Under law, directors and officers owe a fiduciary duty of care to their shareholders. This duty is the highest duty of care and/or dealings which any individual could exhibit in the conduct of their own affairs. Law, however is not the be all and end all of an individual’s obligations to society, but rather is the encodification by society of a set of rules agreed to by the body politic. Implicit in law are standards of conduct and morality. Accordingly, the thesis of this discussion will be broader than the mere requirements of law, as currently encompassed.

The standard of conduct required by law is not set by that duty performed and held by the average director or officer in the community. In other words the proliferating moral bankruptcy of corporate America, in general does not lower the standard of care required just because the mean (average) of care performed has fallen to new and previously unplumbed lows. Rather, the standard of performance set by law and required is and ought to be that level of performance which would be expected of the most intelligent, most well informed man in the community, acting not for his own account but as a trustee for the interest of others - his shareholders. This does however, not require “hindsight’s” perfection in his substantive decisions. Decisions made or actions taken or omitted are and should be subject to the reasonable business judgment rule. Here the standard is not what would be done by the best, brightest, and most well-informed, but what would be done by a reasonable business man of reasonable intelligence, reasonably well-informed, with reasonable experience as determined by the community standard. However, that standard of substantive performance must be applied in an environment free from any taint, or the appearance of taint of self-interest. “Service before self” is the measure required in the discharge of a fiduciary’s obligations.

The abuses which have received so much publicity, the Enrons, Worldcoms, Arthur Andersons, and Global Crossings, have occurred not only in the public sphere, but also among privately held businesses, where amorality is a rampant disease. Who is injured if a sole shareholder who also serves as the sole officer and director of a company runs his personal expenses through the corporate entity, or inflates his stated inventories (thus lowering) his reported profits and income tax payment obligations, or under-reports income or inflates expenses? Some might argue no one! A tree that falls in woods is silent if there is no one near to hear it! I disagree! Not only are the non-shareholder stakeholders, vendors, creditors, and governmental taxing and regulatory authorities - the body politic, damaged, but the individual shareholder sustains an inchoate loss. Which oft times only surfaces in a subsequent sale of the business or investor transaction and must then be explained. This of course does not speak to the moral destitution and the slippery slope that such loose and questionable conduct implicitly condones. If you cheat on your taxes, are you more likely to close your eyes to other moral failings i.e. lie to your children, or cheat on your spouse?

When preparing a business for sale, it is common to look for “Add Backs” to make the business compare favorably to other businesses in the same industry. For example, if a business owner has paid household help as a business employee with the thought of avoiding personal income taxes on the salary not taken, since this expense would be personal and therefor non-deductible, on a subsequent sale of all or part of the business, he will want to add that expense back to the profits. Since businesses often sell at a multiple of profit, or earnings before interest and taxes, EBIT, the five or ten thousand dollars ($5-10,000) in taxes saved each year, through this “harmless and victimless” device may affect the business’s value for sale purposes by ten to twenty times or fifty to two hundred thousand dollars ($50 to $200,000)! Of course, the seller can try to explain this to the buyer - unofficially! But, he most probably will be required to disclose the “theft” in written form in the Purchase Agreement - thus, a written admission of a probable felony (tax fraud)!

Furthermore, the Seller has also, by implication, advised a potential business associate that he, the Seller, plays fast and loose with the truth, and is not to be trusted - even when the potential penalty is criminal in nature. Is this the kind of person a Buyer with alternative investment options is going to ignore? Probably not! At a minimum, he will require indemnification by the Seller for all of the known and unknown sins of the past. But what of those that are unknowable? After all the Seller has already painted himself as a liar, when it suits his purposes. Many Buyers, at this point choose prudently to walk away from the prospective transaction and all of its potential for liability and grief. After all, how ironclad can an indemnity be? What will be the cost in time and money to enforce the indemnity through lawyers and courts? With the Seller’s known and admitted history it is not likely that he will “own up and pay up” without being pushed to the limit.

At a minimum, the Buyer will certainly be advised that the business is worth less because of the potential for unknown and unfavorable liabilities. And, if one Buyer is potentially so advised, then it is likely that all buyers would be so advised and therefor the market value of the business (that price at which a willing buyer and a willing seller would transact business neither being under a compulsion to do so) would be accordingly decreased when valued in comparison to a “clean’ business - one without the liabilities implicit from the so-called victimless theft. But, we do not have to look to an ultimate sale or refinancing of the business to find harm to the entrepreneur; how about the immediate harm done to his business’s credit rating and financial resources caused by understating true operating profits due to understated income or overstated expenses?

One of my clients is a third generation family business that has provided the extended family with all of their income for over fifty (50) years. It has become ingrained in the family members that they have a “right” to an income stream from the company by virtue of their birthright irrespective of their contribution to the enterprise. To a certain extent, in good times, this is just a reallocation of family wealth among its members and is understandable and perhaps even socially laudable. However, in economically tough times, not only is it more difficult to reduce unneeded and noncontributory expenses i.e., the salaries of family members, in make-work, no work or work assignments for which they are not skilled or educated, but merely hold by virtue of family status, but even if changes could be made for the future without disrupting the family and the ownership - the family’s past actions have crippled the family members on the “dole” and denuded the business enterprises of a depth of financial resources that would otherwise have been accumulated.

Thus, in effect, the damages, of what are thought by the family to be benevolent family “gifts” and sharing can actually be two-fold: (a) to the company as the income paid out needlessly will not have been accumulated in the company to provide a cushion fo the lean times in the business cycle; and (b) to the individuals who were cushioned from reality by the family’s good intentions, and consequently will not have developed marketable skills, accumulated valuable work ethic habits, or pursued educational opportunities, and will almost certainly, be eventually cast adrift in the unforgiving marketplace when the business suffers or ultimately fails.

Of course, in addition to all of this “self-injury” and potential and actual injury to the body politic, there is direct and immediate injury to the business’s non-shareholder/director stake holders. Creditors, lenders, and vendors continue to extend credit and choose to do business with the company based upon financial representations made. Not only is there the direct risk associated with the financial information being incomplete or inaccurate, but there are the indirect risks of dealing with a principal who is assumed to be honest and is in fact not. How do you as a vendor choose to do business with one customer over another? How do you price your products and services? Implicit in these questions is the cost of goods and services sold, but also a premium for the risks involved (payment, collection, continuation of the enterprise) and there is here intentional misrepresentation of the business’s financial health.

If we move away from the sole director, officer, shareholder, or family owned corporation to that which, while still small or closely held, has at least one other shareholder, even or especially if only a minority, one who holds less other fifty percent (50%) interest, the legal perils become more easily visible. One of my clients is a closely held (2 shareholders) successful (millions of dollars per year on profits) business where one director had a single, momentary lapse of focus with respect to his obligations and required duty of care as a director. He acted for his self-interest and with disregard for the interests of his fellow shareholder/director and officer. This single act, created upon its ultimate discovery, so much controversy and distrust that the company,or if you prefer the “golden goose”, producing these extraordinary profits became impossible to manage, and is now in the process of court supervised dissolution and liquidation. Obviously, the director at fault now realizes his failing, but it was impossible to stuff the genie back in the bottle, or perhaps more appropriate “Pandora back in her box.”

Of course, as is often the case when one does something of this nature, the “felony” tends to be compounded by the cover-up or secrecy which follows and surrounds the initial wrongful act which just serves to make the appearance of the act worse. The “cover-up”, here, as in most cases, I believe, was caused by the fact that the director/actor in question knew at some level, at least subconsciously, at the time of the act, that it was improper - and was not something of which he would be proud. One of the directors of the company I used to manage as President and C.E.O., postulated that the best test for any contemplated action was, “would you want to see it as the headline in your hometown newspaper?” Sometimes, the knowledge does not rise like cream to the conscious surface, until after the act, but even at that late date, it might, with proper immediate and full disclosure accompanied by acknowledgment and appropriate reparations, allow for the re-establishment of some degree of trust between the parties. Thereafter, failure to disclose - “the cover-up” - becomes the Watergate, cause celebe, and even the substance of the original wrongful act becomes less of the immediate and focus of the dispute at issue.

