications, not just business security. While the idea of cloud computing can sometimes seem hard to grasp, it’s clear that it saves its users money – especially SMBs, including small office/home office (SOHO).

Plenty of oh-so-clever industry people will tell you what cloud computing is and isn’t. Here’s my simple view: It’s what we used to call software as a service (SaaS), but it’s set up so it’s easy to switch on, simple to expand and contract, and usually has a usage-based pricing model.

Read on to discover why moving to the cloud will save you money in five ways (six, if you’re picky)….

 

1. Fully utilized hardware

Cloud computing brings natural economies of scale. The practicalities of cloud computing mean high utilization and smoothing of the inevitable peaks and troughs in workloads. Your workloads will share server infrastructure with other organizations’ computing needs. This allows the cloud-computing provider to optimize the hardware needs of its data centers, which means lower costs for you.

 

2. Lower power costs

Cloud computing uses less electricity. That’s an inevitable result of the economies of scale I just discussed: Better hardware utilization means more efficient power use. When you run your own data center, your servers won’t be fully-utilized (unless yours is a very unusual organization). Idle servers waste energy. So a cloud service provider can charge you less for energy used than you’re spending in your own data center.

 

3. Lower people costs

Whenever I analyze organizations’ computing costs, the staffing budget is usually the biggest single line item; it often makes up more than half of the total. Why so high? Good IT people are expensive; their salaries, benefits, and other employment costs usually outweigh the costs of hardware and software. And that’s even before you add in the cost of recruiting good staff with the right experience.

When you move to the cloud, some of the money you pay for the service goes to the provider’s staffing costs. But it’s typically a much smaller amount than if you did all that work in-house. Yet again, we have to thank our old friend:economies of scale.

(In case you worry that moving to the cloud means firing good workers, don’t. Many organizations that move to cloud computing find they can redeploy their scarce, valuable IT people resources to areas that make more money for the business.)

 

4. Zero capital costs

When you run your own servers, you’re looking at up-front capital costs. But in the world of cloud-computing, financing that capital investment is someone else’s problem.

Sure, if you run the servers yourself, the accounting wizards do their amortization magic which makes it appear that the cost gets spread over a server’s life. But that money still has to come from somewhere, so it’s capital that otherwise can’t be invested in the business—be it actual money or a line of credit.

How it can be used for strategic advantage

The biennial exploratory scenario (BES), announced this spring by the Bank of England, is a stress-testing exercise unlike any other. It seeks to understand how the entire UK banking system might evolve if recent headwinds to profitability persist or intensify. In so doing, it may help banks in the United Kingdom and elsewhere think about how to use stress testing to improve their strategic and financial planning. In this article, we will present the key elements of the BES and explore its strategic relevance beyond mere regulatory compliance.

The BES attempts to put on the table a specific scenario combining two sets of headwinds: sluggish growth with low interest rates, combined with rapid digitization and the rise of fintechs. These topics have been prominent for some time on the agendas of banking conferences, in academic papers, and in high-profile executive-committee war games.

However, this is the first time that they form the core of an official regulatory exercise. Unlike other stress tests, the BES does not aim to stress reality in the form of a crisis. It does not aim to address if banks could build sustainable business models in such a difficult environment, but rather how they might do so. To generate answers over the longer term, the BES has a ten-year horizon.

The BES makes some key assumptions about the macroeconomic and industry landscape: global trade stagnates and cross-border banking activity continues to fall. Long-term global GDP growth falls to 1.9 percent, driven largely by deceleration in emerging markets and slower productivity growth. In the United Kingdom, the bank rate is cut to, and remains at, zero. In addition, ten-year gilt yields are 1.25 percent by the end of the ten-year horizon.

Most important, innovations in financial technology in the United Kingdom drive two negative trends: a 40 percent drop in the spread between market retail rates for deposits and lending, and a 21 percent drop in the aggregate stock of corporate loans on banks’ balance sheets. There is no hurdle to pass on the core tier equity ratio; however, banks are required to demonstrate how they will meet, and exceed, the cost of capital over the ten-year horizon.