E.S.G. (Environment, Social & Governance) 2020. Here’s what you need to know

Headline: Davos, Switzerland – World Braces for Climate Doom.

On January 21st, 2020, 3000 attendees including top leaders from governments, institutions, and industries from around the world gathered at the 50th World Economic Forum(WEF) in Davos, Switzerland to share and influence the trajectory of humankind. Once again as they have for the last 5 decades these leaders came ready to tackle this year’s topic: Stakeholders for a Cohesive and Sustainable World. And this time the lion’s roar centerstage was climate change, including Sustainable Development Goals (SDGs) inclusive within a broader spectrum framework known as ESG (Environment, Social, and Governance). Like the World Economic Forum itself, ESG is essentially an amalgamated group of key stakeholder issues that demand remediation, especially given the impact human endeavors are having on the planet and each other up to now.  So, let’s take a closer look at what’s working, and what isn’t.

ESG as a concept is not new. In theory it stems as far back as human ethical behavior goes. One could argue that among the very first notable rules governing good Social behaviors are ages old. The idea was to teach us how to live together and prosper without destroying ourselves. The basic rules of Social life. The Ten Commandments were among the first proliferated as such I could argue, mostly S and G, but still an early endeavor to curb the temptation of human vice, including sex, alcohol, gambling and usury among others. But a lot has changed. While ‘Western’ religions of old warned that to indulge in these vices earned you a one-way ticket to the gates of Hades, today’s regulatory sanctions out of Washington and elsewhere have a bit less bite, and certainly not the gruesome feared spectacle of life in the underworld just yet. But that too is changing as more stakeholders demand accountability and measurement progress at Davos.

The latest in the race to Measure ESG

Unlike ‘Scoring ESG’ companies, discussed later, what and how to ‘Measure ESG’ comes first. And to date like Scoring ESG there is no standardized agreement across the board to agree on. Still, despite these challenges organizations are trying to pull together a framework. The International Integrated Reporting Council (IIRC), the Global Reporting Initiative (GRI) and the Task Force for Climate Related Disclosure (TCFD) are each working to help enterprises identify and measure specific accounts, but they aren’t working closely enough together. Enter the US-based Sustainability Accounting Standards Board (SASB). The SASB is a non-profit adjunct to the Financial Accounting Standards Board which in this case serves as a provider of materially significant measurable and reportable ESG category “standards” for 77 industries to 3rd party ESG scorers like State Street Global Advisors and MCSI Research.

But while the SASB makes headway to identify and standardize ESG impact metrics and disclosure standards across the board, the majority of the calls for action to-date are driven by climate change, aka the E in Environmental issues as notably exemplified by rising waters in Florida, poor air quality in China, and the catastrophic fires raging in Australia to name a few. These among others altogether, perpetuated by news and Social Media reporting over the last few years are now the central investment thesis for a growing list of climate and sustainability-minded investors looking to identify and differentiate ESG-signatory from non ESG-signatory companies. But despite all the pressure and ambitious talk the pace of adoption is horrendously too slow for climate-change activists like 17yr-old Swedish climate-change activist and Davos speaker Greta Thunberg who lambasted:

“From a sustainability perspective the Right, Left and Center (political landscapes) have all failed… or worse empty words that give the impression action is being taken.”

Voices like Thunberg’s magnify the urgency to act, not on which SDGs should be met, but rather over what period of time. Time being the most important component of any key decision or choice at hand. But despite the urgent need to take action by all stakeholders to stem the tide from climate change aka global warming, even the World Economic Forum’s own request that each attendee at Davos this year commit to becoming a net-zero carbon emitter by 2050 is way too late for the likes of Ms. Thunberg, who is calling for the end to fossil fuel emissions now. Adding lift to the growing warning signs CEO Larry Fink of investment firm BlackRock declared in an open letter to all CEOs recently that his firm has committed to dis-invest from thermal coal producers by the end of this year. BlackRock manages more than $7 trillion in assets for clients which puts Fink’s statement noticeably on the front page of financial news sites across the globe, marking a significant milestone to the climate impact of E in ESG at Davos.

So then what’s the hold up? Why can’t governments and companies all agree on ESG standards & goals?