Less obvious than the loss and damages occasioned by the act of self-dealing to the fellow shareholder are the repercussions and the losses visited by this act on the corporation’s third party stakeholders. The shareholder damaged can resort to the law to recover damages experienced and may in addition be able to recover his costs and legal fees. In an exceptional case, he may even be able to recover punitive damages against the wrongdoer, if the wrongdoer has sufficient assets (a very big if). But he, like the other stakeholders will never be truly made whole - because the future profits of the now defunct business - will never be generated or realized and they are almost always too speculative for a court to determine and award as damages.

But what of the damages incurred by the other stakeholders? Employees that are now terminated and either have no jobs or at least incur the cost of re-employment or relocation. Vendors, suppliers, and lenders that no longer have a profitable company to deal with, even if paid in full for past services, etc., etc. These stakeholders have no redress at law for their lost opportunities, futures and security. But, clearly they are at least as potentially damaged as the wronged shareholder.

That the law does not provide a remedy for every wrong is axiomatic. However, that the law does not provide a remedy, does not and should not in anyway relieve a director or officer, who loses their way in a forest of self-interest from bearing at least the full measure of moral guilt and societal reprobation such a callous act of disregard deserves. Perhaps, like public and government service the best remedy is “day-lighting” the wrongful acts and doers, such that they suffer as punishment, the rightful disdain of their former peers.

Retirement used to be associated with turning 65, receiving a gold watch, your pension, social security and having gray hair. Today many people retire intentionally and voluntarily in their mid 50’s or even earlier - through careful planning, or find themselves involuntarily retired (unemployed) through technological or other market factor changes. The difference is in being prepared.

Our society envies those whose industry and business acumen permits them to retire voluntarily at an early age to enjoy the fruits of their labors. At the same time this same society looks down at and feels sorry for those who perhaps find themselves in the same factual circumstances i.e. not going to work (at the same age and financial condition as many who are retired), but who view themselves as being unemployed. The word unemployed carries with it a stigma and an undertone of having been involuntarily terminated with the implication of failure or lack of performance or perhaps even lack of work ethic or some other personal defect (drug or alcohol use, excessive absenteeism, etc.) and the subtext that one is looking to be re-employed. While the word retired implies a voluntary cessation of a daily work regimen and no immediate intention or need for re-employment.

Thus although many feel the difference between being retired and unemployed is one of economic circumstance we believe it is rather one of adequate preparation and self perception. In other words it is not about the money! It is about being prepared, being ready, and having a vision that you are comfortable with what you would like your life to be like in the event of a planned or an unplanned early retirement. Are you ready now? Will you be ready? What steps should you consider taking now to prepare yourself?

In the past it used to be easy to distinguish between employment that terminated voluntarily from that which terminated involuntarily. In the first instance the employee quits and in the second he was fired. Today however it is often not quite so simple as an employee may be put in a position where he is either forced to terminate employment or accept new and unanticipated duties and obligations not originally contemplated in the employment relationship. Or the job for which the employee may have been hired may no longer exist due either to technological change or market condition. It is therefor often difficult to determine whether or not a change of employment is through the affirmative action of the employee or the employer. It may in fact be without attributable fault to either or any party.

It becomes more important in the absence of any reliable third party determinable fact for each party in the employment relationship to make its own independent determination as to the cause for a change in employment. Each party is entitled to their own view of the facts surrounding the termination of ongoing services and may therefore hold themselves out to the world and the community in the manner in which they are most comfortable, ie. voluntarily retired or unemployed. The fact that the employer and the employee may individually determine different and incompatible causes may be as much from a different viewpoint or emotion as from a difference in recognition of market conditions and is entirely acceptable. Consistency may be impossible to achieve and totally unnecessary.

First and foremost American males take their identity most frequently from their employment. What we do in large part forms the identity of how we see ourselves and how we at least perceive others see us. When you meet someone new the most frequently asked question following a person’s name is: “what do you do?” The information that is really being sought here is “who are you” where do you fit in society’s pecking order?

In other languages and cultures this question is in fact asked and answered directly at the time of first introduction. In Israel and in most of the mid-east the usual introduction is “I am Ron, son of Nathan of the clan Levi of Safed” Thus in giving your name you have given your parentage, family status, societal rank and city of birth. Here in America we answer “I am a lawyer or doctor, etc.” giving clues to our employment work hours, socioeconomic status and education. But how do you answer these questions if you are retired or unemployed? If unemployed you might answer in the same way you would have prior to the event, but then you would have to deal with a nagging sense of dishonesty or misdirection and of course you would have missed an opportunity to indicate your current availability.

Alternatively, you might indicate that you were a lawyer, but between assignment i.e. a politically correct expression of being unemployed. Remember that in Israel where your identity is not work or socioeconomically related your answer to the “who are you” inquiry would remain unchanged. But how do you answer if you are retired? Are you proud or at least comfortable with your new station in life or are you sheepish and attempt to make light of the question so as to avoid giving a real answer to the inquiry. The answer to this and many related self identity issues is in the degree of your pre-event preparation.

A large part of your emotional preparation and identity is bound up in being able to comfortably answer this inquiry, either with or without reference to your former title and status. You can temporize by saying that you are the former C.E.O of a well known company, now retired, or you can substitute your new status as an investor or consultant (modern spin speak for unemployed) or if you are truly comfortable you can answer the real question “who are you?” by saying: “I am a full time husband, grandfather and a part-time tennis player.” Which of these makes you most comfortable reflects on how you think of yourself , as the facts and your work status, are the same in either case.

How do you want to be seen by yourself and others? Upon your retirement you have a rare opportunity to change your world and community views. Have you adequately prepared yourself to take advantage of this opportunity? Do you have the self-analytical tools to review your current emotional and mental condition and outlook and take appropriate action? If your answer in no or not yet or even I do not know, now is the time for some advance planning and research. Think about what self-analytical tools you will need to acquire and whom you can go to for help in their use. Certainly you will have to bear the cost in term of time commitment and perhaps financial costs as well but being prepared for the transition to retirement will provide more than adequate rewards for the efforts expended.

How many times have you avoided a chore, a trip, an obligation or just relaxing and having fun with the excuse or the reason that you just don’t have the time. More realistically what you are saying is that you have the time, but you have chosen to spend it in a manner which you gave a higher priority whether or not society or your family agreed. Sooner or later you will catch up on all the deferred maintenance and “honey-do” task lists (all of the family albums will have been labeled and indexed) and need to face the reality of allocating your free time in a manner that makes you feel comfortable. Your decision must, allow you to feel of value and maintain your physical and emotional health. There are certainly an abundance of options.

Now as a newly retired person it seems that this excuse/reason is gone. You obviously have the time because you have just bought back the 40-70 hours each week that were previously spent at work. How you choose to spend this time is truly a matter of conscious discretion individual choice and prioritization. You can of course opt to go back to work full or part time or as a consultant or you can contribute your time and efforts to a cause you believe in whether of a political, religious, or charitable nature. You can spend more time with family and favorite past times and there is always the opportunity for self-improvement.

If your vision of retirement requires that you learn new skills or improve existing ones now is the time to start getting ready. It is probably unrealistic to expect yourself to have the stamina and strength skill to play an enjoyable 36 holes of golf or 6 sets of tennis everyday unless you have prepared yourself both physically and mentally for that level of physical and mental concentration and activity after having spent 40 years sitting at a desk 6 days a week . Start your preparation for your vision of the perfect retirement now by learning those new skills and improving your old skills so that when the opportunity arises you will be ready for retirement and not merely ready to start planning for a retirement already upon you.

If your retirement is free from financial concerns i.e. you have the present ability to maintain your lifestyle and that of your dependents in a manner acceptable to you for the balance of your lifetime, then the decision as to how you use your time becomes a wonderful opportunity and provides you with many alternatives to experiment with. Try your hand at everything that passes your fancy. Experiment and continue to do those activities that give you pleasure, feelings of worth, that improve your physical, mental and emotional health and discontinue those that don’t add to your well-being. There is no right answer, there are no time limits, there are no goals other than the journey. You need to learn to take your pleasure from the process and not just the completion of the intermediary tasks.

