Appendix 8 - Where are FIFA’s ethics?

Whether you are a football fan or not, I’m sure you will have heard something surrounding the ongoing scandal involving the sport’s governing body, FIFA. Alongside Volkswagen, there has barely been a week gone by in recent months without more shocking revelations. Ethical issues have hung over FIFA for over 4 years now, dating back to early 2011 when executives were banned for involvement in bribery and wrongdoing.

From reading articles on the scandal, including this one on the FT, I was amazed at the number of people involved in the scandal.  41 individuals and entities have been charged so far, with the key phrase being ‘so far’ with the prediction there will be more to come. US authorities have recently announced criminal charges against 16 current and former FIFA executives for ‘sustained abuse of their positions for financial gain’. One fundamental principle in business ethics is behaving professional and it does not take a genius to figure out that those that have been charged have failed to do just that. Rather than acting professional, many officials have used their position to abuse the system for their own self-interest.

Alongside this, FIFA’s stance on tax is another ethical issue. Having headquarters in Switzerland has enabled them to benefit from low tax rates, whilst for a country to host a world cup they must agree to a number of conditions, for example the event to be tax free for FIFA. Whilst they may argue this is completely legal and therefore they are not doing anything wrong, is it ethical correct to run an organisational like this to avoid taxes? What if all major companies did this across the world, who would suffer then? The public would as they would be forced to pay the difference.

So far the consequences of this scandal have been significant. The negative press coverage has given FIFA an extremely bad image across the world, even among those who do not follow football. This has led to many of the organisations main sponsors, such as Adidas, Coca-Cola and McDonalds threatening to withdraw their financial support, which was hardly surprising. Why would multinational organisations want to sponsor an organisation that is involved in corruption? This would just lead to a negative public image for those companies having involvement with FIFA.

In responding to the scandal, FIFA ‘s ethics committee has temporarily suspended the president, Sepp Blatter, who announced he would step down from his role after seven officials were arrested in May. What I found astonishing and rather laughable is that his possible successor, Michel Platini has also been suspended as well as Jérôme Valcke. How long have these people been getting away with all this wrong doing? Surely someone must have known about it, and isn’t the whole point of having an ethics committee to prevent anything like this happening in the first place?

Whilst suspending those suspected of involvement, FIFA has a long road ahead of them if they are to recover from this. One suggestion is that FIFA should rotate their president every two to four years, following an EU-style rotating presidency, in order to avoid future corruption and scandals. In my opinion this would be a positive move as it would give clear transparency into the governing body as people from different backgrounds would be able to come in every few years and see what has gone on in the past and ensure that everyone is behaving as they should.

If FIFA doesn’t know what the best response should be, maybe they should look at how Mattel acquitted themselves having discovered a major health and safety issue with their products. Some toy’s contained dangerous levels of lead, and the company responded by being clear and transparent, as well as recalling more than 20 million toys. This turned out to be an extremely successful response as Mattel were praised for their response and sales rose by 6%.

It seems to me that ethics today are having a major influence on the success of businesses across the world, due to the way which news spreads instantly. One harmful report could have a disastrous impact on the performance of a company, and the chances are that if you are behaving unethically you will be caught sooner rather than later.

Appendix 7 - Inside the Bank that ran out of money

In 2001, Frederick Goodwin became CEO of the then relatively small regional bank, Royal Bank of Scotland. His tenure at the top of the bank can only be described as eventful as RBS grew from a small Scottish bank to become the largest bank in the world in terms of assets before it all came crashing down in 2008.

Having initially expressed an interest in taking over Barclays (before being told where to go), RBS took over NatWest in 2000, which was the biggest hostile takeover in history at the time. 3 years later RBS had become the 5^th largest bank in the world as a result of investing NatWest’s savings and deposits in various areas such as an insurance company and a 2^nd hand car franchise. Despite the focus on growth, Fred proved particularly effective for shareholders as the bank delivered strong profits.

