Why bad companies are here to stay...

A recent study by McKinsey was discussing the relative position of companies badly managed to well managed ones.

The findings showed that, obviously, companies that have adopted good management practices were better equipped in terms of flexibility, adaptation to change, and were generally performing better than poorly managed ones. This is hardly suprising.

An interesting question that was raised was: how come poorly managed companies survive longer than they should? Theoritically, only the better managed companies should prevail on the market.

The study suggests that badly managed companies survive longer mostly because regulations and laws tend to protect them. Any bad move made by a bad manager will actually be mitigated by a collection of external factors -regulations oriented- that will slow down the company errosion, and, as a matter of fact also indirectly contribute to a slower expansion of the better managed ones!...

What's in a CV?

In Western countries where individual results -by opposition to Japan's job for life and promotion through seniority (and it's whole different debate) - tend to be highly praised, a CV that shows strong achievements such as

• Increased yearly profit by 18%
• Directly contributed to USD 19 Million sales
• Managed line of 28 employees, raising profit to USD 7.2 M

will catch, with reason, the interest of a recruiter...

When the economic situation is good, it is very difficult to sink a company right away. The bad manager still will have some leeway, understanding, and trust (from the top) before any real damage can be felt.

While indeed profits may rise, one shouldn't be oblivious to the quality of said profits and sales: Has your manager placed his sales in strategic sectors? Is he taking the proper initiatives? Has he paved the way for future growth, are the employees being empowered to bring more ideas, business? Is morale high? Or he is just cashing in on quick wins while developing his network before moving on to his next important position?

When the economic situation is bad and everybody is "supposed" to be suffering, the bad manager's strategy will be probably to do a minimum so as not to threaten his position by taking bold moves (than he cannot actually conceive) and keep his seat for as long as the show will let him run.

How many so-called "managers" are moving around from one prestigious company to another every two-three years showing impressive result while invariably erroding company effectiveness wherever they go? How many are leaving behind them ill prepared department and companies? Their deeds did not have to be obvious and create havoc, their actions just prevented their company from positioning themselves better on the market. More than often they are also praised for bringing in money! But as we said, what is the quality of this money?...

So, this is the type of managers you are likely to recruit for your company one day or another. You will offer them a ready made springboard for their next assignement, at the cost of your company's integrity and growth. Sadly enough, most of them will make you feel happy about it before they move on to their next position. Do you get along with this situation? Will you let your company be vampirized? Do you believe this is a necessary evil one has to live with?

Recruiting has never been an easy task, but ultimately what goes around will come around, and this remains at any stage your own decision. Tough call.

(On a more joyous note, if you are the bad manager we have been talking about, you are probably not reading these lines as you are enjoying the comfort of a cosy armchair, drinking a smooth 20 years old whisky, in the lounge, with another important executive!... )

Corporate governance : What's in the box?

A while back I had to analyze a large blue chip company and determine whether it would be a good or bad investment. The company had all its fundamentals in the green, perfect financial information, the strategy looked sound and the market promising. Logically it was a "buy and invest"...

So you think the company you are looking at is in good shape? The return is good, the market is healthy? You are ready to invest long term. You could be very far from the truth...

The figures are good but look for more...

While reading carefully a financial report is important, a lot of softer but nonetheless very valuable information lies in the Corporate governance structure of the company... and the good news is that this information is comparatively easy to understand.

Many tend to see Corporate governance as an assembly of sissy - feel good - foggy - whatever it is - anyway it is not the hard facts - obscure meaningless bureaucratic controls.

One couldn't be farther from the truth...

Corporate governance's main objective is to protect the interests of the numerous stakeholders of the company and foremost the people who own it. While the new Sarbanes-Oxley (SOX) compliance regulations define rules for better transparency, Corporate Governance describes the company's controls, rules and policies that enforce ethical conduct, respect, good practices and integrity of the way the company is directed.

Is it all about "endless love in a beautiful world of durable development and environment friendly companies"?

While we have been accustomed to numerous spin doctor practices camouflaging what really matters to make an informed decision, checking the publicly available information will yield much insight into a company. Whether the financial report looks good or not, whether the website is slick, whether the analysts tell you "it is a solid company".

For Corporate Governance, you should look at the following criteria

• Existence of an ethic code of good practices?
• Independence of the executive members of the board
• Division of Management and Control functions
• Specialized committees on the board
• Non-discriminating voting procedures
• Use of International accounting standards
• Absence of anti-takeover measures
• Information on executive salaries

What does it mean?

Are these points just obscure control measures? Are they "nice to have" features? Not by a long shot! All the Corporate Governance points should be investigated with as much care as the financials. They will tell you:

• Whether management is accountable to their shareholders for their decisions
• Whether management can be changed if not performing
• Whether the shareholder's value is maximized (and a takeover will maximize the value)
• Whether politics, cover-ups, and nepotism govern the company
• Whether the company is optimized for future growth

In practice, what gives Corporate Governance?...

