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Do companies of the future need shareholders?

Posted By Charlotte Aguilar-Millan, Tuesday, July 9, 2019

Charlotte Aguilar-Millan asks if companies of the future need shareholders in her seventh blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.

 

Shareholders are typically those who have made an investment into a company. This entitles them to a return. They also are entitled to vote on matters such as the composition of the Directors for the company. However, Shareholders have little control over how the Directors run the company.

 

When the views of the Shareholders and the governance of Directors do not coincide, this can lead to Shareholder frustration. This frustration can result in Shareholder protests or even the disposal of their investments. This result for the company can lead to bad press which can have a snowball effect, leading the company to fall out of favour with shareholders.  The market saw this with Woodford’s fund in 2019. The fund had become loss making, impervious to shareholder comment, on which the media then commented, leading to a mass sell off in the market. This resulted the fund being suspended.

 

The investment landscape is changing for companies seeking finance. There is a diminishing need for companies to seek equity or debt finance. This can provide an avenue for Companies to gain funding without the risk of Shareholder protests or mass share disposal. The therefore question arises, do companies of the future need shareholders?

 

One growing investment landscape is online crowdfunding. It is projected that by 2025 the crowdfunding industry will have raised over $300 billion. The vast majority of this is in the form of a contribution rather than in return for equity. It means that companies are able to raise finance without having shareholders entitled to vote on company operations. Platforms such as GoFundMe and Kickstarter are helping smaller companies grow through donations rather than taking on debt or new shareholders (equity). It is starting to disrupt traditional means. It enables smaller companies to have more control over their operations and direction of growth.

 

The UK government demonstrated their support of alternative financing by introducing the Innovative Finance ISA in 2016. This enables the UK retail investor to invest directly into unlisted companies seeking finance through alternative means. The retail investor generates a tax-free return on their investment. While the company maintains autonomous control.

 

This does have an effect on public trust. Unlisted companies need to meet fewer legal regulations and are not required to be as transparent as listed companies. How can the public trust a company where they cannot cast a vote but can only observe the operations? The only regulation some unlisted companies will be subject to is a financial audit. However, trust in financial audits has been declining at a significant rate. Almost all audit firms have now been fined for inadequate audits. Yet, most Partners involved remain in the industry. The public no longer can trust fully that a company with a ‘clean’ audited opinion can be sufficiently trustworthy to invest in.

 

This is leading to Boards preferring to de-list and no longer suffer public scrutiny. Shareholders also are shying away from holding shares directly. Instead, they hold them through an intermediary such a fund. Shareholders simply cannot rely on the provided information of an individual company. The rise private equity investment has seen a significant global increase in the past 5 years.

 

This process is likely to continue into the future as public shareholdings are replaced by private equity. Boards will want to avoid public scrutiny by taking the company private and shareholders will want to invest privately through private equity. The future investor will use private equity as a vehicle in which to place trust.  It is likely that the need for companies to have individual shareholders will diminish. This will result in the company of the future having fewer, but larger institutional, shareholders.

 

© Charlotte Aguilar-Millan 2019

Tags:  company  private equity  shareholder 

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What is Missed by a Focus on Profit?

Posted By Administration, Tuesday, April 2, 2019

Charlotte Aguilar-Millan shares her concern about the mere focus on profit in her fourth blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.

 

For a company to grow, profit is required. This has been the age old mantra that those in the world of business have restated again and again. Why, when we look at fast growing companies, do they make limited profits? Deliveroo, a food delivery service, whose revenue increased by 116% in 2017, saw profits grow only by 1.5% during the same period. This is as a result of reinvestment into their technology apps. It is also an indication of the changing landscape. For companies to deliver long term shareholder value, profits are not the key driver. Instead, profits act as a by-product from placing value on other areas.

 

Too often companies focused on profit look to scaling efficiency and reducing costs, resulting in missed opportunities. Amazon is a prime example of a company which reinvested into its services including delivery and inventory availability. This has enabled fast growth and expansion into new markets. It has also added an edge to the market. Companies focussing on profits cannot compete with this edge. 

 

Globalisation has enabled more end user awareness of the behaviour of a profit focused company. Poor treatment of staff stops a brand from being able to convey aspirational attributes. Potential employees are able to research these workplace habits and have become aware of the working environment of a profit focussed entity. This has made potential employees wary of those companies tarnished with a profit only focus.

 

There are longer term impacts on society where companies solely focus on profits. When cost reduction is a main factor, the contribution to the remedy of global issues is weak. Measures to help reduce climate change and poverty from seeking the lowest cost are often retrospective. Often this action is as a result of external pressures only. Take corporate social responsibility (CSR) as an example. This is a tool now used by companies to demonstrate they are ethically aware. However, companies persevere with using suppliers who do not pay a living wage. They offset this in retrospect by allowing employees to take a volunteering day or sponsored run. Rather than take responsibility for the repercussions of their cost saving exercises, companies introduce CSR policies and assume that this is sufficient. It is the individual who has to pay the price for a company focussed on profits. Whether it’s by accepting higher prices or lower quality. Whether it’s by downsizing with fewer staff but the same workload. Or even whether it’s accepting climate change as a consequence of the profit focus.

