SOUTHERN DISCOMFORT

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18 OPINION TUESDAY 9 AUGUST 2016 CITYAM.COM FORUM EDITED BY TOM WELSH How going public changes the role of the chief executive forever Bernard Liautaud, managing partner of Balderton Capital and the first ever European entrepreneur to take a company public on Nasdaq, lifts the lid on the life of a chief executive of a public company in an open letter to Mike Tuchen, the chief executive of software company Talend, which listed on Nasdaq at the end of last month. Hi Mike, Congratulations on a great stock market debut and for all you have done for Talend so far. As I’m sure you know by now, your job as a chief executive has changed forever. As you prepare for this new chapter, I thought I would share a few things I’ve learned. THAT WONDERFUL (AWFUL) THING CALLED THE STOCK PRICE It is mesmerising to see your share price on the ticker for the first time, and it is tempting to monitor it constantly. But the novelty wears off, especially when people start to use the constantly fluctuating number as a yardstick for your own performance. Your team needs to know that it is an indicator of company performance over the long term, not a day-to-day barometer. Your share price can be blown around in the breeze by market fluctuations, economic outlook, political instability, currency movements, and even your rivals’ results. Make it clear to your team that you will stay focused on the business regardless of stock fluctuations. Perform well and the stock price will eventually reflect your success. PUBLIC MEANS PUBLIC Every quarter you will release earnings to Wall Street. Everything that SPECULATION is building over who will replace Raghuram Rajan, the much-admired governor of India’s central bank, amid growing expectations that an announcement will be made soon. Rajan, one of India’s key reform figures, is stepping down in September. His three-year term wasn’t extended despite his important role in helping restore investors’ faith in the way the economy is run. Inflation has fallen under his watch, as have interest rates. Foreign exchange reserves of some $362bn are near record levels. Problem loans in the banking system are finally being tackled. The country has been one of the greatest beneficiaries of the windfall gains from cheaper oil, but government finances are healthier too. The days when India was derided as a “Fragile Five” economy seem long ago, and the country is now feted as one of the few shining stars within the emerging markets constellation. Rajan represents that rarest of things in emerging markets: a public servant whose competence is admired around was once a private conversation will become a detailed press release and a two-hour phone call with well-prepared analysts. The transcript of this call will be available to anyone who wants it, and even your tone of voice will be analysed. Private investors are used to results that are “not quite on budget”. Public investors, in contrast, have little tolerance for even a small earnings-pershare miss. Poor results, or even good results with a lowered guidance, will send the stock tumbling. It is often said that it takes six good quarters to recover fully from a bad one. Forecasting is one of the hardest things to master. You have to issue guidance but also watch the “consensus”. If your guidance is too low, the analysts’ consensus will be higher. Fail to reach the consensus in the next quarter and you may be punished, even if you have beaten your forecast. YOUR SHAREHOLDERS AND BOARD MEMBERS WILL NO LONGER BE ONE AND THE SAME Many private chief executives grow close to their investors, who often become mentors. However, over the next few years most of us will make way for independent board members. Take the time to choose an experienced board with different expertise and backgrounds, who will challenge and support you equally. Perhaps most importantly, pick people who have the time to be engaged. There is little point in having a brilliantly qualified board that you never speak to. You must also take care of your public shareholders. They have entrusted you with close to $100m. Building strong relationships with them, and communicating openly and regularly, the world; whose private affairs are untainted; someone who speaks his mind and is free from inappropriate political influence. However, he also alienated some in the ruling Bharatiya Janata Party by being so outspoken and because of his refusal to cut interest rates at a faster pace – a move that would score points with voters but risks conceding ground in the fight against inflation. One serious constraint to reforms has been the inability of the state-controlled banks, saddled with bad loans, to support investment. Rajan forced the country’s lenders to conduct asset quality reviews as the first step towards identifying and dealing with these loans – a long and painful process that is unpopular with some of the country’s most powerful businessmen. A credible successor will ensure that, when the going gets tough, the task of cleaning up bank balance sheets isn’t quietly swept under the carpet. While the markets may welcome the prospect of more central bank stimulus – the stock market has actually strengthened since Rajan’s departure Bernard Liautaud Becoming a public chief executive comes, of course, with great responsibilities, but it is the most thrilling adventure a person can have will help to gain their trust. The grilling questions of research analysts and shareholder technical teams can offer great insight on what really matters to your business, and therefore to your shareholders. YOUR FIRST CLASS