Labour flexibility is a value, and it has a price (scarcity principle)

Labour flexibility is a value, and it has a price (scarcity principle)

Work review eyes pay premium for zero-hours contracts

Stopping ‘lazy’ bosses shifting risk to employees a priority

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Requiring companies to pay a premium wage on zero-hours contracts could discourage “lazy employers” from pushing risk on to workers, according to the man reviewing employment rights for the government.

“The problem in the labour market is not security of work, it’s security of income,” Mr Taylor, Tony Blair’s former policy chief, said in an interview.

Mr Taylor was appointed by Theresa May in October to lead an independent review of whether “employment regulation and practices are keeping pace with the changing world of work”.

Employment in Britain is at a record high, but the rise of self-employment; of the “gig economy” of short-term, freelance work; and of zero-hours contracts has sparked debate about whether the changes to the way people work bring welcome flexibility or worrying insecurity.

Mr Taylor told the FT he wanted to discourage employers from forcing workers to accept new burdens that were once shouldered by businesses.

Forcing companies to pay a top-up on the minimum wage for hours not guaranteed in advance is one idea he is considering to redress employers’ demands for “one-sided flexibility” from workers. It would not apply to workers who choose their hours.

According to official data, there were 905,000 people on zero-hours contracts in the final quarter of 2016, 101,000 more than the previous year. Some of these workers are free to turn down the work offered by employers, but Mr Taylor has heard evidence that others do not have that flexibility.

“We’ve been hearing today about people in the social care sector who are told ‘be ready to leave the house at 7 in the morning’, then a phone call [comes to say] ‘no we haven’t any work for you today’,” he said.
He believes that if employers were made to pay a higher rate for every “non-guaranteed” hour the person had to work, they would be incentivised to guarantee more hours in advance.

“I think we can encourage employers to be a bit less lazy about transferring risk, even if it means [an employer] offers 15 hours a week rather than one hour, at least that’s 15 hours that I can know I’m going to be able to pay my mortgage.”

However, he stressed the idea was only a possibility and was still “up for debate”. “The drawback is we don’t want a proliferation of different minimum wages, because there’s something good about the fact the minimum wage is simple and everyone understands it.” It might also be difficult to distinguish between two-sided and one-sided flexibility and to define how much notice must be given.

The CBI employer’s group, said it was “vital” that the success of the minimum wage was not “put at risk by complexity or the unintended consequences . . . [of] trying to reshape employment contracts using a wage rate”.
Mr Taylor and the three members of his expert panel are halfway through a series of regional visits across the UK, where they are meeting employers, unions, experts and workers in town-hall style events. They will publish their recommendations in mid-June. The government will then respond.

Not long after Matthew Taylor was appointed by the government to review the changes to the UK labour market, a barrister sent him a copy of a recent speech about UK employment law. It was 64 pages long. “Dear Matthew,” the barrister wrote, “here’s my speech — I’m afraid it’s a rather superficial account.”

Mr Taylor won a ripple of sympathetic laughter in Cardiff this week when he told this anecdote to a room of academics, trade unionists, employers and members of the public.
Over the course of the next two hours, their debate gave a taste of the wide-ranging and complex issues on Mr Taylor’s plate: a supply teacher complained she was earning half what she should be; a Deliveroo employee said couriers did not want to lose their flexibility; a trade unionist had a spat with the leader of a recruitment trade body over a wrinkle in employment law relating to agency workers’ pay, which is known as the “Swedish derogation”.

Mr Taylor’s ideas for policy recommendations are similarly wide-ranging. They vary in scope from employability skills to zero-hours contracts to longer-term recommendations about the direction of tax and benefit policies.

The UK’s growing “gig economy” is one of the thorniest issues on his agenda. Legal battles have broken out across the UK over whether workers for companies like Uber and Deliveroo are truly “self-employed”. So far, these questions are being settled very slowly by employment tribunals.

Uber lost a test case last year after judges ruled the company had misclassified two drivers as “self-employed” so owed them the minimum wage and holiday pay. However, Uber continues to treat drivers as self-employed while the company appeals against the decision.

If people think good work is impossible, or they think it’s incompatible with business competitiveness, then we’re in trouble
Matthew Taylor
“We all agree in the review, the law should do more of the work and the courts should do less of the work,” Mr Taylor said. He wants to “define in primary legislation” the principles that distinguish “self-employment” status from “worker” status — people in the latter group have more rights than the self-employed but fewer rights than full “employees”.

He is also considering the idea of reversing the burden of proof so that individual workers do not have to go to court to settle disputes over their employment status.

Instead they could ask an intermediary organisation such as Acas for a judgment. The onus would then be on the employer to challenge that decision in the courts.

