Why are values, morals, and ethics important? V2

What is the purpose of this article?

Help founders, corporate leadership, investors, and their coaches and advisory boards begin a discussion regarding VME (values, morals, and ethics).

You may download a PDF of this article from: Why are values, morals, and ethics important V2

What are the critical learnings in this article?

  • You need to have a shared and commonly understood definition of values, morals, and ethics.
  • You need to define how VME is used in decision making and to guide the behaviour of everyone in your company.

What are VME?

People often use these terms interchangeably. The concepts are different, which can result in confusing sets of expectations. E.g. many board of director’s mandates mention meeting “highest ethical standards”, but what does that actually mean? Many in corporate leadership1 believe ethics means compliance with laws, regulations, and company policies.  Many in the broader public associate ethics with morals and doing what is right.

To illustrate the confusion: for a few years Apple Computer only paid .005% income tax on billions of Euros of profit in Ireland.  The CEO stated that what Apple did was OK because all the laws were followed.  Many people felt that paying .005% income tax was “not the right thing to do.”

The following are my definitions.  You should have your own definitions.  You cannot have a discussion about VME if everyone has different definition of what the words mean.

Values: Values are the rules by which people make decisions about what they should or should not do. Values have different importance’s, which is helpful when needed to trade off or balance one value versus other values. Values are what someone thinks and feels internally.

Morals: Morals are decisions, actions, and behaviours which other people feel are right or wrong, good or bad.  Morals are actions and behaviours arising from one or more values.  Not all values are related to morals.  You are judged by others as to whether or not your actions and behaviours are moral or immoral.

Ethics: Ethical decisions, actions, and behaviours are based on following a documented set of standards or principles.   Many companies and professions have a Code of Ethics.

VME should also tie back to the purpose of the corporation.1 Is the sole purpose to make as much money as possible, constrained by laws, regulations, and company policies?

How are VME used?

VME are used by the board of directors, CEO, C-Suite and major investors when making decisions and taking action within the company’s ecosystem.2  Ecosystem members (such as employees, the public, customers, suppliers) may have major differences in their individual VME.  Corporate leadership uses their personal VME to manage the conflicts of interests within corporate leadership, and with ecosystem members.

Lawyers would point out the fiduciary duty e.g. in Canada to act in the best interest of the corporation (fiduciary duty varies by country).  But is that the right thing to do?  Professor Didier Cossin makes the following observation, “The doctrine of maximizing profitability may be used as justification for deceiving customers, polluting the environment, evading taxes, squeezing suppliers, and treating employees as commodities. Companies that operate in this way are not contributors to society. Instead, they are viewed as value extractors. Conscientious directors are able to distinguish good from bad and are more likely to act as stewards for safeguarding long-term, responsible value creation for the common good of humanity. When a company’s purpose is in conflict with the interests of society, board members need to take an ethical stand, exercise care, and make sensible decisions.”3

Documented ethics arise from interactions between your company and its ecosystem members. Your company, and others, may be lobbying the government to change laws and regulations to benefit what they believe is important (i.e. their values and morals).  How should corporate leadership deal with the conflict of interest regarding laws and regulations which provide value to society vs providing value to the corporation?  Some people believe laws and regulations exist to protect the interests of society as a whole or protect those who cannot protect themselves.  Some companies have Codes of Ethics written to minimize legal risks to corporate leadership.

Some companies use values, morals, and ethics play in hiring, promotions, and terminations. Warren Buffet said “You’re looking for three things, generally, in a person: intelligence, energy, and integrity.  And if they don’t have the last one, don’t even bother with the first two”.

How do values, morals and ethics impact company value growth and preservation?

Positive or good values, morals, and ethics are not a pre-requisite for company value growth and preservation.  I sure you can think of some example – I know I can.

Poor VME can lead to the following major company risks;

  • Company leaders may engage in fraud or illegal actions.
  • In 2002, Arthur Andersen was found guilty of a criminal act, based on one single email. (Incredible but true). As a result, this large global audit firm went out of business.
  • Companies may lose their social license to operate. In 2022, the European Union, Australia and other country government were actively seeking laws and regulations to restrict the activities of major high tech companies. Governments felt that the companies were not acting in the best interests of society.
  • There can be challenges in recruiting and retaining the elite talent necessary to grow in the intensely competitive global ecosystem.
  • The value from mergers and acquisitions can be threatened when companies have different sets of VME. It can be extremely hard to change the VME of people. Even ensuring compliance with a new set of documented ethical standards may be a challenge.

What are the challenges of VME?

The challenges of VME include:

  • What do you do when VME could reduce long term profits? Some companies consciously decided to take actions which they believe is better for the broader society but may result in lower profits. g. Vancity Credit Union (in Vancouver, British Columbia) pays its workers a living wage and expects its suppliers to pay their workers a living wage.  On the other hand, Loblaws shareholders, in an early 2018 Annual General Meeting, voted not to pay workers a living wage.
  • Shareholders trust the board of directors to make the right decisions. The board, in turn, delegates the bulk of authority to the CEO.  The board and the CEO must be able to manage a broad range of conflicts of interest, especially personal.  g. with average CEO tenure below 4 years, it can be a challenge for the CEO to focus on the long-term, rather than maximizing the value of short-term bonuses and stock options.  Directors have been known to question a merger when their own director roles are in jeopardy.
  • If the board and CEO have different sets of VME, then the CEO’s decision making, and tone setting for the company, will not be aligned with the board.
  • Corporate leadership, through their actions and behaviours, communicates what the acceptable VME are. It is important that the leadership, when making difficult decisions, communicates how those decisions are related to VME. Children by the age of seven have already developed a set of values and morals.4 They observe their parents and learn from their parents.
  • The most difficult decisions made by corporate leadership (e.g. times of crisis, cost-cutting, re-organization, major merger, major change in strategy, CEO appointment or termination, etc.) often reveal what the true VME are. It’s easy to talk about VME when it does not take major personal courage to make a difficult decision.

What are your next steps?

You need to customize the following generic plan for your specific company.

