Swann Newsletter - Volume 2, May 2009

Middle East Regional Business Profile

Understanding the economic make up of individual states and regional groupings is essential when examining the Middle East as a potential business hub or destination for investment. For the purpose of this article I will discuss the Gulf States as they are the most economically and politically stable the Middle East.

In the current financial climate, two factors indicate obvious potential for business development and Investment. The first is export products that are marketable during a global recession. The production cycles of these products must be mature and they must be saleable despite decreasing demand globally. These products must also be profitable at the lower margins that flow on from decreasing demand.  For the Middle East this means that states with mature and efficient oil and gas industries find themselves in an enviable position. The clearest examples of this are among the politically stable and economically forward thinking Gulf States. Abu Dhabi in the UAE, Bahrain and Saudi Arabia continue to demonstrate strong growth driven by sophisticated oil production industries. Qatar is similarly placed although their economic development stems from vast gas fields. Dubai, by way of comparison, sits next to Abu Dhabi within the UAE and until recently was at the heart of business affairs in the Gulf States. Dubai currently faces significant economic contraction because it does not have a product that is marketable in the down turn that compares to the oil and gas resources of its neighbours. As the real estate, construction and financial markets, which drove growth in Dubai, have foundered with the contraction of credit globally, economic growth in the Emirates has been stopped in its tracks.
The second factor is sovereign wealth. Countries that seconded money from the economy in the boom years through sovereign wealth funds are now able to spend on development with little regard for the tightening of credit globally. They are also able to take advantage of discounted stock, commodity and labour costs that reflect falling demand across the global market. For example, states that are able to afford infrastructure spending at the present time are able to purchase materials for less than they have cost in a decade. It is also possible to buy up financial assets at prices that were unimaginable six months ago. Put simply, as access to credit tightens globally, the liquidity of sovereign wealth funds has become both a buffer for countries that had the ability and foresight to build them. Again the gulf states of Abu Dhabi, Saudi Arabia, Qatar and Bahrain are well placed in this arena. Fiscally conservative leadership in these states during the recent boom years created sovereign funds that are being deployed and will likely ensure positive economic growth while most of the world sinks into recession.

This is not to say that these four states represent easy money or are the only states with business or investment potential. Competition is high for government contracts and sensible private entities – that is, those that are likely to survive in the current economic environment - are monitoring their cash as closely as any of their counterparts in any other corner of the globe. Local markets and business owners in the Middle East have become more discerning and more sophisticated in recent years through experience and exposure to Western and East Asian business practices. Just as importantly, the personal aspects of doing business in the Middle East are integral when dealing with local business and stakeholders. Even for established or prestige brands, the company will be largely judged by the client-facing employees who deal with local partners on a daily basis.

For those willing to risk moving into less developed markets, countries like Oman provide interesting options. As Oman is less globalised it has been less traumatised by the current economic crisis. Long-term stable government and a desire for development across the financial, real estate and commodities sectors presents opportunities for companies with the time and inclination to move into a new market.
What does this mean for the region generally? Barring unforeseen political upheaval or serious deterioration in Oil and Gas prices, the Gulf States may present opportunities for discerning investors and companies that are able to establish them selves in the region. In the long term it also means that companies that gain a footing states like Dubai and Oman while costs remain low may also be in strong positions to take advantage of a future up turn.

David Tynan - General Manager, Gulf States

Reviewing Board Performance 

We have discussed in these pages previously aspects of talent management that are increasing the work of Boards of Directors in order that they stay informed and vigilant on behalf of stakeholders, in identifying areas of weakness and potential risk. The financial crisis has reached a point where organizations are looking for opportunities to differentiate competitively in preparation for the gradual upturn. Summarised in this article are the themes from recent client projects from different parts of the world in the form of a “how to” board review kit.

Talent Management – our work with investment markets prior to last fall, highlighted investors views that execution risk was increasing because of the shortage of qualified people and the absence of effective people management. This was not just a lack of succession planning which is actually pure risk rather than talent management, but the business of building an appealing employment brand capable of attracting and retaining high performing individuals.  Talent management means appropriately qualified people in key positions, evidence of a process to grow replacements and move them through the organization with stretching and rewarding assignments (velocity) and aligned reward and other terms of employment.

