I am writing this on a bitter February day. This fits with the exceptionally difficult and unpleasant start to the year I had as a result of being involved in the failure of City Link, which ruined Christmas, and much more, for a lot of people.
City Link was the delivery business that Better Capital bought for £1 in 2013, but, despite our best efforts and many millions of pounds invested, it proved impossible to save. Capitalism is the best way to run an economy but that does not stop it being a hard route. At its core is that weaker business models must give way to stronger ones. Given the entrenched interests of owners and other ‘stakeholders’ (a term I hate, whose correct usage is rooted in Transylvania) this means companies usually fail painfully when the money ceases to be enough to pay their liabilities.
Nowadays, things like redundancy pay mean that those liabilities actually expand on ceasing to trade, guaranteeing that creditors will not all get paid. And that is what happened to City Link – contractors especially took a substantial loss.
In the real world, people don’t much use the information that is readily available to them. City Link had accounts showing the auditors were far from happy about its being a going concern. The fact that there was secured debt also sat on public record – all this obtainable with a few clicks on the computer. But the failure still caught a lot of suppliers apparently by surprise.
Many of those who took a loss on City Link did not think of reading even the company’s own disclosure. If no one reads disclosure, it gives only a false impression of safety, just like the great long leaflets you get with medicines, which you don’t read because they must be OK if someone has gone to the trouble to generate this (often terrifying) mass of information.
This brings me to the Financial Reporting Council (FRC) – a body more interesting than it sounds. It stands for something that surely everyone must be in favour of – encouraging good, clear, readable financial reporting.
But however laudable the aim, it has not succeeded. On the FRC’s watch, annual accounts for listed vehicles continue to bloat. A document that’s 400 pages long is bound to go unread, and despite the FRC forcing boards to say the accounts are ‘fair, balanced and understandable’, they clearly are not.
But the FRC is not idle. Lengthy consultations are produced regularly – nine are currently open – as well as more pages to be added to annual reports. We now have audit reports, risk reports, assessments, strategic reports and so on – all of which we used to manage quite well without.
Boards are even required to produce a ‘viability’ statement, specifying the earliest reasonable date for the failure of their business. Astrology rather than accounting is needed here.
Despite all these gripes, I can see it’s appropriate that a specialist organisation should handle the probity and utility of financial reporting and auditing. But the FRC seems to be straying well beyond its remit and into company management, under the guise of ‘corporate governance’.
Its focus this year is succession planning and company culture. Given that the FRC’s own board is chosen by government, it will have to look outside for a decent model of succession. Also, as discrimination is illegal, it will be difficult for companies to avoid platitudes in the inevitable, additional mandatory disclosures.
As for culture, apart from honesty (not a strong feature of some of the organisations that previously employed some FRC directors) what is right or wrong in company culture is pretty unclear. However, another solemn homily will obviously soon be added to the accounts, at some further cost.
It’s all a long way from financial reports, so I have a request: please, FRC, can you stop adding more of this stuff to company accounts. Please.
To return to where I began, City Link was a train-crash PR nightmare for Better Capital, but more importantly a personal disaster for many of those who worked for City Link.
We were obviously going to get very adverse press given an unavoidable insolvency at Christmas time and all we could do was to brace ourselves. The press were as unpleasant as expected and reckless with their approach to factual accuracy – but I am old enough to expect this. Although the reference to me as a Grinch rather missed its target as I had to look it up.
Then the politicians moved in – I had to appear for what became over two hours before two select committees at the House of Commons. A bit of research on the members of said committees showed a large proportion of them as having had substantial issues with expenses, and one even with Brazilian sex workers. This greatly diminished any anxiety I may have felt about my own performance. (Although why do we have such souls ruling us?) The quality of the questioning was variable, with some right on target and some in the learners’ class.
I was and remain happy that we tried very hard to save City Link but very sad that we failed. Business is not just about winners.
Jon Moulton is the founder and managing partner of private equity firm Better Capital