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Cameron and corporate duds

Robert Peston | 11:07 UK time, Tuesday, 15 July 2008

Are British managers in general sufficiently competent to be given the benefit of the doubt as and when their respective businesses run into trouble?

David CameronEven ten years ago, the answer would have been probably not...Back then, British-born managers were like their co-nationals in today's Premier League: workmanlike, functional, but rarely as skilled or classy as their overseas counterparts.

Since then, UK PLC has become a bit more like the Premier League, in that we've imported quite a battalion of highly paid talented execs from all over the globe...

But what about the Brits? Are they any more adept as managers than they were? My impression is that management standards have been raised very considerably. Today I rarely encounter an absolute dud running a big or small business. A decade ago, quite a big part of my life was lunching with corporate clots.

The relevance of this is that David Cameron has today made a proposal to reform our bankruptcy law in a way that would give considerably more power to managers to protect their own jobs and the integrity of their businesses when they face difficulty keeping up the payments on debts.

That would have been a bit impetuous even a few years ago - because raising our economic game, improving our productivity, probably required the forces of creative destruction to blow relatively unchecked through the economy, laying waste to the long tail of poorly performing businesses.

It was probably good for the UK that our insolvency procedures were tilted a bit more than those of the US towards the extinction of overstretched firms.

However, although we may not yet be world business champs, we're much higher up the league table than we were. So I can see the argument, as we head into what may be a prolonged period of challenging economic conditions, for doing as the Tory leader suggests, and trying to put in place a new legal framework (modelled on America's Chapter 11 arrangements) that would allow managers of financially challenged businesses a little more breathing space to come up with a credible rescue plan.

In theory, this would be more than a job-protection scheme for execs: it could save some unnecessary redundancies and hardship lower down the corporate hierarchy.

But it would be wrong to assume that even for business, the benefits of such a reform would outweigh the costs. If the power of creditors to pull the rug were reduced, lenders might well put up the cost of providing credit to compensate for the additional risks they would be shouldering. And that could have a negative impact on the formation of new businesses and on investment by existing one.

So changing our insolvency procedures should not be done lightly. But among business leaders there is a sense that Cameron has come up with a decent idea at the right time (which is not what they say about all his policies, especially those on airport expansion and changes to the planning system).

UPDATE 11:49AM: I have two other concerns about the Cameron Chapter 11 proposals.

First, that in straitened times there is a risk that when a company freezes payments it can cause serious contagion to trade creditors and suppliers. So saving one business could inflict mortal damage on others.

Second that in certain sectors, protecting one business from creditors can be anti-competitive. Just look at the bloated US airline industry, where inefficient airlines in Chapter 11 have periodically had an unfair cost advantage over their more efficient rivals, thanks to the waiver in their obligation to pay what they owe.

So although what Cameron wants seems attractive, he won't find it easy to come up with a practical and workable proposal.

Comments

  • Comment number 1.

    In a world of rapid information flow, where a single reporter can start a run on a UK bank - the first run on a uk bank for over 100 years - then giving those in authority a little breathing space to consider better options should be supported.

    What do you think Robert?

  • Comment number 2.

    Surely such a moratorium could only be granted by a court order, requiring the courts to sign off that the rescue plan is worth pursuing? Would this be the 'practical and workable' end of the proposal that you are looking for?

  • Comment number 3.

    What exactly is wrong with the current situation of a company going into administration?

    That seems to work for football clubs (to continue your analogy), creditors can be kept at bay and companies can either come out of it with additional funding or be broken up and sold off so that what is worth preserving is kept alive.

  • Comment number 4.

    Robert, how exactly would this work?

    If, for example, you ran a company that owed many thousands of pounds (money which your creditors need to run their own succesful businesses) and it was in enough trouble that it would go into liquidation under current rules, what is Cameron proposing to do to pay off those debts with his new "breathing space"?

    Or is there no real thought behind this idea..... someone cynical could say "like most of his ideas" ;o)

  • Comment number 5.

    Are British managers duds? Now there's a question. Robert, all I can say is that there are good and bad managers. Bad managers, though, shouldn't be rewarded for their business negligence. If that's what this proposal will do then it's pointless.

