Tag Archives: economy

Customers First, Investors Last: What were they thinking?

For years now, my colleagues and I here at BoardBench, have been saying that Wall Street has it backwards.  In the boardroom, directors have been fed, with a very large spoon, the mantra that they are beholden to the shareholder, that their purpose is to “maximize shareholder value.”  If you asked a large group of directors if this is true, you’d see a lot of bobbleheads in the room.  Many believe this is a legal requirement and in line with good business sense and good corporate governance.  Unfortunately, the concept of “shareholder primacy” is a relatively recent phenomenon.  It is also simplistic (shareholders’ wants are not homogeneous), has no legal basis anywhere (go ahead, try to prove me wrong), and, as many are now pointing out, usually damaging to companies, and the economy as a whole.

What we believe is real, and will eventually be proven again as real to the Street, is that customers, and employees are the two key drivers of corporate success.  When I say “again” I’m referring to Peter Drucker’s famous quote from decades ago: “the purpose of a business is to create and keep customers.”  So many seem to have forgotten this, or have never even heard of it.

But the basic premise is this: if you take care of your customers, and have great employees who are well supported and appreciated for being curious and excited about what they do such that they will ensure that customers love the products and services that the company offers, the company and shareholders will reap the rewards, too.  Of course other things come into play, like managing R&D investments (with the customer in mind), operations, and supporting a corporate culture that has strong values and morals.  The basic premise may be slightly oversimplified, but it applies, and should resonate with the board.

It appears that I’m finally not standing alone on this either.  In a recent interview, Jack Ma, the world’s newest CEO darling, made two bold public statements.  He basically shunned the current thinking of the Street by stating, on national TV, that “our customers come first, ouJack.jpgr employees second, and our shareholders third.”   He continued: “We aim to be larger than Wal-Mart by 2016, or sooner.”  If – no, when – Jack succeeds, and executes flawlessly on his statement, that customers and employees take a front seat over shareholders/investors, then he’s got an excellent chance of passing Wal-Mart as the world’s largest retailer.  Note, Wal-Mart just slapped some of its employees, who have the most direct relationship with their customers, by cutting their insurance benefits. This was probably done to cut costs, but it will probably also have a long-term impact on their customer relationships, too. But, I digress.

It seems that too many directors, CEOs, and business leaders, have become obsessed with what Wall Street, its analysts, and shareholders think.  Many have learned to play these groups exceptionally well, too. Countless analysts and shareholders have been taken in by companies’ projections, quarterly earnings estimates, and highly creative financial management and reporting.  Don’t get me wrong, the importance of the exchanges and the markets cannot be downplayed, but a balance is needed.  Focusing on Main Street is just as important, if not more so.

If you follow Main Street, you know about big box discount stores. Costco Wholesale Club, founded by Jim Sinegal and Jeffrey Brotman, believe in serving the customer first, and that if employees are treated properly, they will work with, and treat the customer well too.  Jim, the public face, is a “hands on guy” who is known for visiting each individual Costco store.  Jim is also outspoken about his views on Wall Street.  He’s been known to say that he puts his customers and employee needs above “pleasing shareholders.”  This philosophy must be working: Costco’s five year return is +116.73%.  If you bought the stock earlier, your return would be closer to 354%.

American Express is another company known for taking good care of its customer/members.  Personally I’ve been a fan of the company’s customer service representatives over the years, and tell them that every time I’ve called for help.  Don’t get me wrong, working at this company must be tough: when I was younger, AmEx employees were nicknamed The Dragons.  Perhaps because they were seehat2.jpgn as willing to fight for the company and their customers nearly to the end.  By the way, if you invested in American Express five years ago, your return on investment would be up 149.46%.

If you’ve worked with the general retail public, as I did during my college years, then you know just how tough this can be.  Sadly, not everyone who enters a store, calls a helpline, or dines in a restaurant is a kind and thoughtful customer.  Amazon deals with all sorts of customers from nearly every continent in the world, and I’m sure they have some interesting stories to share.  However, the company is noted for being one of the best customer service organizations in the world.  Amazon has more than one customer base, as many do: retail members, and consumers.  Jeff Bezos clearly divided the customer’s connection to Amazon into two categories: the experience and the service.  At this level, he notes that customer service is part of the full customer experience.  If it’s unpleasant, it’s a negative customer experience.  He supports the idea that a positive customer experience creates greater loyalty with Amazon.  If you’ve ever dealt with an Amazon Customer Service rep, you know that they work quickly to resolve your issue, they get the job done for you, and you are nearly always satisfied and left feeling good about your relationship with Amazon.  And, if you invested in Amazon five year ago, your return on investment is now up 236.64%.