The Devils in the Scoring

A few firms have undertaken the enormous task to measure and score ESG impacts at the company level. Some look at Risk, some look at actual spending and savings if available. But all are trying to make an effort to quantify that which can be measured effectively at this stage. Three good examples of monitors and ESG data tracking scorers are:

  • State Street global – uses SASB framework to create a Responsibility (r)- factor for each company analyzed, and uses the r-factor as a score-measure of ESG engagement vs exposure.
  • MSCI ESG Research – (Morgan Stanley Capital International) calculates a risk profile scale spread from AAA (ESG Leader) to CCC (ESG Laggard). This score card helps investors understand where a particular company is on the spectrum.
  • Harvard – Impact Weighted Accounts  – new accounting measurements and reporting standards in development to translate all ESG categories into measurable currency that can consistently, across all industries, measure the ESG accounting impact on a company’s financial statements.

For each of these notable data collectors and scoring companies there are many more looking to cash in on the ESG (Measurement & Disclose) bandwagon. High Scoring ESG companies tend to have greater flexibility in overall macro industry risks like less exposure to higher future energy costs, human capital, and waste. At the ground level early reports indicate companies with high ESG scores have less staff turnover, a lower cost of capital, and tend to save more money via operating efficiencies, reduced input/output waste and reduced overhead costs. By contrast lower Scoring ESG companies may (for a time) operate more profitably as measured by their quarterly EPS, but in the next decade ahead the 2020s may see them fall significantly behind the cost curve as compared to their higher ESG  scoring competitors, and potentially force them to close up shop, or merge with a higher-scoring ESG player.

Lastly, how to measure the financial impact of ESG issues on a company’s financial performance. Currently only two methods are gaining traction, one is the R-Factor (Responsibility Factor) created by State Street Global Advisors for fund sponsors like Bloomberg ESG indices. It uses the SASB framework of ESG categories per industry and weights each company subjectively on how it responds to the SASB outlined issues. The other is Harvard’s Impact-Weighted Accounts Initiative (IWAI). The approach here is to standardize an accounting process that adds an impact measure of risk to each company’s accounting system to produce a second set of books that reflects the monetized impact of ESG efforts, rather than an ESG scoring method. It all seems to be coming together, right?

But there are Skeptics

Because the troubles with ESG measuring and monitoring is getting agreement on such things. Everyone is working on the E-Environment because it’s frontpage news, and more straightforward. As it stands now, however, given the several dispersed ESG-related groups and the breath of the ESG landscape for what and how to measure the financial impact on a particular company over another is still considered the wild west frontier out there. Measuring S & G issues is far from identifying a coherent path forward because Social and Governance issues are less directly connected to a company’s financial performance, and thus by no means a slam dunk for CEOs to implement. So why not just lay low? Berkshire Hathaway CEO Warren Buffett has remained on the ESG sidelines for example, averting any material commitment thus far. Perhaps because heavy industry and manufacturing companies in general have the deck stacked against them at the outset, especially to reduce their carbon footprint, a far harder effort at a large refinery like Chevron burning off waste fumes than at a large retailer like Walmart, re-stocking shelves. This ESG industry impact gap and the underlying mismatch of ESG data collected, measured, and disclosed is what mostly troubles adopters across the globe at Davos.

In fact, in its ESG Guidelines report BlackRock for example identifies (3) key challenges ESG data collectors & monitors face including:

  1. Reliance on self-reported data to questionnaires and industry bodies. Company disclosed information is sparse and disparate across industries and regions. The reliance on self-reported data to private aggregators allows companies to disclose favorable data or opt out completely. Furthermore, there is no accountability or overarching governing body ensuring accuracy of reported information.
  • Inconsistent collection, management, and distribution of ESG data. ESG data is collected, managed, and dispersed by multiple data providers and is not easily accessible to all investors in a standard form. This creates a challenge for investment professionals attempting to systematically compare companies across industries and regions, either in real time or over historical time periods.
  • Disparate approaches to measure and report ESG information to investors. Due to different methodologies and disclosures, index providers and asset managers report ESG considerations inconsistently, creating challenges for investors seeking to compare ESG investment strategies, objectives and outcomes consistently.