  • Survey the board of directors, C-Suite, and a sample of employees, asking what they observe the purpose of the company is and what the purpose should be.
  • Survey the board of directors, C-Suite, and a sample of employees, asking what they observe the companies values to be. In the case of the employees, asking them what they observe the values of the board of directors and C-Suite to be.
  • Survey the board of directors, C-Suite, and a sample of employees, asking what whether of not the leaders are following the documented code of ethics.
  • Survey the board of directors, C-Suite, and a sample of employees, asking what they observe the purpose of the company is and what the purpose should be.
  • Look back over the past 5 years. How have VME guided critical board and CEO actions?  g. during crisis, making important one-time decisions such as appointing or terminating a CEO.
  • What questions, if any, are asked of director candidates and CEO candidates to assess their understanding and commitment to the company’s VME? Which VME, if any, are a perquisite for hiring? Which violations of VME result in immediate termination or hold back promotion?
  • Analyze the above data to identify things such as: differences among your company leadership, differences between your employees and your company leaderships, differences between what is documented vs actual behaviours and actions.
  • What are the definitions of VME used by your corporate leadership? If your company has documented values, how are they used?  What are employees supposed to do with the values?  How do you know how the employees are using the values, if at all?
  • Read and discuss the values of the United States Army. What are the differences between your company values and morals relative to the U.S. Army.  The Army explicitly identifies morals – do your company values identify morals? The Army values guide individual conduct 24 hours a day. Are your VME intended to guide decision making, actions and behaviours only during working hours or 24 hours a day?  Some would argue that the company has no business in what an employee does in their non-working hours.
  • Prepare a short collection of stories describing how corporate leadership and employees should make decisions and behave in key situations.
  • Revise your company values and code of ethics to reflect those stories.
  • Put in place processes to communicate and use the company values and code of ethics e.g. prior to each board meeting, every attendee reads the company values and code of ethics. As each key board decision is being made, briefly discuss how the decision reflects the company values and code of ethics. The board should also consider the degree to which the members of the company’s ecosystem would view the decision as moral.

Footnotes

1 Purpose of the corporation definition: What is the purpose of the corporation and why does it exist?

Is the only purpose of the corporation to create wealth?  Is there a higher purpose, either to a community or to society?  Or you may conclude the only purpose is to create wealth for shareholders and the C-Suite.  Peter Drucker said: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

2 Ecosystem definition: A business ecosystem is the network of people and organizations, including stakeholders and third parties directly and indirectly involved in the delivery of a specific product or service through both competition and cooperation. The idea is that each entity in the ecosystem affects and is affected by the others, creating a constantly evolving set and nature of relationships in which each entity must be flexible and adaptable in order to survive, as in a biological ecosystem. Stakeholder definition: Stakeholders have an economic interest in the corporation: Shareholders, Non-equity capital, Customers/ users, Employees/ unions, Suppliers, partners

Third party definition: Politicians, Regulators, Third party standard setters (e.g. Proxy advisory firm, accountants, lawyers), Society

3 “The four tiers of conflict of interest faced by boards of directors”, Professor Didier Cossin and Abraham Longze Lu, IMD Global Board Centre   https://www.imd.org/research-knowledge/articles/the-four-tiers-of-conflict-of-interest-faced-by-board-directors/

4 “Teaching young children morals”, Meri Wallace, Psychology Today, April 6, 2018

https://www.psychologytoday.com/ca/blog/how-raise-happy-cooperative-child/201804/teaching-young-children-morals

 Further reading

“Society’s trust in corporate leadership and political leadership is low”  koorandassociates.org  Society’s trust in corporate leadership and political leadership is low.

“Values – U.S. Army” koorandassociates.org Values – U.S. Army

“Why is trust critical for transformation” koorandassociates.org Why is trust critical for transformation success?

Leaders eat last University of California – Davis, Center for Student involvement https://csi.ucdavis.edu/leaders-eat-last/

What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

Tools

“What are your values and morals? Survey Tool”, koorandassocicates.org What are your values and morals? Survey Tool

How can a private company sell securities in Ontario? V2

What is the purpose of this article?

Enable private company founders, boards of directors, CEOs, CFOs, and investors to structure their discussion on raising capital and how to sell securities (equity or debt) in Ontario.

This article does not provide legal or financial advice.  Before making any decisions or take any actions to sell securities in Ontario, you should consult with the appropriate professionals.

You can download a PDF of this article from: How can a private company sell securities in Ontario V2

What are the critical learnings in this article?

  • There are many ways to raise capital, in addition to selling securities.
  • There are many provinces and countries to raise capital from.
  • You need an experienced finance person or financial advisor to help you think through the best way to raise capital.

There are many ways for a private company to raise capital in Ontario.

  • These include: government loans, grants, and tax credits; factoring; pre-payments from customers, deferring payments to suppliers, a variety of financial instruments, loans, and selling securities in Ontario.
  • Any company in the world selling securities in Ontario must follow Ontario laws and regulations. The OSC (Ontario Securities Commission) regulates the selling and trading of securities in Ontario.
  • Any Ontario company selling securities in another province or country must follow the local laws and regulations.

This article is focused on a private company selling securities in Ontario.  Publicly traded companies or private companies going public are outside this article’s scope.

A prospectus is always required unless the company meets specific exemption conditions.

Creating a prospectus can be a long and expensive process. Much of the funds from the sale of a small amount of securities could be consumed by the prospectus costs.

Under certain situations a prospectus is not required, resulting in a faster and lower cost sale of securities. The following provides a high-level overview of the 6 general situations in which a prospectus is not required. Each situation reflects the characteristics of a specific type of investor.  You must consult a securities lawyer for advice, as the laws and regulations are far more detailed than this overview.

  • Private issuer: your corporation has fewer than 50 people holding securities. A company starting out with a handful of founding shareholders actually takes advantage of this exemption, often without being aware of it.
  • Family, friends and business associates including employees, officers, board directors of the corporation, or consultants to the corporation.
  • Accredited investor: These are investors with assets and income which meet the OSC’s definition of a “accredited investor”. The OSC views these as sophisticated investors who do not require the detail contained in a prospectus in order to make an investment decision.
  • Minimum purchase amount of $150,000. As long as the investor (who cannot be an individual) purchases at least $150,000 of securities.
  • Offering memorandum: an offering memorandum is a simplified prospectus, which must follow OSC regulations and be filed with the OSC.
  • Crowdfunding: your corporation can sell simple securities (e.g. common shares and non-convertible debt) through a registered online funding portal.