MANAGEMENT TEAM As the chief executive, you will manage less and lead more. Part of your role has been, and continues to be, fulfilling that age-old piece of advice: surround yourself with people better than you. A strong management team is now more important than ever. Creating and leading a highly functional team is the most rewarding experience a chief executive can have. was announced on 18 June – excessive easing will undermine the monetary policy discipline that has been a hallmark of his tenure. What India also doesn’t need is a compliant governor who will only weaken the central bank’s independence. Rajan’s successor needs to have the courage to eschew the quick-fixes beloved of politicians and champion lasting solutions. That said, the wheels of reform are already in motion. Many of Rajan’s most important achievements – a credible Monetary Policy Committee, inflation-targeting and the overhaul of bankruptcy rules – are backed by legislation and have Modi’s support. This will help ensure policy continuity. Those who have been linked to the Building complete trust, working in full cooperation, and being all aligned behind clear and coherent objectives feels like magic. Don’t take that precious equilibrium for granted, as it is your biggest asset. COMPANY CULTURE DOES NOT HAVE TO CHANGE When you employ 500 people, employees fondly recall a time when there were only 100, when everyone knew each other and when decisions could be made in minutes. When you have 2,000 employees, people will reminisce about how good and cosy things were when you were “only” 500. The IPO usually signals a new period of growth, and a strong chief executive can ensure that the company remains nimble, by keeping everyone informed and empowered. But this will require effort, focus, and time on your part. Communicate even more, ensure the organisation’s structure doesn’t hinder staff, and build company traditions and habits that unite your team. ENJOY IT Becoming a public chief executive comes, of course, with great responsibilities, but it is the most thrilling adventure a person can have. You have set the company on a terrific path. You have given it financial power and access to markets. You have given it a visibility that it never enjoyed before. You have given it the opportunity to acquire businesses if you so wished. Enjoy every moment. Congratulations for making your company part of this exclusive club, and good luck for the many years ahead. India risks squandering its hard-won gains if it abandons monetary policy discipline Adrian Lim job include: Reserve Bank of India deputy governor Urjit Patel; former deputy governors Rakesh Mohan and Subir Gokarn; the government’s chief economic adviser Arvind Subramanian; economic affairs secretary Shaktikanta Das; vice chairman of the NITI Aayog, an economic think tank, Arvind Panagariya; and State Bank of India chair Arundhati Bhattacharya. Whoever is selected, however, will face a potential early test amid growing doubts about the global recovery. While India’s capital markets are relatively insulated, the country relies on foreign investment and isn’t immune from the forces constraining global growth. Rajan, a former IMF high-flier, grasped this instinctively. His successor may be more of a New Delhi insider, but he or she must strive to be outward-looking. Otherwise the country risks squandering its hard-won gains. £ Adrian Lim is senior investment manager at Aberdeen Asset Management. DEBATE Q: As May pushes cash payouts for households, would sharing the proceeds of shale turbocharge the dash for gas? Michael Hulme YES Sharing the proceeds of shale with individual households as well as local councils will help kick-start the process, yes. The driver of shale development in the US was the existence of mineral rights – simply put, the ownership of what lies under the ground by the owner of the property or land. That doesn’t exist in the UK, as the Exchequer owns the rights to oil and gas and other minerals below ground. However, if royalties were payable which provided a meaningful share to the landowner, the council, and the exchequer, then that would help bring all parties together through mutual financial interest. In the US, royalties for landowners often represent around 15 per cent or more of total revenues from the sale of gas, with local taxes often adding a further 7-8 per cent to that amount. Royalties or stakeholder payments of as little as 5-10 per cent in the UK could help provide the right financial incentives that localities need to cut through the red tape and get fracking! £ Michael Hulme is head of commodities at Carmignac. Jonathan Robinson NO This policy change is not enough to kickstart a shale gas boom. Opposition to shale gas in the communities where it has been proposed runs deep, and many are likely to perceive this as a bribe to buy their support. There are several practical challenges. Because payments are made on production royalties, if gas flows are weak, residents would get a much lower payment than expected. Even if flow rates are high, it could take five years for volume production to be reached, so residents would be committing themselves to a property for at least five years, a potential challenge in the mobile UK property market. What of the impact on house prices? Certainly, in the south east of England, a £10,000 payment is nothing if you feel the value of your house could decline by much more. Finally, this could be very divisive for local communities, pitting against each other those who want (or need) the money and those who are strongly opposed. £ Jonathan Robinson is principal consultant at Frost & Sullivan.
