Mafia Buzz Issue 3

Citizen

David Carte explores why companies buy back shares and declare special dividends. Some ideas are:

1. 
   The company believes that the best investment it can make is in itself.
   
2. 
   It can improve ratios such as earnings per share, return on assets and equity and gearing.
   
3. 
   To avoid criticism that the company is empire building.
   
4. 
   The company has run out of ideas for further investments.
   

The alternative is to build up cash reserves and when the cycle turns, pick up assets at cheap prices. However, with the short term nature of investment thinking among shareholders and investment analysts, one has to be pretty strong to fend off criticism if one takes this stand. (18^th)

Chris Buchanan writes that financial planners will have to choose between becoming sales agents for financial products or providing independent advice for a fee. [They will not survive on the latter!] Greg Snedden of the Financial Couch gives the six steps one should follow when giving financial planning advice:

1. 
   Establish and define the client-planner relationship (like an engagement letter in auditing).
   
2. 
   Gather information about the client (goals, timeframe, risk attitude, etc.)
   
3. 
   Analyse and evaluate the financial status of the client (financial position, income generating ability, cash flows, insurance coverage, tax status).
   
4. 
   Present financial planning recommendations and options.
   
5. 
   Implement the financial planning recommendations.
   
6. 
   Monitor the outcome of the recommendations.
   

Financial Mail

Ignatius Sehoole, CEO of SAICA, says that if the new regulator (the IASB) follows through with its statement that it intends to be a tough regulator, it may end up having no-one to regulate. He warns that we must not allow the auditor to go the way of the dodo. [If SAICA pursues its policy of forcing chairmen, CEOs and CFOs of companies who happen to be CAs to sit for 20 hours in lectures once a year, I can foresee SAICA losing these very valuable and high profile members as well.]

FinWeek

“I thought that the article written by Paddy Upton, former trainer of the SA cricket team and currently leadership and mental conditioning coach in business and professional sport, in the 10 August 2006 journal was brilliant. He maintains that too much emphasis is given to instructing and not enough to coaching, too much on skill, technique and fitness and too little on the mind and too much on performance and too little on the person. He gives a list of the differences between instructing and coaching:

Instructor	Coach
Tells	Asks
One way relationship	Partnership
Reflects and plans	Gets player to reflect/plan
Teaches	Helps learn
The old way	The new way
Exerts power	Influences
Gets frustrated	Empowers
Goes for the quick fix	Takes time and patience
Sometimes works	Most time works

He sets out a cycle of how players learn:

Step 1: Analyse and plan

Step 2: Practise and train

Step 3: Play the game

Step 4: Reflect (I call this doing a post-mortem)

Step 5: Redo steps 1 to 4, and so on and so on.

In Vic de Klerk’s article on share buybacks he says: “Unfortunately, dividends are currently taxable in the hands of the company that declares them – in the form of the detestable 15% secondary tax on companies. That results in directors sometimes choosing the paternalistic route of buying shares back rather than declaring a special dividend.” Firstly, the “detestable 15% secondary tax on companies” is not 15% but 12,5% and secondly, STC is payable on any buyback that cannot be charged to share capital or share premium once the 10% limit is reached on using subsidiaries to house the shares.]

Fortune

Once in a while this prestigious magazine comes up with something that is really good. In the August 7^th issue there is an excellent article on General Electric’s new management style. Jack Welch’s (departed from GE five years ago) rules for running a large company are being questioned with Jeff Immelt now at the helm. I will attempt in the synopsis below to capture the essence of the battle that is raging between the old and the new. JW’s approach was consistent earnings growth. He would not tolerate low margin low growth units. If you did not shape up in JW’s GE, you were shipped out. JW went for size, being number 1, keeping lean, exploiting niches, placing the customer first, looking outward and ranking employees and firing those who did not meet his standards. Debate is now taking place as to whether the old rules are still applicable in today’s environment:

1.O: Big dogs won the street.

1.N: Agile is best; being big can bite you.

2.O: Be number 1 or number 2 in your market.

2.N: Find a niche, create something new.

3.O: Shareholders rule.

3.N: The customer is king.

4.O: Be lean and mean.

4.N: Look out, not in.

5.O: Rank your players; go with the A’s.

5.N: Hire passionate people.

6.O: Hire a charismatic CEO

7.N: Hire a courageous CEO

8.O: Admire my might.

8.N: Admire my soul.

Makes you think, doesn’t it? My only comment is that one should have a holistic approach to management and to choose one rule over another can become narrow thinking.