However, by 2005, RBS had acquired 25 businesses and spent nearly £30 billion and shareholders demanded an end to this. There was a perception among some that Fred was a maniac who went after size as opposed to shareholder wealth. Looking at this it seems as though Fred was motivated by dominating the industry through growth. He was more interested in controlling a bank that were the largest in the world, rather than focusing on internal controls and high shareholder returns.

Goodwin had been given the nickname of ‘Fred the Shed’ as a result of his tough approach to work and his reputation for making hard decisions. The fact that employees at Clydesdale Bank had allegedly celebrated Fred’s departure to join RBS for three days was possibly a sign of things to come. Put yourself in RBS’s employee’s shoes who had heard this, would you be excited to work for Fred?

During his time in charge of the bank, Sir Fred as he was known (before he had his knighthood removed in 2012), created an atmosphere where even senior board members were reluctant to express their views, so much so that the morning meetings had become known as ‘morning beatings’ as Fred grilled executives. Having a culture such as this has the potential to be extremely damaging as employees may not express their concerns over something in fear of being criticised. I have a feeling this may have been the case in RBS as people did not do anything about the way the bank was being run before it was too late and a bailout was required.

The takeover of Dutch bank, ABN Amro in 2007 was the final nail in RBS’s coffin. Fred decided that they should go ahead with this deal without conducting the necessary due diligence, a decision which would come back to haunt him. It seemed as though Fred himself wasn’t sure what ABN Amro were involved in, in one interview he denied that they were involved in sub-prime lending, again a sign of RBS’s failure to properly look into ABN Amro’s operations. Consequently billions were written off the value of RBS’s investments with analysts convinced they would have to ask shareholders for more cash, which Fred denied. Several weeks later, he did just that by asking for £12 billion to stay afloat. This clearly showed how Fred didn’t understand and realise the enormity of the situation. This may have been as a result of the culture he had installed as employees were reluctant to express their concerns.

The outcome of all this was that RBS came within 2 hours of running out of money, and were forced to accept a £20 billion bailout from the British Government. Could this have been avoided? Personally I feel the collapse of RBS could have been avoided if Fred had focused on shareholder wealth and not purely expansion. Although the risks taken by RBS had helped them to become a huge global player in the financial market, in the end it came back to bite them extremely hard.

Appendix 6 - Record breaking year for Mergers and Acquisitions

There is a strong chance that at some point in the past year you have heard about a merger or acquisition. In fact, it has been hard to avoid them in the news this year with a total value of $4.2tn in transactions in 2015 alone. What is interesting, or possible concerning depending on your view point, is that this figure beats the previous record which was set in 2007 on the eve of the financial crisis.

So why have mergers and acquisitions (M&A’s) become so popular? Well quite simply, there are several advantages that a company can benefit from. From operational efficiency’s to increased market power, entry to new markets and industries as well as tax benefits (something which I will look at closely later).

One particular merger which caught my eye for a few different reasons was the recent announcement that US pharmaceutical company, Pfizer, have agreed a $160bn deal to takeover Irish based Allergan. Having read many articles on this deal, including this one on the FT, the thinking behind this seems clear. In moving the company to Ireland, Frank D’Amelio, Pfizer’s CFO said that the company’s effective tax rate would fall from the 25.5% it was in 2014, to somewhere around 17-18%. As a result of this, Pfizer will be able to save around $21bn (yes, $21bn!) on their future tax bills.

Having been offered a role working for Pfizer and visiting their UK head office in Surrey a couple of years ago, I learnt a lot about the company and ever since then I have kept an eye on how they have been doing, so as you can imagine I was intrigued by this announcement. From the company’s perspective, the tax savings would be hugely beneficial and as CEO Ian Read stated, it would allow the newly formed company to increase investment on research to discover new drugs, which in the future could be potentially be lifesaving. In an industry such as pharmaceuticals, where the main objective is to produce drugs which can help deal with illnesses, surely all companies should be encouraged to reduce their costs which could then enable them to develop new medicines.