Mr Taylor and his team have been unusually open about their ideas, even when they are only on the drawing board. “There’s virtually nothing I’ll say to you that I didn’t say last time I met my Number 10 minders,” he said. “[It] means we may float ideas that don’t end up in the report, but I think that’s a price worth paying for openness.”

Mr Taylor, now the chief executive of the RSA — the Royal Society for the encouragement of Arts, Manufactures and Commerce — is a savvy political operator who led the Number 10 policy unit for several years under Mr Blair. He has seen independent reviews fail in the past, their policy recommendations left to languish on dusty shelves. As a result, he wants to build support for the Taylor Review before it is published. Next month, he will launch a national campaign to encourage people to discuss the notion “good work” and what it means to them.

“If people think good work is impossible, or they think it’s incompatible with business competitiveness, then we’re in trouble,” he said. “So I want to have that conversation and win that argument.”

https://www.ft.com/content/84abe8ea-20f7-11e7-a454-ab04428977f9

 

PE firms way would benefit multibusiness enterprise

PE firms way would benefit multibusiness enterprise

Successful PE firms model practices that would benefit any multibusiness enterprise—as well as some that break the public-company mold.

In many respects, successful private-equity (PE) firms seem to defy economic logic. They acquire most of their businesses through some form of auction, where competitive bidding drives prices above what other potential buyers are willing to pay. Because they manage portfolios of discrete businesses, their acquisitions rarely reap substantial synergies. Their ability to survive, let alone thrive, depends on sustaining returns that attract limited partners to reinvest every few years. And unlike traditionally organized public companies, PE firms can’t underperform for very long, because their track records directly affect their ability to tap into capital markets.

Yet a number of prominent private-equity firms have succeeded for decades, earning healthy returns for investors and founders alike. So it’s not surprising that some public-company managers would look in that direction for new models to address their own myriad challenges—around aspects of governance, operations, and active ownership, among other things.1The way private-equity firms manage strategic planning, for example, offers lessons that might help public companies adapt to an environment marked by heightened shareholder pressure for performance and a fast-paced business cycle.

In our experience, successful private-equity firms excel at some practices that public companies should—but often don’t. These include detaching themselves from the tyranny of quarterly-earnings guidance, deploying highly disciplined business-unit strategies, and developing a competitive advantage in M&A. We believe many public companies would benefit from applying a private equity–like approach more aggressively in these areas, even by going to lengths that might seem unorthodox.

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Don’t be tyrannized by the short term

Private equity’s most powerful advantage may simply be that it is private. These firms can restructure and invest for the future while avoiding the glare of quarterly analysts’ calls and the business media. They can also communicate more intimately with a much smaller investment community, so they don’t broadcast their strategies and growth advantages to competitors. Our research shows that public-company managers can also gain shareholder support for long-term programs by communicating convincingly and making the right progress metrics clear to the investment community.

In the first 100 days after an acquisition, some successful PE firms explicitly collaborate with the new portfolio company during an intensive planning process. Over this period, management and the board develop a five- to seven-year plan, agreeing on new markets, channels, or products; assessing the capital needed to execute these initiatives; and developing an explicit set of new metrics and corresponding management incentives. In addition, they identify tactical near-term moves to build positive momentum from the deal’s most readily apparent benefits.

Such efforts require a highly disciplined, rigorous emphasis on metrics that reflect longer-term value, like cash flow, rather than short-term ones, like earnings per share (EPS). Many private-equity firms separate the financing of a business from its operating performance, which they get management teams to focus on by using cash flow–based measures, such as earnings before interest, taxes, depreciation, and amortization (EBITDA) and free cash flow. EPS reflects nonoperating factors (such as interest and tax expenses) that rely on a deal’s structure, but EBITDA depends more on operating performance. Free cash flow also takes into account the capital expenditures and additional working capital required to generate profits; EPS does not.

During the 100-day planning process, private-equity firms are more active than public companies in considering the furthest horizons of strategic planning. Public companies often focus on nearer-term objectives, including existing baseline products and emerging product lines, though longer-term bets can help to create significant longer-term value. Typically, private-equity firms more actively identify and emphasize strategic planning’s third horizon—including new markets and products—and diligently make tactical bets on it. For example, when PE firm Clayton Dubilier & Rice (CD&R) acquired PharMEDium for $900 million, in 2014, it hadn’t previously invested in outpatient care. But managers identified this as a major growth opportunity and made a calculated bet that paid off handsomely. CD&R ultimately sold the business for $2.6 billion.

Public companies could emulate much of this. Quarterly earnings can’t be ignored, but long-term shareholder value depends heavily on the generation of free cash and on the third horizon of future growth trajectories. Public companies should also explore the intensive 100-day planning process PE firms put in place after acquisitions, whether every other year or after the transition to a new leadership team.

