Entrepreneurial business, start young!

Corporate Social Responsibility – entrepreneurial business, start young!

Paul A. Zaman explores how triple bottom line reporting pays dividends for start-up and small business.

Some may be thinking that CSR reporting is only form multinational corporations and they would be wrong. A study in Canada of ten entrepreneurial businesses whom engaged in pro-active CSR reporting and strategy execution found that all grew strong and established themselves in the community. Start young and grow.

So how does an entrepreneurial company embrace and execute corporate social responsibility. There are two major global initiatives on CSR reporting, also known as triple bottom line reporting. The Global Reporting Initiative (GRI) sponsored by the United Nations and the Institute of Social and Ethical Accountability (AccountAbility) a not for profit institution set up in 1995. The GRI focuses on a process of identifying and reporting upon key relevant CSR issues. The GRI has a scheme for small business called High Five; AccountAbility focuses upon assurance, which means the process of reporting and the audit role. GRI has over 600 users and AccountABility over 300 users. Each is growing fast and is just the tip of the iceberg.  There are many more companies that use the guidelines yet do not formally submit reports back.

Dr. Anwar Ibrahim, the former Deputy Prime Minister of Malaysia was on 30th March 2006 appointed Honorary President of AccountAbility. AccountAbility says that Dr. Anwar is a prominent advocate for democracy, freedom, responsible business and the rule of law.

In my view, GRI has a focus on the financial, management and operational key performance indicators that make it easy for a business person to get great results. Whereas AccountAbility has a focus on auditing the process and dialogue with the stakeholders to verify the voracity of the data.  I like to stay focused upon creating shareholder value, which means the GRI five step process is a great starting point.

STEP 1: Get Board and Senior Management and owner sponsorship.

STEP 2: Using the business vision, objectives, strategies, activities and plan identify the stakeholders and map out the company relevant key interest areas.

STEP 3: Identify from the GRI the relevant type and nature of indicators to report upon that match to the key interest areas. Collect and collate historic data on these areas and candidate indicators. Identify the historic relevant management activities in these areas and determine what enhance and new activities could be done.

STEP 4: Verify data quality, with internal and external stakeholders. Engage in dialogue with key external NGO whom are respected surrogate representative of the external stakeholders. Set targets, management activities and accountabilities for the forward-looking years of the CSR. Write, finalise and distribute the first CSR report.

STEP 5: Collect feedback from the CSR report in areas of improvement in CSR performance. Plan the next steps of the CSR strategy and execution. Get recognition from management, staff, suppliers, and customers for the CSR awareness and commitment.

Developing a corporate sustainability report is like most business wide projects requires the support and commitment of top management and in a small business the entrepreneur owner and founder. Much of the information will already be in the company it just will be in different areas awaiting collation. Companies as small as five employees have created CSR reports.

An initial step is setting the context and significance of CSR reporting for the company. There must be real benefits in reporting such as enhanced reputation. increased profit, improved access to capital, improved access to information, new market opportunities, improved relationships and increased staff motivation. Reviewing CSR reports on other companies available at GRI or via sustainability reports on corporate web sites, in your industry and peers will help. This will help identify what are the major environmental sustainability and integrity issues and the social welfare and human rights issues affecting your industry sector and specific to your company. These are then listed, profiled and ranked for importance.

Like an annual report and financial statement there are a few guiding principles on what to report such as: materiality, comprehensiveness, inclusiveness and transparency. The quality and reliability of reporting is based upon reproducibility and accuracy. The CSR report is intended for senior management to make informed decisions about how to improve the CSR report, the economic benefit, strategy and execution plans. The CSR reporting must therefore also be timely and relevant for management action. Lastly, the process for data gathering should be auditable to demonstrate that the underlying information and report is fair and true.

One of the initial dilemmas is identifying whom your company’s key stakeholders are. Candidates include employees, family, community leaders, owners and equity investors, banks, financial analysts, suppliers, customers, end users, NGOs, labour associations, licensing bodies and environmental inspectors.  Once established map the key CSR issue areas to each stakeholder and rank the level of  stakeholder’s interest.