This disconnect between investors’ desires for reliable ESG disclosures and how to do it has corporate boardrooms on edge and a little uneasy. In fact, according to a recent PwC Annual Corporate Directors Survey roughly 1 in 3 corporate board directors think institutional investors should devote less attention to some ESG issues, like Board Ethnic, Gender & Racial Diversity, Environmental, and Social & Sustainability Issues. Directors argue they are already handling ESG issues as components of Risk Management, Business Continuity or IT Security plans. Hence many enterprises feel they already have many of these ESG issues under control, and don’t need to extend their transparency for any good reason. And there’s the rub. On the one hand investors want to see ESG metrics far more than corporate executives want to show them because corporates are concerned that ESG measures could negatively impact the value of their capital stock in the public markets. Thus, begging the age-old question; ‘why introduce another layer of competitive performance metrics unless you’re forced to’? Still however, CEOs are eager to stay ahead of the growing populist ESG movement and to engage the sustainability culture sweeping across the globe.

So. What should CEOs do now?

The answer depends on your appetite for short termism vs long termism. And that’s the message from Davos, BlackRock and the new Business Roundtable announcement last August. Wherein the leaders of nearly 200 US-based corporations pledged to include their “stakeholders” as well as their “stockholders” in their profit motives going forward.

Nonetheless, if ESG is a new concept to you. Yikes! You’re behind the curve. So start with an ESG Assessment. Don’t sit on your hands and wait for it to go away. It won’t. If you wait around, eventually investment dollars will dry up as investment funds (public and private) add layers of benchmark ESG rankings & scores to compare companies to one another. Fall too far behind (public or private company) and it will catch up to you at some point, and when it does there will be few places to hide anymore. So Step one: review your industry guidelines in the Sustainability Accounting Standards Board (SASB).  

Step two, hire a Chief ESG Officer to create and champion an ESG effort and roll-out plan sending a strong message to show the public and all stakeholders of your elevated efforts to embrace ESG issues, and to concentrate your metrics-tracking and disclosure/reporting functions into a single head. The new C-ESG executive can report directly to the CFO’s office or the Board of Directors to ensure proper accountability and disclosure. The idea is to provide investors with more transparency into your progress on ESG issues asap.

Q: What will ESG Cost?

A: It’s all about the ‘Long Term Value Creation Story’

At the company level ESG implementation costs obviously vary widely from tens of thousands for Solar installs, to tens of millions to remediate a coal-burning power plant. But cost is relative to time. Pay now or pay later. When is later? According to climate change advocates and activists of the same mind costs are in the trillions so the time is now, while there’s still a good story to tell. In support, former IBM CEO Sam Palmisano said recently that ESG has to be part of your brand, “not just a timely project initiative.” The value creation story argument is that in the long run value is increased as consumers and stakeholders only patronize brands synonymous with ESG, and won’t patronize non-ESG firms. And over time those left behind will suffer a huge catch-up investment requirement potentially causing a significant valuation-decline from their industry peers. Can you measure that? It won’t be easy or straightforward. Best advice is simply to get started down the path and learn from others along the way.

Walmart Case Study

Safe to say that recent concerns about abrupt climate change issues largely focus on contemporary pressures to reduce greenhouse gases by lowering a company’s fossil fuel energy use aka carbon footprint. For example, a transportation trucking firm should buy all electric vehicles, a large manufacturer and heavy coal consumer should add more solar/wind resources, and food industry packaging providers should recycle their own packaging, and pledge to clean up the growing plastic waste problem, etc. And there is a good story to be told there. But ESG goes far further, into the future, and offers far greater rewards to ESG adopters who can gain the public trust telling a compelling ESG-friendly story.

Walmart is a good example of taking ESG seriously. The company has a CSO (Chief Sustainability Officer) who manages a Working Group (as shown) the hub of several corporatewide ESG initiatives that impact many corporate functions across their entire enterprise ecosystem, and externally as well across their stakeholder landscape from supplier sustainability mandates to power consumption. And given its $500 Billion in global annual revenues and 2.2 Million employees (1.5M in the U.S.) implementing an institution-wide ESG program has a corresponding widespread network influencer effect. In their 2019 ESG Report Walmart cites the importance it gives to ESG issues:

[ESG practices can enhance customer trust, catalyze new product lines, increase productivity, reduce costs and secure future supply, while simultaneously improving livelihoods, advancing economic mobility and opportunity, reducing emissions and waste, and restoring natural capital.]—

Now that’s a mouthful. The company not only clearly recognizes and embraces its leadership role to set a good example for other companies to follow, but also actually moves the needle on specific measures for employees, customers, suppliers and all stakeholders, which by order of magnitude includes millions of people across the globe. Being a first mover, or early adopter incorporating ESG into the fabric or the business whose growth strategy embraces rather than side-steps ESG is likely a successful approach.