To some extent your degree of comfort may well depend on your economic circumstances. A precipitating event which has all the hallmarks of involuntary unemployment may from a pre-prepared vantage point be cast as a well earned early retirement. Hundreds of books and countless articles have been written on the financial aspects of retirement planning, so I will not attempt to cover in any thorough fashion this extremely important subject. However, I cannot resist a few general comments. [For those of you who, (a) wish to avoid yet another repetition of the basic concepts of financial planning and, (b) of course for all of you who have completed by age 30 and have consistently lived by your 30 year financial plan (and I know a few who qualify) feel free to skip the next few paragraphs for the rest of you perhaps one more repetition will help.]

In our economic system the grasshopper who saves for the winter day is well cared for during the winter (retirement) while the ant who may have more immediate enjoyment in his day-to-day work life experience will likely have to continue to toil and have fewer opportunities to survive winter’s first frost … Ideally, a secure retirement should be an early and constant goal for everyone. Early action taken towards this goal should provide a comfortable cushion that may allow an early and potentially unplanned for unemployment into a comfortable retirement. The ideal condition of financial resources of course, would be to have the ability at the time of the precipitating event to maintain from savings and passive investment income yourself and your dependents in the same or at least an acceptable standard of living without the requirement of creating either the reality or the perception of loss in comfort, enjoyment or security.

The financial model for achieving this result is simple and well understood. It is in fact merely the funding for a future value, at an estimated future date, at a set minimum interest rate of a lump sum - to be available as of the date of estimated retirement. This sum should in turn be sufficient to provide an amortizing annuity for the balance of the natural life of yourself and your dependents. Because of the power of compounding interest, those that start the process early with 30, 40, or 50 years to plan, save, invest and allow compounding interest to work its magic will have not only the advantage of seeing progress toward their goal and growing financial security, but also the advantage of being able to focus on the most conservative of returns in order to achieve their objectives. Unlike those who by necessity or lack of planning start late and are forced to accept higher risks to get needed higher returns and therefore in many cases achieve only the self-fulfilling prophecy of complete loss, no security and no opportunities. Early planners are more likely to achieve their preset retirement objectives.

For example, if you start planning for your retirement at age 65 when your are 25 years old you will have 40 years to accumulate the necessary lump sum. If we assume that at age 65 you will have a 20 year life expectancy and will need $100,000 per year after tax to maintain your standard of living for each of those 20 years and if we assume a conservative post retirement rate of interest of 4% per annum we can easily calculate that the lump sum needed at age 65 will be approximately $1,375,000. Since you have 40 years to accumulate this amount if we assume the same conservative 4% return we can easily calculate that you will need to save approximately $14,000 per year. If however you don’t begin saving until age 45 and have only 20 years to save at the same rate of savings you will only have at retirement $440,000 which will only provide for 5 years of retirement in lieu of 20 at the same conservative rate of interest.

Alternatively you may at age 45 elect to proceed with a higher rate of return which of course implies a higher rate of risk for the investments needed to reach your retirement investment goal. In order to reach your retirement goal in 20 years you would need to achieve a rate of return on your investment of in excess of 14% this of course translates into an increase of over 350% in the amount of risk that you are required to take by virtue of the fact that you delayed the implementation of a financial plan for your retirement from age 25 to age 45!

If, as Plato said, “the unexamined life is not worth living,” much of our present day society is in for a rude awakening. More importantly as one of my dear friends is always reminding me, “What is your downside?” How are you injured from taking a little time now and assessing your preparation and readiness for your planned or unplanned early or timely retirement? Always keep in mind that being retirement ready requires not only sound and early financial planning, but also thorough mental and emotional planning.

Relationships in a business environment, as in all other venues, are built and maintained by constant and continual attention to the other party’s, “your partner’s,” perceived self-interest as well as the delivery of unmatched superior assistance in the attainment of your partner’s goals and objectives, in a manner consistent with his values.

As shown in early behavioral studies, habits or patterns of human action are first built by frequent repetition of a stimulus event immediately followed by a reward event. And, they [these behavioral patterns] are best maintained by intermittent reinforcement. When applied in a business environment to one of your stakeholders, i.e. a customer, you will wish him to perceive the stocking of your product, or the offering of your service as the stimulus event and the profit realized to his business as the reward event. Obviously your customer’s primary goal is sales, at a price that will result in maximizing the customer’s gross profits, i.e. maximum sales units multiplied by the maximum achievable price, while recognizing as the applicable constraints market size and conditions on both the macro (total market) and micro (customer unit) levels.

However, when building a new customer relationship, (or for the matter maintaining an existing relationship) special attention must be paid to both the stated and the unstated goals of your customer. For example, in a retail environment the customer may indicate a need for maintaining no less than a 30% “maintain margin” and may say nothing about “turns,” however your knowledge of his business should lead you to inquire of his objectives in this related but oft times unstated and inversely varying goal. In other words, if selling more units at a lower price is more advantageous to him than selling fewer units at a higher price, in each case where price exceeds the 30% minimum margin level because of the customer’s manner of going to market and niche creation and marketing approach, then perhaps products of lesser quality, with fewer included features, or a less inclusive service component can be developed and offered to meet his objectives of greater turns and unit sales.

Customer relations, of course, come immediately to mind. Although it is the function of your sales staff to develop and maintain these relationships, I believe the entire company must participate in their development and maintenance, including at the highest levels their maintenance must also fall to the company’s chief executive and operating officers. Furthermore, I believe it is a primary function of every single employee and agent of your company, to keep each of your customers in a state of total delight with your products and services. The so called “customer service” department, as a practical matter, must include your company’s total staff.

Many businesses today function on a “man to man” basis with key customer personnel being matched up against functionally related individuals in the supplier’s organization rather than on a “zone” or office to office level. The difference is oft times in the quality of the relationships. By having individuals in all disciplines and functionalities match up with those charged with the same although oft times reciprocal tasks, e.g. distribution and transportation matches with distribution and transportation people or reciprocally shipping people match up with the customer’s equivalent of a receiving department, you guarantee a common vocabulary as well as common interests and hopefully common measures of excellence.

By encouraging these common functional cross company relationships at every level of both organizations (yours and the customer’s) you: a) multiply the inter-connectiveness of the companies; b) create new opportunities for problem solving at the lowest possible organizational level - (to help prevent little problems easily cured from becoming big problems discussed at decision levels in either organization); and c) lastly, but probably of the most primary importance, allow the establishment of long term personal relationships between individuals early in their respective careers who as they advance to greater rank, responsibility and authority, over time in their respective organizations will maintain their connection, relationship, and continue to build trust!

Trust, of course, cannot be feigned or given and must be earned by repeated and reliable performance within established expectations over time. This trust established between people and organizations, over time, at all levels, is in fact the best relationship cement.

The individual who acts as the lead buyer for a multi-billion dollar customer may not always have the “yes” power, but he almost always has the power to say “no.” Accordingly, if the buyer is the only point of organizational access to a key customer account it may be appropriate to have your President and C.E.O. be your point of contact rather than a sales representative or a Vice President of Sales. If however, you are in a “man to man” sales approach, you will be creating and actively maintaining many independent contacts with your customer at all levels of the customer’s organization.

For example, on any given day in a company with which I am intimately familiar, the president and chief executive officer might talk to or meet with a key customer’s chief executive officer and chief financial officer respecting a proposed change in pricing or terms, while at the same time the company’s sales training personnel might be running sales training classes for the customer’s employees, and the company’s sales and service teams would be matched up to assure everyone that the customer’s shelves are full and that no costly out-of-stocks occur. Concurrently, the company’s logistics and distribution teams might be coordinating the set up of six to ten new stores for the customer and be jointly planning promotional and advertising campaigns with the marketing staffs of both companies. Each of the players, in each position, throughout the whole company, is aligned with and focused on keeping his opposite respective staff or team member informed and engaged. Consequently, no one person on the customer’s team could, or would, at least at an operational level, be able to derail the relationship.

