Improving Profitability, Productivity AND Shareholder Value

Author: AICD The Boardroom Report Volume 7, Issue 15, 12 August 2009 www.companydirectors.com.au

IMPROVING PROFITABILITY AND PRODUCTIVITY even when unit labout costs are high

A proven methodology – even when unit labour costs are high

We may jest about McDonalds and its food but this article looks at how an Aussie achieved fantastic profitability and productivity results from an ‘over-investment’ in training. This story is similar to the history of Andersens who did also over-invested in training compared to their competitors and they grew from a small city based firm in Chicago in the 1920’s to become the largest worldwide accounting firm by the 1980’s (yes, they fell from grace in the 1990’s but for other reasons – and that’s another interesting stort to tell!).

Here is the AICD article (emphasis added by BIR Editors and BIR comments in [square brackets]:

Australian boards are letting the country down by not developing from within, not paying enough attention to succession planning and not training their people well enough from the grass roots.

This was the view of Peter Ritchie AO, current deputy chairman of Seven Network and the man who brought McDonalds to Australia, when addressing an AICD Leaders’ Edge luncheon in Brisbane recently.

Ritchie noted that McDonald’s was a leader in many ways, paying US$6 billion in dividends this year and still opening around a 1,000 stores a year. But he added: “On most of the business aspects that McDonald’s measures, Australia is in a leadership position. And, in the most important one – the productivity (of the management teams to crew in the stores) – McDonald’s Australia is the best in the world and has been for many years.

“The parent company is benchmarking from Australia. The best indicator of the Australian leadership position is that Australia has become a people gold mine for the worldwide system. At last count, there were 22 young Aussies running significant parts of the worldwide company. And if it were not for his untimely death, the worldwide CEO would still be a young Aussie (one of my prot g ‘s) Charlie Bell.

“Don’t you think that it is amazing that a tiny market of 20 million people, down here in the South Pacific, could be so dominant in a company founded in the US, in a market of 250 million people, and operating in markets with probably a billion more people?”

But Ritchie noted that Australia was not always so influential. “For the first 14 years of our operation in Australia we struggled to survive for half that time and then ran a profitable, but mediocre operation for the next seven years.”

However, in 1985 he had an epiphany. “I recognised as a result of benchmarking that because of our high labour cost and inability to have as many people in the store, we had to make our people smarter, more productive,” he said. “There was, of course, only one way to do that – train them better.”

In 1986, he spent 30 per cent of his total bottom line on additional training and continued to spend disproportionately on training over the next five years. The result was that the Australian operation moved inexorably up the productivity ranking – from the bottom five per cent of the world in 1985 to number one in 1991.

Ritchie noted: “Attention to training brings about a strong culture, peopled by leaders who are self-confident enough to be able to really pay attention to what the customer is saying. I’m sure you will recognise that there are very few, if any, Australian companies with such a strong belief system. That is because they are not prepared to devote the necessary time, dollars and effort to the one thing that did not change in the McDonald’s system – the detailed training of their people.”

He urged those at the luncheon to go away just thinking more – or differently – about training and leadership, but if they wanted to talk about this within their organisations, they should not just go back and stir up HR. “They’ve had it all this time. If you are going to try to stir anyone’s imagination, give it to your line management [not HR]” he said.

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MPROVING NET WORTH:  how strategies to reduce risk improve shareholder value

Corporate governance is not very sexy, and many business owners may question its value to their owner-managed businesses. But if you look at corporate governance as a strategy which reduces risks by independent thought processes reviewing what is going on in and around the business then you can start to see how owner-managed businesses may benefit.

New research examining 10 Asian markets confirms that companies with higher corporate governance ratings tend to outperform low-rated companies on an annualised basis for holding periods of one year or longer.

The findings were announced by GovernanceMetrics International (GMI) and recently published by UBS Investment Research in a report titled Corporate Governance in Asia.

Commenting on the findings, GMI chairman Gavin Anderson notes: “The first thing that is evident in the study is that corporate governance does matter and the authors contend that governance as an investment criterion will become more important as the economic recession recedes.

While they are speaking specifically about Asia, we believe that the same holds for Australian companies.

The authors found that those companies with better governance practices outperformed those with lower GMI scores. A separate study by the Asian Development Bank a few years ago found that well governed firms tend to trade at higher Price/Book Value ratios. Yet another study published earlier this year by the University of Wisconsin (Spellman and Watson), quoted in the UBS report, suggested that share prices of companies with better governance tend to outperform both in bull and bear markets.”

Anderson continues: “Clearly, there is an association between good governance practices and company performance. As this academic and other data expand and as more institutional investors embrace it – the International Corporate Governance Network and UN Principles for Responsible Investment conferences in Sydney last month both focused on greater institutional investor governance commitments – it seems apparent that governance practices at companies worldwide, including Australia, will be under scrutiny.”

The study also found that countries with a British colonial heritage – Hong Kong, India and Singapore – tended to have higher levels of transparency and higher average ratings. “This should not surprise since they all share the same common legal system inherited from the British,” says Anderson. “This is true of Australia as well.

But that is not to say that if you have a strong legal system, you automatically have well governed companies. A legal system that protects property rights is a plus, but that seems to us to be a minimum for corporate behaviour, not a maximum. Several companies highlighted in the UBS report have disclosure practices well beyond what is simply mandated by the law of their home country.

From an investors’ point of view, the greater the transparency the better able one is to make an informed investment decision. This seems to us to be equally applicable to Australian companies as well.”

A separate UBS report on the performance of the ASX 100 companies was also released, and while similar, it was a lot less detailed than the Asia study. “It too found a correlation between GMI governance scores and stock performance. In particular, the Australian study showed that low-rated companies (and the GMI scores are relative not absolute) significantly underperform.

Mention was made of investment strategies utilising long/ short approaches, which suggests that companies with poor governance relative to their peers might be the target for short sellers,” says Anderson.

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