The next stage is dialogue with a representative set of stakeholders to verify their level of interest and understand their expectations for your business. This could be by a town hall meeting, one on one meeting or even an email questionnaire. With this feedback you can gauge if you are satisfying the key stakeholders interests.

The CSR report areas can now be formulated along three themes. The economic theme impacts typically affects customers, suppliers, employees and owners. The Environmental theme impacts typically on materials, energy, water, pollution, compliance, transportation, and your products and services. The social theme relates to labour practices and conditions, human rights, community at large, product responsibility.

The next step is to start collecting the core performance indicators. Again the GRI, AccountAbility and peer CSR reports will guide you into the selection. It is key to select the core indicators relevant to your business and your CSR areas of interest. Formal sources of information are the financial accounts, utility bills on water, electricity and waste quantity, staff turnover and sick leave.

The focus is on setting CSR objectives, strategies and action for improvement. In doing this like all planning iteration and consultation is required.

To capture the economic benefits the CSR initiative the results need to be published and disseminated. For small business this could be via notice boards, web page, newsletters, meetings, press releases, presentations, industry conferences. The communication method should be matched to the stakeholder groups identified to ensure you get your company’s message out there. Naturally the senior management needs to do a final review before distribution of the CSR report.

What small companies, 5 to 100 employees have done CSR reporting? All types such as advisory services like consulting, training and financial planning; business services like printers and waste management; hospitality, food and beverage outlets. Plus many large multinationals in every sector including Sony, Canon, Microsoft, McDonalds, Telstra, Heineken, Hewlett Packard, Lend Lease, Phillips, TNT, Westpac

Another benefit of the CSR Report is making corporate social initiatives more meaningful. Corporate social initiatives differ from corporate philanthropy in that it is aligned with the company’s vision and the CSR strategic issues. This means your company’s social sponsorship affects the key community stakeholders that your company is involved with and they recognize the power of your intention and commitment.

The CSR Report is a critical window on management’s claim of being socially responsible. It means that corporate sponsorship makes sense to all that witness it and becomes justifiable and sensible to owners and beneficiaries.

Alliances… till death do we part!

Why do businesses enter into alliances? Very simply because a single company does not have the critical scale and set of capabilities. So, when allied with a chosen partner, complimentary capabilities fill the gaps, and supplementary capabilities top up the business to the right critical level. Alliances are useful to any size of business to achieve the critical scale and set of capabilities needed for successful growth and competition.

Alliances usually simply mean a faster way of building capabilities for example building the desired product technology, product portfolio, or building distribution channels to access new geographic or customer segments, rather than via organic company growth. Sometimes alliances are used for joint R&D, where a company and research centre are in active collaboration.

Often alliance formation and success is made an analogy of marriage. First the courting, then the engagement, the wedding and honeymoon period, then the marriage ending in a divorce, or in successful alliances in death do we part?

Large companies understand the need for alliances whereas small companies are often fearful of sharing, or opening themselves to discussion and collaboration. Small companies would do well to remember the proverb, “A wise man surrounds himself with wise men”.

Alliances can encompass any short term or long-term collaborative agreement. Some people include customers, and call them strategic customer partners. Others include suppliers, and call them strategic supplier partners. However, this is not the real meaning of business alliances, but rather the over usage of business jargon such as ‘alliance’ and ‘strategy’ to make a ordinary or even poorly managed business relationship sound more grandiose and important, without actually accomplishing anything more.

The characteristics of a business alliance will have: Contributions from both parties in terms of funding, manpower, management team, financing, physical assets, intellectual property, sales and distribution channel access, and customer base access. The contribution mix and level of importance of each contribution element normally determines the alliance ownership level and the level of management control.