  • Comment number 6.

    To 12.21pm, why on earth would a court be qualified to judge whether a rescue plan was viable? They're not businessmen, they have no experience of business, this isn't an interpretation of the law they're being asked to look at. I'm struggling to think of anyone less qualified than a court.

  • Comment number 7.

    Sorry Robert but Mr. Cameron is wrong . dead wrong.
    What he is in affect saying that the business managers that have not had the acumen to see the troubles ahead or have put the business in such peril as it is likely to fold are the very people to recover from that situation.
    Take a look at corporate history even very recent history and you will see that this is misguided belief.
    Alliance and Leicester .. badly managed to the point of financial strain when their only job is to manage finances (good job they did of that) and are now botching their recovery efforts so badly the best course of action is to sell out (of course the management will get bonuses for the sale which is all that matters).
    As for Bradford and Bingley .. it makes you wonder what these MANAGERS were supposed to be good at when the screw up so badly in their efforts to shore up their balance sheets ... oh .. we were so in touch with our business we didn't notice the escalation in defaults on our loan book.
    Then of course those fantastic managers (still employed I believe) that ran Northern Rock to ruin ... Don't you just want to give them all another chance to mess up ?

    Sorry Robert but the short termism of their careers and the genius of their skills and visionary foresight have been the justification for excessive remuneration and when I say excessive I mean really EXCESSIVE. Along with that was always the inherent risk of scrap heap for failure, and now they don't even want that consequence.

    As a U.S Senator said last week, what is becoming very clear in our society is that Socialism is acceptable for the Rich and executive class yet Capitalism is imposed on the Poor and working class.

    Bail out the bosses and wealthy at the expense of the workers and poor who subsidize with their taxes.

    Please reconsider your tacit support for this venture.

  • Comment number 8.

    Thirty years ago the Tory argument against nationalisation was that it propped up lame duck companies against market forces. Now they want to change the bankruptcy laws to prop up lame ducks against market forces. It's a funny old world!

  • Comment number 9.

    Interesting, I suppose it depends on whose controlling those Market Forces.

    A Market isn't a neutral animal.

    A Market is influenced and sometimes controlled by its participants.

    This is why I don't like Stock Lending.

    Stock lending allows someone who does not own goods to sell those goods on mass, with no respect to the actual owners of the goods.

    Then when the owners have lost out, they buy back the goods, they sold to start the problem.

    It wouldn't be allowed at a car boot sale, in fact it would probably be fraud.

    Anyway whoever controls the Market and many markets in this world are controlled, calls the tune.

    Sometimes there could be Moral or Strategic (even cultural) reasons why a business or industry, should be protected from the machinations of the Market Controllers (these are people remember with all the faults of Human nature).

    I'm sure Mr Cameron would not be the first Tory to protect an industry.

  • Comment number 10.

    This is harking back to the 80's policies of the Tory party. Whilst there is certainly room to look at the insolvency procedures in this country, I don't David's proposals do much for anyone.

    It's a bit like the old adage "Survival of the fittest". We may rescue the occassional business from insolvency that goes on to be successful - however the changes would actually result in us dragging out the death of failing businesses.

    The best proposal Cameron could come up with is a new set of qualifications that assist businesses with the fundamentals of cash flow and profit and loss.

    Any fool can (and often does) set up a business in this country, and depending at which stage in the economic cycle they might find it incredibly easy, or incredibly hard going.

    I will never cease to be amazed by the sheer number of business that are started at home - almost as a hobby - that grow quickly during boom time, but when a downturn hits - you realise the owner knows nothing about financial planning for a business and hence - they hit the wall hard.

    Robert is spot on with the failings of Camerons proposal - with regard to both the increased risk (cost) of lending as well as the 'virus' effect of several businesses failing at once and the ability to stave off payments bringing down much bigger business as a result.

    I cannot understand why D.C.'s advisors aren't aware of this. It's not very reassuring when the 'experts' come up with a plan that's got 2 dirty great holes in it.

    Maybe Mr Preston should advise DC and the Government instead.