The demographic valley, the lost generation and the new cohorts entering middle management have not gone away nor have they changed as a result of the downturn. An acute shortage of talent in the resource sector will return and the employment offerings that we have relied upon for so many years will not respond. Having the wrong people in the wrong jobs may not impact the next quarter but over time blown schedules and budget overruns will negatively impact financial results, corporate credibility and in turn its ability to attract the best performing people. Currently managements tell us that there is no shortage, they are able to hire all they need. In numbers this may be true but high performers continue to be difficult to attract. Boards should be looking for evidence of management process and satisfying themselves that long term problems are not being created through current short term expediency. There is no doubt that the available talent is of a higher quality than one year ago but are the best being added to your organisation or just the available?
Reward – As the Chinese might say we live in interesting times with the US having had several attempts at (and clearly failing) to control executive compensation through legislation, Canada having gone through its first reporting season under new abstract disclosure rules and with Australia debating the creation of a new watch dog. Where will all of this lead to? In the short run there is no doubt to a more compliance driven, tick the box mentality. Incentive caps, maximum tax write offs and claw backs are all important features in suppressing excessive compensation risk – more is not always better. However, in the boom and bust mentality of the mining industry this will be difficult to overcome and could deter talented individuals from joining the industry. With the crash of financial markets the compensation vehicle of choice amongst most organizations below the majors, stock options, have taken a fearful reduction in value.

Directors and Remuneration Committees will be challenged to comply, legal and investor relations specialists will no doubt continue to argue for minimum disclosure while compensation consultants will caveat and generalise their now disclosed recommendations. Directors must not be distracted by all of this. Their focus is to ensure alignment; that compensation is reasonable and appropriately delivered when the business goals of the company are achieved. We never cease to be surprised how even in the most sophisticated companies compensation can become payable for behaviour and achievements that are not directly aligned with the stated goals of the corporation. More rather than less disclosure is not a bad thing; it will help investor and employee understanding and promote a stronger brand. Ask how competitive compensation levels are determined; is it reasonable to measure incentives paid by your company’s peer group and if so how, by target or amounts actually paid? It may be time to align amounts with specific business plan targets rather than competitive practice, after all no one has figured out how to measure the inherent risk in the business plans of their competitor group.

Relevance – Directors need a thorough understanding of the business over which they have oversight. Without this they cannot effectively opine or approve programs relating to people. While no one disputes the importance of a strong relationship between CEO and the Board, a stronger relationship that should be pursued is that of the Board with the management team. Boards should ask themselves whether they have sufficient access to lower levels in the organization to gain a deeper understanding of issues and to be better prepared for management proposals as they come forward. Boards of directors are also of course enormous sources of wisdom and making this available to the management team will directly enable them to fulfil their wider obligations. Are there in place processes that create opportunities for management and the board to effectively interact?

Board talent remains in short supply – there simply are not enough people to fill available positions. Qualified former executives will be in short supply as retirements are delayed while executives replenish retirement pots to cover their market losses and increasing concerns about liability and the financial crises are not helping supply. Recent well publicised corporate failures have increased attention on the monitoring role of Boards, and resulted in frameworks to improve corporate accountability (e.g. Corporate Governance Principles and Recommendations). Ensure that there is a talent management process in place for the board that is as robust as that for management.

We have focussed on the people issues about which investors are increasingly concerned. As an introduction to considering Board performance the following questions apply to all board operations and not just people matters.

1. How does the Board compare with that of its competitors?
    a. What are the benchmarks of effective performance?
    b. What does outstanding performance look like?

2. Do your standards measure up to those set by the market?
    a. What measures are in use by the competition?
    b. How are different measures compared?

3. Does the Board work as a team?
    a. Do Committees work effectively with the Board?
    b. Is there duplication or effective overlap?

 4. What is the relationship with management?
    a. Do the executive team have formal and regular access to the Board?
    b. Does the Board have adequate insight into the senior management?

