One day this could all be yours……

Nick Clegg’s recent suggestion that voters should be given shares when the almost nationalised banks are returned to full private ownership has received mixed reviews.  For many it is a throwback to the eighties and the swathe of privatisations initiated by Mrs Thatcher’s government in her attempt to transform the UK into a property owning share owning democracy. The iconic “Tell Sid” campaign to sell shares in British Gas was perhaps the most memorable privatisation, and the one evoked by many commentators on hearing Clegg’s proposals.

Arguably though, it was the “free” shares which followed the demutualisation of a number of building societies from 1989 onwards that dramatically expanded the shareholder base in the UK, rather than the privatisations of the eighties, and these are probably a better comparison for what the deputy PM is trying to achieve. Therefore Nick may be onto something after all.

Widening share ownership has long been seen as a way of cementing the primacy of capitalism and giving people a real stake in the future wealth generation of their own, and the country’s, businesses. Whilst privatisations and demutualisations have hogged the headlines, the spread of employee share schemes, many of them tax efficient, have also played a key role. Whether through Save As You Earn share schemes, Enterprise Management Incentive schemes or bog standard share option arrangements, the carrot of participating in the future value of the business has become a key component of many employee packages.

“Ownership” of course is an interesting concept in itself. The contrasting styles of the “absentee landlord” institutions and the more “hands on” style of entrepreneurial businesses large and small are clear to see. Dealing with ownership by targets versus ownership by gut feel is a challenge for managers and employees looking to make their own contribution to the success of a business.

The move from employee to owner is an interesting one. MBOs are still a very popular exit route for many owner/managed businesses. However the difference between receiving a regular salary one day and suddenly being responsible for everybody else’s the next is quite a psychological leap, and one that many owners and employees need to think very carefully about when considering this option.

Business ownership theory is often focused on the financial side, hence the bias towards shares. And yet for it to be really effective as a tool for engagement and incentive surely it needs to be mental state as well. People need to feel like owners. Whether it is Nick Clegg giving away free shares in nationalised banks or an owner managed business selling to an MBO team, the head needs to be right if the wallet is to follow. Real ownership I would argue is all in the mind.

Three sets of books? Well that makes everything clear then…….

I recently read an recent article in Accountancy Age (no please keep reading, it’s not going to be that bad), which railed against the proposals made last year by the Accounting Standards Board concerning the future of financial reporting in the UK . In essence big companies will need to use the full set of International Financial Reporting Standards (IFRS), smaller companies will use IFRS “lite”, and the smallest will continue use the Financial Reporting Standard for Smaller Entities (FRSSE). It is hoped that this will promote consistency in financial reporting and enhance global comparability and understanding of the numbers presented.

Still with me? Good, because here is the bit that ought to concern you.

There are going to be three ways of presenting your accounts, all of which involve theoretical approximations of certain economic situations e.g. financial derivatives, share option schemes, pension, most of which are not relevant to SMEs, and arguably none of which really explain how a business is performing, and what the end cash is likely to be. The last comment is pertinent because, as we all know, the value of any business is based on its cash flows to investors.

This all reminds me of that old story of a certain faraway country (OK you’re not that far away, are you Italy?) where each business used to keep three sets of books. A first set was given to the tax authorities, who would normally return them after collapsing on the floor laughing. They were then given a second more acceptable set. The third set, of course, were the real books used by the people that actually owned and managed the company to run the business.

It seems to be we are all being driven in the same direction as regards company reporting, although this time it is not the taxman being taken for a ride (not intentionally anyway), but anybody who wants to use their accounts to manage their businesses efficiently and effectively, and explain to investors what is really happening.

We will have a set of books which constitute the statutory accounts of the business, which are legally required and used by the wider investor community based on a combination of IFRS and FRSSE. We will then have internal management accounts with key performance indicators (KPI’s) reflecting whichever agenda the incumbent management have chosen to make them look good. Finally, we will have the cash focused set of books which really determine business success or survival, but will probably get hidden from the people who really matter.

As the accounting profession rushes to place emphasis on the former, and in house finance functions focus on management reporting, it does seem that we are all losing sight of what really makes the business live or die.

It is surely our responsibility as finance professionals to report financial issues in as clear and unambiguous way as possible. If we do not then frankly we are not doing our job properly. The message from company owners and managers needs to be clear. Show us where the cash has come from and where it is ultimately heading. Then we can know if the business is worth continuing with or not, and whether you, Finance Professional, are actually adding value.