Credit crunch will change the way businesses think

Jan 20 2010 by Andrew Mernin, The Journal

Will the next 12 months see us finally shake off the recession and return to the buoyant conditions we enjoyed before the credit crunch reared its ugly head? Or could there perhaps be even darker times ahead? Here the CBI - alongside other well-placed business experts - checks the pulse of the region’s economy to see if it is fit enough to take on the challenges that lie ahead.

Small businesses are backbone of our economy

THIS Christmas many of us will have shopped at Fenwick and enjoyed their window displays, perhaps eaten Christmas pudding accompanied by Doddingtons ice cream and took a bracing walk along the beach or in the Cheviots, protected from the elements by a Barbour jacket.

These are all well-known regional businesses – businesses that play a fundamental role in the North East economy.

One of my roles on the Thought Leaders’ Panel was to make sure that the concerns and aspirations of small and medium-sized businesses like these were represented.

As a member of the CBI’s national SME Council, I am acutely aware that medium-sized businesses can be regarded as the ‘Cinderella sector’.

Yet research has shown they employ around 30% of the workforce, so their survival and growth is critical for the both the region and the UK’s economy.

My fellow panel members were all from large national or international organisations: Ian Smith, formerly CEO of Reed Elsevier; David Callaghan, senior vice president of Oracle; Gary Sturgess, executive director, The Serco Institute; Dean Gilmore, managing director, PRTM; Andreas Goss, CEO Siemens; Steve Holliday, CEO National Grid; Ray King, CEO Bupa; and Keith Attwood, CEO e2v.

To help our deliberations we had the resources of comprehensive consultations and contributions from around 500 CBI members, including 50 trade associations, discussions with regional committees and individual interviews with CEOs.

What is clear from this process is that financing a business will remain a challenge in the next ten years. This is particularly difficult for SMEs and mid-market companies who are acutely vulnerable to the banks’ current capital constraints.

They will need to seek alternative sources of capital, such as supply chain finance and equity investments.

This is a major step change, particularly for medium-sized enterprises, who received less than 7% of equity investments in 2007, according to the British Venture Capital Association’s Annual Report.

Securing the money from private equity investors, or indeed business angels, is the beginning, not the end of the relationship with the investor.

A private equity investor will take a long-term view when financing businesses with potential to grow and will be able to provide strategic support to the management team, often bringing their own skills, experience and contacts to help the business too. The large companies in this region, particularly those who are plcs, are used to working this way, using non-executive directors, investors and advisers, to bring an objective perspective and dispassionate questioning to the board table, valuing them as an investment not a cost.

Their contribution can be vital to the survival or success of the company – if only because they may have made mistakes in the past and now know how to avoid them.

I know from my work with The Alchemists that bringing in an experienced business person, often from outside this region, can inject both a rigour and an enthusiasm that inspires a step change in growth.

Non-executive directors do have specific responsibilities, however, and should not be chosen simply because they are someone you already know or like. They have a duty to create value, whether that is financial, social or environmental.

One of the challenges for this region is that businesses are focus on surviving, rather than investing in tackling their sustainability and ethical responsibilities.

They can feel their increased compliance activity constrain their creativity and ability to compete, and could lose out to larger companies who regard these as a development of their existing corporate responsibility commitments.

However, the businesses involved in the Shape of the Business report were clear, "although these investments may be costly, the costs of not investing in sustainability and governance are much greater."

Lucy Armstrong is CEO of The Alchemists and a member of the member of CBI Thought Leaders’ Panel