5. Is the Board appropriately populated?
    a. Does it have the skills to match the business strategy going forward?
    b. Is there a regular review of Board strengths?

6. What is the Board’s relationship with the Chief Executive?
    a. Through the Chairman?
    b. Do all directors have access to the CEO?

A board review should address amongst other things these questions and involve the entire board in discussion. Board performance is an important component of employment brand assessed by current and future employees.

Paul Pittman,
Managing Director, The Americas and Swann Consulting
&
Chris Eckert,
Associate Director

The Challenge of Raising Capital in the Current Markets   

World stock markets are working through a decline in asset valuations to an extent not seen since the Depression years 1929 -1933.  In fact the decline of the US markets over the 18 months to March was about the same (ca. – 50%) as the fall in the first 18 months of the Depression.  Recently stock markets have staged a swift rebound in anticipation of the end of recession.

The previously accepted levels of gearing and methodologies of structuring financings were abandoned almost overnight in late 2007.  The world continues to experience “de-leveraging” and “de-engineering” – this has had a direct and wide-ranging impact on economic activity.

Systemic collapse in the financial services sector was narrowly averted in late 2008.  A credit squeeze affecting even top quality corporates ensued.  Investor confidence collapsed. 

As a consequence, the Western world economies are operating in a deep recessionary environment – annualised GDP growth was minus 5% in the December 2008 quarter.  The emerging market economies, although showing positive GDP performance, have slowed far more than anticipated.

The recovery in economic activity will be slow due to the following factors:  (a) asset valuations will not recover quickly due to the negative effects of lower gearing and less financial engineering and (b) major global banks are still to be further re-capitalised before they commence to offer more normal levels of lending and other commercial activities with clients.

The massive and co-ordinated intervention by governments (bank bail-outs, guaranteed borrowings, back-up funding, and taking equity stakes in financial institutions) and significant cuts in interest rates will eventually bear fruit as well as inflation.  The US Fed and the Bank of England have resorted to very bold measures to generate lower market interest rates and free up capacity for banks to lend - by printing money to buy back government issued paper and more mortgage-backed securities.

We are continually reminded that the outlook is clouded – in March the IMF further downgraded its growth forecasts for 2009 (a sharp revision from 7 weeks earlier) and Moody’s predicts significant rises in defaults of non-investment grade debt before the end of the year. 

However in the face of this, there are small signs of improving investor sentiment and engagement in the hope that government actions and lower interest rates will “work”.
The traditional sources of capital – equity markets, bond markets and bank debt – have become far more selective.  Credit standards have risen and simplicity and transparency of corporate structures are now benchmark requirements.  Equity also will now place far more focus on free cash flow and less geared situations.

Brad Glynne
Cougar Energy Limited
General Manager - Corporate Finance

HR Practice in Difficult Times

My original intention, when I thought I could choose the topic and the audience were to be sympathetic and like-minded HR people, was just to wing it by talking about labour regulation in the Congo. I thought it unlikely there would be anyone here who had worked in the Congo; and therefore there would be no requirement to distinguish between presenting fact or opinion, as no-one would be in a position to challenge.
Unfortunately, the topic has been chosen for me and anything I have to say on it is just opinion and doubtless delivered in a didactic manner – which is bound to be polarising. Never mind – ‘popular HR manager’ is an oxymoron.  

Of course, difficult times for HR people are when everything is booming. Can’t fill jobs, wages bill go through the roof, not enough managerial talent, competent people get promoted to positions where they become incompetent, feral managers doing side-deals with employees, grasping behaviour exhibited everywhere, contractors and consultants taking the piss on rates, all the junior HR people want to get involved in ‘strategic HR management’ (whatever that is), in-house recruiters  - where recruiting used to be a stepping-stone job duty for an aspiring HR Officer – get $100k plus salaries. Everyone wants to go on courses, wants a gymn, wants day-care, wants study leave, wants paid breaks, wants job-share, wants part-time work, wants bonuses, want, want, want. All paid for by shareholders – and pretty much all approved because of the unrelenting labour market pressure and the need to establish the company ‘brand’. Madness.