If you are taking advantage of one of these exemptions, you must file a report with the OSC, unless you are utilizing the Private Issuer or Employee, Officer, Board Director, Consultant exemptions.

 By utilizing these exemptions, the corporation has multiple potential securities buyers.

Potential securities buyers may include:

  • Friends and family;
  • Individual investors;
  • Family Offices;
  • Venture Capital or Private equity;
  • Strategic investors;1 and
  • Institutions.

In addition to the above, the corporation may utilize an exempt market dealer, who is an intermediary between the corporation and accredited investors. The exempt market dealer should have a broad network of potential investors, enabling your company to quickly sell securities.  It could be very time consuming for your company to find investors. The exempt market dealer must be registered with the OSC.

What are your next steps?

  • Begin your next steps at least 12 months before you need to sell securities.
  • Define your company’s long-term value creation plan (sometimes called a strategic plan).
  • Outline your company’s long-term cash-flow and capital requirements plan, linked to your long-term value creation plan.
  • Agree on what is driving the need to raise capital at this point. g. funding growth, founder(s) want to exit, founder divorce or death.
  • Analyze the long-term implications, in multiple-scenarios, of raising capital at this point.
  • Determine the best way to raise capital at this point. There may be many options rather than selling securities. There may be many options for which province or country to sell securities.
  • What stage is your corporation at? g. Seeking angel investors/seed capital or A, B, C series funding?  An established corporation that has been in business for many years? Founders seeking to sell their interest or sell the company?
  • Founders and major shareholders must also consider their personal and family financial plans.
  • Create your plan to build relationships with potential buyers of your securities. Investors, especially funds and institutions, will need time to get to know you e.g. many months of receiving your monthly updates.

Footnotes

1 Strategic investor: an investor (typically a company) that invests primarily for strategic rather than financial (return) purposes. E.g. in order to gain future access to a key new technology or product. (By contrast, financial investors make investment decisions primarily based on the prospect of a strong financial return.)

What further reading should you do?

What will be the board and C-Suite talent requirements? V2

What is the purpose of this article?

Enable the board of directors and C-Suite to have a discussion regarding their talent requirements and how to manage those requirements.

You can download a PDF of this article from:  What will be the board and C-Suite talent requirements V2

What are the critical learnings in this article?

  • A company without a competitively differentiated board of directors and C-Suite will not survive.
  • Define the current and future value contribution required from each role. Assess each candidate’s capabilities in terms of their historical impact on value and their future potential to impact value.

What type of company is this article appropriate for?

  • Public companies with no controlling shareholder or group of shareholders (e.g. no founders with dual class shares, no voting trust).
  • This article is not designed for private companies with a unanimous shareholders agreement reserving key decisions (e.g. CEO appointment, value creation/strategic plan approval) for shareholders or investors.

Your company’s future is uncertain.

  • The future global environment is uncertain. (e.g. technology, politics, the economy, climate change)
  • Both the future members of your company’s ecosystem, and their interactions are uncertain. Members of your company’s ecosystem include: customers, employees, local communities, society, and investors.
  • Becoming or remaining a large company requires understanding the problems and needs of customers who are willing and able to pay. These problems and needs often change over time.
  • Becoming or remaining a large company requires creating and maintaining competitively differentiated solutions and assets. These solutions and assets will be constantly changing and evolving in your company’s uncertain future.

Why do you need a talented and competitively differentiated board of directors and C-suite?

  • It is your company’s competitively differentiated talent which develops competitively differentiated solutions and assets based on a competitively differentiated understanding of your company’s ecosystem members.
  • Capital availability has grown dramatically over the past 10 years, and is close to unlimited. The availability of quality talent has had little growth.  The scarcest talent of all are those people who are able to grow and develop the capabilities of others. Great teams need great coaches and advisors.

What drives talent requirements for the board of directors?

The director can enable long-term success and value creation via the decisions they make; and the actions they take.

The decisions may include:

  • Appointment, termination, and compensation of the CEO.
  • Review and approval of the CEO’s value creation plan (often referred to as the strategic plan)
  • Ensuring there is a pool of successors for the CEO and the C-suite.

The value creation actions may include:

  • Representing the company with key members of the ecosystem such as government.
  • Introducing the company to the directors’ network of relationships such as: investors, potential employees (including CEO and C-suite successors), suppliers, business partners.

The directors must have history of enabling value creation.

  • Directors are like airline pilots. They aren’t needed when the company is smoothly executing the flight plan.  The directors are needed when there are problems, crisis and black swan events. E.g. replacing the CEO.
  • Each director needs a history of decisions which have resulted in major value creation. For example, past appointments of CEOs who successfully executed their value creation plans. If a director has no history of appointing CEOs, or approving C-suite members, then you need to carefully consider whether they should be nominated. Director education is insufficient.  You cannot learn to ride a bicycle by only reading about it.  You actually have to get on the bicycle and ride it, and perhaps fall many times.
  • If directors are expected to directly create value by their own actions, then they should have a history of actions which have created value.
  • The directors as a whole need relevant current understanding of: customers, target markets, adjacent markets, key components of the company’s ecosystem, and the global environment.

What drives talent requirements for the CEO?

There are three things only the CEO can do, and no one else in the company:

  • Create and maintain alignment of people with the purpose of the company.
  • Nurture the company’s values, morals, and ethics (often referred to as culture).
  • Hire the leadership team and ensure they work well together.

The CEO must be able to oversee the creation and execution of the value creation plan for the company, and modify the plan quickly as circumstances change.

What are the common talent characteristics of the board and C-Suite?

  • They must have fluid intelligence. Fluid intelligence is the capacity to think speedily and reason flexibly in order to solve new problems without relying on past experience and accumulated knowledge. The uncertain future means that decisions must often be made for which past experience and knowledge is obsolete.
  • They must be able to quickly learn new facts, knowledge, processes etc. and unlearn what is obsolete.
  • They must be passionately curious to understand the world around them.