While it’s much more pleasant to focus on the “good guys,” there are dark clouds.  Some companies are noted for their poor customer service.  Some survive because there are few alternatives: think of phone companies and cable providers, and some you can name on your own (take a look at their five-year ROIs).  However, when it comes to poor customer experience these days, I think sadly of that American icon Sears.  Whenever I bring them up these days, all I hear is: “Oh my gosh, I could tell you about the time when…”  Sears is a sad story101.jpg about the decline of a once great and loved retail giant.  Many years ago, the Sears catalog used to be called a “wish book.”  Families would anxiously wait for it to arrive in the mail.  It was nearly 5 inches thick. Moms, dads, sisters, and brothers would argue over whose turn it was to browse through and select from among the items they wanted for birthdays, holidays, special occasions and more.  Some people even bought their homes out of the Sears catalog.  But, it has lost its way, and it’s touch with its customers and has already begun its drop down that magical slide once pictured in its own catalog.  The entire company and its hopes for the future look pretty dismal: sell off of units and real estate, store closings, etc.  Sadly, if you invested in Sear’s five years ago, your return on investment would be -58.50% and it’s still falling today.

To sum up and put things into even sharper perspective, I recently spoke with the General Counsel of one of the largest, most recognized corporations in the world.  He told me, succinctly, that the biggest problem with their board is that not one director had any understanding of who their customers were and are or what they want.  I can also assume that they don’t understand their employees either.  So I will watch how this company slides in the next few years (Note: their record has been negative for some time), and report back with an update, unless, that is, they somehow figure it out and turn it around.

Do you need to focus on board improvement: composition, strategy, direction, execution, oversight?  Boards are our specialty. Give us a call.

Nancy May

Are you just starting out in this strange time?

The times are strange. Your university, college, or school, your parents, and those you take advice from know one world — but you live in another.

The world they know is one of relentless, unending inflation. One where racking up debt to study, then to “get on the real estate ladder”, was the right thing to do.

But you live in a world of deflation. Debt is your enemy, because money is worth more every day, and debt parts harder to repay.

So here’s the necessary steps to prosper in the world you actually live in.

First, if you owe, make it go. Every penny of debt must be retired as fast as you can. Live cheaply, plough as much as you can to take that burden off your neck.

Second, be very cautious around buying real estate. It will be illiquid when you want to sell, and the mortgage and condo fees will choke you over time. Landlords will try to churn units to raise rents (they, too, are being choked by their mortgages) so ride it out. The less you owe, the easier it’ll go.

You can buy when and if you see a period of stability for yourself — if you do, accelerate your payments and get out from under as fast as you can, and don’t pay for space you don’t need. Four child families were comfortably raised in 900 sq ft bungalows sixty years ago. That’s a lot cheaper than the 3,000+ considered “essential” for a family that large today.

Third, be employed. If the best you can get is flipping burgers or pouring coffees, accept it. some income is better than none. A year later, at least your résumé says you don’t quit.

Fourth, consider the pressure to keep going on — Master’s, Doctorates, certificates galore — with a cynical eye. These are the remaining profit centres in higher education (which hires sessional instructors now rather than tenure-track staff). What do you get out of it? For a solid answer, go. For speculation, avoid it: it’ll still be there in a few years and they’ll take you part-time to get your money when you go back (if you do).

Accept that no degree comes with a guarantee of employment. No, not even engineering, medicine, or the like. (If you’re in high school and reading this, study what motivates you, and pay cash. Seven years (study one, work the next) to do a Bachelor’s degree will become “normal”. Working until you’re 21, then going, not only let’s you go with cash, it brings you in as a mature student — one they’ll back off a lot of rules for.

This period is likely to last most of your life. You may do twenty different things before you finally stop working, as employers downsize or frat merged out of existence. Be adaptable — and always be working.

Are You Ready for a Strange Time?

A strange time. What, on earth, is a “strange time”, and why might you have to prepare, to be ready, for it?