CITYAM.COM TUESDAY 9 AUGUST 2016 OPINION 19 WE WANT TO HEAR YOUR VIEWS › E:theforum@cityam.com COMMENT AT:cityam.com/forum :@cityam LETTERS TO THE EDITOR Little sympathy for savers [Re: Letters, yesterday] Mark Taylor writes about long-suffering savers. In a free market, prices are set by supply and demand. Today, across the globe, there is too much savings: consumers are insecure and savings rates far higher than pre-2008; companies are hoarding cash despite bumper profits; governments have pursued gratuitous austerity. Central banks do not manipulate rates, but react to the reality: if everyone wants something – in this case a safe asset – its cost will rise. Savers have themselves to blame in part for their predicament, though politicians, policymakers, regulators, and industry leaders that have not produced growth or inflation are more culpable. David Nowakowski Over to Hammond [Re: Will the Bank succeed in stimulating the economy? Friday] Can I add my wholehearted support to both Dean Turner and Andrew Sentance. The Bank of England had to do what it did, but the base rate cut is symbolic only. And while many of us may like more QE because our house prices will go up a bit, its impact on the real economy will be diffuse and limited. We’ve seen many years now of low growth despite monetary policy being as loose as the lower bound will allow. What we need now is a substantial fiscal stimulus from government, borrowing at current historically low rates to renew our infrastructure. Now is the time for decisive action. Peter Hemington, partner, BDO BEST OF TWITTER Correct me if I’m wrong, but are Labour taking Labour to court to stop Labour letting Labour members from voting in the Labour leadership vote? @MarcherLord1 I see people actually think Corbyn can win a general election. Wowsers. Their come down will be worse than when I came back from Ibiza in 07. @make_trouble Sales of top end (£2m+) London homes have plummeted by 62 per cent in Q2 says latest Strutt and Parker research. @HenryPryor The UK 10 year gilt yield drops to a record low of 0.6 per cent as the Bank of England recommences its QE programme. @notayesmansecon YouGov: Do you think it was right or wrong for the UK to leave the EU? Right: 46 per cent; Wrong: 42 per cent; Don’t Know: 12 per cent. @minefornothing Why do politicians think they would be better at planning migration than anything else? ALARGE number of MPs seem to believe that net inflows of 330,000 people per year into Britain are “too high”. What, then, is the optimal annual number of net migrants? Up until recently, the Conservatives said “tens of thousands” should be the aim. What’s not entirely clear is why they felt they had the knowledge to centrally plan for the right level of people Britain should admit any more than the right number of cars or bottles of wine we should import. For just as with trade, behind the aggregate migration statistics lie the very personal decisions and actions of hundreds of thousands of individuals, deciding to relocate for employment or for love or for a multitude of other reasons. These decisions can be shaped at any given time by the macroeconomic climate here and abroad, individual circumstances, firms’ desire for certain workers, and “push” and “pull” factors related to policy. Trying to cap migration given the changing scene and the unknown preferences of individuals and firms can therefore be extremely damaging. Indeed, the cost of immigration quotas can be seen with a simple example. Suppose an entrepreneur wanted to come to the UK and had the potential to build a business worth billions. Ludicrously, if he was number 100,000 that year, he’d be kept out. Of course, given free movement from the rest of the EU, immigration cannot currently be “capped” anyway, and trying to cap net migration with any degree of precision without also restricting people leaving the country is Ryan Bourne simply impossible. So for economic and practical reasons, it would be better if the government simply abandoned a quota or number target altogether. But in the post-Brexit world, and if we were to leave the Single Market, it seems likely that we will see a whole reset in immigration policy. In formulating a new framework, two economic lessons should be borne in mind. First, all migration controls (just like controls on trade) have economic costs. Second, the role of government should be to set the rules and conditions to allow free people to make migration decisions, rather than trying to set the outcome or quantity of those decisions with number targets. Ideally, this would mean lowering barriers to migration as broadly as possible but making the UK’s welfare system more contributory to avoid any welfare draw factors. It would also mean more flexible planning laws and markets in public services, to allow the supply of these to adjust to changing demand as the population fluctuates. If neither of these were possible directly, a migrant payment could be made to cover a number of years of public service provision or to be allocated to development funds. But many people seem to want the role of government in setting the rules to be much more extensive. An idea popular among many Brexiteers is an Australian-style points-based system, where a government bureaucracy lists a whole range of criterion, including on skills, that migrants must meet before being allowed entry to the UK. Yet just as with quotas, this assumes a level of foresight in economic planning that governments are simply incapable of. How on earth is a government department supposed to assess what skills businesses and the broader economy require at any given time? How can a “system” react to the constant changes in demand the economy faces? It requires knowledge that is inherently decentralised, and ignores the possibility for latent demand for goods and services, and hence skills, which may not even exist yet. The reality would be a policy biased towards those who meet certain skills criteria today, ignoring the potential for many low-skilled migrants to better themselves. After all, most skills are developed “on the job” rather than being acquired in established vocational training or degrees. These days, most people’s careers do not entail 40 years of working in a particular field. Sadly, even many politicians who understand the benefits of markets and free decisions in other areas of life seem to have a remarkable faith in the planner when it comes to allowing the “right people” in. It would be good to know where this faith comes from. £ Ryan Bourne is head of public policy at the Institute of Economic Affairs. 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Visit CityAM.com/awards-nominate before 12 August 2016 to submit your nominations. THE CATEGORIES PERSONALITY OF THE YEAR £ BUSINESS OF THE YEAR £ BANK OF THE YEAR £ INSURANCE COMPANY OF THE YEAR £ LAW FIRM OF THE YEAR £ ACCOUNTANCY FIRM OF THE YEAR £ FINTECH COMPANY OF THE YEAR £ INNOVATIVE COMPANY OF THE YEAR £ DEALMAKER OF THE YEAR £ INVESTOR OF THE YEAR £ ANALYST OF THE YEAR £ ENTREPRENEUR OF THE YEAR
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SOUTHERN DISCOMFORT

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