Alliances also usually last for more than one year or simply the duration of a big project. For example, a building developer does not claim his contractors and suppliers to be alliance partners, so why should any one else? By lasting more than one year, the alliance will straddle more than one financial year. Often the two partners will then set up a joint venture company for the alliance. By law in most countries, a company cannot enter into an alliance with a partner or an individual, but rather only another company. However, a partnership or individual can enter into alliances with one another. Therefore, an alliance will either be a co-marketing agreement, co-R&D agreement, pilot or a joint venture company. The crux is that the legal entity that is the joint venture has capabilities, resources and assets transferred into it. This means it has its own P&L and bank account. Therefore for substantial and lasting arrangements over a year, a subsidiary company is usually created, called a joint venture company.

Can a joint venture company exist without being an alliance? No, as the joint venture will have an article of association and board of Directors establishing goals and strategies, as well as the resources to achieve these goals. Therefore, firms often set up joint ventures without really realizing that they are establishing an alliance. The two firms entered into the joint venture to achieve critical scale and size. Each company knows that the joit venture fast tracks this and so they are likely to be working on building their own in-house capability. So at some point in time, a conflict of interest or parallel operations result, meaning the joint venture has fulfilled its purpose and be closed down.

Whereas, if the alliance is forged first then the joint venture, then it tends to be more sophisticated as the parent companies tend to be more sophisticated and understand the need for a long term exit. So, they build this in from the beginning therefore avoiding a value-destroying divorce. This means that there is a Board of Directors of the joint venture company for the alliance, which may have joint or rotating Chairmen, as well as Directors from the two companies. There will also be Senior Operational Managers from both companies.

So what is the difference between a joint venture and an alliance joint venture? The answer is only the intended timeframe for the sunset plan. Any company is set up as an eternal entity by law, including any joint venture. However in a strategic alliance, there is an expected sunset and in a good alliance a written sunset clause. This sets out how the joint venture will be terminated which may mean the dissolution of the company or perhaps the terms on which one equity holder buys out the other equity holder. Usually in an alliance, one partner already knows that after a period of time, when they have achieved the stated goals, they will either exit, or buy the joint venture. Alliances via joint ventures are not usually set up as ongoing joint business.

An alliance therefore needs to have a clear internal communication and conflict resolution process. If this process fails, then the situation is escalated to the joint venture Board with its predetermined policy on how to handle conflict. The final decision being dissolution of the joint venture on predetermined terms and conditions.

When searching for an alliance partner, the simple criteria for success are:
• Similar organization cultures or the creation of a joint venture with a new culture
• A sharing of minds at the Champion, usually CEO level and the forging of alliance goals, purpose and sunset
• Equality of power and capability contribution
• Equality of size: being roughly equal in turnover and headcount rather than a David and Goliath syndrome.
• Minimal hidden agendas
• Track record of successfully operating alliances
• Honesty, integrity and trust
• Alliance sunset clause

Why do alliances fail?
• One of the originating CEO leaves and new CEO does not like the joint venture or perhaps the other CEO
• Parties fail to contribute their agreed capabilities and contributions
• Personality and culture clash
• Lack of a conflict resolution process resulting in eventual explosive eruption
• External product and customer market changes
• Growing Conflict of interest.

Small to medium size businesses can benefit the most from alliances, and yet they often do not even try. At the simplest level, sharing sales and distribution capability means that the customer can benefit from better service and a wider product portfolio. The companies can also minimize advertising and promotion and selling costs to reach the customer segment. Small to medium companies tend to have too much of a survival orientation and cannot risk trusting a third party. Often alliances at the small to medium business level are between family businesses for example the traditional Guanxi of business relationships between trading families, which has been in place for generations. Small to medium businesses also believe that they do not have spare management or operational capability to spin of into a new joint venture, yet they prefer to muddle though with a capability below critical mass of success.

A key component of alliances are the sunset clause when one partner is due to scale down and exit, or perhaps the joint venture is agreed to be dissolved. It is human nature, and so corporate culture, to perhaps cheat when the sunset clause timing is imminent. The honesty, trust and integrity was a firm bond at the beginning and middle, however towards the sunset cracks often appear. In the final sunset stage, it is critical for both companies to have renewed focus on the integrity of the joint venture rather than focusing upon asset and benefit stripping.

