Should we kill off unproductive companies?

The out-of-business business.

The out-of-business business has done a roaring trade this month, as a walk down any high street will testify.  But the staff of one closed store using their empty shop window to advertise themselves as available for work was a heartbreakingly public illustration of what each redundancy actually represents. Stories like that one have been painful to read, but it was both right and necessary that the media (including this newspaper) made space for the victims of these events.

Amid the concern for the newly-jobless, however, has come new talk around an old idea: the notion that some insolvencies can actually promote recovery in the economy. The theory is that labour and capital can be released from fundamentally unproductive companies, to re-enter the system in some more productive context.

For that to hold true in practice, however, the conditions must be in place for capital and labour to be reabsorbed into the economy. That means strong growth – assets find a market, staff find new jobs, creditors can offset loss. But an economy which is currently only adding new jobs at the rate of a few thousand a month will struggle to place the newly-redundant back into work. Therefore, one must sound a note of caution before we decide that unproductive companies should all be killed off.  If the current rash of large-scale insolvencies was indeed a side-effect of the recovery, there would be no cause to worry, but that is clearly not the case.  The economy is simply not adding enough jobs to re-employ those left without work.

By the time a business enters administration, it is generally beyond all help, but the end should not come as a surprise to those in charge. One reason that it might, is that the means used to measure productivity within companies are often inadequate, and provide an incomplete picture at best.  It’s fairly easy for the leader of a small business to look around his or her office and, from the ringing of the phone alone, gain a fairly clear grasp of the productivity of their company.  It’s far harder for the management of a retail chain with hundreds of locations and thousands of employees. That’s a major problem because, if business leaders cannot analyse productivity effectively, then many of their decisions will be based on little more than guesswork.

When attempting to arrest a slide in revenue, or a loss of market share, it ought to be relatively simple to identify the points at which productivity and effectiveness can be improved.  These might include things like closer centralised control of planned absences like holidays, to reduce reliance on costly agency staff; another might be better assessment of the peaks and troughs of customer demand.  Indicators like these allow a much clearer insight into whether problems are internal or external, and whether internal reforms, or more radical measures, are required to return the organisation to health. 

Similarly, the measurement (and projection) of customer loyalty is often left to the most basic analysis, while the factors affecting it are multifarious and complex. No business’s cashflow is immune from the impact of customer loyalty, whether positive or negative, and any kind of long-term planning demands some means to accurately predict what will motivate customers to keep spending.  Indeed, research suggests business leaders are not doing enough to impress their customers: less than half of UK consumers say they are satisfied with the service they receive from organisations including retailers, banks and phone companies.

Of course, some firms do fall victim to truly exogenic factors, and not all businesses can succeed, but those are largely the exception rather than the rule.  Bosses should not be spared blame if they do not do all they can to identify and fix inefficiencies within their business or, indeed, if they pretend to be surprised when their creditors finally run out of patience.

One of the most horrid features of the recent series of bankruptcies was the extent to which staff were kept in ignorance of the state of the company.  At the shop mentioned previously, employees only found out that the company had folded when a journalist phoned the store to ask for comment. That’s unforgiveable – when the writing is on the wall, executives should recognise it, and seek to wind up their company in an orderly fashion. 

Equally unforgivable is if they never made an effort to read that writing in the first place. Business leaders carry an inherent responsibility for those that work for them, ensuring that they stay productive and that the business keeps competing. That entails a duty to make mature decisions about the future of the business, and a duty to do so in full possession of the facts.

Claire Richardson is a VP at customer relations consultants Verint.

Closing down. Photograph: Getty Images
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What Brussels can learn from the Italian referendum

Matteo Renzi's proposed reforms would have made it easier for eurosceptic forces within Italy to gain power in upcoming elections in 2018.

The Austrian presidential elections can justifiably be claimed as a victory for supporters of the European Union. But the Italian referendum is not the triumph for euroscepticism some have claimed.

In Austria, the victorious candidate Alexander van der Bellen ruthlessly put the EU centre stage in his campaign. “From the beginning I fought and argued for a pro-European Austria,” he said after a campaign that saw posters warning against “Öxit”.

Austrians have traditionally been eurosceptic, only joining the bloc in 1995, but Brexit changed all that.  Austrian voters saw the instability in the UK and support for EU membership soared. An overwhelming majority now back continued membership.

Van der Bellen’s opponent Norbert Hofer was at an immediate disadvantage. His far right Freedom Party has long pushed for an Öxit referendum.

The Freedom Party has claimed to have undergone a Damascene conversion but voters were not fooled.  They even blamed Nigel Farage for harming their chances with an interview he gave to Fox News claiming that the party would push to leave the EU.

The European Commission, as one would expect, hailed the result. “Europe was central in the campaign that led to the election of a new president and the final result speaks for itself,” chief spokesman Margaritis Schinas said today in Brussels.

“We think the referendum in Italy was about a change to the Italian constitution and not about Europe,” Schinas added.

Brussels has a history of sticking its head in the sand when it gets political results it doesn’t like.

When asked what lessons the Commission could learn from Brexit, Schinas had said the lessons to be learnt were for the government that called the referendum.

But in this case, the commission is right. The EU was a peripheral issue compared to domestic politics in the Italian referendum.

Alberto Alemanno is Jean Monnet Professor of EU Law and an Italian. He said the reforms would have been vital to modernise Italy but rejected any idea it would lead to an Italian Brexit.

“While anti-establishment and eurosceptic actors are likely to emerge emboldened from the vote, interpreting the outcome of the Italian referendum as the next stage of Europe’s populist, anti-establishment movement – as many mainstream journalists have done – is not only factually wrong, but also far-fetched.”

Renzi was very popular in Brussels after coming to power in a palace coup in February 2014. He was a pro-EU reformer, who seemed keen to engage in European politics.

After the Brexit vote, he was photographed with Merkel and Hollande on the Italian island of Ventotene, where a landmark manifesto by the EU’s founding fathers was written.

This staged communion with the past was swiftly forgotten as Renzi indulged in increasingly virulent Brussels-bashing over EU budget flexibility in a bid to shore up his plummeting popularity. 

Commission President Jean-Claude Juncker even publicly reprimanded Renzi for demonising the EU.

Renzi’s vow to resign personalised the referendum. He gave voters a chance to give him a bloody nose when his popularity was at an all-time low.

Some of the reforms he wanted were marked “to be confirmed”.  The referendum question was astonishingly verbose and complex. He was asking for a blank cheque from the voters.

Ironically Renzi’s reforms to the constitution and senate would have made it easier for the eurosceptic Five Star Movement to gain power in upcoming elections in 2018.

For reasons best known to themselves, they campaigned against the changes to their own disadvantage.

Thanks to the reforms, a Five Star government would have found it far easier to push through a “Quitaly” referendum, which now seems very distant.  

As things stand, Five Star has said it would push for an advisory vote on membership of the euro but not necessarily the EU.

The Italian constitution bans the overruling of international treaties by popular vote, so Five Star would need to amend the constitution. That would require a two thirds majority in both houses of parliament and then another referendum on euro membership. Even that could be blocked by one of the country’s supreme courts.

The Italian referendum was closely watched in Brussels. It was hailed as another triumph for euroscepticism by the likes of Farage and Marine Le Pen. But Italians are far more likely to be concerned about the possibility of financial turbulence, which has so far been mildly volatile, than any prospect of leaving the EU in the near future.

James Crisp is the news editor at EurActiv.com.