Going back to the blue chip company I mentioned above, with all the "right" indicators in the green, I looked where it stood on Corporate Governance. Here is a summary of the analysis:

• Existence of an ethic code of good practices? Average
• Independence of the executive members of the board Average
• Division of Management and Control functions Terrible
• Specialized committees on the board Average
• Non-discriminating voting procedures Terrible
• Use of International accounting standards Terrible
• Absence of anti-takeover measures Terrible
• Information on executive salaries Excellent

The conclusions were:

• Too much reliance on one man and first circle
• Inadapted strategies to changing situation
• No counter power (risk of morale corruption)
• Group think
• Lower motivation of mid-managers
• Higher “unproductive” politics : no emulation
• Crown Prince might be inadapted
• Succession war? No inner regulation process
• Company not optimized
• Company bears seeds of long term organizational problems
• Risky investment for shareholder in the next 5-10 years
• Risk for employees in face of unsolved latent tensions
• Risk to competitiveness: less initiative, less creativity

No need to say that long term investments were not on the agenda anymore...

Gilles Daquin at http://gillesdaquin.blogspot.com

Cultural differences

Working overseas is always a challenging experience, rewarding most of the time, and sometimes frustrating. Where will you let the frustration go is another question...

Work habits, customs can be very different. Especially in Japan, where the way to conduct business might differ greatly from what one could expect in the US or Europe. The simple fact of introducing yourself in an inappropriate way might be the cause for a long polite embarrassment. Thinking that the person who talks the more is the one in charge may lead to a few surprises... Codes may vary indeed from what you are used to: are you active and have a "can do" attitude?... You may very well be perceived as a slightly immature individual. Do you read what is being implied rather than being said? Are you sure your counterpart is conviced by what you say or is he just trying to be polite? Do you feel the meeting was a success, if so, why no contract was signed? Those are the very questions you may have to ask yourself while working in Japan.

The culture is indeed different, the sum of hundreds of years of experience. From a strict business point of view this may present quite a few challenges.

Being respectful of the customs and habits will certainly get you closer to the objective you wish to reach, but will it be enough? Probably not, and here is the dilemma:

Where lies the line between respecting the country's culture and getting people to do what they are supposed to? Do you blend in and try to move things from "within"? Will you challenge the rules at the risk of alienating the people you are working with?

The question is not trivial, especially for foreign investors who wish to acquire Japanese companies or grow business in Japan.

Numerous foreign companies have tried, some have succeeded and some have failed. While not everything can be put on the account of culture, being aware of the issue will only help.

But the question remains:

"Will you challenge the rules at the risk of alienating the people you are working with? Or will you blend in?"

Here is what I think:
Business environment is constantly changing, new strategies have to be put in place, new products created, new markets developed. Your operations cannot succeed if they are not in tune with the market or reaching opportunities. Growing your business requires change and change tends to create anxiety.

In any country people have a low tolerance for anxiety, and if you want your business to succeed, you will create anxiety. Wherever you are in the world, you will always find, as a manager, staff ready to help and grow your company and staff that is not. In any case, to push your business forward, you will have to reward those employees who support it and signal to those who are breaking it they should reconsider their attitude.

There is no other way. This is your business, and you have to enforce the strategy that you feel is the more appropriate and press your employees to support it.

While the way to convey your message should be appropriate to a Japanese environment, do not compromise on the objectives you are trying to achieve: communicate "Japanese", talk "Japanese", respect the people you are working with but don't ever let yourself be misguided by the cultural "differences". There are (and they are not extremely easy to overcome) but behind, there will always be the do-ers and the breakers.

• This is your business, your business strategy, and your business culture, in a Japanese environment
• Don't let yourself believe 'resistance' is a foreign/japanese cultural issue
• Don't let your staff believe 'change' is a foreign annoyance: it is a business annoyance
• Cultural differences, if well managed, are never the issue

How well is your company's cashflow managed?

While numerous comments concerning the management of a company can be made, the point I would like to address today is the importance of cashflows:

Briefly put cashflows are the life and blood of your company, without them you cannot pay your employees, you cannot meet your debts, you cannot further expand or buy stock. If your cashflows are not tightly managed, you may very well end up filing for bankruptcy, even if your business is successful (i.e overheating) !...

Managing cashflow might be technical at times but this shouldn't prevent you from making sure your CFO knows what he is doing:

• Does he understand your current business model?
• Can he identify its weaknesses and strengths in terms of cashflows?
• Can he offer solutions to mitigate the weaknesses?

It is very likely that every good CFO will be able to answer yes to all these questions... however, the problem is that less experienced CFOs will answer yes too...