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The three-minute elevator chance to fund your idea!

Corporate Governance: the three-minute chance to fund your idea

Innovation needs investment funds. Entrepreneurs need investment funds. Entrepreneurs inside corporations, sometimes called intrepreneurs need investment funds. The process of research, development, product design and finally commericialisation is the end-to-end innovation process. The costs are incurred before the sales revenue is earned. Entrepreneurial spirit is required in all businesses. P.F Drucker thought that innovation and selling where the two critical management processes and capability for survival and growth. So how does an entrepreneur get the investment funds?

The venture capital (VC) approach is the easiest to describe and the principles apply everywhere. A VC wants a single page summary followed by a 5-page business and financial plan. If after they screen this plan they are still interested they will ask for the management team to present themselves and explain the: business model and franchise; management team and track record; and investment opportunity. This presentation needs only the last three minutes as they are assessing the calibre of the management team and understanding the investment opportunity. VCs are usually polite and let the entrepreneurs have 30 minutes and waffle. If the VC is convinced on the calibre of the team, then they may discuss the investment opportunity. VCs contrary to popular belief is in reality an administrative screening process of thousands of candidates ideas to find a few good ideas that have investment merit. The Entrepreneur needs to help the VC get through the process. Get the single page submission correct first time and know what and how to present the key points in three minutes.

In the corporate world the investment approach is similar it is just not such a transparent and simple end-to-end process. Many well-run corporations have a step-by-step investment process. First a good idea is approved by the department head.  Then it is submitted into the investment process, which is often led by the finance group. Different levels and depth of submission are needed at the feasibility stage, production planning stage and the final commercialisation stage by the sales force. Often there is a investment process committee chaired by the finance group, with representatives from corporate strategy to review and approve strategic fit, sales to review and approve fit with customer base; production to review and fit with production capability and so on. However even in a large corporate, a chance meeting with the CEO in the lift, gives the chance to tell the story and jump several steps in the investment process.

Any entrepreneur seeking a discussion with a business investor must describe in less than three minutes, one minute for a journey in a lift, the following: What do you want? What will you offer in return? What is your business model? Why do you have a great franchise? What is your management team track record? When do I get my investment return? Again for simplicity lets demonstrate this by considering getting attention and investment funds from a venture capital or business angel investor.

Entrepreneurs always think they have a great business idea and are baffled why they cannot convince others, apart from family and friends whom are duty bound, to investment in their company. Even more difficult is to get a discussion with a venture capitalist and the mythical business angel. Entrepreneurs need to understand the investor’s viewpoint and get a powerful first conversation.

Venture Capitalists have preferences for types of deal, company size, industry and investment approach. VCs invests a pool of private equity funds. They also often syndicate investments with other VCs to share the risk by taking smaller bites.

A business angel is investing their own private money, sometimes on behalf of a small private partnership or syndicate,in areas they can understand and are interested in.

The first step is to find the investor. The second step is to ask yourself if your idea fits their investment profile and selection criteria. If not move directly to the next, otherwise your time wasting reputation will move ahead of you. VCs follow a standard process starting with the one page initial application format. Get it and follow it. Business Angels tend to be more individualistic.

The best way to get an investor interested is to get referred by a friend whom has a professional connection to them. In California, this traditionally approach centered on a couple of coffee shops in San Jose and Stanford Village California. Often over early morning breakfast after jogging. This is California VC guanxi. Asia entrepreneurs will not have the guanxi so the office front door is the next best option. For an entrepreneur seeking a discussion with an investor be prepared to describe in less three minutes the following areas.

What do you want?

Be clear about how much money and when you want it. Be specific on any other business capabilities like alliance partners and distributors you want. Say if you want hands on involvement by the investor and even help in filling management team gaps.

What will you offer in return?

Be specific in what you will be offering in return such as interest, equity stake, share of franchise fee, consulting fee and royalty.