    One thing Mr Preston hasn't noted in his holes is the danger of criminality. At the moment we have issues where Ltd companies are created simply to farm money in and out again, before being wound up and the crooks running off with the money (see V.A.T Fraud - Carouselling). DC's solution would allow this to continue for longer with much bigger consequences for the suppliers.

  • Comment number 11.

    No matter what you call it bankruptcy is bankruptcy - call it chapter 11 or not. Bankruptcy (receivership / administration/ chapter 11) is about dealing with the collapse of a business. The assets are collected together as are the liabilities either by an outsider( receiver or administrator, depending on circumstances) or by the management (in chapter11) and the best is made of a bad situation. This has to be 'fair' according to a set of rules, but generally everybody loses something.

    Adding more complexity with a British version of chapter 11 looks like bureaucracy for the sake of bureaucracy to me. Again it may be a good thing depending on the detail.

    There is no way to fairly judge Mr Cameron's idea until he produces the detail - something he has been totally unable, or unwilling, to do to date.

    This is another case of a sound bite without substance and might as well have been, and probably will be, blown away by the wind of events!

  • Comment number 12.

    soapboxjoe.

    You have highlighted one of the big problems with Western society as a whole. Businessmen are usually unqualified, uneducated and not very clever to begin with.

    A businessman's usually has one thing going for him to make him successful - a lack of morales which allows him to bend every rule and shaft every competitor.

    However as you have said, we reward these businessmen very well, and at the expense of public sector workers (see PPI).

    So what does it say about our society where we reward the stupid and selfish, and positively encourage that behaviour?

    Most 'business leaders' will point to the job creation that employment produces, but as we all know, this is at the expense of the worker (who never gets paid the full amount for the work he / she does).

    This is a good indication of where we are all heading, down the road of an increasing selfish and self interested society. You have a choice - be trodden on, or do the treading yourself.

    Disaster looms, and what will be the cause of this disaster?
    Explain to me how you are going to convince the western world to not use so much of the worlds resources and to stop waste and be generally.......well less selfish.

    Slight contradiction there by the Government - and it will all be too late by the time the 'stupid - but well paid' have worked this one out.

    Maybe Meritocracy is the only solution - lets put the brainy people in charge before the stupid lead us all off the cliff edge chasing little bits of green paper!

  • Comment number 13.

    Somebody really ought to write a song about Stock lending and Shortselling, credit crunch et al.

    I remember Spitting Image, excellent.

    They would have had something to say !

  • Comment number 14.

    Cameron is grandstanding.
    He is perfectly entitled to of course since he is an opposition politician.

    We should see his little publicity seeking schemes for what they are. Total baloney. The cost to functioning businesses of carrying sick ones would be unacceptable.

    The Enterprise Act and EU competition legislation would be compromised too.

    Grandstanding.
    Do not give him the oxygen of publicity.

  • Comment number 15.

    Oh dear.
    Most big businesses rely on University Graduates for their Managers (at least their Trainee Managers).

    Not being a Graduate, I lack their rarefied view of the World, and thus could not be said to be managerial.

    I don't believe these people are dumb, indeed, some may be very clever indeed.

    But it seems to be a cleverness focussed on fleecing others in Society (stock lending etc), and not on actual economic development.

    Where are these new industries and services which are going to pay Britains way in the world, and why aren't our brightest working on developing them instead of playing games with other peoples money ?

    If the Politicians want a plan, then those are the kinds of ideas and questions they should be answering.

  • Comment number 16.

    I read Dave's speech in full. I like this bit:

    "The credit crunch has meant more companies are finding it hard to get the money they need to keep their business alive.

    We've given banks access to £50 billion of help them get through the credit crunch.

    It's right that we did so.

    Because it's in no ones interests for sound banks to go to the wall because of financing problems."

    ERMMM....HELLO? The last sentence is an absolute scream...'sound banks with financing problems'? Isn't that somewhat of a misnomer? More spin from the politicians.

  • Comment number 17.

    Robert

    Might I suggest that you extend your circle of dining partners. The duds are still out there, believe you me.

    After some forty years of close association with British management I have concluded that only very rarely is someone in charge of the business. Usually businesses run themselves and the executives are in office but not in control.