But HR Practice in Difficult Times – meaning straitened economic circumstances – presents for both the people doing it and their companies, probably the only up-side at a fairly miserable time. So – “HR Practice in Difficult Times” … is easy. Certainly not very pleasant, but easy in terms of the things which need to be done - and the way they need to be done. When revenues go down and costs stay static, it doesn’t take any imagination to come up with cost-cutting answers. I do not mean to diminish the discomfort and stress associated with implementing the answers – or to dismiss matters such as hanging on to key people, dealing with the morale of the survivors, the importance of senior managers behaving in a calm and considered manner, even if they are curling up into a foetal position when the lights go out. Because these are all things which can be foreseen, they can be dealt with. Of course, steeling yourself to actually do some distasteful things can be a challenge. The two dicta by which I try to live:

1. There is no problem so small that I can’t run away from it; and
2. Follow the path of least resistance are sorely tested in difficult times.

But if you are able to look in the mirror and say “What I am about to do is for the greater good” and believe it, then it gets a little easier. There is absolutely no joy in making people redundant. However, when payback is usually somewhat less than 6 months on a redundancy program, it is inevitably the resort of distressed companies – even after canning the biscuits, introducing short working weeks and using up accrued leave.

It’s an axiom that the best time to change is when you are not compelled to – but no-one does. It seems always that a ‘burning bridge’ scenario is required.
Difficult times provide an opportunity to clean up the act and fix some over the top practices, which surely can no longer be justified under any ‘need to be competitive’, or ‘differentiated in the market’, arguments.

To establish a bit of context and to see whether my views have any resonance, this is what I think has happened over the last 20 or so years.

When Award Restructuring was all the rage in the 80’s, the limelight people in HR (not that it was commonly called that then) were IR Practitioners – and by and large at site level they were a fairly crusty bunch.  Quite often at corporate level as well. But after they’d done the deals, which generally centered around trading money for acquiring new skills – not necessarily using them - and removing demarcations, the problem of designing the skills programs fell to Training people, who were predominantly very well disposed to their fellow man. By the early 90’s most of the hard-nosed IR people had disappeared and apart from a brief resurgence in the mid-90’s when WPA’s came into play, they haven’t been on the scene since. And even the ones around in the mid 90’s were reasonably sophisticated because employment regulation was becoming so legalistic.

And so now after 15 years or so of all staff environments and no work restrictions and gutted unions – paid for with constantly escalating salaries and an expectation of annual increases – the new rules catapult us back into the 80’s and we have minimal expertise and experience to deal with it – particularly at site level. And now we have no money either.

The point is that we have rightly fostered cultures which place a premium on cooperation and respectful interchange between people – and have had through performance management systems and discretionary pay systems the muscle to implement those cultures. And the muscle behind the muscle was Individual Contracts. Now we are in a period where the ability to deal individually with employees is greatly threatened.

In synopsis:

1. We have people and systems geared to what has been an
     unbelievably free rein period for industry. 
2. Employees have been well rewarded and have much better jobs as a consequence of that free rein.
3. It’s been paid for by the ability to work assets far more productively and by shedding thousands of jobs. Which was disguised by the fact those workers found jobs elsewhere in a booming economy.
4. Workplaces are manifestly better – safer, cleaner and freer of bullying and harassment.

It is likely that the people and systems which were the strength of what was a Camelot environment will become its weakness. There hasn’t been a better time in 20 years to be a union official trying to make a name.  So when looking to attack, where is a company exposed, apart from Safety?

On anything which affects employees  (potential union members) in the hip pocket or job security. And that is now a daily constant.

A system under threat is the Performance Review.

Every company makes up its own – and a very turgid exercise it is – and that’s just when it’s confined to HR people.  The fact that company to company they are all essentially the same doesn’t seem to matter.

Performance Reviews, which are invariably linked in some way to Remuneration (otherwise what’s the point?) are potentially going to be a major free kick for unions. They need to be bullet proof against attacks on the grounds of subjectivity, favouritism, process etc. And it would be really helpful if the Employer Organisations came out with an endorsement for one template.