What is your business?

Describe what your business is about from your perspective. Then describe the business from the customers’ perspective of features, benefits and value adding. Specify how your product serves the customer’s need in terms of: a solution, solution options, and getting into action.

Why do you have a great business model and franchise?

Describe why you have a great business franchise, which means you will be better positioned than current competitors and new entrants. Describe your competitors and their products and their likely reaction to your product.

What is your management team capability and track record?

What is the capability and track record of the entrepreneur and the members of the management team? What gaps are there and how and when will you fill the gaps?

That’s all there is to the pitch.  The investor will be judging the calibre of the team first and the opportunity second. Always be convincing, committed, expectant and passionate.

Remember, the investor does not invest in business plans, ideas or technology they invest in people. Investors, in the west favour entrepreneurs whom have a track record of starting business, even if the businesses failed. In Asia, failure is often seen as losing face. This is a poor perspective to hold as a VC as untried entrepreneurs increases the risk profile of the investment over tired and failed entrepreneurs.  The profile of a good entepreneur is being committed, passionate, flexible, innovative, balancing risks, visionary and having multiple back up plans. The investor will first assess if the entrepreneur and the management teams values in the above and then functional and customer know-how in terms of innovation, financial control, marketing and sales. Do not be surprised if a condition of investment is to strengthen the management team, which will mean sacking a founding buddy sooner or later.

The investor needs to know the investment return, the downside and upside investment risks, and the exit approach. He will be assessing if the business can be sold to a trade investor or listed on a public security exchange. Investors tend not to lend money that is the province of banks, rather provide equity, which they later sell for a capital gain. Often the starting point is a mixture of equity plus debt with the debt later converted into equity or just repaid at the investor’s discretion or subject to pre-determined conditions. So do not be naïve and ask to borrow money and return it with a good interest rate, or ask for equity and suggest you will buy the equity back from your share of the profits. If you do not understand why this is naïve do not even attempt to raise investment funds.

The investor will also be looking to see if the entrepreneur is wedded to the business model. Passion and commitment is wanted but not ownership. After all the investor wants to sell the business to a new owner either a trade investor or the public via a listing. Many new listings of companies have the founder and majority owner stay on for too long and the listed company fails after a few years. The new owners will choose the Board of Directors and streamline the old management team and the founding members. Many great investment deals never get started because the founding entrepreneur and family members are fixated on owning the business. This approach largely precludes venture capitalists and business angels from getting involved. A true entrepreneur is motivated by starting and growing a business, and recognises that they will exit themselves when the business has out grown them. Professor Henry Mintzberg a expert in business organizations and strategy suggests there are six organization states, the first being direct supervision, which is suitable for small business, family run or entrepreneurial. To grow into a large organization different organization states and capabilities, processes, and structures are required. Simply, entrepreneurs have skills, capabilities and passion for creating a business and not for managing a large business.

Good hunting

Paul A Zaman is the CEO of Qualvin Advisory, would you like to know how to create sustainable wealth and become a good corporate citizens  email: pzaman@qualvin.com or visitwww.qualvin.com.

Whistle Blowing!

Corporate Governance – Whistle Blowing

Increasingly there is the need for a Director or employee to blow the whistle on suspected illegal activity and undesired ethical and moral conduct. Whistle blowing protection law exists in many countries. Paul Zaman discusses “ how do people react” and when is whistle blowing a rightful action.

Whistle-blowing – a. a person who informs on someone engaged in an illicit activity (Oxford Dictionary) b. (origins) Sir Robert Peel, “Peelers Or Bobbys” police force in 1829 issued with a truncheon and a whistle to summon help to apprehend a criminal c. (film) The Whistle Blower starring Micheal Cain, 1987.

Good corporate governance involves making great decisions and choices that create long term value for the shareholders, society and the environment and choices that you are pleased to live with. Increasingly this means that each Board of Directors must consult their ethical compass. Likewise, each individual in any choice they make in the life towards achieving their life goals must consult their ethical and moral compass and be able to sleep at nights with that choice.  Sometimes as an individual we become aware of a transgression of law of the land or a major conflict to your ethical and moral compass. This often results in a dilemma – staying true to your compass and what you know is right or compromising.

