Lean Times Ahead: 6 Steps to Help You through Them
“We have seen better days” (Shakespeare)
When you read that nearly 75% of the middle class experience financial difficulty and a similar percentage are in debt, it is time to worry.
Add to this the economic difficulties the country is going to experience flowing from the ratings downgrades and it will not be just the poor who will suffer but many middle class South Africans will also find themselves in a crisis.
The “phony war”
In the Second World War, the winter of 1939-1940 saw no activity but in the spring Nazi Germany blitzkrieged Europe and all hell broke loose – the “phony war” was over. It seems inevitable that our own “junk status phony war” will soon be over.
Don’t be fooled by the fact that the country has successfully weathered the first month or two of the downgrades. Remember that only our US Dollar denominated debt has been downgraded and this amounts to ten percent of South African bonds. The rating agency, Moody’s, has yet to decide whether or not it will also downgrade us to junk status. Even if we don’t get a downgrade from Moody’s now, it will probably come in the latter part of the year.
There are several rungs in the ladder below junk status. When this happens to a country its economic growth, currency, unemployment and investment show further declines. If South Africa takes no action to improve State Owned Enterprises and corruption, we will face such further downgrades.
6 steps to take and avoid
Lock down for the lean times with these –
- Don’t take on more debt to supplement monthly living. This amounts to postponing a day of reckoning which more debt will only worsen.
- Budget carefully and understand your spending patterns. For example, analyse the times when you spend unnecessary money and consciously avoid these occasions. Make a plan to cut spend and be disciplined about it.
- Plan to live below your current means. This may sound daunting but will enable you to become frugal. Some simple planning around your habits and strengths (if, for example, you are good with your hands, maintain your own car and home) will help you achieve this.
- If you succeed in either breaking even or saving money, think how it will improve your morale – just think of not waking up at 3 a.m. with a knot in your stomach as you worry about money.
- Learn to distinguish between a want and a need. Once you have done this, reduce or cut out things you want.
- The most important thing is realising your situation will get worse unless you cut costs. Then you must have the willpower to implement living frugally.
Employers: Help your staff through this
Why not share these ideas with your staff – not only can it help them navigate these choppy waters, but it will improve morale and productivity in your workforce.
You Need Independent Directors, not Herd Mentality
“Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently.” (Steve Jobs when he was reinstated as CEO of Apple)
The Companies Act tasks directors to apprise themselves of company activities and make up their own minds as to how decisions should be taken. Strong governance structures should also exist in companies. This spirit of independence and good governance should infuse leadership so that the best interests of the company are safeguarded.
Yet when we look around today, we see State Owned Companies floundering and some multinational heavyweights like KPMG, SAP, McKinsey and Bell Pottinger in serious trouble.
“Surely” you ask “why didn’t some of their directors stop these disasters?”
The herd mentality trap
It is human nature to adopt a herd mentality particularly when there is a forceful and strong CEO. That is precisely why the framers of the Companies Act required independent leadership and good governance.
Good governance and leadership consists of demonstrating accountability, honesty, transparency and respect for all staff and stakeholders. You don’t need committees and red tape if your business is a small one – your leadership should demonstrate these characteristics.
It also pays to be a good listener as this trait curtails “leadership cults”. Encourage your managers and staff to challenge you.
Short term thinking often gets a business into trouble. Listen carefully to your independent thinkers.
Directors and Shareholders: There’s Hope If You Forget Companies Act Compliance Requirements
The “new” Companies Act is pitted with clauses requiring that special resolutions be passed. There are also instances where as directors you are required to take certain actions such as recusing yourself if there is a conflict of interest.
It is important to note that transactions can be set aside if the necessary steps are not taken. Should this happen, a costly and time-consuming exercise would follow.
Can “unanimous consent” rectify non-compliance?
Both our “old” Companies Act and English company law allowed the concept of “unanimous consent” to override statutory non-compliance with certain requirements, such as the requirement for a special resolution to be passed authorising the sale of all (or the greater part) of a company’s assets. Simply put, if all of the shareholders were aware of the implications of a transaction and consented to the transaction, then the “unanimous consent” principle may be available to hold up the transaction despite the required statutory steps not having been taken.
In South Africa following the introduction of the “new” Companies Act in 2011, there was uncertainty whether “unanimous consent” would be accepted here until the Supreme Court of Appeal (SCA) recently pronounced on the subject.
What the SCA said
A company sold the major part of its assets and the directors had a conflict of interest in the sale. Part of the case revolved around setting aside the transaction as no special resolution was passed for the sale of the assets and the directors had not disclosed their interests. The company was owned by a single shareholder – a trust effectively controlled by one person.
The SCA said that the reason for requiring that a special resolution be passed was to “ensure that the interests and views of all shareholders are taken into account”. When reviewing the circumstances of this case the SCA found that the person who controlled the sole shareholder was party to the transaction and thus no special resolution was needed as the shareholder was clearly aware of and had effectively approved the transaction.
It used a similar line of reasoning in resolving the conflict of interest question.
The court specifically accepted the principle of unanimous consent, stating “that principle, long recognised in English company law, from which our courts have received much guidance, was accepted as part of our law relating to companies, under both the 1926 and the 1973 Companies Acts. I can see nothing in the current Act to suggest that the principle no longer finds application”.
The implications are that if a business is owner-managed or the board of directors are a tightly knit group then – even if in error you don’t tie up all the Company law requirements – the “unanimous consent” principle might be available to you.
Be sure however to seek professional advice – every situation will be different.