What are the other sets of critical talent supporting the board and C-Suite?

  • World class teams need world class coaches. The athletes who win gold at the Olympics also have the best coaches in the world.
  • The CEO needs a coach or advisory board, as part of the ongoing development of the CEO. The board of directors cannot coach or mentor the CEO due to conflict of interest.  g. A director could not vote on something which the director has coached the CEO to create – the director would be voting on themselves.
  • The board chair also needs a coach or advisory board.
  • Some members of the C-Suite may also need coaches, especially if they are potential CEO successors

What are your next steps?

Create ongoing process for managing Board of Directors, CEO, and C-Suite talent.

  • Outline the members of your company’s ecosystem, including customers.
  • Describe the components of the global environment which may impact your company’s ecosystem.
  • Create multiple future scenarios for your company.
  • What are the implications for the talent you may need: board of directors, C-Suite, CEO advisory board, and Coach(es) for directors.
  • A company without a competitively differentiated board of directors and C-Suite will not survive.
  • Define the current and future value contribution required from each role. Assess each candidate’s capabilities in terms of their historical impact on value and their future potential to impact value.
  • Determine whether or not the board has a role and accountability for value creation. e.g. relationships with 3rd In private companies, the board and shareholders/investors often have a role and accountability for value creation. In many public companies the board does not have a value creation plan. The only value creation plan is the one the CEO is accountable for.
  • Prior to a new director being nominated, they should be a compensated board observer for one year. This allows them to be evaluated.

What further reading should you do?

Why are values, morals, and ethics important?

https://koorandassociates.org/values-morals-and-ethics/why-are-values-morals-and-ethics-important/

What is the purpose of your company?

https://koorandassociates.org/corporate-governance/what-is-the-purpose-of-your-company/

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

Traditional strategic planning dooms companies to failure.

https://koorandassociates.org/strategy-and-strategic-planning/traditional-strategic-planning-dooms-companies-to-failure/

What is the purpose of my website?

What is the purpose of my website?

 There are two purposes to this website:

  • Help business leaders (current and emerging) succeed.
  • Help business leaders have a positive impact on society.

This website has over 100,000 words of thinking which enables the achievement of the two purposes.  The documents on this website are freely available for anyone to read and download.  I am constantly learning which means the documents continue to evolve.

I have a fundamental framework for looking at companies.  The material in this website slices and dices my framework in many different ways and a wide range of level of detail.

My framework for looking at companies has three components.  These components are valid for any type of company targeting major size, at any stage in the company’s life e.g.. a pre-revenue startup, a venture capital or private equity fund, a large long-established global company, or a company in crisis.

#1 Value achievement by customers and some other members of your company’s ecosystem.

This is an external perspective, focused on your company’s ecosystem. You can think about the following without any consideration of your company’s solutions and assets.

  • Members of your company’s ecosystem include: customers, employees, local communities, society, and investors.
  • Every ecosystem member has some urgent problems and needs as well as many nice-to-haves.
  • Enabling each ecosystem member to meet their problems and needs enables value creation for that member.
  • Your company won’t exist if cashing paying customers don’t perceive that they are able to achieve some value by paying for your company’s solution.
  • Becoming or remaining a large company requires addressing the problems and needs of customers who are willing and able to pay.
  • Your company must have competitively differentiated understanding of your customers, and other ecosystem members in order to create competitively differentiated solutions.
  • Short and long-term investor share price is only one target and measure of your company’s value creation.

#2 Competitively differentiated solutions and assets.

Your company’s solutions and assets include: products and services, reputation, relationships with ecosystem members, alliances and partnerships, processes, technology, intellectual property, and capital. Growing a large company and remaining a large company requires:

  • A large number of cash paying customers perceive that they can achieve more value from your solution than from the competition or the status-quo.
  • Employees would prefer to join and stay with your company rather than competitors.
  • Your company’s internal operations being competitively differentiated including: unique technology, unique processes, unique intellectual property, unique alliances and partnerships.

Your company may be creating value as well as impacting or destroying value. Your company may not be meeting the problems and needs of certain ecosystem members. Your company may be increasing ecosystem member problems and needs e.g. to increase profits your company may shut down the single factory providing all employment in a small town.

#3 A talented leadership team.

It is your company’s competitively differentiated talent which develops competitively differentiated solutions and assets based on competitively differentiated understanding of your company’s ecosystem members.

  • Your company’s core leadership team is comprised of the board of directors, CEO, and C-Suite.
  • Warren Buffet supposedly said “You’re looking for three things, generally, in a person: intelligence, energy, and integrity. And if they don’t have the last one, don’t even bother with the first two.”
  • Perseverance and energy go-together. To become or remain a large company requires never ending battles in todays very competitive world.
  • The values, morals, and ethics of your company’s leaders is critical.
  • Your company’s success requires leaders who are competitively differentiated.
  • Your company’s leaders must be regularly acquiring deep new knowledge relevant to future success and unlearning obsolete 1 Deep ongoing and current knowledge of customers is critical. Obsolete knowledge includes: knowing how to meet customer needs from 20 years ago, knowing the best approaches in the last century to acquire, retain, and develop employees.
  • In today’s rapidly changing world, your company leaders must have fluid intelligence. Fluid intelligence is the capacity to think speedily and reason flexibly in order to solve new problems without relying on past experience and accumulated knowledge. For example, successful startup founders, identify problems and needs that have not been well addressed before and create solutions that have never existed before.
  • It is your company talent which: develops an understanding of the customers and other ecosystem members; creates and operates the solutions which enable customers to achieve value and which impact all the other members of your company’s ecosystem.
  • Capital availability has grown dramatically over the past 10 years, and is close to unlimited. The availability of quality talent has had little growth.  The scarcest talent of all are those people who are able to grow and develop the capabilities of others. Great teams need great coaches and advisors.

Footnotes:

1 https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/seven-essential-elements-of-a-lifelong-learning-mind-set

The following are links to sections of my website.  Each section contains my points of view.

