“Two areas are vital for a board to work on: alignment on strategy, and making sure you have the right people (the right CEO and CFO – or CTO if it's a tech company). The criticality of having the right people in the right positions in the executive team is necessary for the delivery of a successful strategy. You may have the right strategy, but if you haven’t got the right people, it won’t work.”
I don’t think size of business matters. What I think matters is the type of ownership arrangement you have in place. It does tend to mean that if you’re a smaller company, you’re more likely to be private – and the larger you are, the more likely you are to be publicly listed. That to me is a far more substantive difference than the size itself.
The key differences are accountability, directness or a lack of authority. Clearly a listed company has obligations to shareholders who tend to be many and various. A private company, on the other hand, has obligations to fewer shareholders – it may only be one.
Large companies have to deal with increased legislation and scrutiny. They have to be doing all those sorts of things as well as managing scale (which further complicates life), the bureaucratic administration that goes with those types of organisations (which are absent in smaller privately-owned companies), as well as making it more amenable to making more changes. Of course, it can go to the authoritarian end of the spectrum too with single private ownership, but it’s less likely.
Is it better for an MSB to go public or to retain the control and directness of authority?
I would always retain control, be direct and keep the shareholder numbers to a minimum, because I think mid size is not huge. I think £50m to £200m in annual turnover is still not huge – depending on the nature of the business. Directness of decision-making is very powerful and the lack of it in the end can lead to the demise of large corporations.
There is a caveat, and that is: if you are fundraising either because the owners want out or because you’re looking to invest in the business, you may need to go public. It depends on the growth aspirations of the owners and of the company.
How should MSBs go about analysing what to invest in, in order to improve productivity?
I think it depends very much on the nature of the business as to what you do to improve productivity. If you looked at the cost analysis, depending on how you measure productivity of course, it may be the cost per unit of output. You need to look at your cost analysis and understand it. I think the key then is to pick the areas of priority for productivity.
In some situations, if you have a product with a high labour cost, you either move to a country with low labour costs or you automate where you can. If you have a low cost of labour but high material cost, you may have logistical issues and you may need to make sure you’re located near your raw materials.
You have to do the cost analysis. If you’re going to go for automation in one form or another, then you have an investment cost. You need to work out what the return will be on that investment and see whether it makes more sense than seeking a lower unit labour cost. In many cases, it will be a combination of the two.
Some business sectors I know, and have been in, have very high margins which need to be generated because of the high cost of product development – take the aviation or pharmaceutical industry as examples of this. So, any investment in productivity gains needs to factor in high future profit margins.
If you’re in a low-margin industry where you’re making more of a commodity type of product, then your hands are tied more closely, and you need to understand whether it is a labour cost opportunity or a raw materials cost opportunity. Many times you may have no choice but to invest and improve productivity, because to be competitive in a global market you need to be up with the best in the globe – competition comes from everywhere. If you’re in a business where your products can be shipped from and to anywhere in the world, you always invest in better productivity.
How do you manage boards that don’t understand the analysis required to get investment?
There is an element of persuasion required. At board levels you have politics and personal egos which in the end are easy to recognise. You need to find the best way of dealing with people. You can either find a way to deal with them or you can’t – so there’s no good in beating your head against a brick wall over it. In most private companies, you will have egos and personalities, but they are generally straightforward and you can deal with them. In the end, if you can't, you move.
What is the importance of a board to an MSB?
It’s crucial – it’s part of the leadership vehicle. The board expresses opinions and direction, often through the CEO, for the direction and the benefit of the company – so having the right board is important.
In a private company environment, the board has an objective shared by the senior management team (and hopefully by the whole company) which is to improve the lot of the organisation and all the people who are engaged and involved in it. My role on the board is then to either create the strategy for the business or underwrite it if it has been created by the management team. There should be a common strategy, owned by the board, in line with the ownership and executive teams’ thinking.
If there’s a single challenge on the board, it is to align these two things.
In larger companies it’s different. Mid size businesses are more simple and clear-cut. It’s more complicated in a larger or public company where they have much more complex political or legal issues.
Two areas are vital for a board to work on: alignment on strategy, and making sure you have the right people (the right CEO and CFO – or CTO if it’s a tech company). The criticality of having the right people in the right positions in the executive team is necessary for the delivery of a successful strategy. You may have the right strategy, but if you haven’t got the right people, it won’t work.