Create disciplined business-unit strategies

A multibusiness company is the sum of its parts: if strategies for the underlying units aren’t focused and robust, neither will the overall picture. Success requires picking winners and backing them fully—something that often eludes public companies looking for the next new thing. Indeed, most of them pass only three out of ten tests of business-unit strategy.2Although financial theory suggests that capital should always be available for attractive investments, public companies that are constrained, for example, by their EPS commitments to Wall Street or by planned dividends often face intense competition for internal resources. Too often, they spread those resources thinly across business units. The right strategy means little if it isn’t fully resourced.

Private-equity firms don’t plan strategy around business units, but their investment theses for portfolio companies amount to the same thing. They’re a plan for investing across a portfolio of businesses, basing the allocation of capital on ROIC relative to risk, and explicit plans for creating incremental value in each business. PE firms do focus less than public ones on the strategic fit of companies in their portfolios—a tech company in a portfolio of heavy-industry businesses wouldn’t be a concern because they’re managed separately. But the portfolio-management objectives and disciplines ought to be similar. Both public companies and PE firms should evaluate a similar set of expansion options to assess market context, potential returns, and potential risks.

PE firms develop, monitor, and act upon performance metrics built around an investment thesis. That’s in sharp contrast with the one-size-fits-all metrics public companies often use to evaluate diverse business units—an approach that overlooks differences among them resulting from their position in the investment cycle, their prospective roles in the overall portfolio, and the different market and competitive contexts in which they operate. Although tailoring metrics to reflect these differences is hard work, it gives corporate management a much clearer picture of each unit’s progress.

Public companies could go further. Unlike PE firms, for example, they traditionally manage the balance sheets of a business unit against the needs of the enterprise as a whole. But should they always do so? Instead of divesting a slow-growing but cash-generating legacy business unit, should they have it issue its own nonrecourse debt? This would save the tax and transaction costs of divestiture, and potentially preserve additional upside. Would it make sense to bring outside capital into a high-risk emerging business unit—as Google X (now known as X) did for some of its nascent healthcare ventures? This approach would help investors to see the long-term value of such units, which would be more directly exposed to the discipline of the capital markets.

In addition, public companies could emulate the governance of private-equity firms at the business-unit level, where each portfolio company has its own board of directors. These boards are generally controlled at the firm level, but they are often supplemented by knowledgeable and senior outsiders with a meaningful equity stake. Since board activities focus on only one business unit, they can effectively surface, grasp, and debate the critical strategic, organizational, and operational issues it faces. While creating true governance boards for business units isn’t a realistic option for a public company, nothing prevents it from appointing advisory boards, with incentives based on the creation of value at the specific business units they oversee. In fact, freedom from formal governance responsibilities may make such boards more effective, allowing them to spend significant amounts of time on strategy and on developing management.

Finally, public companies could do more to compensate business-unit managers based on their own results. Compensation for private-equity fund managers typically reflects the results of the fund as a whole, but the pay of management teams at portfolio companies strictly reflects their own company’s value creation. This means that portfolio company executives in a lagging business can’t hope to be carried along by strong results at the fund level. It also means that executives in high-performing portfolio companies won’t be affected by the poor performance of entities over which they have no influence. This is a powerful motivator in both directions.

Could it make sense, for example, for multibusiness public companies to link incentive compensation for business-unit managers not to traditional stock options but rather to “phantom” stocks3that reflect changes in the intrinsic value of their business units? That would be counterproductive where businesses are highly interdependent, but in many cases at least some parts of a company operate more independently. And such an approach could generate the kind of entrepreneurial focus on value that private-equity firms get from the management teams of their portfolio companies. In the 1980s, Genzyme, for example, pioneered many tracking stocks for specific business units, and John Malone used them recently for those of conglomerate Liberty Media.

Develop M&A capabilities as a competitive advantage

Among public, nonbanking companies, those that routinely acquire and integrate clearly outperform their peers.4That fact should make unearthing, closing, and extracting value from attractive acquisitions a functional skill—like the effectiveness of the sales force, manufacturing, or R&D. Many public companies don’t treat it that way, but the best private-equity firms do, building and institutionalizing M&A skills as a competitive advantage.

Public companies that do behave like successful PE firms engage in M&A around a handful of explicit themes, supported by both organic and acquired assets to meet specific objectives. Achieving this competitive advantage calls for proactively identifying attractive strategic targets, often outside banker-led deal processes. It calls for managing a reputation as a bold, focused acquirer that can offer real mentorship and distinctive capabilities. And it calls for effective commercial and financial diligence based on the detailed information available to acquirers after signing letters of intent. Other requirements include reassessing synergy targets, adjusting them as appropriate to provide a margin of safety, and being highly disciplined about the price paid for acquisitions, to ensure accretion.5Most public companies seek to develop these skills, but many don’t dedicate enough time or resources.

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/what-private-equity-strategy-planners-can-teach-public-companies?cid=other-eml-alt-mip-mck-oth-1610