So this can only be a good thing yes? Well, don’t be fooled by this because the company themselves have announced that they are going cut $660,000 from their R&D budget in order to save costs. So despite stating they could potentially invest the tax savings in developing new drugs, they are planning to go the other way and reduce investment in R&D. This brings me on to negative aspects of M&A’s, with many US politicians stating their opposition to allowing this deal to go ahead. Hilary Clinton voiced her concerns by saying ‘This proposed merger, and so-called ‘inversions’ by other companies, will leave US taxpayers holding the bag’. I agree totally with this because in the allowing a multi-national company, such a Pfizer, to re-locate to another country will have a huge impact on tax revenues received by the US government, which will have to be replaced from other avenues.

In order to try and get around this problem, the two companies have stated the deal will be a reverse merger, where Allergan will takeover Pfizer, but rename themselves Pfizer and continue to operate on the NYSE as PFE. So basically, what they are suggesting is that on paper it will say Allergan have taken over Pfizer but in reality it is the other way round, sneaky.

Although people will have differing views on this deal, I can’t blame Pfizer for wanting to do this. If you can potentially save $21bn in taxes from relocating why wouldn’t you? If this deal goes ahead and becomes a success, I can see more and more US companies going down the same route and I for one cannot blame them.

Appendix 5 - Inside Job – Shameful Truth behind the Financial Crisis

After watching the award winning film Inside Job, I came away with one question stuck in my mind; how were individuals not held accountable after bringing the global financial industry to its knees, whilst taking millions of dollars in payments in the meantime? What I found even more astonishing than this was that the people involved of the running the failed organisations were then employed by the US government to run and regulate the country’s financial industry.

The film, directed by Charles Ferguson, starts by looking at the level of regulation in America over time. In the 1930s, banks were heavily regulated following the infamous Great Depression.  In 1981, President Ronald Reagan chose the CEO of Merrill Lynch, Donald Regan as Treasury Secretary. This began a 30 year period of financial deregulation, allowing investors to take risks with depositors’ money. By the end of the decade 100’s of loan companies and peoples savings had been lost, consequently costing the taxpayers $121 billion. It doesn’t take a genius to realise this wasn’t the greatest decision ever made.

One interesting point to show how far the levels of deregulation went was the merger between Citicorp and Travellers to form Citigroup. This merger was set to form the largest financial services company in the world however it violated the Glass-Steagall Act (a law passed after the Great Depression). This meant it was illegal for Travellers to be acquired; nevertheless the chairman of the Federal Reserve, Alan Greenspan, said nothing. Citicorp were given a one year exemption and then the law was passed allowing the merger. Straight away this said to me that the most powerful people in the industry could bend the rules to suit them, regardless of the consequences.

Looking back at the financial crisis as a whole, it seems more than likely that the high levels of crime and deception within the industry led the world down the path to adversity. Investment banks were giving inaccurate credit ratings out in public, different to what was being stated privately. In December 2002, 10 investment banks settled a case surrounding this issue for $1.1 billion and promised to change their ways. Since deregulation was introduced, several firms have been caught involved in criminal practices. Citibank helped to funnel $100 million of drug money out of Mexico, whilst Fannie Mae overstated its earnings by more than $10 billion between 1998 and 2003.

By the late 1990s, derivatives had become a $50 trillion unregulated market, despite attempts by the likes of Brooksly Born to bring in some form of regulation. These attempts were blocked, with a lot of the decisions being made by Government officials who had experience of working in the financial industry. Now this seems pretty convenient to me. How could the people who were making the monumental errors in the financial sector be held accountable if those very people had a say in the governing body?

As well as criminal involvement, investment banks combined thousands of mortgages and other loans to create complex derivatives called Collateralised Debt Obligations (CDO’s). These were then sold to investors, with many given the highest rating of AAA. As financial institutions noticed how much money the CDO’s were making, they started to give out riskier ‘sub-prime’ mortgages. Many of the sub-prime lenders were wrongly given an AAA rating, causing investors to believe that they were somewhat risk free investments. Some people may not see the issue with this, and it is all well and good doing this whilst house prices are on the up but as soon as prices begin to fall, massive problems arise.