In business today, as a result of incredible telecommunication advancements such as the Internet, email and mobile phones, very few places of the world are not connected in seconds. This creates great opportunities and challenges. No longer can we hide behind the tyranny of time and space, and hope that out of sight means the issue goes away or that by the time it is known, you will be long gone or at least out of the firing line.

Therefore good governance today is about changing culture to reflect the higher levels of good corporate citizenship that many people across the Earth are expecting.

Whistle blowing has become very popular in recent years with Government agencies providing more than protection with actual payouts in cases of recovered fraud money.   If you wish to be a whistle-blower each time your morality is offended, you will never hold a job or a relationship. The moral and ethic aberration should be huge so know what sort of aberrations are out there so you can calibrate your own ethical and moral compass. Most of our affronts are not extreme and should be dealt with through normal complaint process. The majority of cases are low profile and receive no media attention.

Some people see whistleblowers as martyrs to the cause and others view them as glory seekers.

Although most countries have had laws protecting whistle blowers for many years, these were often a patchwork of law. Perhaps part of a new environmental law protecting employees whom reported environmental pollution breaches to a government agency or a law which enables government officials to report upon senior officials or government department mal-practice. In recent years arising from major whistle blowing events such as Frank Serpico the first USA police officer to testifying against fellow police officers on corruption; Sherron Watkins in Enron; Harry Templeton challenging Robert Maxwell in plundering the company pension fund, Dr Jiang Yanyong forcing Chinese government to reveal details about SARS. Andrew Wilkie, an Australia intelligence officer whom asserted in the run-up to the 2003 Gulf war that their internal reports do not support the claims of weapons of mass destruction. There is now a lot of protection for individuals to take action and be assured that there is some level of protection. The UK’s Public Interest Disclosure Act 1999 is internationally recognized as a benchmark in public interest whistle blowing.

The Board of Directors often creates a whistle blowing policy and passes it to internal audit for the role of running the whistle blower hot-line dealing with concerns.  Mr Idris Jala, the new managing director of Malaysia Airlines (MAS), announced in 2006 that it had drawn up a whistle-blower policy. The policy is aimed at creating a safe way for employees to register knowledge of fraud and other illicit acts. MAS’s policy and the Whistle-Blowers Independent Committee were a first for any Malaysian company.

Internal and external audit of a company’s financial accounts is also a form of legitimized and process driven whistle blowing. The audit purpose is to ensure many things, including integrity of the information and highlighting internal process and control weaknesses for correction before an event occurs. Therefore the need for whistle blowing only occurs when the internal processes and control mechanism do not work or are out of date or the values and culture of the company is out of touch with modern expected values and codes of conduct. Often, the Chairman, CEO or a responsible individual will say, when the disaster surfaces “ why did not anyone tell us”. Use the internal processes and ensure that decision makers are in the know.

Whistle blowing is also suited today to a campaign to change values and beliefs and make a huge difference to the world such as global warming, genetically modified items, renewable energy, abuse of labour in sweat shops, systemic pollution, protecting the ocean and the rainforest.

Whistle blowing dos include:

• keep calm, stand back and review the broader picture, issues and outcome before you act;
• remember you are a witness supporting informed decision making, not a antagonist and not a judge;
• and remember there may be an innocent or good explanation for the event and outcome witnessed;
• use help lines & hot lines, and join a co-ordinated group and campaign.

Whistle blower do nots:

• become a private detective or vigilante;
• use whistle blowing as a way of venting a personal grievance;
• bear in mind that the situation will be uncovered at some stage and then you will have to account for your in-action.

Paul A Zaman is the CEO of Qualvin Advisory, would you like to know how to create sustainable wealth and become a good corporate citizens  email: pzaman@qualvin.com or visit http://www.qualvin.com