The past few months have given us clues, if we only bother to look for them.

So let’s look, shall we, and think about what it might all mean.

This is, after all, about doing personal due diligence. Such looking is a diligent person’s stock in trade.

A society deflating around us

Deflation is far more than just falling prices, although that is how it is often portrayed. It’s also far more than something central bankers get all panicked over, doing “whatever it takes” to fight.

Deflation is the shrinking of the economy. In particular, money increases in value. Labour is less valuable. So, too, is debt – quite a bit less valuable, in fact.

A deflating economy takes real money – cash in hand – and raises its value. Technological improvements (whether those are physical or programmed technology, or better processes, or better ideas) increase productivity. This shows up as needing less people to do the same work. That, in turn, shows up to you as job risk.

Since the 1990s at the very least – it was then that the first web sites went online, that most people started to buy computers, and that electronic communications (starting with email and text messages) became a part of our lives – technology has been wiping out jobs left, right, and centre.

This hasn’t shown up in an obvious fashion. The jobs I held in the 1970s were still there in the 1990s. They don’t exist at all today in the 2010s. But new jobs have replaced them, right?

Well, not exactly. Toronto, where I live, is a prosperous city on the surface. But it has over ten percent unemployment. Half its citizens only hold part-time jobs – often, two or three of them, none with benefits, none paying well – or are “consultants” scratching out a living from one project to the next.

50% with no security, 10% with no anything – only 40% have some degree of security. That’s not prosperous.

But, like Japan two and a half decades into a deflation, appearances differ from reality. Japan has lost its lifetime employment guarantees during these years. Only the fact that the Japanese population is falling has stopped mass unemployment from becoming a reality (the way it is in Europe in most of the countries along the Mediterranean). But many Japanese now scratch out a living from project to project or hold part-time positions without benefits, rather than the lifetime positions they used to hold.

Canada and the United States faced their last long deflation after the American Civil War and after Canadian Confederation. The 1870s, 1880s, and 1890s were decades of deflation. Look at the progress: streetcar networks in cities, electricity, the phonograph, the projector, the automobile, asphalt and macadam (to pave roads and put the mud at bay), street lighting, a web of continental railways – it’s a long list. But for a quarter century jobs were hard to find, self-employment wasn’t rewarding in most cases, people on farms (and doctors) lived near starvation most of the time.

The next few years will see this deflation – that began two decades ago – erupt into full view. The central banks will, either by choice (as with the Swiss National Bank this month, or Iceland’s central bank), or by being forced into it by the market, to give up trying to forestall this deflation.

They spent $50 trillion – yes, $50,000,000,000,000 – over the last seven years to stop this deflation. That money must still be repaid (it’s on their books as loans). But, in a deflation, debt doesn’t get cheaper – it must be repaid with ever more expensive money, as money grows in value (a dollar buys more, in other words).

The nineteenth century didn’t have central banks and spent half its time in inflation, half in deflation. That was the pattern since the fourth century in Europe. The twentieth century was one long inflation.

Dare you bet that the twenty-first, starting in deflation, won’t be a long, long run of deflation (relative to periods of inflation)? I wouldn’t.

What this means for your career is twofold. First, everything you know about assets, how they change in value, their long term value, is suspect. All that knowledge comes from inflation. None of it comes from deflations.

Second, jobs held up by inflation – especially those that aren’t critical to the work of the firm – are about to be dispensed with. Firms need plant workers and sales staff. They don’t need analysts, strategists, human resource clerks, and the like.

Look at how much of the support of the business is already outsourced. Ask what happens next.

It’s not only important that you do – it may be the difference between you having a retirement and feeding your family, or not.

If that sounds extreme, well, I’m sorry. But deflations are payback time – payback of debt, and payback of structural debts in the economy.

You and me? We just have to stay out of the way of being ground down.

The economy shifted years ago

It’s all about the job, right? That’s why you avoided your passions when you went to university and studied a program that could get you employed. It’s why you threw another $40,000 or so in debt on top of the pile to get that business degree. Perhaps, even, it’s why you’re holding down a cubicle or workstation even now in the bowels of some faceless corporation, eyeing the greasy pole of advancement?