The main issue was that if people defaulted on these loans when house prices were rising, the costs of this could be recovered. However, when prices were falling there was no way that they costs could be covered and CDO’s had no value. The consequences of this were massive, people who invested in CDO’s lost out big time. Furthermore, people who had issued insurance on these (Credit Default Swaps) had to pay out and AIG for example paid out $61 billion to the owners of the CDS’s the day after they had been bailed out. Having read this blog so far, you may not be surprised to hear that this was another unregulated market and speculators were able to bet against CDO’s which they didn’t own.

During the bubble, investment banks borrowed heavily to buy more loans and create CDO’s, so much so that they were leveraging at up to 33-1. This meant a tiny decrease of 3% in their asset base would leave them insolvent. It seems to me as though investment banks had the intention of trying to make as much money as possible, as quickly as possible, without thinking about the potential consequences. In my eyes Goldman Sachs were the biggest offenders, they bet against their CDO’s with CDS’s, they were selling CDO’s which meant that the more money the customer lost, the more they made. This is unbelievable, and to think that they got away with this is astonishing. Richard Fuld, CEO of Lehman Brothers, managed to take home $485 million despite the collapse of the bank.

To conclude, I believe what has occurred in the US financial market is a disgrace. I would be extremely interested to see what would happen should some of the events occur again. Will regulation prevent the collapse from occurring? The fact that many of the top executives who contributed significantly to the financial crisis were not only able to walk away unpunished, but they kept all their bonuses they had earned whilst running the industry into the ground, is unbelievable.

Appendix 4 - Dividend Irrelevance

In this week’s blog I am going to cover dividend policy’s, which will include another theory from Modigliani & Miller. Once again, their theory assumed everything was perfect, there was no tax and the markets were efficient. M&M’s theory was titled Dividend Irrelevance; however do not be fooled by this because they do not argue that dividends themselves are irrelevant.

M&M do not argue that whether or not dividends are paid is irrelevant to the company’s valuation; if dividends are never paid then the shares in a company will be completely worthless. They argued that shareholders are indifferent, because if a company does not pay a dividend, and chooses to invest in +ve NPV projects, then the share price will rise and therefore the shareholder can create their own dividend by selling some shares. On the other hand, if a company does pay dividends then the shareholders can use that payment to buy more shares. M&M’s key point in this theory is that +ve NPV projects should always be undertaken, which is something I completely agree with.

Put yourself in the shoes of a shareholder, would you rather receive a small dividend today, or instead of paying dividends, the company invested into projects that have a positive rate of return, which in turn will help to increase the company’s value. I know if I had that choice, I would prefer for the funds to be reinvested. The shareholder will benefit from the rising share price of the company and can receive a dividend that way.

Nowadays fewer companies are choosing to invest their profits in the business. Instead they are serving the short term interests of shareholders by paying dividends, according to Andrew Haldane, the chief economist of the Bank of England. He believes this is having a damaging impact on the growth of the economy. It is believed that between 60-70% of profits are now being returned to shareholders, a huge increase from the 1970s where the figure stood at 10%. I found an intriguing article on the FT website on this subject, which can be found here.

Why don’t companies invest 100% of their profits? Surely, it would make sense to do so in order to grow. Well investors sometimes look at dividend payments to see how a company is performing; high dividends are good whilst small dividend payments are bad. As there is no insider information available, investors have to base their decisions on what is publically available. Therefore some companies may believe paying dividends is a way to grow as people are more likely to invest as a result. This is a very short-term view; something which Andrew Haldane believes is damaging the economy.

In another article on the Financial Times, Terry Smith said that if you opt to spend the dividend or you do not invest it then you will not perform as well. The graph shows that it is the rate of return that you make on the reinvestment or dividend, which makes the biggest difference. Company A does not pay any dividends and reinvests 100% of profits, with a 20% rate of return. Company B has the same return but only invests 70% of profits, with remaining 30% used for dividends. Whilst Company C also reinvests all its profit, the rate of return is lower at 10%.