 

Shareholders have a responsibility to make the directors of a profit focused company accountable. They have the opportunity at least annually to demonstrate an activist investor approach. Activist investors can use their equity stake in a company to put pressure on its management. Companies have historically taken no action where no pressure or incentive is given.

 

The end user can also demonstrate more self-awareness of the products and services they are consuming. We have seen the growth of ethically sourced products, such as Lush and The Body Shop. This is starting to develop within other industries. The size of ethical funds is at the highest level it has ever been before, peaking at roughly £4bn in May 2018 on the London Stock Exchange.

 

The choice lies with consumers. Consumers can use their purchasing power for positive change. Activist shareholders can place pressure on companies in the future to enable the change they want to see. This could change the approach of companies to effective climate change mitigation, reducing unequal director to employee pay ratios and increasing staff welfare. In the future, companies may have to pay more attention to those issues which are missed by a focus purely upon profit.

 

 

© Charlotte Aguilar-Millan 2019

Tags:  company  economics  profit 

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How Can Corporate Foresight Create Value?

Posted By Administration, Monday, December 15, 2014
Updated: Saturday, February 23, 2019

Alireza Hejazi shares his thoughts with us about “creating value by foresight” in this blog post for our Emerging Fellows program. The views expressed are those of the author and not necessarily those of the APF or its other members.

Talking to an architecture company CEO recently, I was confronted with this question: “How can corporate foresight create value in my company?” I wanted to offer a “business-as-usual” response, but I changed my mind by remembering Rohrbeck and Schwarz’s (2013) clear-cut response identifying four faces of value creation through corporate foresight. Basing my response on their view, I told my CEO friend that corporate foresight may create an enhanced capacity to perceive, interpret and respond to change, an enhanced capacity for organizational learning, and more impacts on other actors.

In fact, the philosophy of applying corporate foresight is to reduce the uncertainty by scanning the unknown in the environment. If this is the least and perhaps the most value it can create, then employing corporate foresight is worthy enough to be considered by managers and leaders. I also suggested my CEO pal to form a multi-disciplinary team who might lower the risk of disregarding and misunderstanding the change factors. In this way, his company wouldn’t fall into the traps that might be made by personal biased assumptions about future.

My suggestion for shaping a multi-disciplinary team originated from Gracht and Stillings’ (2013) observation maintaining that interdisciplinary cooperation not only could solve the problem of biases, but also satisfies the future needs of the target customer. In this sense, techniques like scenario planning may sound useful as far as they depict the picture of the future market and introduces new product concepts that might provide new opportunities and development routes for the market and the technology. Corporation decision makers can enrich their short-, medium- and long- term decisions significantly through alternative scenarios or by technology road-mapping.

However, as Rohrbeck and Schwarz admit, the implementation of corporate foresight activities is still limited due to uncertainty in getting desirable outcomes and return on investment and the degree of their value creation for strategic planning. On the other hand, too much focus on current conditions and activities makes the organizations inattentive to small changes that are taking place in the wider environment but impactful in the future.

Rohrbeck and Schwarz’s review of foresight research in the European context reveals that foresight can create value for innovation and strategic management through utilizing appropriate methods in the process of decision-making and strategic planning. Companies who practice foresight in different sectors gradually find out that foresight is a tool of value-creation. It contributes to their survival in the competitive business environment, especially in time of discontinuous change. More importantly, the application of corporate foresight methods can lead to the improvement of organizational responses and thereby improving values in innovation management. This shapes Rohrbeck and Schwarz’s (2013) paradigm that links knowledge creation to value generation.

In my view, if the value of foresight is to influence decision, then foresight practitioners should extend their efforts beyond conventional business decision making to discover alternative methods and analyses that might enrich businesses, organizations and policy makers with new solutions. The simple world of Shell Company and its well-known six scenarios in oil crisis is evolved into a complex world of STEEPV interactions and interpersonal relations where the survival of values is tested every day. Today, value networks are drenched in intangible value exchanges that create their strategic advantage in the market.

Corporate foresight is able to aid companies which create value by connecting clients and customers that prefer to depend on each other. These companies create and distribute tangible and intangible values through networks that are webs of dynamic relationships and exchanges between two or more individuals, groups or organizations. In my view, the success of corporate foresight in the future depends on the contributions that it would make to the development and management of these networks. For such success to happen, effective interpersonal networks must be built on a foundation of expertise, trust and shared understanding. I think that APF is exactly established to build that foundation now and in the future.


References

Rohrbeck, R. & J. O. Schwarz. (2013). The value contribution of strategic foresight: Insights from an empirical study on large European companies. Technological Forecasting and Social Change, 80(8), 1593-1606.

Von der Gracht, H. A., & Stillings, C. (2013). An innovation-focused scenario process: A case from the materials producing industry. Technological Forecasting & Social Change, 80, 599-610.

Tags:  company  foresight  value 

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