Are ESG-embracing Companies like Walmart “worth” more?

Is Walmart stock worth more as a direct measure of their ESG programs? It’s too early to tell. But probably not. Nor should it be, until Wall Street and Main Street agree on the “why.” Walmart itself cites this dis-connection among their challenges when addressing stock analysts for example who question if short term ESG costs will pay off in a long-term strategy, especially as it relates to stockholders’ earnings expectations. And this gap between cost of adopting ESG broadly and earnings performance may keep many CEOs on the sidelines until they are either forced to comply or appropriately incentivized. But the writing is still on the wall. ESG is here. Deal with it!

From a CEO Point of View

Is my company worth more if I embrace ESG? This is a tough question to say yes to. Worth more can mean higher profits, or multiple expansion for public companies. Currently ESG engagement remains an important cost center, not a profit center. And until that changes higher costs drive earnings down in the short term. But as mentioned ESG is not a short-term investment play, hence the multiple expansion option anticipating higher earnings down the line is more likely a reason for any valuation premium. How far down the line? Unknown. Each industry is unique and each CEO’s approach is different in timing and commitment. But the argument is that one day soon access to funds, and the cost of capital will be higher for non-ESG companies, especially as more ESG-targeted investment funds and managers assert their “sustainable investment” mandates.

From an Investment Fund Manager point of view

According to Jim Rossman Lazard head of shareholder advisory, CEOs who avoid ESG do so at their own peril. In an interview on January 17th, 2020 on Bloomberg tv Rossman said “I think the movement of ESG from the periphery to the center stage over the last two years is probably as significant as the rise of activism. I think it’s going to fundamentally disrupt asset management and the way not only passive managers, but also active managers think about prioritizing ESG in their Investments… yet another agenda the board and the management team have to take into account…”

Meanwhile, Brian Deese, Head of Sustainable Investment for BlackRock, said in an interview on PBS Newshour that same day January 17th, 2020 regarding the increase in climate change activity:

“these risks are not fully appreciated in financial markets and so we believe we are going to see a massive re-allocation of capital…”

Once again timing is everything. And nevertheless, as it stands ESG-investment funds are a nascent piece of the overall investment pool available to companies. Today ESG funds still do not outperform non-ESG investment funds, however, some say that will change. As ESG-compliant companies begin to take investment centerstage, they will eventually have access to cheaper investment capital and thus potentially lock-out or restrict capital to serial polluters for instance. But to be fair, ESG has a bright future and is likely to compel most every company to show some level of engagement and commitment starting soon.

At the end of the day until a global comparative set of consistently measurable and reportable ESG financial metrics becomes the rule rather than the discretionary exception for public market valuation, it’s still Corporate Earnings aka “the mother’s milk of the stock market” that will drive stock prices up or down for some time ahead. For now, however, CEOs who avoid ESG do so at their own peril. Because the message is clear, get started now on your ESG planning, or face the consequences later. And that is the real take-away from Davos, Switzerland this year.

Make sense?

About the author: Rick Andrade is an investment banker at Janas Associates in Pasadena, where he helps CEOs buy, sell and finance middle market companies. Rick earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a CA Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. Please note this article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC.

CEO Tenures are Under Pressure in 2020. Here’s Why

By Rick Andrade – As published at CEOWorld.com

The first CEOs in history, or rather pre-history were clan and tribal leaders thousands of years ago, notable Greek, Roman and Persian leaders like Alexander the Great, Julius Caesar, and Persian King Xerxes the Great were all the rage. These heads of state were also CEOs, responsible for the successes and failures of the actions and decisions they made each day while in control. Similarly, as is the case today these ancient leaders often confided in a select few advisors: personal, military, and political to help them craft a winning plan. Today we call these advisors the Board of Directors, a body originally designed to advise, monitor and champion the CEO. Later as public SEC rules matured the BOD became focused foremost on maximizing shareholder wealth and has become like the Oracle Temple at Delphi the historic corporate institution leaders must look to for wisdom and guidance.

Nevertheless, as time passed into modern history it was the Monarchs and Czars essentially who inherited the conquests and properties of their forefathers taking the reins of power and responsibility to acquire more. Most ruled from the time they became top dog until their death, which was by most accounts violent and synonymous with regime change and significantly more unpleasant than early retirement of CEOs today as a rule of thumb. Nonetheless, back then CEOs were far more in control of their own destiny, and to stay on the job meant stacking the deck in your favor.