So to conclude, I believe that it is in the best of interests of both the company and the investor that profits are reinvested in order to grow and increase the company’s value. Although dividends may be demanded by some shareholders in the long run they will get more back from investments which will generate wealth.

Appendix 3 - What is the Optimal Capital Structure for Companies?

Finding the right balance between debt and equity can be problematic for a company. Choosing debt is seen as a safer option, as lenders offer large amounts of finance for a relatively small return. On the other hand, equity is more expensive and viewed as the riskier option. Because of this increased risk, shareholders demand higher returns and reduce the owner’s control of the business. Dividends are tax deductible whereas debt isn’t, this suggest that companies should take on more debt in order to increase gearing. Increased gearing will reduce the WACC which would then increase the overall value of the company.

At this point it would seem a straight forward decision; debt is the much safer choice than equity. You only have to repay the loan plus interest, which can be offset against pre-tax profits before the calculation of the corporation tax bill, therefore lowering the amount of tax paid. Whereas with equity, shareholders own part of the company and therefore they will also receive part of any future profits. Raising capital through equity is also costly due to the transaction costs implemented on the stock market.

You are probably thinking why do companies opt to raise capital through equity rather than debt? Well, equity doesn’t have to be repaid and of course, debt does with additional interest. If a business is losing money, they are still faced with the loan repayments but it wouldn’t have to pay any dividends out to its shareholders. A highly geared company will have higher risks of financial distress as a result. Furthermore if a business already has high levels of debts, then it would not be an attractive proposition for lenders to lend even more money. The company may be seen as high risk, which could also have a negative impact on the company’s overall value.

An example of a company who struggled with their capital structure was American Apparel. According to reports in the Financial Times, the company has recently filed for chapter 11 bankruptcy whilst they seek to restructure its debt. American Apparel’s debt rose to 11.6 times its annual earnings and consequently their credit rating has fallen deeper into junk territory of Caa3. A plan has been outlined with creditors to swap $200m in debt for equity which shows they did not have the right balance of debt and equity. This restructure will help to reduce interest payments by $20m which shows how damaging debts can be.

Modigliani and Millar argued in 1958 that a company’s structure does not have an impact on the WACC, therefore no optimal structure exists and the value of a company was dependent on business risk alone. This theory assumed that capital markets were perfect, with no tax, no transaction costs, there was no financial distress and that individuals could borrow as cheaply as corporations. In reality, could this theory work? When comparing these assumptions to real world business, the theory can be easily argued against. M&M’s theory in 1963 incorporated these assumptions and suggested that as you increase gearing you will reduce the WACC, which will then increase the company’s value.

Having studied capital structures, personally I believe funding a company simply through debt is a bad idea. Although it does have its benefits, debt still has to be repaid regardless of how well the company is performing. The level of debt a company has should be suitable for the industry and at the same time, be accepted by the shareholders in order to increase value. The balance between debt and equity will vary depending on the industry a company operates in, however I believe that equity and other ways of financing should definitely be used.

Appendix 2 - The collapse of the Lehman Brothers

It has been over 7 years since the astonishing collapse of one of the world’s largest banks shook the global financial system. Having only been 15 years old at the time, I did not fully understand the enormity of the problem. One thing that sticks in my mind, how could a bank the size of Lehman Brothers be allowed to fall?

Having watched the ‘The Last Days of the Lehman Brothers’ documentary, it helped me to understand the underlying issues which led to the bank to collapse and consequently file for bankruptcy. The investment bank had deliberately overstated the value of its assets, such as the collateralised debt obligations (CBO’s). When you combine this with the US subprime mortgage housing crisis, Lehman brothers faced a $25 billion hole, seemingly in the eyes of the bank, out of nowhere.

$25 billion is not exactly a sum which could quite easily go unnoticed, is it? Surely one of 25,000 employees should have picked up on this well before it became too late. Once the bank noticed they were in trouble, they had to write down their commercial real estate assets from $40 billion, to $33 billion and the banks rating was also downgraded. Not looking pretty is it? Yet the company had carried on doing what they were doing as though there were no issues, until it was too late.