Avoiding business failure

The startup journey

Understanding customers

Investor management

Corporate Governance

Creating business value

Strategy and strategic planning

Business transformation

Values, morals, and ethics

Charitable support – the charities I support.

The following is a link to the front page of my website:

https://wordpress.com/view/koorandassociates.org

What are your values, morals, and ethics?

What are your values, morals, and ethics?

A breakdown of values, morals, and ethics  within society risks social upheaval which may devastate businesses. In 2021 and 2022 Canada and the U.S. have seen major social upheaval.

The 2022  Edelman Global Trust Barometer1 has disturbing statistics:

  • 52% of people agree capitalism as it exists today does more harm than good.
  • 85% of people worry about job loss.
  • 57% experience prejudice or racism.
  • 66% believe government leaders are purposefully trying to mislead people by saying things they know are false or gross exaggeration.
  • 42% trust government leaders.
  • 48% believe government is a dividing force in society.

The 2022  Edelman CanadianTrust Barometer show Canada is similar to the rest of the world.

  • 48% of people agree capitalism as it exists today does more harm than good.
  • 34% of Canadian believe they and their families will be better off in 5 years time,
  • 74% of people worry about job loss.
  • 42% experience prejudice or racism.
  • 58% believe government leaders are purposefully trying to mislead people by saying things they know are false or gross exaggeration.
  • 43% trust government leaders.
  • 45% believe government is a dividing force in society.

6 surveys done in 2018 by Professors Michael Bang Petersen, Mathias Osmundsen, and Kevin Arceneaux3 revealed:

  • 24% of the American public agreed “society should be burned to the ground”
  • 40% of the American public agreed “we cannot fix the problems in our social institutions we need to tear them down and start over” and “when it comes to our political and social institutions, I cannot help thinking ‘just let them all burn’”.
  • Key findings include: people are so discontent that they do not care about truth; people deliberately share false and hostile rumours on social media with the goal ”to mobilize the audience in pursuit of chaos.”

My personal observation is that if people believe their interests are not being looked after by institutions and society, then the sense of frustration can lead to tearing them down.  I wonder if politicians, CEOs, and boards of directors understand the long-term implications of their actions to destroy the public’s trust in them.

Footnotes

1 2022 Edelman Trust Barometer – global report

https://www.edelman.com/sites/g/files/aatuss191/files/2022-01/2022%20Edelman%20Trust%20Barometer%20Global%20Report_Final.pdf

2 2022 Edelman Trust Barometer – Canada

https://www.edelman.ca/trust-barometer/2022-edelman-trust-barometer-trust-canada

 3 Professors Michael Bang Petersen, Mathias Osmundsen, and Kevin Arceneaux  “A ‘Need for Chaos’ and the Sharing of Hostile Political Rumors in Advanced Democracies”.  In 2019 won the award for best paper in the Political Psychology division of the American Political Science Association.

How can M&A create value? V2

What is the purpose of this article?

  • Enable the board of directors, C-Suite, and investors discuss how to achieve value from M&A

You can download a PDF of this article from: How can M&A create value V2

 What are the critical learnings in this article?

  • More than half of all deals destroy value for investors.
  • Focus on creating long-term value for the merged company’s ecosystem members, especially customers.
  • Accountability for achieving value must be assigned as part of the initial M&A planning and analysis.

More than half of all deals destroy value for investors.1

The root causes of M&A failure at the deal stage are:

  • The M&A target does not fit the business strategy and future business model
  • Synergy estimates (both revenue and costs) are optimistic. Relevant external benchmarks are not used. No bottom-up analysis.
  • Weak due diligence.
  • Those accountable for delivering the benefits are not involved at the deal stage.

The root causes of M&A failure at the integration stage are:

  • Taking too long to put in place the leadership accountable for delivering results.
  • Poor change management.
  • Poor planning and execution.
  • Limited ongoing communications with stakeholders.
  • Losing customers.

The value of the integrated company must be greater than the value of the standalone companies.

I have had the luck to be at a board of directors meeting at which the newly appointed CFO presented the results of the company’s past merger to the board and the newly appointed CEO. The combined sales and profits after the merged company were significantly lower than the pre-merger sales and profits.  I assume this is what led to appointing a new CFO and a new CEO.

Why are you doing M&A?

  • Support the purpose of your company.
  • Provide increased value to the members of your company’s current ecosystem and the future merged ecosystem. These members include: customers, employees, investors, suppliers, partners, the broader public etc.

How will you create long-term value>

#1 Focus on the customer. You must:

  • Retain the existing customers (except those unprofitable ones you decide to drop).
  • Attract additional customers.
  • Increase the profit arising from customers by meeting more of the customers urgent problems and needs. One way to be able to share the merged set of solutions among the merged set of customers, use the merged set of distribution channels and partners.

#2The merged set of talent, technology, intellectual property and external partners may enable the:

  • Improvement and development of new solutions.
  • Improvement of marketing, sales, and customer service.
  • Improve other internal processes.

#3 The merged company may be able to create or access new distribution channels and attract new partners.

#4 The merged company may require new technology.

#5 The merged process may also require the divestiture of: talent, obsolete intellectual property, obsolete technology, distribution channels, partners, etc.  There may be the opportunity to sell some pieces of the business.

What will be your synergy targets?

Only 58% of acquiring companies publicly announce synergy targets.  Of those that do announce synergy targets, only 29% update investors regarding progress against targets. Successful acquirers have higher internal targets than what is externally communicated.1

What are your next steps?