In all relationships bumps in the road occur, and present either obstacles or opportunities. They will always be opportunities if you follow the following four step program:

1. Acknowledge the issue promptly - if the customer is unaware of the issue, inform him immediately.
2. If the issue has been caused by a failure of your team, accompany the acknowledgment of the event with an immediate acceptance of responsibility for the correction, and the cost of correction.
3. If the issue is not attributable to a failure of your team, but can be easily and quickly remedied by your team, immediately accept responsibility for the correction and promptly make arrangements to discuss the cost of correction.
4. If the issue is not attributable to a failure of your team and can not be easily and quickly remedied by them, then determine all of the available alternative courses of action which may lead to the remedy, and promptly propose them together with your recommendations to your customer.

Your customer must always see you as proactive, positive, acting in the customer’s best interest, and accepting of all appropriately assumed responsibility. Always go the extra mile - always exceed expectations.

A large part of always exceeding your customer’s expectations is determined by your continuing efforts at managing the customer’s expectations. If you always under promise and over perform, your customers can not help but to be impressed and supportive of your requests (whether for justified price increases, scheduling flexibility or new product listings) - when you need to make them. Of course, this does not mean that I advocate the practice of “sand-bagging.” But I do not believe that it is “sand-bagging” to be conservative in your appraisals of your own capabilities. Nor does a conservative self-appraisal of your capabilities in any way imply that you owe your customer less than your best 110% effort. It does however require that even under performance pressure you never commit to what you cannot deliver.

Clearly, from a pure quantity and risk standpoint, you would rather have 1,000 customers each purchasing $1,000,000 in products and services per annum than 1,000 customers each purchasing $100,000 in products and services per annum, assuming equal profitability per dollar of sales i.e. 100% pure variable costing. But, what of the more difficult permutations and combinations i.e.:

Each of these examples, of course, has its own challenges. Even in a fully variable cost structure (never present in the short term and always present if you consider a period that is long enough), you would in general feel more secure, i.e. less at risk, if you have more rather than fewer customers. With each customer representing a small share of your total business, sales, and profits, each is therefore less able to cause your company damage if they should elect to eliminate your company as a supplier. However, in the real world there is a cost of customer contact. In other words, it is more expensive to deal with, sell, ship to, communicate with, service and collect from 1,000,000 customers than 1. Therefore, at least in theory, having fewer large customers rather than more small customers should be more profitable and make your business more manageable, unless of course unequal bargaining power operates to erode not only achieved economies of scale, which in general should be shared, but also the supplier company’s underlying cost structure.

On the one hand, customer concentration is classically deemed to be a factor meriting a discount in the value of a business, since the loss of a customer could destroy a large portion, or even all of the company’s sales and profitability. On the other hand, by having fewer customers you should be able to make the loss of any customer a rare event since each customer will be significant and will therefore be prized and serviced with an increased focus. There is, of course, a trade off, and classical business doctrine would suggest that your business chooses to serve the most profitable, the industry leaders, and the innovators - but this assumes a choice which is rarely, if ever, present.

If one of your small customers grows to dominate his industry, do you terminate your relationship because your customer base would become too concentrated? Assuredly not! You “ride the wild horse” as long as possible! After all, if the customer is dominating the industry, you have fewer alternatives for new customers, and your competition, who are being dispossessed by the shake up in the portions of the industry not controlled by your successful customer, will out of loss of opportunity and desperation, become intensely competitive - and jealous of your supplier status - even if it means increased customer concentration. Should not this envy in the marketplace translate into increased value for your business enterprise despite the concentration?

What has been stated above for your customers is in every way and at all times equally the case for your relationships with each of the other stakeholders in your company including your suppliers, lenders, employees, shareholders, and community. Suppliers (and lenders, who are after all, just suppliers of credit and financial products and services) require, the attention of their functional cross organizational partners.

Just as you partner with your customer you must partner with your suppliers and encourage them to follow your example with their suppliers in turn. Your shareholders are no different, they require that you inform them of your expected performance and then at a minimum achieve their expectations. Hopefully, by managing their expectations, you can always exceed the levels of expected performance without creating a psychology suggestive of “sand-bagging” (generally avoidable at the shareholder level if your company’s performance also exceeds that of its industry peers and competitors.)

The process must always be seen from the stakeholder’s viewpoint. The rules of creating and monitoring all stakeholder relationships,(as well as those in any non business setting) may be distilled from the above example and our common experiences and are stated as follows:

1. Always view the relationship through the eyes of your stakeholder:
   • Constantly critique and recharacterize, with as much independence as possible - (including the potential use of outside third party consultants to gain new “eyes” and viewpoints )- the relationship and its features, benefits, and detriments to the stakeholder and your company.
   • Be flexible and be prepared to continually improve both the reality and the stakeholder’s perception of your value to the stakeholder -( appraise your company’s performance in terms of products, services, information and value not only in your own terms, [i.e. against standards and historical or industry norms, but also using the same “yardstick” and measurements used by your stakeholders R.O.E - return in equity, R.O.I-return on investment, R.O.I.C.- return on invested capital, turns, G.M.R.O.I.- gross margin return on investment , or whatever measure of performance the stakeholder desires to use as its appraisal tool -. Ask them for these appraisal tools as well as for their collected information on your performance both to verify accuracy against your own records, and also to see how your stakeholder really sees you - you must perform in areas important to the stakeholder - not those only important your company!)
   • Determine from the customer both their stated and unstated goals and objectives and how they measure their own achievement and success -( then continually check and double check, with all levels of contact with the customer, that these are accurate and still in use, have not been replaced and that you are doing everything you can to help them achieve their own goals and objectives.)
   • Apply these performance standards via market research and intelligence to your competitors and the marketplace - (you know your customer will always be looking for a better, cheaper, smarter, hungrier competition.)
2. Manage your stakeholder’s expectations of your performance:
   • Never promise what you cannot deliver.
   • Under promise and over perform.
   • Be conservative in your commitments.
   • Always perform at your maximum 110% level.
3. Divide your time, money, effort, and resources among the building, developing monitoring and maintaining of your stakeholder relationships:
   • It does no good to acquire stakeholders by overstating your expected performances only to lose them to your under performance of excess expectations.
   • It does no good to have a great sales staff and world class products if all of your time and money are spent in the acquisition of the client relationship and none is left for its maintenance.

In other words always follow the “golden rule”, exceed expectations, be proactive, act in your stakeholders best perceived long term interests. Place your stakeholders interests at least on a parity with your own, and most importantly see the world through their eyes and ‘walk the walk” in their shoes.

The art of creating and maintaining personal passion in business, as in all human endeavors, is dependent upon nurturing an environment in which systems, attitude and culture continuously engender and promote positive feelings akin to love for the company, as well as its products, services, employees, customers and other stakeholders.

Perhaps the best place to start is with a recipe for passion in the business world? The recipe requires that we begin with visceral excitement, and add a firm link to basic human belief systems and finish with a healthy dash of personal self-interest. Bring to a boil in a business culture infused with respect, appreciation, and praise and serve with a sense of a community of interest. When properly cooked this mighty elixir is self-propagating and like sourdough starter just gets better with age and continuous repetition. Its presence creates a focus on the needs of the business as being aligned perfectly with the needs, desires, expectations and ambitions of a company’s stakeholders.

Employees with Personal Passion know they will be praised, appreciated, promoted and incentivized to do their best. They are motivated beyond simply showing up and punching in, but rather they focus on the positive aspects of what they do and how they do it. Physical labor, though necessary and appreciated, becomes a secondary contribution, as their thoughts, suggestions and practical experiences are recognized for their independent value. This sets the stage for a culture resulting in continuous improvement, added profits (More Money), and greater security for all of the stakeholders. While we may not be able to measure Personal Passion with precision against a scale, its absence is easily detected. If your employees show up late, are chronically absent, use all their personal leave/sick days, punch out at the earliest possible time and never miss a break, a lunch or a vacation, this is probably a pretty good indication that the business lacks a shared passion. If your suggestion box is filled with candy wrappers and your company meetings are directive lectures with no participation, no dialog, and no questions asked or answers given,— well you get the picture.