    Now and again you come across a really competent business leader who has built their organisation through cool rational thought matched to a sharp sense of opportunity. These are rare and often only exist because they also have a secure, trusted and trusting capital source.

    We have very testing times ahead over the next few years. I have seen what bankruptcy does to people and it is very unpleasant. We are due to get a load more of it in the near future.

    However, I would question any changes to the law on commercial administration. What causes a company to go bust? Insufficient capital? Poor liquidity? Poor profits? Failure to make timely change? All of these can be perceived quickly by a moderately competent and experienced manager. So what really causes it to happen?

  • Comment number 18.

    I was intrigued by his proposals. I have just started a fund management business which buys companies which are basically about to collapse.

    We are very busy at the moment because of the downturn and I have to say with many companies that we see, a chapter 11 style 'accomodation' will not address the problems. What I would want to see are the detailed proposals behind when a company is allowed to call a chapter 11. Could it be used as a way of just beating out concessions from creditors and unions (the airline example works here). Then I am also seriously concerned about management 'protection'. What Chapter 11 has allowed in the US is for managers to be richly rewarded whilst working on turning the situation around. You cannot have a situation where managers call a chapter 11 and enrich themselves.

    On balance, I am against the move as I believe the current structures, whilst not perfect - work. They punish bad companies, but allow jobs etc to survive as companies can still be bought through pre-packs and from the administrator.

  • Comment number 19.

    My biggest problem is the unfairness for a firm that manages itself prudently.

    If a rival expands recklessly, the prudent firm can be blown out of the market.

    And even if it is proven to be reckless, there's no respite.

    The reckless firm can still trade as a zombie.

  • Comment number 20.

    Competency of British management? Lets say that a management team can look an awful lot better in a benign economic environment as opposed to the sort of downturn we are entering. Why? For a start it is much easier for weaker companies to survive when an economy is booming. On the otherhand a downturn needs different skills and is arguably more demanding. Furthermore a management team that was successful in boom times wil inevitably try to apply the same recipes to a downturn and... make a bigger mess of things. The true test of British management is about to begin and it doesn't help that not many of today's generation of managers have experience of a recession.

  • Comment number 21.

    Robert I'm not sure that most ordinary folk would disagree with your comment that over the past ten years UK Plc has moved into the premier division of the business league because, we imported from around the globe, a battalion of highly talented and extreemly well paid executives to run our major banks and businesses.

    You might well, when sharing lunch with this new breed of managers, be impressed by their skills and abilities but I would venture to suggest that you are simply referring to the standard MBA types who have been extreemly well coached in the art of talking the talk as opposed to managers who might not be eloquent but do have the skills and ability to walk the walk.

    Over the past decade many of the business school managers have benefited from the what the governor of the BOE (Mervyn King) described as the nice decade. When interest rates remained low and trading conditions were benign. The next twelve months or so will show just how good and capable these people really are.

    Your analogy with premier league football clubs is somewhat unfortunate because most of these clubs are up to their eyeballs in debt. If the rich owners of the most sucessful clubs (Abramovich, Glazier's and Gillette/Hicks and co) decided to walk away because they had enough of football then those clubs would find it difficult to service their debts and maintain their status.

    David Cameron's proposal to refrom the bankruptcy laws in the UK (along the American chapter 11 lines) to give companies and businessmen greater protection from unscruperlous banks is worthy of consideration. Many banks are far too eager to foreclose on businesses that run into difficulties, simply to ensure their interests are best protected first. This is often at the expense of all other parties concerned.


  • Comment number 22.

    Mr Preston,

    You are right, of course, about the damage this proposal would be likely to do if implemented. However, are you sure thay you should take that danger seriously?

    Cameron wants to make sure that Conservative Party finances are healthy in the run up to the general election, That means that he wants to line up a good number of substantial but sub-50,000 pound donors. There are a lot of Boards worried about the consequences to Directors of the firm going bust. Cameron has showed these Directors tha the is on their side. The donations should follow from the majority whose firms do not go under in these two years.