Some of the things to consider include:

  • As soon as you start thinking about M&A, create the VCO (Value Creation Officer) role. The VCO is focused on creating long-term value from M&A.
  • The VCO will: outline the overall stages and journey of M&A, ranging from first considering M&A through to the eventual achievement of value; outline how Value Creation should be built into the M&A process and into the ongoing normal management process; not be a decision maker but will suggest the decision making process and criteria; be a temporary role, reporting to the CEO, and without any direct full-time reports.
  • Define the decision making principles, process, and participants for each stage of the overall M&A process.
  • Outline the purpose of your company and of the post-merger company.
  • State the purpose of M&A.
  • Describe the ecosystem members of the merged company and the impact on them of the merger. Model how much more value will be created by the merged company compared to the standalone companies.
  • Describe your approach for creating long-term value.
  • Describe why you’ll be able to create more value than competing bidders.
  • Determine the maximum amount you are willing to pay. This will depend upon the terms and conditions.
  • Outline the CEO, President, Chief Operating Officer, C-Suite and C-suite direct reports roles and organization structure for the merged company.
  • Assign accountability for the roles, within the merged company, which will be accountable for achieving value. Set the targets for each role. If the people occupying the roles will not commit, then replace those people. If the people who will occupy the roles will come from the merged company, then determine their commitment to targets as soon as possible.
  • The people accountable for value achievement are also accountable for the plans to achieve that value.
  • Conduct a fact based, sanity checked due diligence. Those who will be accountable for creating and achieving value must have a degree of involvement with the due diligence.
  • The scope of the plans may include changes to: board of directors, C-Suite, talent throughout the company, the organization structure, processes, technology, channels, partners, etc.

Footnotes

1 “The real deal on M&A, synergies, and value”, Boston Consulting Group, BCG Perspectives, 2016

https://www.bcg.com/en-ca/publications/2016/merger-acquisitions-corporate-finance-real-deal-m-a-synergies-value

Further reading

Do you understand your customers? V2

https://koorandassociates.org/understanding-customers/do-you-understand-your-customers/

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

“The six types of successful acquisitions”, McKinsey, 2017 May

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-six-types-of-successful-acquisitions

“Change management in merger integration” Bain, 2017

https://www.bain.com/insights/change-management-in-merger-integration/

What is the difference between strategy and tactics? V2

What is the purpose of this article?

  • Enable founders, C-Suite, Board of Directors, and investors to discuss and asses the company’s strategy and tactics.

You can download a PDF of this article from: What is the difference between strategy and tactics V2

 What are the critical learnings in this article?

  • Long-term success requires both the right strategy and successful execution of the right tactics.
  • Everyone in the company must understand the company’s strategy and focus their energy on achieving the strategy.

 What is strategy?

What will the company’s future success look like to the members of the company’s ecosystem?

  • How will customers perceive success? For example, “In five years time, we will be seen as the world’s best online search company.” is much different from “In five years time, we will be the world’s biggest search company.”
  • Your strategy will define assumptions as to who your target customers are, their ecosystem, and why the customers will be dealing with you rather than your competition. And of course, your competition will also change.  I’ve seen too many company failures resulting from strategies that basically say “This is what we are going to do.  This is the vision and mission of the company. We hope the customers will buy from us.  Hope is our strategy.”.
  • Strategy describes the company’s position in the customer’s ecosystem.
  • How will the other members of your company’s ecosystem perceive the future success of the company? Ecosystem members include: customers, employees, competitors, partners, and investors.

What are tactics?

  • What do you have to do to achieve future success? What are the types of people you need to build that future? (i.e. board directors, CEO, advisory board, C-Suite, management, and staff) If you are in a rapidly changing environment, you need people who can learn quickly and change quickly – knowing what worked 20 years ago may not be helpful in solving future challenges.
  • How will you enable every single person in the company from entry level staff through to the board of directors to understand how they are achieving the company’s strategy. There is a story that when President Kennedy visited a NASA facility in 1962, he asked a janitor with a broom what the janitor was doing. The janitor supposedly said “Mr. President, I’m helping put a man on the moon.”
  • The tactics will depend on the person’s role in the company e.g. The CEO may do acquisitions and divestitures, at all levels there may be processes, technology and talent changes, and the janitors have the tools to create and maintain cleaner work environment.

What are two illustrations of the difference between strategy and tactics?

#1 Hannibal 218-204 BC

  • Hannibal crossed the Alps (Romans thought this was not possible).
  • Hannibal won massive victories in Italy in 18 months – 70,000 Romans died in battle of Cannae; ¼ of Roman adult males killed.
  • Hannibal never lost a battle in Italy during the next 14 years
  • Roman Consul Fabius avoided battle with Hannibal but did not win the war.
  • Roman General Scipio did NOT fight Hannibal in Italy, because Scipio knew he’d lose. Scipio conquered Hannibal’s financial and logistical bases in Spain and then attacked Carthage, resulting in Hannibal being recalled from Italy.
  • Hannibal never attacked the city of Rome. Rome never surrendered or gave up. Hannibal lost the war.
  • Scipio never fought Hannibal it Italy, and won the war.

The key to strategy is being clear on what long-term success actually looks like. Then you need to successfully execute the right tactics. Hannibal and Scipio had different strategies i.e. different definitions of what long-term success looked like.

#2 Tiger Woods – 2006 British Open

  • Tiger Woods’ competitors teed off, using drivers to hit balls over the bunkers.
  • Tiger Woods typically used a four or five iron.
  • His long-term vision of success was getting the ball in the hole.
  • He then determined the best place to putt from to get the ball in the hole
  • Working backwards from the best place to put from; he then used four or five iron to position for eventual success. Tiger Woods, like Scipio, was focused on long-term success.

The key to strategy is being clear on what long-term success actually looks like. Then you need to successfully execute the right tactics.

Doesn’t good execution beat strategy?

  • I’ve often heard people say that good execution beats strategy. Being able to run faster, and last longer, than the competitors in your race, is of no value if you are running away from the finish line.
  • Your challenge is to have a better strategy than the competition and to successfully execute the right tactics.

Do you need an Office of Strategic Initiatives?

  • Do not create an Office of Strategic Initiatives, with EVPs, VP, Directors, etc. of Strategic Initiatives.
  • Why not?
  • Every single person in your company must be focused on executing the tactics to achieve the strategy of your company.
  • Every single person in your company needs to understand the relationship between what they do every day and your company’s strategy.
  • When ever I come across an organization with people whose titles include “Strategic Initiatives”, I make two observations: a) I wonder how those leaders and employees who are not working on strategic initiatives feel and are motivated b) I wonder why the company does not eliminate all the people, processes, and technology that are not focused on achieving the company’s strategy.

What are your next steps?