Conversely, when your employees are always on time, excited about the opportunities presented by each days work experience for personal growth, advancement and increased self worth, through participation in the pulse of a successful enterprise. When the company’s every action imparts dignity and respect to and for its employees and shows how their contributions are valued by your enterprise, this is very good evidence of the presence of an environment managed by leaders with Personal Passion. Then, and only then, will you and your management team and each member of the company engaged in the enterprise produce action moving towards clearly defined objectives and goals, the attainment of which will provide immediate and clear personal and collective benefits both to the individual employees and the company as a whole; by virtue of the perfect and absolute alignment of company and stakeholder interests. That is the basis for a passionate environment, which is the first requirement for creating a passionate company, where passion becomes virulently contagious.

It is easy to determine whether the company’s non-employee stakeholders (customers, suppliers, vendors, stockholders, lenders, etc.) have passion for the business. Customers who have Personal Passion for their suppliers (hopefully your company) know that they will be cared for, appreciated, and provided with the highest quality and most timely service available in order that they be able to maximize their own gross margins - enlightened self interest. These customers are certain that any and all information generated in the process will not only be exclusively and proprietarily available to them, but also will be utilized and provided in appropriate forms to maximize their market position. If your customers routinely and regularly contact your company, as opposed to your competitors, in order to solve their problems and regard their relationship with your company as unique and special and indeed one of their key assets they have and are exhibiting Personal Passion for your company. In fact with enough Personal Passion they may even actually allow for pricing which provides a return not only on the products and services rendered to the marketplace in competition with your peers, but which also recognizes the special values added by the relationship itself. In other words, your companies repeated and demonstrated willingness to “go the extra mile” in order to facilitate and resolve your customer’s special needs when, and as, they arise without necessarily maximizing the company’s short term return is ample evidence that your customers have caught the Personal Passion fever.

For example, when one of my client’s key customers had a quality issue with some of the components of a competitor’s product line, that (a) the competitor could not seem to remedy, and (b) had never presented a problem to our client - the customer requested that our client and their competitor work together in solving the problem. Now this may, at first blush, seem like a request against self-interest, but a more thoughtful and long-term view indicated that the action should be immediately taken and would further the client’s own long-term interests. The customer considered the competitor’s products a necessity in the marketing mix and our research validated that the competitive brand’s inclusion in the customer’s product line added perceived value to my client’s product offering as a “move up” brand. After a relatively short review and analysis of the problem, without the expenditure of vast resources by my client, the cause of the quality defect was identified and suggestions were made as to its remedy. Of course, the process had the immediate advantage of affording our client an in depth view of our competitor’s manufacturing and supply chain process - wonderful competitive intelligence. But, more importantly it demonstrated to our client’s customer why the company was special and deserved special treatment at the customer’s hands. The company went the extra mile to solve the customer’s problem. The company made the customer’s problem it’s own even at the apparent immediate cost of making the company’s competitor stronger.

Suppliers, lenders (another form of supplier providing financial requirements), and vendors will also be appreciated, valued, and incented so as to provide the company with services and products which when combined with the company’s internally generated creativity engenders and provides products and services to the marketplace with inherent value and clear differentiation. When a key supplier develops a new product or process, where and how does that supplier introduce its innovation to the marketplace? The desired answer and the explicit, continuing request to all suppliers must be :(a) bring all of your innovations and value added ideas, products, processes and services to us first, let us partner with you in their testing an marketing and; b) give us a period of market exclusivity, lead time to maximize our joint economic benefit. Once the innovation is introduced and recognized by the market, we or the supplier and the company, will have shared the “first to market advantage”. Then the supplier is free to capitalize on its now proven innovation and maximize its own economic advantage. However, the marketplace will long remember who was first to market with the value added innovation. And that adds valuable luster to your brand.

Shareholders also must know and accept that their interests are carefully guarded and indeed constitute the fulcrum upon which the business rests such that the maximization of shareholder value is in fact the central focus of the business enterprise. Perhaps it is only with your shareholder stakeholders that the degree of Personal Passion can actually be qualified. Why do some enterprises with identical earnings per share (”EPS”), operating in the same marketplace, with a similar offering of products and services command higher price/earnings (”P/E”) multiples? The obvious answer is that they are more desirable - but why? If the numbers are similar should not their opportunities also be similar? The answer is clearly and empirically: “NO!” Some enterprises make more out of less - you might call it focus or intensity - I call it Personal Passion.

Like almost everything creating Personal Passion for your business starts with you, the leader. If you do not absolutely love, yes love, the time you spend in your enterprise, for the participation itself and not just the rewards, then you cannot expect others to feel the passion. But if you do then you have the second requirement for creating a business rich with Personal Passion. Which is a “gut level” throbbing, beating, ever present, pulse of excitement and participation, in a GREAT common enterprise full of humanity and, personal satisfaction and enjoyment. Here’s an easy test: do you get up early full of ideas and thoughts about making your business better, is going to work, for you, in at least the top two things you like to do with your time? Is it always rewarding? Does it make you feel like a winner? If these feelings, and emotions are present odds are that you feel passion for your business.

Being a winner is in fact part and parcel of personal passion. The only thing that is better than being a winner is being on a winning team. Because when your are on a winning team, every time you celebrate a team member’s success you are able to vicariously participate in the success of the whole team which of course is in part a self-declaration of your own feelings of achievement and worth.

The third and only other thing needed when you have the right environment and a leader with passion is a great system for consistently communicating the leader’s Personal Passion to all of the enterprises’ stakeholders. Communication, it must be remembered takes place not only orally and in writing, but most importantly and visibly through your actions. Do you consistently seek out and celebrate your stakeholders’ individual victories frequently and publicly in a manner sharing both the benefits and the feelings of success with all the stakeholders who have contributed. Do you engage all of your employees and show appreciation for all their efforts beyond salary and bonus? And most importantly, do you find a way to praise performance loudly and publicly but uniformly provide criticisms sparingly, positively and in private? In order to celebrate, you must trust your employees because you will most probably be communicating potentially valuable competitive and, harmful information to them. But the evidence of your trust in them will be immediately felt by them - they will respect your confidence in them - and they will swell with pride not only at your joint accomplishment, but also at the knowledge that you, a respected business leader, trust your employees and treat them with the respect due each of them by sharing this information. It does not matter whether it is a new sales goal achieved, a new manufacturing process, or a new and higher quality standard reached the point well be intuitively understood, and more importantly, felt with powerful emotional impact.

Every time a milestone is reached whether it is a company wide milestone, a department milestone, a team milestone or an individual milestone, it affords an opportunity for a celebration. The milestones can be significant as in most products shipped in a year, month, a week, a day, or even an hour, or relatively insignificant, but if you look hard enough you can almost always, on a daily basis, find a cause for celebration. In companies I have managed we have celebrated profits, sales, safety, shipments, employee longevity, new employee hires, reductions in turn over, attendance, training, and just about every other thing you can imagine.

The celebration itself can be as simple as a public congratulations and a handshake or it can take place of an awards banquet. Both have been used successfully. When possible I believe it is a good idea to provide a tangible reminder of successes achieved. These can be as simple as certificates and plaques, or baseball caps and tee shirts, but by having these tangible representations of success continually visible, other members of your stakeholder group will be incented to extraordinary efforts in order to achieve similar recognition by peers and superiors. One of the most successful success recognition programs that I am aware was instituted years ago and takes the form of a jacket awarded to employees who achieve an extraordinary amount of a highly desirable productive activity in a single month (repeat awards result in jacket patches being added). In order that the award have value it was early established that the only way to procure a jacket of this type was to achieve this specific performance goal and not even the President and C.E.O. of the company could obtain one because it was recognized that to do so would diminish the award’s value in the eyes of those who achieved the performance and earned the award and the respect and envy of their peers and the respect and appreciation of the company’s leaders.