A pipedream which goes with Performance Reviews is a standardised salary system. If there is a movement to go back in time in industrial relations – go first and further back.  Individually administered salaries were fantastic in their day and got people onto staff contracts. (Assisted by the one-off payout of sick leave and overtime earnings rolled into salaries). Now they’re a pain and a very expensive one.  Supervisors and managers will always contrive outcomes where all their solidly performing people are sitting within a few dollars of each other, because to do otherwise just generates pain for the management. It is simply not credible that Performance Reviews can generate $300 pa or $500 pa gross salary differences between members of the same crew – yet often these minor and irritating salary differences are required to demonstrate that the company administers salaries and rewards on an individual basis.

The old-fashioned fixed rates combined with one off discretionary performance payments could be a cheaper and less contentious remuneration method. Individual salaries are red rag to unions.  It would be neat to take the ground away as well as remove the requirement for supervisors to exercise discretion.
 

We have also created a climate of expectation.  The door to a union will be wide open when a company imposes a salary freeze – which is now happening everywhere. At least under fixed rates the performance bonus could be frozen in tough times.
And never forgetting that managers fall in love with their own people, so it’s always tough to say ‘no’ – especially when you’ve been saying ‘yes’ forever. Unions may not be the worst thing in the world to re-appear on the scene. They should be a great force for wage restraint – it is much easier to say ‘no’ to an adversary than a friend.
As a general statement, people working in HR, particularly at site, are not now equipped to deal with union people knocking at the gate or sitting across the table from them. In fact, people working in HR now have been encouraged to look for more and more opportunities to advance employee conditions in innovative ways. They generally have an HR Degree and are particularly keen on moving into ‘Change Management’ and being involved in ‘Strategic HR’ after doing six months of recruiting or pulling stats from the HRIS.  Not their fault – big expectations engendered and not a climate where rough experience was available.
There will, I think, come a time when it is going to be difficult for people (not just HR people), to hold true to the belief that it is ‘our people’ they’re still dealing with, when they are daily confronted by a workforce which seems more grasping and intransigent and speaks with a collective voice. The workforce becomes imbued with the character of its mouthpiece, who may be significantly more assertive than managers and HR people are used to.

It is likely that contracting companies will be better placed to cope, as it is unlikely they ever strayed too far away from the disciplines required by a tough commercial environment. 

But bringing HR people up to speed, not only with knowledge about employment regulation – which would increase their confidence levels, but with some skills to handle disputation - appears prudent.  Many minor incidents which may have an industrial character will likely be referred to head office for resolution, simply because people won’t have seen anything like it before. And there’s not much left in head offices.

It will not be sufficient for Managers and HR people to just pound the table or wring their hands and say:
 “All the good work we’ve done over the last 15 years in aligning people with the company will keep them with us.”
Or
“We’ll do more of what we’ve been doing. It will get us through this.”
This is like starting with 100% market share and being confronted with a predatory competitor who has guaranteed access to the consumer to make a sales pitch. Some people will buy. How many depends on how innovative you are in keeping them with you. Appealing to loyalty is not a good strategy.
If ‘HR Practice in Difficult Times’ is really about implementing organisational change to cope with reduced circumstances, then that might be worth a few observations.
It’s possible the people who get most excited about ‘organisational change’ are line managers who have had a ‘Road to Damascus’ conversion about the efficacy of treating people well; and now want to share their insights with the rest of the company.

The ‘Damascans’ will often find Human Resources people in their company – and certainly external consultants – who will cobble together a ‘Program for Organisational Change’. A few things will distinguish the ‘Program’ (which may have the word ‘cultural’ somewhere in the heading):

- direct costs are expensive
- indirect costs are expensive
- the word ‘team’ will be used often
- values and behaviours workshops figure prominently
- the leadership group must define its ‘mission’ or ‘vision’ or ‘strategy’ and ‘involve stakeholders’. First the words ‘mission, vision’ etc must be defined.
- the leadership must ‘walk the talk’
- any employee who is openly cynical will ‘not be on board’
- any employee who is wary will have ‘time to adapt’
- all ambitious managers will follow the lead of the most senior person. If the CEO is ‘on board’, there will be widespread take-up for as long as the CEO’s enthusiasm lasts.