Phase One

  • Individually survey each board director and C-Suite member.
  • Ask them what the strategy of the company is and what are they doing to achieve the strategy of the company.
  • Identify the metrics regarding the strategy.
  • Document the metrics for each member of the board of directors and the C-Suite.
  • Analyze the results to determine: common understanding of the strategy and alignment of individual leader efforts with the overall strategy.
  • What are the learnings of the analysis?
  • What needs to change? Some of the changes may require replacing people.

Further phases

  • Extend the Phase One process throughout your company.

 What further reading should you do?

Is your company planning to fail?

https://koorandassociates.org/avoiding-business-failure/is-your-company-planning-to-fail/

Thank you for your help

Thank you for helping to make our 2021 Lupus Ontario Geoff Carr Fellowship fundraiser a success.  76 family, friends, neighbours, and colleagues donated $8,533 – more than $251,000 in 16 years!  

Dr. Ambika Gupta, Internist and Rheumatologist, is the 2020/2021 Geoff Carr Fellow.  The following are her words regarding the value and impact of the Fellowship:

I am very fortunate to have been part of the Toronto Lupus Clinic at Toronto Western Hospital over this last year. I have had the opportunity to work with and learn from world-renowned leaders in the care of Systemic Lupus Erythematosus: Dr. Zahi Touma, Dr. Murray Urowitz and Dr. Dafna Gladman. With their guidance, I have improved my clinical skills and am becoming proficient at diagnosing, treating, and addressing complications of Lupus. I have also had the opportunity to be involved with clinical research, in the area of neuropsychiatric manifestations of Lupus. The ability to make a difference in the lives of patients with Lupus has been a very personally rewarding experience for me. I am extremely thankful for the Geoff Carr Lupus Fellowship and Lupus Ontario, because without their support, it would not have been possible to obtain this education and experience. 

What is the difference between pre-seed and seed financing?

What is the purpose of this article?

Enable founders and investors to discuss their assumptions about what each startup financing round means.

You can download a PDF of this article from: What is the difference between pre-seed and seed financing

What are the critical learnings in this article?

  • Investors are looking for the evolving validation of: a large market; a competitively differentiated value proposition; and a team that is able to quickly learn and change.
  • There are no commonly accepted standard definitions. I observe that people have many different interpretations of these words, resulting in confusion and mis-representation.

What are investors looking for?

Investors are looking for a startup with three critical potentials:

  • A large number of cash paying customers with an urgent problem or need they are willing and able to pay for. A large market is needed in order to have a successful startup with a large shareholder value enabling a very profitable exit for the investors.
  • A value proposition and solution which enables a large number of cash paying customers to achieve benefits and value. The startup will fail if the cash paying customers are not getting benefits and value.
  • A great team which is able to continuously learn quickly and adapt. Continuous learning results in the team changing the focus of: who the target cash paying customers are; what the customers urgent problems and needs are; the characteristics of the competitively differentiated solution.

The financing evolution from family and friends through to Series A, B etc. provides ever increasing validation of the three critical potentials outlined above.

Pre-seed

  • First funding after family, friends etc.
  • The goal or end-result, of the pre-seed stage is demonstrating that there is a market need.
  • Prior to pre-seed funding, the startup has:
    1. Created something that works.
    2. Validated that that there are some potential customers with urgent problems/needs they are willing and able to pay for.
  • The startup does not have a complete founding/leadership team, partners, channels.
  • During pre-seed, there is likely little or no revenue.
  • Funding provides a 3-9 month runway.
  • Funds raised: $50K to $1 million.

Seed

  • The goal, or end result, of the seed stage is proving that there are a large number of potential customers that are willing and able to pay for the solution AND there is a solution which can be scaled.
  • Prior to seed funding, the startup has:
    1. Customer traction: e.g. at least one passionate pilot user, some customers that are paying for some beneficial operational piece of the solution or pilot, etc. (This traction excludes consulting and other revenue not reflecting the long term-solution the company is aiming for). The seed stage will further expand the scope of the benefits and the scope of the solution.
    2. Pilot users or customers validate the benefits they are able to achieve.
    3. The right founding team is in place to take the company to the point of being able to scale. The team will expand as the company starts to scale with the funds obtained from Series A funding.
  • Funding provides a 12-18 month runway
  • Funds raised $1-4 million.

Series A

Prior to series A funding, the solution and company have the potential to scale. Series A, and subsequent, funds are used for scaling. Scaling may require changes to: the technology, processes, and talent.

 What are your next steps?

Founders and investors must write down exactly what they mean by terms such as “pre-seed” or “seed”.

What further reading should you do?

What does the startup journey look like?

https://koorandassociates.org/the-startup-journey/what-does-the-startup-journey-look-like/

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Due diligence questions for a startup. V2

What is the purpose of this article

  • Provide a framework for founders and investors to identify due diligence questions.

You can download a PDF of this article from: Due diligence questions for a startup V2

What are the critical learnings in this article?

  • Due diligence begins before a startup asks for funding. Due diligence is not a one time event.
  • Due diligence is based on more than the information a startup provides.
  • Detailed due diligence questions depend upon where a startup is in the investors’ analysis and decision making process. Due diligence increases the further along a startup is in the funding process.
  • Due diligence is done for every kind of startup, including investment funds and angel investment groups.
  • Three overarching due diligence questions apply to any company or fund at any stage: How many cash paying customers are there with urgent problems and needs they are willing and able to pay for? How does the company enable customers and users to achieve more value than the competition? How is the leadership team competitively differentiated?

What is a startup?

A startup is a temporary organization designed to search out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.

Startups are not building a solution.  They are building a tool to learn what solution to build.1

A business model describes how a company creates more value for C&U (customers, users) than the status quo and competitors. Who are your target C&U (Customers and Users)? What C&U  problems are your solving? What C&U needs are you addressing?  What benefits and value are you enabling C&U to achieve? What are the human and technology resources needed?  What are the channels and partnerships?

What are the startup stages?