In short, if you have Personal Passion from every stakeholder in your business, cherish it, respect it, and work hard to maintain and enhance its vigor. If you have Personal Passion from some of, but not all of, your stakeholders learn from those with the Passion and enlist them in spreading your joint Personal Passion to everyone in the company. If you do not have Personal Passion for your business, or have it and can’t communicate it or don’t have an environment amenable to its continual and constant propagation - sell the business - quick - because your competitors will sense this weakness and maximize their competitive advantage by exalting THEIR Personal Passion in the marketplace to your company’s immediate and ruinous detriment!

Once a company has adequately determined its present position and determined its goals and corporate vision, it is in a position to select the route to be followed from among all of the alternative available paths. The first step however must be a full and adequate analysis of a company’s current position.

What are the company’s strengths and weaknesses (S.W.O.T. analysis)? What tools and process does the company have available? What are the company’s resources (personnel, financial, operational) and its requirements? How are the company’s products and services differentiated from its competitors’ offerings? All of these questions and many others need to be first answered and quantified.

Merely going through the exercise involved in a S.W.O.T. analysis, listing the company’s strengths and weaknesses, as well as how important each is to its stakeholders, will deliver significant value in the planning process. It is key that the company’s strengths which are most important to its stakeholders be emphasized, but it is even more important that its weakness, in areas which are important to them, get immediate attention. Once the S.W.O.T. analysis is complete, it can be used to help in the allocation of the company’s scarce resources.

Obviously it would make no more sense for a company to adopt a strategy for which it lacks resources or which does not meet its requirements stakeholders collective expectations than to buy a pair of shoes that are too small just because they look good! The adopted strategy must take into consideration only the company’s presently available resources and those which will be available with at least an 80% confidence level. That means the weaknesses must get first call on the company’s resources. The company must survive before it can thrive.

Once all of the lethal weaknesses have been addressed, the company can afford to devote additional resources to the process of emphasizing its strengths. Obviously, few resources should be allocated to company weaknesses that are unimportant to its stakeholders. Where the company has strengths that are unimportant to its stakeholders either management may seek to educate and market its strengths in these areas, to the stakeholders as differentiating factors, that should be recognized as important or alternatively mine and reallocate the resources utilized in developing and maintaining these strengths to address company weaknesses.

Collectively, the results of the company’s analysis of its present position together with the company’s vision statement, will ultimately determine its path or market strategy. Any strategy that gets the company to the end vision is in some measure sound. But, it is that strategy which will gain the goal in the most direct way, in the shortest time, with the highest probability of success in light of the company’s present resources and capabilities, that constitutes what we refer to as a Sound Strategy.

Like the concept of confidence level, that of probability of success comes out of the statistical disciplines. An event is probable of occurrence if it will more likely than not occur. However, as used here we mean that of all of the paths to the company’s vision the selected one, after consideration of all relevant factors, is the most likely of success.

It is the company’s Sound Strategy which directs the creation of the company’s business plan and budgets, forecasts and estimates, defines the company’s vision, and makes the statement that the vision is both practical and achievable. It is, of course, axiomatic that the shortest distance between two points - the company’s present position and its corporate vision- is a straight line. Although this may work in two dimensions, it may not always be true in three or more dimensions, such as the great circle routes often taken by today’s airlines.

Today’s business environment is both multidimensional and multi-variant. Therefore, the company may need to establish intermediate way points in its strategic plan. Although these way points advance the company in time and distance in the direction of the corporate vision, they may when viewed from the outside appear to move the company away from its base course. In fact, such observable misdirection to third parties may be a key part of the company’s strategy to lull others into believing either the company is off course or to misjudge its ultimate destination.

For example, a job-shop manufacturer without proprietary branded products may have as a corporate vision the manufacturing, distribution, and marketing of unique, proprietary and branded products of its own with the goal of realizing substantial enhanced operating margins. The vision may however, as an intermediate step, require the manufacturer to first become the low cost producer of similar commodity products in order to finance facilities, equipment and the trained work force which will ultimately be required to achieve the corporate vision. The plan and strategy may then be sound and direct even though it may from an external viewpoint not appear to be so.

Sound Strategies are all unique to a particular industry and company. They are custom made and based on each company’s own strengths, weaknesses, marketing position, and vision as well as its resources. By taking Intelligent Information and developing a Sound Strategy, a company can, through Planned Performance, achieve its vision.

Success in business does not occur by accident. It is about making more timely right decisions than wrong decisions. In addition to being timely made, and right, each decision must be based on the best and most current information then available, viewed dispassionately without emotion or prejudice and be based solely on facts or “the facts, nothing but the facts,” as Joe Friday always said.

A “right decision” is any timely choice made in the course of the business process whether by action or inaction, that advances the business in the general direction of the company’s vision. A “wrong decision” is a decision that causes the business to stand still or to lose ground in movement toward its vision, or is not made when first “timely.”

These definitions, of course, assume the existence of a known, communicated, specific, reasonable and achievable set of corporate goals which together form the corporate vision the corporate plans and goals collectively form the company’s vision of its future performance.

Clearly the definitions above contemplate the beliefs:

• that a decision is not a “right” decision even if substantively correct if it is not timely;
• that a decision that merely maintains the status quo ante is not a “right decision”;
• that most decisions do not move the company, even when correctly made, in a direct line to the company’s vision;
• that a decision made by default or omission is nonetheless a decision made; and
• that no decision, right or wrong, when made is final in the sense of being inviolate, or so cast in concrete that it is not amenable to course correction.

Each of these belief sets will be discussed in the light of the company’s reasoning process. It is by reason alone, not instinct, natural ability, or the alignment of the stars, that decisions can be made in a fashion that will:

• most adroitly manage the risks attendant on making a decision; and
• best direct the company’s course towards its vision while minimizing the odds of a “wrong decision.”

Managers often talk of the present value of money (P.V.M.) i.e. a dollar today is worth more than that same dollar in one year (at 10%, about $0.90 P.V.M.), but no one seems to talk about or the present value of a decision, or “P.V.D.” Time is money, or said another way: “time is of the essence.” When a decision is ripe and ready to be made it won’t wait! Either the decision is made or it makes itself! A decision deferred is a decision made, because management will never again have the opportunity to make that specific decision at that specific time.

All decisions have a shelf life and, like milk, a decision is sweeter, or more valuable, the earlier it is made. Over time a decision loses its freshness, its value, eventually spoils, and becomes valueless.

Decisions are most valuable when they are accompanied by the highest risks - risk equals the absolute, but opposite in sign value of a decision. Over time the company will accumulate more perfect information from its available data sources and become more certain of making a right decision. But the value of the decision diminishes proportionately with the diminished risk of making a wrong decision until the point of complete information and perfect knowledge, or zero risk - at which time the decision has zero value because the clock has run out and management is talking in the past tense about history!

The object of business is to increase stakeholder (shareholder, employee, creditor, vendor, customer) value, by means of the timely execution of the company’s plan to achieve its vision. This therefore requires movement and change in position over time as well as the taking of acceptable risk.

As Deepak Chopra has said, more or less, the area of opportunity is congruent with the area of uncertainty, or risk. If the result of a decision causes a retrograde movement in a business direction or merely maintenance of a current position, over time it is “wrong” in that it has not moved the company forward toward its vision in keeping with its plan. The time and opportunity to make a decision at its most valuable point to the company will have forever been lost if it is not made when it first ripens. In other words, the same decision made correctly at a latter time will have a lower P.V.D.

Any decision that moves the company even generally closer to the direct line of march from its then current position to its vision, even if oblique, is a right decision. Because the next decision point will be ahead in time, where the company will have more perfect knowledge and there will be a shorter distance to realizing the vision. Then, with the aid of a new, changed, amended or modified plan based upon the updated forecast, the company will have an opportunity to course correct at the earliest possible time, and therefore maintain the highest possible P.V.D.

No stakeholder ever expects its company to be free from errors and misjudgements. In fact, the freedom to err is a valuable perquisite of enlightened management. If employees are not free to err, they are not free to experiment, to innovate, to try, to improve, and to create, and the company will stagnate and eventually die. To err is therefore okay, and in some respects, even to be encouraged as error adds value, provided that error, when recognized, is followed by prompt acknowledgment and correction and then not repeated.