Some of these programs are very interesting. They have an enduring and profound effect on some participants and are helpful for most people. However, they are generally a waste of money as far as the business is concerned, because the business environment in which the newly enlightened person works does not change. They would be of far greater value if as a precursor to their deployment the companies cleaned up the obvious and simple deficiencies in their business.

Assumption # 1
The best reason for wanting to change a business is that it is not delivering as a business – so the change has to do with improving its business performance.
Assumption # 2
All changes come from management. It is easy for managers to make improvements to business processes – but first they have to see the opportunities.
Assumption # 3
No decent manager is threatened by detailed examination of the basics of the business. i.e. all the detail that makes up the P & L of the business.  People like to talk about their business.

To introduce organisational change that is enduring, start with the financial systems.
That is by no means an original idea or method – but it’s surprising how few companies use it with any discipline. It does not mean that a new and expensive financial reporting system should be introduced.

Call it “Follow the Money”  - and it just means that all the numbers in the business should be recorded the same way, reported the same way and reported at the same time. Not a particularly enlightening observation and most companies would think that is what is occurring – and it may be, under the aegis of the Finance department. But in good times or difficult times, the process should be managed by the most senior operator.

If commonality does not exist, there should be a three-month directed exercise to install it, regardless of whatever system or systems may presently prevail. By the fourth month, reports from all parts of the business should be readily examined and compared. That examination and comparison will highlight the opportunities.
Those opportunities can then be categorised – many will come under Capex – and some will inevitably have consequences for organisational design:

- structure
- headcount
- employment regulation
- location

Other organisational opportunities will emerge, particularly in Safety and Training.
The process for establishing commonality in financial reporting systems involves face-to-face management review. That is the key. The head of the business or division sits at the same table as the people providing the information – it is presented in synopsis format to that person and the presenters are quizzed on ‘why’ the numbers are as they are and what are the improvement or remedial actions for the next month. The senior Finance and HR people should also attend.

This naturally leads to an examination or discussion about the various functions or departments that make up the ‘numbers’ in the presented material. None of this is original and plenty of companies have done this and probably still do – but it is a discipline which generally slips in good times. In no time, control and focus is lost; money is spent on a thousand different fronts; it is difficult to pinpoint accountability and poor performance has been obfuscated by high profits and high cash-flow. How much better could results have been if appropriate rigour had been introduced or maintained? 

By the third month – i.e. by the third management review – presenters are very alert to the scope and detail required in their presentations. Presenters are also focused directly via this process on what is considered important in the business.
Management Reviews have moved seamlessly past an examination of the financials – which is simply a consolidation of after the event data – to an examination of how the particular business is conducted. This has been accomplished without a ‘Program for Change’ and the usual resistance that accompanies all programs.

At this point a number of other organisational issues are easily observed:
- which managers (the presenters) are on top of the numbers in their business
- which managers give airplay to their subordinates and encourage talent
- which managers readily and rapidly implement plans to improve their businesses or get them back on track
- which managers run fiefdoms and which draw on the help available from the wider organisation
- which managers have the verve and the gravitas to progress
- which managers will profit by some management development

Following from the establishment of common and consistent practices in financial reporting (the numbers) and the discipline of monthly management reviews, Human Resources systems should be examined for consistency. Of course, this could be a concurrent activity. The ‘corporate’ HR function should be accountable for the company wide application of common systems, such as job sizing, salary administration, performance reviews, development reviews. Management development should similarly be a corporately held activity. At some point, common skills training programs should be corporately held e.g. statistical process control, negotiation skills, presentation skills etc. Not simply because of the cost savings, but to establish common language and create opportunities for people from various parts of the company to meet.

HR Practice in Difficult Times?

Nothing but opportunity – so many things to be done, none of it new.
All that is needed is a clear assessment, a dispassionate plan, an empathetic style, well behaving managers with good values, no moaning – it is what it is, and some reflection time to read ‘Desiderata’.

All in all – a pretty good time to be in HR. If your company can afford to keep you.

Presentation by Jeff Knuckey
Anvil Mining