What percentage, do you suppose, of the economy, is organizations smaller than 500 people? If you’re sitting in Toronto, for instance, the downtown skyline is dominated by skyscrapers with the logos of banks, international consulting firms, and the like. Kitchener-Waterloo’s business district have the logos of insurance companies, and global technology firms. Head to Calgary and the city centre advertises — from heights — energy giants, a national railway, and the like. Looks pretty conventionally corporate, right?

I spent several days this past week just asking people, at a workshop I was facilitating, in the line at my favourite local coffee shop, in the queue at the grocery store, what they thought. The “survey said” about half: most figured half of us work for small organizations, while the other half work for companies with over 500 people.

Well, on TV Ontario this week, a business professor, the head of the Canadian Federation of Independent Business, and a business reporter agreed that the real number is much higher. Well into the 90s, in fact.

Think about that. Over nine-tenths of the economy is small. (Half of all the people in Toronto, Canada’s largest city, actually work in organizations of size one: they’re contractors, independent consultants, or owner-operators of a very small enterprise, indeed.)

The economy shifted away from the organizations with the money to pay to have their logos in lights on the tops of tall buildings years ago, and none of us noticed. In fact, when we were being counselled through high school about our higher education and futures, no one pointed out that almost all of us would have to learn how to make something work for ourselves rather than expect to find a job with a nice career ladder attached to it.

One of the reasons most of us haven’t looked at this shift — it is, after all, right before our eyes — is because we confuse small businesses with start ups. They really are very different things.

Take Instagram. Did it even break 20 employees before being sold, for over one billion dollars, to Facebook? Both Instagram, and Facebook, were start ups, but never small businesses. Their eyes were set on global domination of their spaces right from the get go.

Twenty people in a small factory in Bramalea in an industrial park, or twenty people working at a local coffee shop, on the other hand, is a small business. Global domination doesn’t enter into it. Making a really good product at a suitable price and finding buyers for it does. But if you’re Red Rocket Coffee on the Danforth, the existence of Rooster Coffee on Broadview, Seb’s two subway stops east of you, or Bandit on Gerrard don’t hurt you in the slightest. In fact, more great coffee shops “close enough but not too close” actually get more people interested in forgoing chain-store global coffee (be it Starbucks or Tim Horton’s) and having a cup made with care and love in a small business. There’s room, in other words, for more to prosper without “getting big”.

But because we keep pointing to the billions made by start ups that make it — you could be Bill! Gates! — we ignore the entrepreneurial option that most of us will need, at some point in our working lives.

Being an entrepreneur, after all, is just about finding a need, and meeting it. It’s not about taking over the world. Howard Schultz may have had that dream having experienced real coffee culture in Verona, Italy (and he had to displace the owners of local coffee roaster Starbucks to roll out his Dunkin’ Donuts-busting mermaid chain), just as Ray Kroc saw the potential in a hamburger stand in California and, buying out the owners, turned it into the Golden Arches. (See: not all stories of global domination turn on technology companies.)

That, by the way, is why you see so many “social entrepreneurs” these days, building small organizations to meet community needs on a breaking-even basis. Better ways to advocate, to counsel, to serve are just as much entrepreneurial (and job creating for oneself) as is opening a shop, a factory, or a consultancy. Ask Bill, the guy at the Toronto Tool Library (become a member, use the workshop and the tools — everything from lathes few homeowners can find space for, much less apartment dwellers, to 3-D printers). Social enterprise needn’t be just the soft, touchy-feely stuff.

Why we don’t teach all of this in high school: how to run a business, how to set up a venture, how to examine situations and look for opportunities, is beyond me. We also don’t teach money management, how to assess whether to grow with debt (or not), and a host of other life skills that would make people into more than job-seekers. Couple that with “study whatever you want, but pay cash for it” (so you don’t need a job you don’t like or want simply to pay off the loans) and you’d really be preparing teens for the real world.

There’s still too many people in big corporate (and bureaucratic) roles who sniff (daintily) and drop a résumé filled with small company life in the round file as “not one of us”. True, you’re not. But their world is shrinking, and the small business world is growing. It’s just that small business life and honking big piles of debt left over from school don’t go together (you’ll need that for growing a venture).

The Personal Due Diligence project is where you come to be advised on how to deal in the real world — whether you’re 16 and looking at your future, 36, trying to find some happiness your current work isn’t providing, or 56, dumped out in an early retirement package and looking at nothing. Call or email and explore your options. You’ll be the better for it.