Of course, step one of any course correction is recognition that although the company is moving in the general desired direction, it is not on the direct path required by the plan. Once recognized the second step is to acknowledge that the directional error is movement off plan, and communicate this knowledge to the company so that the company and all concerned can start to prepare for the next directional change, or tack, even before anyone knows the new course direction.

Following prompt communication, the plan is amended, in turn communicated a new decision made, forward momentum maintained, and speed and direction refocused on the original vision from the new, present position. This constant decision, recognition, acknowledgment, communication, modification, decision wheel sometimes referred to as the continuous improvement process is present in all successful enterprises.

Communication is a key component of the decision wheel. The communication must be clear, direct, positive and heard. A communication is clear if it is understandable by its intended audience. It will be direct if it is free from extraneous information, commentary, and value judgments. It will be positive if it is presented in a manner that first acknowledges the value of the audience and finishes with a reminder of the company’s vision and the audience’s participation as stakeholders in the enterprise. And lastly, the communication will be known to the speaker as being heard by the audience when the audience has acknowledged and provided oral, written, or physical feed back acknowledging the message as having been understood and accepted by them. It must also be made in a manner that acknowledges both the forward momentum of the company, as positive, as well as the need to modify the plan quickly, so as not to move further away from the originally planned line of march.

The communication should seek the participation and input of the entire team as to how to best select a corrective course of action. Management must then promptly analyze all of the alternative opportunities presented, select the decision most in line with the company’s values and vision and renew the cycle of the decision wheel.

Even in the event of a “wrong decision,” prompt corrective action may move the business in a positive and acceptable direction though it will never be able to gain the original position in time and value, P.V.D. Since a company only need to make more right decisions than wrong decisions prompt acknowledgment of a wrong decision will move the wheel forward and give the company a second opportunity to thrive. Obstinate adherence to a course of action proven wrong by actual market experience will delay potentially remedial action and exacerbate the off course, or retrograde, motion and deprive the company’s stakeholders of additional P.V.D.

By maintaining a reasoned decision process and eliminating emotional and other bias dealing with what “is” rather than what you wished “was” and making decisions timely at the point of highest practically achievable P.V.D. Reasoned Results will be achieved. Once the company has a destination - its corporate vision and a roadmap, its budget plan and forecasts in place, and it is ready to commence its journey - the company must still continuously monitor the reasoning process and its progress in the light of then currently known market conditions in order to turn Planned Performance into Reasoned Results.

It is no longer enough to be profitable and have positive cash flow to be adjudged successful! Indeed profits and cash flows which are not consistent from period to period and in conformity with predictions, estimates, and budgets are not even minimally acceptable!

Lenders, creditors, vendors, employees, customers, and shareholders, all of the company’s stakeholders require the company to perform within a narrow band of predetermined expectations. Failure to fall within the band of expected performance can, and will, result in:

• reduced access to funding both debt and equity;
• loss of employee morale and de-motivation;
• loss of customers and suppliers; and
• shareholder revolt.

The company’s first and best opportunity to meet performance expectations is in the setting of those estimates, forecasts, and budgets which together give rise to stakeholder expectations. Then, when the company executes on the communicated plans and meets or exceeds its stakeholders’ expectations it will have delivered Planned Performance!

Unless otherwise pre-warned, lenders expect profits, positive cash flow, growth and debt reduction. Employees expect increased wages and benefits as well as stable employment and growth. Creditors and vendors expect payment within invoice terms and growth. Customers expect timely and complete delivery of services and products with increasing value and quality at appropriate pricing. Shareholders expect the continuance of the business enterprise and increasing shareholder value.

One of the ways in which a company’s executives can manage its stakeholders’ expectations is to promise less and perform more. Exceeding a company’s stakeholders’ expectations is the cardinal rule of achieving Planned Performance, and the best way to ensure its achievement is to promise less and perform more. This does not mean that we advocate “sandbagging” the company’s stakeholders. It does mean that we advocate a conservative approach to the creation of stakeholder expectations.

Budgeting is a tool for performance assessment as well as a model upon which expectations are, in part, based. Having a budget does not mean economizing on expenditures any more than being on a diet means reducing caloric intake although in common usage many would ascribe to these definitions. If the company does not have a budget and use it frequently, at least monthly, to analyze its performance by variance or exception analysis or both, its management will never develop a deep understanding of the financial inter-relationships of each constituent line item (expense) on its operating statement with each other expense item and with the company’s top line revenue, and rate of growth. An expense item that has an underexpenditure to budget is, or should be, of equal concern to one that has an overexpenditure to budget. In each case the absolute, positive or negative, actual to budget dollar variance must be analyzed and explained. Then causes must be determined, plans developed, actions taken and feedback again collected to get back “on plan.” If the budget is proven by performance to be inappropriate or no longer achievable, management then has the opportunity to modify the plan forecast to be more reflective of current actual market conditions.

When setting the company’s annual and monthly budgets we recommend that the company apply both a top down and a bottoms up methodology. Then compare the results of each and reach a company wide consensus at what is achievable with at least an 80% confidence level. The use of the statistically significant concept of a confidence level indicates that within a narrow band of deviation a given result will have a specified probability of success. For example, a budget will have an 80% confidence level of being achieved at specified dollar and unit volumes, plus or minus, 5%. Since budgets of necessity deal with future events and unknown and unknowable market conditions, the setting of a confidence level for their achievement cannot be a purely statistical exercise, but will of necessity, involve management’s best judgements in the light of their intelligence, market experience, and knowledge.

A bottoms up budget is one which starts by analyzing the expected unit volumes of each product and service which the company offers, in each marketing area, by each sales representative, to each known or expected customer or client. The process which should involve every member of the executive, sales and marketing teams should be started no later than the company’s third business quarter for application to the company’s next succeeding annual period, and it must be completed early enough to allow the company to prepare and implement the resource reallocations that will be required prior to the start of budget period in order for the company to get a running start at meeting the plan on day one. The process must require not only numerical responses, but also well reasoned written explanations for market conditions, applicable by geographical area or identified customer or customer class for the current year to date taking into consideration seasonal variances and exceptions as well as planned unit, dollar volume, and pricing adjustments for the budget period.

Once the unit sales budget is delivered by geographical area, product, service offering, salesman and customer, it can be rolled up into an expected top line in units and then priced at both current and expected pricing to provide a first look at the new budget year. This projected top line can then be provided to the accounting department to create a tentative budget with the application of existing fixed costs and variable costs applied to the indicated unit volumes, with the resultant bottom line being available to management as a first look at next year’s prospective budgeted results.

Unlike a bottoms up approach to budgeting, a top down approach starts with a management determination of what next year’s bottom line should look like to meet the existing or current financial expectations of the stakeholder group. By management communicating continuing expectations of the company’s stakeholders in a clear manner in numerical form accompanied by an explanatory text to the accounting and finance staff, a second, or top down, view of next year’s budget can be developed. These budgets when analyzed and synthesized will form the basis for an internally negotiated consensus budget.

However, the task of budget creation is not finalized until the budget is both communicated to and accepted by the company’s stakeholders as reasonable, achievable and appropriate. It is reasonable if all of the requirements for successful achievement, adequate capital (debt and equity), staffing, equipment, facilities, vendor capacities, quality standards and identified current and prospective customers are, or will, with at least eighty percent certainty (level of confidence) be available. It is achievable if reasonable and the stakeholders consent and buy in to its success without condition. Where participants state conditions or “buts” each must be heard, discussed, analyzed, and incorporated, if valid, into the budget. Remember, there is an important distinction between just listening to a communicated thought and really hearing the thought. If the company’s stakeholders can devote the time and care to comment, management must devote the time and equal care to hearing, understanding, and thinking about the stakeholder’s comments.