Global insurance giant, AIG, were another company that got into difficulty. They had decided to maximise profits to trade in credit default swaps, until the mortgages that were tied to those swaps began to regularly default. The firm were running out of cash to cover their losses and asked the Government for an emergency loan to cover these losses, believed to be worth $40bilion. The difference between this situation and the one Lehman brothers found themselves in, as reported by the BBC at the time, was that allowing AIG to fall would directly affect millions of consumers and companies around the word and therefore they were deemed too big to be allowed to collapse.

Having already rescued other private companies, it was becoming less and less acceptable for the Government to continue bail out firms. The US Treasury refused to give UK bank, Barclays, a guarantee for Lehman’s trading obligations which consequently led to the deal falling through. In doing this, the US Treasury made a statement, saying that they were unwilling to use public money to rescue banks that had got themselves in this mess.

Some people may think this is a sceptical view; however I believe the Government took the view that no organisation was too big to fail and if avoidable mistakes had been made, then they needed to be prepared to face the consequences. In comparison to AIG, Lehman Brothers were in a different position. In order to even enter discussions with Barclays, they realised that they needed to take on $25 billion of bad debts. As well as the current issue of being illiquid, the bank didn’t have the assets to be able to pay off their long term debts.

Looking back on the financial crisis, it is clear in my eyes that the vastly unregulated firms got too far ahead of themselves, seeming thinking that they would be fine no matter what happened. Merrill Lynch were another Bank who fell into difficulty, and were ultimately rescued rather controversially by the Bank of America in $50 billion deal. These banks had all over stated what they had and as a result successfully made millions through over inflated share prices. However, the success was short lived as it was only a matter of time until this caught up with them and as a result almost wiped out the entire industry.

At the end of the day, the issue stemmed from whoever believed it was a good idea to approve these mortgages, without realising that these people would be unable to pay the banks back. Someone within the industry must have looked into this lending and surely thought we could be in trouble here. Was it just a case of it being too little too late by the time Lehman Brothers realised? Can a bank like this not know how many bad debts they possess, and honestly not realise how many mortgages were going to default as well not realising how deadly these CDO’s would turn out to be? I for one am certainly not convinced, someone somewhere must have known something.

Appendix 1 - Insider trading touches down in Fantasy Football

Is it really possible to beat the market? Can you consistently make high returns from investments without any inside knowledge? Investors certainly think so, otherwise why would anyone invest in something that isn’t going to make them money? Some people believe it is pure luck, others are more suspicious.

Recently, there has been a suggestion that employees at two US fantasy sports companies have been acting improperly following allegations of insider trading. This industry came about from an American Fantasy Football game where users would pick players to form a team and score points based on players weekly performances, all for fun. However, this all changed recently as companies such as DraftKings and FanDuel set up online daily and weekly games based on a very similar idea. However this option requires an entry fee to paid (up to $1,000, as reported by the New York Times) to play against hundreds of opponents, with a potential $2 million prize for the winner.

‘It is the simplest way to win life-changing piles of cash every week!’ stated DraftKings, the company who raised $300m in a funding round during July, led by 21^st Century Fox, with rival FanDuel raising a similar amount according to the Financial Times. For the vast majority it is a way of losing money, with only a tiny proportion of the participant’s actually winning cash. Interestingly it has been revealed some of the tiny percentage of winners, are employees of these two fantasy companies. Seems coincidental right?

In my eyes, it should not be possible for employees at either of these companies to be able to compete in the fantasy leagues; as they have access to information not available to the very people they are competing against, the general public. Employees at the two companies have a clear advantage and are able to beat the market as a result of inside knowledge.

But this is exactly what has happened this month, as one employee won $350,000 on a FanDuel website, by using the information he had access to as a result of working for DraftKings. More information on the story can be found here.

