Battle-hardened FDs

THE LAST UK recession began in the third quarter of 1990 and continued throughout 1991. Recovery started at the beginning of 1992 but slipped again before growth resumed. Interest rates were high as the government battled Lawson-boom inflation and managed the exchange rate so that sterling shadowed the deutschemark. On ‘Black Wednesday’, 16 September 1992, the pound left the European Exchange Rate Mechanism (ERM), but only after interest rates hit 15%. The economy never looked back.

But what was the recession of 1990-92 like for finance directors who were in t in the front line at the time? Finance directors from a cross-section of industries spoke to Financial Director about what they went through, the lessons they learned that work in today’s environment, and what’s changed in the finance world since then.

Old-fashioned values: David Keens
Then: Joined retail group Next in 1986, becoming finance director in 1991
Today: Still finance director of FTSE-100 group Next

Next grew very, very rapidly through the 1980s and in 1986-87 made a lot of acquisitions, including the acquisition of [catalogue shopping group] Grattan. We bought a lot of businesses: some retail, some wholesale, some connected with garments, some totally different. We had over-expanded both the financial capacity of the company and also the management capacity. By the time we got to 1990-91, we had disposed of a significant part of the acquisitions that we’d made in the previous five years. So while Next had difficulties of its own making, fortuitously it was in the midst of sorting those out when the real deep economic situation hit.

We were getting rid of non-core businesses, and had much greater focus on cash management. We had a very, very strong focus on our return on capital. For example, we had two financial hurdles before we would invest in a new store: the first is that the store had to make a 15% profit [contribution to group overheads] on sales. Secondly, it had to pay back the capital invested in the fitting out of that store in 24 months.

For 20 years that formula has not changed. We would rather miss a profitable opportunity than take on an unprofitable opportunity. It is not a balanced risk. One doesn’t offset the other. Taking on the unprofitable opportunity generally is a more negative risk than the positive opportunity would have been.

Management has to be brutally honest with itself, and plan accordingly. Only by being brutally honest internally do you set the right budgets and objectives. And you tell all of the people in your business, not just the directors but the management and everybody else: this is the situation, this is our objectives, and you plan the business. To be overly optimistic in that environment almost guarantees failure. ~

Key lesson: Cash flow is paramount. Closures, write-offs, layoffs, strategy about-turns – all of those can be value-destructive but with advance planning you can avoid most of those types of costs. Finally, it’s not just about weathering the storm, it’s about getting in good shape for when times improve.

Recession, recession, recession: Nigel McNair Scott
Then: Joined property group Helical Bar in 1985 as a non-executive director, became finance director in 1987
Today: Still finance director of FTSE-Small Cap group Helical Bar

I remember the recession and secondary banking crisis of 1974. The lesson from then is if your counterparty banks are having to go into the marketplace and pay a large sum of money for their funds, then they’re probably not a particularly good counterparty to borrow from. They are at risk. You need to look at your counterparty risk not only with regard to where you put your deposits but when you’re borrowing. Secondly, why property companies go bust is they get over-geared. If you think there’s going to be a recession – and sure as eggs is eggs there will be a recession every now and again – for heaven’s sake don’t leverage yourself up. If you can, always protect yourself on the interest rate.

All you can do, if things look as though they are going to come bad, is try to cash up as much as you can before it becomes bad. And sometimes you can’t and then you’re stuffed and then you have to be completely honest and transparent with your bankers. It’s very much in their interests to work with you, but they can’t do it unless they have good information.

Key lesson: Bull markets are very dangerous. In an ideal world one would have been completely de-geared before 2008 but I don’t think anyone forecast that property values were going to go down by 45-50% – but they sure did. But we were lucky. We had lots of cash in the bank. We’d sold half our development portfolio. If we’d known how ghastly it was going to be we’d have sold a lot more. We came to the conclusion that we could see nothing of value to buy and so the corollary of that is if someone is paying good prices for what you have then you probably took it.

Don’t worry, be happy: Trevor Dighton
Then: Finance director of the security division of BET, 1986-1994
Today: CFO of FTSE-100 security group G4S since 2004

BET was hit really hard because it was a very expansionary conglomerate. They’d been in massive acquisition mode, built up massive debt and just thought that they would keep on expanding forever. And then when the recession happened it made the whole organisation reassess what they were doing, turning it on its head and eventually having to sell itself to Rentokil in 1996.

[The recession] was quite a big change for me. It was very enjoyable and good fun. I think that’s the important thing to bring out. That’s what working is all about. You deal with different working conditions, different scenarios, different business cycles – and it was just as interesting for me and just as exciting to deal with this change from expansion to contraction.

You need to be able to think fast, to really apply a lot of common sense and have a good perspective about what’s important and what’s not important. You couldn’t really think, ‘Maybe the problems will go away and let’s stick to what we’ve been doing in the past.’ You did have to identify it quickly and do something about it quickly.

Keep motivated, and remind yourself that it is your job to act in negative situations as well as positive situations and really try to see the personal fulfilment that you can get from reacting in negative situations as well as positive situations. The people element of all our jobs is the most important one and making sure when you’re in a senior finance role that the finance people that you have working with you are okay and that they’re not bending under the strain of change.

Communication was probably one of the worst elements of what happened in BET. The communications did fall apart within the organisation because everybody was dashing off looking after their own particular parts of the business. The organisation did sort of implode – that was just as much a reflection of taking out too much central control and central resource as the actual environment itself.

Key lesson: Stay cool and enjoy it. If that’s a weird message, I’m sorry. It is just as interesting for finance people to cope with these sorts of pressures. In a lot of ways they do come to the fore in these sorts of environments and the strong one really do come through. And be flexible, that’s the other thing.

No small change at the banks: Oliver Stocken
Then: Joined investment bank Barclays de Zoete Wedd (BZW) in 1986, FD 1991-93; FD of Barclays 1993-1999
Today: Chairman of FTSE-250 Argos and Homebase owner, Home Retail Group, since 2006

The thing which struck me then was the preponderance of bad debts in the banks, right across the spectrum. The big difference with 1990 over the last few years is that although the smaller companies are going under, the big companies are not actually being particularly badly affected. Actually, the larger FTSE-100 and FTSE-250 companies have oodles of cash, compared with what they had back in 1992. And of course interest rates were much higher then.

The banks themselves were almost completely different animals. The products were very different, very much more simple; there weren’t these esoteric, structured products – they were almost unheard of. The advisers didn’t hunt in packs: when a company appointed an adviser, they appointed one bank. They didn’t appoint four investment banks. And of course the fees were much, much more reasonable. What were the bonuses like in BZW then? I think one person probably got a bonus of £200,000 – and that was seen as absolutely because of extraordinary performance. Absolutely top whack.

Key lesson: I’ve always said when you get a bundle of finance papers, go straight to the cash flow. People can fiddle about with their P&l statements, they can fiddle around with balance sheets. You can fiddle around with cash flow, but you’re probably getting close to fraud if you did. I do think people forgot about that.