    In two years time, bankruptcies should be a much less pressing worry. So the stage is set for a statesmanlike Commission to review the whole of bankruptcy law in the light of the recent recession. Cameron and the Tories are free and clear with their Party still solvent; and this proposal has vanished from the agenda.

    In my view, this proposal is likely to cost Cameron less in political capital and less in committments for a Conservative Government than any other party funding option that has been suggested.

  • Comment number 23.

    Re: 21

    My first line should have read as follows:

    Robert (Preston) I'm sure most ordinary folk would disagree with your comment etc.

  • Comment number 24.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 25.


    Interesting that Mr Cameron wants to make changes to the Insolvency Act, in my view, it will be problematic for three reasons:

    1: We already have Administration which means a Court appointed insolvency practitioner (IP's) restructures the distressed but viable company and either protects it or sells the assets. It is growing in use and is an excellent tool used properly.

    And we have the excellent tool, Company Voluntary Arrangement which is a very flexible solution that leaves the directors in control of the debtor company but allows rapid cost reduction, management refocus and suspension of payments to creditors followed by affordable repayments of a %age of debt over time.

    Why add a third type of insolvency tool when these two are very powerful and effective when used properly?

    2: The Insolvency Act is a huge piece of legislation with links to most other legislation structures in the UK. To make a big change like he proposes could take up a lot of Parliamentary time and take years to bring to law. Then he would need to find a whole raft of judges or advisors that could act to oversee the Chapter 11 type restructure, where are they to be found? Unless IP's become judges or insolvency judges?

    3: The Banks control lending to most UK companies through fixed and floating charges. They will want to be sure that any such insolvency change does not impact upon their securities.

    Banks ain't philanthropic towards other creditors !

    So allowing Chapter 11 type changes will require the banks input and frankly they are too busy for the next few years dealing with all of their own problems and those of the fast growing army of insolvent companies they have as customers!

    I would say the UK insolvency structure whilst far from perfect, ain't bust so don't try and fix it.

    The Country needs many other things addressed first by a new Conservative Government (if he wins): the huge Government machine needs slimmed down, thousands of quangoes need to be scrapped, taxes need to be cut and we need LESS interference in business and personal lives by the State.

    Keith Steven

  • Comment number 26.

    Re: #9 supercalmdown

    This is why I don't like Stock Lending.

    Stock lending allows someone who does not own goods to sell those goods on mass, with no respect to the actual owners of the goods.

    Then when the owners have lost out, they buy back the goods, they sold to start the problem.


    Suppose party A owns some shares in company X. Now, "supercalmdown", explain to all of us the difference between:

    (1) party A thinking that company X's share price is set to drop and therefore sells all of its shares, buying them back again a few weeks/months later at a lower price

    and

    (2) party B thinking that company X's share price is set to drop and therefore borrows the shares that party A owns, sells them and buys them back again a few weeks/months later at a lower price, then returning them to party A

    Both actions will have exactly the same effect, but (1) involves closing a long position and (2) involves taking a short position. It is pure SEMANTICS. And while you're at it, perhaps you could also explain exactly how Futures markets are expected to function, where it is essential that every long position has a corresponding short position?

    Your repeated posts railing against the practice of short-selling are ignorant and uninformed, and are no doubt driven by the fact that you own shares in companies whose share prices have been falling in recent times. If you truly OWN the shares, rather than just RENTING them, the short-term price fluctuations should have absolutely no bearing on your investment whatsoever. Please do us all a favour and quit contaminating these boards with your ill-founded prejudices.

  • Comment number 27.

    In all of this, businesses are suffering. Not just the mortgage banks, but run of the mill organisations. Many could go under. So Cameron's thoughts on the insolvency laws are coming at the right time of the (potential) recession, even if they are unlikely to be acted on for years to come. It is just worth remembering that this was the whole point of of Sir Kenneth Cork's proposed reforms many years ago, although Administration (the major innovation of the last insolvency act) does not seem to have done the trick in the way that Chapter 11 does. Talking of Sir Kenneth, who remembers his top ten pointers to a failed company? I can only remember:

    Company flag on company flagpole
    Fish tank in the atrium (was an atrium itself one? That would be an indictment of many organisations...)
    Chairman's Rolls Royce with personalised number plate

 

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