  • You have some assumptions about an urgent problem or need that C&U have.
  • You meet with C&U to hear from their lips: that this is an urgent problem or need that they have, and the value to them of meeting this urgent problem or need.
  • Within a few months you have something in C&U hands which delights them. This is not the whole solution, but something which provides noticeable value.
  • You keep adding customers while enhancing your solution to provide more value to more customers. You may be changing direction several times during this phase.

A startup is no longer a startup when it has successfully searched out a repeatable, scalable, and profitable business model with lots of potential customers who are willing and able to pay to solve their problems and needs.  The startup has learned what solution to build.  The temporary organization structure must change to one that can grow rapidly.

What are the three key sets of questions an investor asks throughout the life of the startup?

  • How many cash paying customers are there with urgent problems and needs they are willing and able to pay for?
  • How does the company enable customers and users to achieve more value than the competition?
  • How is the leadership team competitively differentiated?

The number of detailed questions in each of the three sets increases as the startup progresses through the due diligence process.

 Due diligence begins before there is a funding deal to consider.

  • Early stage funds encourage startups to: enter information into the funds’ databases at the pre-revenue stage and before asking for funds; update the data regularly; provide month updates to the fund; etc. Software tools analyze the data to identify high potential startups.
  • Early stage funds are using software to build large databases of startups based on existing third party databases and their own tools to scan the web. Analytic tools identify high potential startups.
  • Many funds are now using software to determine which startups to actually contact. InReach Ventures in Europe has built custom software which created a database of over 95,000 startups. The software identified 2,000 candidates for management contact.2 Framework Venture Partners (Toronto Canada) has a 20,000 startup database with about 100 datapoints per startup.  Startups from the pre-revenue stage on can submit information and receive benchmark feedback.3

Due diligence also occurs at the deal sourcing stage

Only 12% of deals arise from companies applying to VCs. Each of the deal sources does some degree of due diligence.

Where do VC source early stage deals?4

31% Generated through professional network

23% Proactively self generated

22% Referred by other investors

12% Inbound from company management

09% Referred by portfolio company

01% Quantitiave  sourcing

02% Other

Once there is a deal, each step of the deal process has due diligence.

Harvard Business Review published the findings from a survey of 885 venture capitalists at 681 firms.5

For each deal that closes, on average:

  • 101 deals are considered;
  • 28 deals proceed to a meeting with company management;
  • 10 deals are reviewed at partner meeting;
  • 8 deals have detailed due diligence;
  • 7 deals result in negotiation; and
  • 1 deal actually closes.

What is one example of the questions asked at the screening stage?

Going VC has pass/fail factors in their one page screening test:6

  • Fit with the fund themes and areas of focus.
  • Addressing problems in the fund’s target industries/sectors.
  • Startup stage aligns with the fund’s target stages.
  • Startup target geography aligns with fund’s target geography.
  • Quality of the referral.
  • Strengths of the startup’s partnerships, customer traction and suppliers.
  • Startup’s market size aligned with fund’s target market size.
  • Other

What are the most important factors for VC investment decision making?4

What do VC’s say is the most important factor when they make the final investment decision?

53% team

13% fit with the fund

12% product/technology

07% Business model

07% Market

06% industry

02% fund’s ability to add value

00% valuation (not a typo – 00%)

Why is the team the most important factor at investment decision time?  Capital is unlimited but the talent to search out a large market and supporting business model is very scarce.  The team must have demonstrated that: they can work together, learn a variety of skills very quickly, build relationships quickly, make fundamental changes in direction when required, have integrity and trust worthiness, maximize the results from careful cash management, etc.

Andreessen Horawitz looks for three things in a startup: huge market, differentiated technology, incredible people.7

What are your next steps

If you’re an investor:

  • Ensure you have an investment thesis.
  • Define your due diligence process and questions. You’ll need several stages of due diligence to quickly screen out companies for which you’ll put in the time and resources for detailed due diligence.

If you’re a startup:

  • Write down your answers to the three overarching due diligence questions apply to any company or fund at any stage: How many cash paying customers are there with urgent problems and needs they are willing and able to pay for? How does your startup enable customers and users to achieve more value than the competition? How is your leadership team competitively differentiated?
  • Define how you communicate these answers to investors and your team: in person or video calls, in presentations, in seminars, in your newsletter, on your website.
  • Research your target investors to understand their due diligence process and detailed questions.

If you’re a company past the startup stage:

  • Follow the same steps as a startup, described above.

If you are a company that is not planning at any point to raise capital:

  • Follow the same steps as a startup, described above. Note that you need to communicate with any existing capital providers

 Footnotes

1 Alistair Croll, Benjamin Yoskovitz , Lean Analytics – Use data to build a better startup faster, (Sebastopol California: O’Reilly Media ,2013) Page 41

2 Maija Palmer, “Artificial Intelligence is guiding venture capital to websites”, Financial Times, https://www.ft.com/content/dd7fa798-bfcd-11e7-823b-ed31693349d3

3 Framework Venture Partners, “What is world class – how do we benchmark venture companies?”, https://www.framework.vc/blogs/what-is-world-class-how-do-we-benchmark-startup-companies/

4 Paul Compers, Harvard Business School, Will Gornall, University of British Columbia Saunder School of Business, Steven N. Kaplan, University of Chicago Booth School of Business, Ilya A. Strebulaev, Graduate School of Business Stanford, “How do venture capitalists make decisions”, Medium,  https://medium.com/vcdium/venture-capital-decision-making-c3258bc1b09c

5 Paul Compers, Will Gornall, Steven N. Kaplan, Ilya A. Strebulaev, “How do venture capitalists make decisions”, Harvard Business Review, https://hbr.org/2021/03/how-venture-capitalists-make-decisions

6 GoingVC Team, “Screening Scorecard”, GoingVC,  https://www.goingvc.com/post/venture-capital-due-diligence-the-scorecard

7 Corporate Finance Institute, “How VCs look at startups and founders”, Corporate Finance Institute, https://corporatefinanceinstitute.com/resources/knowledge/other/how-vcs-look-at-startups-and-founders/

 

What further reading should you do?

How do venture capitalists assess teams?

https://koorandassociates.org/selling-a-company-or-raising-capital/how-do-venture-capitalists-assess-teams

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