You may be thinking, does the information employees have access to, really give them a clear advantage? I thought the same but yes it does. They are able to see the number of people who have picked particular players and therefore work out which footballers would give them to best chance of winning. This is because if they pick a player who has been selected by a small proportion of the public, and this player scores a lot of points then there will be less teams doing well at the same time.

Where is the fun in that? Fantasy football was created for people to test their knowledge against other football fans, not for people to abuse their positions and win money at other people’s expense. Having played the UK version of fantasy football (or ‘soccer’ as it known in the US) for a number of years, I would be very upset if I knew people I was competing against have an unfair advantage. I would be even more annoyed if I had lost money as a result of this.

What makes this all the more astonishing is this is taking place in a country where online gambling is illegal. The simplest way to solve this issue is to ban all employees, who have access to insider information, from playing any kind of pay-to-play fantasy football. This would prevent anyone from making an abnormal return and also ensure the general public are competing on a level playing field. A similar step was taken by the English FA, where common sense was used to prevent any chance of insider trading occurring. All professional footballers have been banned on betting on any football match, regardless of whether they are involved or not.

People may argue that the fantasy football market does not need to be regulated as it is a game all about skill; however with such large sums of money at stake there needs to be some form on intervention. If this has happened once, what is stopping it happening again?

Digby Jones: The New Troubleshooter Episode 1

Lord Digby Jones began this new 3 part series by visiting Hereford Furniture, a medium sized family run furniture company, who have struggled in recent times. Digby doesn’t hang around and gets straight to the point, ‘You’re not trying to say you’re the cheapest, you’re trying to say you’re the best.’ This is a key point where many companies have become unstuck in the past, focusing on low prices whilst forgetting quality. The furniture industry has followed the general trend in recent years after the economic downturn, with 1,200+ furniture firms going bust during the recession. Having made an £80,000 loss last year, Hereford Furniture are beginning to consider their future.

After watching this intriguing documentary, one point that stood out straight away was Digby’s desire to turn the company’s fortunes around, keeping people employed and paying taxes. This is a different view to many conventional consultants as many will look to reduce the company’s costs and tackle the issue from a monetary point of view as opposed to a social perspective.

Digby immediately identified some key areas which may have caused the business to perform poorly. Hereford Furniture had a huge product range, whilst being effectively split into 3 separate businesses; a manufacturer, an importer and a retailer. In order to succeed, Digby advised that they should specialise in one area which MD Mike Muxworthy struggled to understand. This is often an issue with family run businesses; people struggle to see the issues with their current strategy and do not see the bigger picture. Can a business like this really operate in these 3 areas and be successful? Based on their recent performance, I believe they cannot.

Following a trip round the shop floor, Digby and Mike realised that employees felt one of the businesses weaknesses was the communication between themselves and senior management as well as the workforce’s organisation. In my eyes, it is an important managerial technique to speak to those at the bottom of the ladder within an under-performing business, to hear their honest opinions. These employees know the ins and outs of the daily operations and have different perspectives to management. 

It is vital that all the stakeholders, both internal and external, work together to achieve the same goal. Good communication between management, shareholders and employees can help to improve overall efficiency and effectiveness which is shown towards the end of the documentary as employee’s state that their jobs have become easier and they are able to get more done. This has come as a result of Mike changing the company’s strategy to focus on producing fewer products and only building for stock. 

Following a visit from Digby’s friend, Stuart Towe, Mike announced that they were planning to cut their range from 1000 products to just 20. By divesting some of their assets and cutting 49 out of every 50 product, Mike hopes this will improve their efficiency and create value. It was also agreed that they would brand their products under the ‘Hygge’ name, a word from the Danish language. This was an ambitious plan which the company hoped would turn their fortunes around. 

Looking back at the documentary, Digby posed the right questions to the company in order to suggest ways of improvement, but as is often the case, it is hard to change the culture within a family run business. Digby persevered and in the end Mike saw his way of thinking and made some changes, which in my eyes should give the company a better chance of performing well in the future.  

Did these changes help turn their fortunes around? Unfortunately not, as an article in the Hereford Times stated that the company were to cease trading at the end of June to make way for Land Rover car showroom.