The budget will be appropriate if it is reasonable, achievable, and consistent with the corporation’s long term vision statement and quality and market objectives. Once the company’s budget is established, its actual performance must be compared on at least a monthly basis to its budgeted performance with all variances (positive and negative) being explained. These explanations should then be transformed into an adjusted budget or forecast of performance for the balance of the budget period. The forecast not only provides an updated view of the company’s expected Planned Performance for the current period, but when compared to the budget a tool for validating and modifying, if necessary, the budgeting process itself. When both the actual to budget and forecasted performance are promptly and continually communicated to the company’s stakeholders, their expectations of the company’s performance will be adjusted and the surprise factor which is so deadly to stakeholder confidence will be diminished.

The company’s budget for the ensuing year should not be changed. The budget will form the basis for assessing how susceptible your business is to periodic prediction as well as serving as a basis for performance evaluation. However, once the company has completed a single month of actual performance the company’s monthly financial performance evaluation packages, which in various and appropriate levels of detail should be provided to the company’s stakeholders, should include the budget with the actual to budget variance analysis, and the forecast for the current year. The forecast will, or course, consist of the years actual to date performance plus an updated budget forecast based on current market conditions for the balance of the year.

Just as budgets are differentiated from forecasts so are estimates differentiated from forecasts. We believe that the more remote in time, the more fallible and uncertain the performance or said another way, the lower the confidence level of the predicted result. As we insist on an eighty percent confidence level for a budget, we do not believe it to be appropriate to refer to any performance more than twelve (12) months in the future as a budget, as to do so would raise the stakeholders’ expectations beyond that which is reasonable. In other words, we do not believe an 80% confidence level is achievable for any performance more than one year in the future. Hence the term estimate.

It is important not to unreasonably raise stakeholders’ expectations of future performance by delivering overly optimistic budgets, forecasts, or even estimates. However, if estimates clearly are understood to have a lower confidence level than forecasts, and forecasts a lower confidence level than budgets, the delivery of long term, more than one year in the future, estimates should not unduly or unreasonably raise stakeholder expectations.

We believe planned performance requires the creation, use, and communication of a five year forward vision reduced to numbers, accurately adjusted to conform with both the company’s budget and updated forecast accompanied by a detailed written explanation of market conditions, the company’s market approach, and all other relevant factors. This estimate becomes the foundation upon which the business’ financial, sales and marketing, process, operational, capital, employee base, and other models can be constructed and tested. Each functional model once constructed then becomes a tool for use in the operation of the business to test the feasibility of alternative options, plans, and visions against the company’s stakeholder objectives, and each in turn becomes a component of Planned Performance.

Managing a business consistent with the concept of Planned Performance requires a high degree of discipline and focus, but we believe that the rewards provided by continuously meeting stakeholder expectations increases access to funding, employee morale and participation, satisfied suppliers and happy customers, and makes the effort well worth the investment.

Although allowance must be made in the company’s vision for socially responsible actions, the rationale for these actions cannot be social betterment as the expenditure of company assets for purposes which will not ultimately increase shareholder value, would not only breach management’s fiduciary responsibility, but will deprive the shareholders of More Money.

The business of business is to provide an economic return to its shareholders. Ultimately the measure of a business’s success is increased shareholder value. However, as intermediary steps the concerns of all stakeholders must be addressed.

Employees expect and need:

• personal recognition and acknowledgment of their value and contributions;
• security and continuity in their employment;
• opportunity for advancement and
• increased direct and indirect compensation and benefits - More Money.

Creditors and vendors expect and need:

• recognition and acknowledgment of their performance and value;
• a continuous outlet for their products and services;
• a growing market and increased market share; and
• prompt and full timely payment at adequate prices - More Money.

Customers expect and need:

• recognition and acknowledgment of their achievements in the marketplace;
• secure and continuous supply of all required products and services;
• a growing market with increased market share; and
• pricing and terms that permit them to make reliable and adequate margins - More Money.

Shareholders expect and need:

• the productive and continuous employment of their capital; and
• increased shareholder value - More Money.

Since the shareholders are the most senior of your stakeholders and the ultimate goal of the corporation’s vision, and indeed its existence, is to increase shareholder value - More Money - it follows that any action which decreases ultimate shareholder value is to be avoided. This does not mean that all expense must be avoided as any expense will necessarily decrease current net worth nor does it mean that net worth and shareholder value are congruent concepts. Expenses incurred in the ordinary course of business in order to further the corporate vision are in the shareholders best interests as they are made in furtherance of the company’s plan to increase, as quickly as practicable shareholder value.

Providing a company’s employees and other stakeholders More Money and meeting their other non-financial requirements and expectations, demands time and resources which might otherwise immediately fall to the bottom line as current profits. However, shareholder value, is not about current profits or current cash flow distributions dividends. Management must take a long term view of the necessity and benefit of meeting all stakeholder expectations. Counterintuitively, paying your employees more than market but less than costs attendant on industry average turnover, including the costs of searching, hiring, training, lost time, taxes etc., increases shareholder value.

Acknowledging, rewarding and providing incentives to employees for commitment, focus, quality, and productivity induces the occurrence and continuance of those desirable qualities which in turn increase company profits, and ensures the company’s longevity, quality, reputation for the benefit of the employees and increases shareholder value.

In order for the company’s creditors and vendors to meet its continuing and growing requirements for an uninterrupted, timely supply of quality goods and services, they need to be appreciated and acknowledged, paid promptly, and receive for reinvestment pricing. That means squeezing the nickel out of the company’s suppliers until the buffalo screams, especially for non-commodity, specialty or uniquely available goods and services does not add to shareholder value even though it may increase short term profits. The company’s vendors need to make enough of a return on their operations in order to continue to invest in their own business new facilities, equipment, employee training in order to continue to reliably supply the company’s growing needs. They are the company’s strategic partners and they must be recognized and treated with respect and as a valuable resource available for use to increase shareholder value - More Money.

Customers continuously “vote with their feet.” If they are not perceiving the receipt of an uninterrupted, timely supply of goods and services, at value pricing, they will vote with their feet by walking away and going elsewhere. Since a company’s customers are the engine that starts and can stop the company’s wheel from spinning, their requirements must be met and their expectations exceeded. While it is true that building quality into the company’s products and services is costly, failure to do so is terminal. It is a necessary balancing act which management must perform every day. The company must deliver more quality than the customers expect, yet not more quality than the customers value. This tension is created as most often quality and cost go hand in hand. Since customers also demand value pricing, so they can make More Money, excess or unappreciated quality will not add to ultimate shareholder value, but rather detract from it because of the increased cost.

Shareholder value is defined as the net present value of all distributions expected over the course of the company’s existence, plus the net present value of the company’s liquidation or terminal value. Clearly time is an essential factor in determining shareholder value. The longer a shareholder must wait for a return on and of his capital the lower the per dollar value of that return and accordingly the greater the return must be in order to justify the investment. As a corollary to the time factor, it is axiomatic that funds, not profitably, employed by the company should be returned to the shareholders as soon as they are determined to be excess. The return of funds may take the form of dividends or even liquidating distributions. The company does not exist for the benefit of management, but rather for the increase of shareholder value and when the company’s vision can no longer be profitably pursued or when the pursuit of the company’s vision no longer requires all of the company’s resources those resources in the pursuit of its vision must be immediately distributed.

Of course if a company is publicly held you can easily determine a market value. It is the stock price times outstanding shares. However, market price even for a widely held public company is not a substitute for shareholder value because free markets are imperfect and information is not uniformly, universally, and evenly distributed to a knowledgeable universe of shareholders. In fact shareholder sentiment influenced by terrorism or presidential politics may have a greater influence on share value than a company’s true worth.

One of the issues is of course is the difficulty in assessing probabilities of success and ultimate amounts recoverable. Is a small but virtually certain return more desirable or of higher value than highly speculative, but immensely profitable return i.e. municipal bonds versus an equity investment in a start up internet company? “Aye, there’s the rub,” to take a few words from Treasure Island’s Long John Silver. For all the science of management discussed in this series of articles, all of the tools, models, budgets, forecasts and estimates, the achievement of a company’s vision and the making of More Money still requires human intelligence, experience and application. These decisions and countless others like them, are integral to the company’s Sound Strategies and must be based on Intelligent Information in order for Planned Performance to lead to Reasoned Results and ultimately More Money.