In the early days of American capitalism, the icons of the day aka Robber Barons also ruled the roost of empires and for good reason, they created them. For these ruling class business tycoon-elites the thinking was simple. Many will benefit from their creations hence such rare birds should be left alone. This translated the idea that maximizing ownership-wealth was the very essence of western capitalism, the American Dream. A CEO decision then was thought to be always in the best interests of the business and its workers. And if workers are happy, the community is happy. If the community is happy, the politicians are happy, and when politicians are happy there are fewer rules, fewer regulations, and a boundless field of opportunity for industry and their leaders to grow and control massive wealth and power. In fact, the US government had to ask JP Morgan to help bail out the US treasury in the bank Panic of 1907, exemplifying that such concentration of wealth and power in a single corporation meant something had to change. And by mid century US corporations, while still big and controlled by dynamic commanders-in-chief, began to face growing concerns about who the real winners were in their world. In the 1950s a typical CEO earned 20 times the average worker salary. That might not seem fair to some. But today, that gap is more than 360 times average worker wages according to Executive Paywatch reports.

CEO Job Pressures Build

As CEO compensation continued higher through the 1970s the average tenure turn-over rate for the top gun was still 10% of Fortune 500 companies, 11% in the 1980s according to Kaplan & Minston research, at Chicago Booth, and the main focus through the 1990s was the same. CEOs would be measured by stock performance. And stock performance was measured by (3) things according to Kaplan & Minton  

1) Stock performance of the firm relative to the industry, 2) the stock performance of the industry relative to the stock market, 3) stock performance of the overall stock market.

In the 2000s, a disparity in tenure-ships by industry was evident. While finance and insurance CEOs lasted the longest in the job (13 yrs), manufacturing company CEOs had even less time. Part of the pressures came from Sarbanes Oxley Act (2002) after the corporate fraud accounts and collapse of notable icons Enron, Worldcom and Tyco required independent Board of Director members, not just friends and allies, which in turn caused a significant drop in tenure the following year in 2003. Five years later the financial crisis and Great Recession (2008) hit after the collapse of the real estate loan market caught banks off-guard and resulted in both a recession and a bevy of new regulations on our financial and lending practices in America. And when all was considered many thought the game was up for CEOs whose collective tenures in 2009-10 dropped to 7 years. But like a spring rose after a cold winter they bounced back. Over the 17 years from 2001 to 2017 the average CEO tenure for large public companies was 9yrs according to the Conference Board CEO Succession Practices annual report on CEO Tenure.

This means that over the last 50 years CEO tenure has not trended downward for long, rather it’s become more stable as the chart shows, even considering the impacts over the last 20 years.

Still, while many long-term CEOs have been on the job for decades including Les Waxler of L Brands (55 yrs), Warren Buffett of Berkshire Hathaway (48 yrs), Al Miller of Universal Health (39 yrs), Jeff Bezos (21 yrs), despite the increase in lifespan, CEOs today face even greater pressures.

Today CEO tenure is still principally based on delivering the goods, that is profits and higher stock prices. According to 2019 Equilar research on CEO Pay Trends since 2014 CEO performance-based incentives have risen from 52% to 58% of total compensation today. This increasingly myopic short-term focus on stock performance makes for happy shareholders, and has rewarded CEOs with millions in executive pay for a long time. But there is a growing new question hitting the streets from activists, institutional shareholders, and independent directors these days all asking the same question. Are “shareholders” still the most important constituents in corporate America?

This past August 2019 the Business Roundtable (a group of 200 CEOs from America’s leading companies representing $7 Trillion in annual sales) issued a new Statement on the Purpose of a Corporation that pledged to include “stakeholders” alongside shareholders in their collective bond to recognize more fundamentally the wider swath of contributors to their success over the long term. For the last 20+ years the Roundtable mission was to generate “economic returns” to its owners. That has now changed.

In response to the new announcement CEO Alex Gorsky of Johnson & Johnson said “This new statement better reflects the way corporations can and should operate today.” In a separate interview (Nov-2019) with CNBC tv commentator Jim Cramer, the CEO of Salesforce.com Marc Benioff said the new CEO mandate can no longer just focus on the “stockholders,” rather the new model must include “stakeholders,” essentially everyone that has a stake in the success of the business including those in the business, in the community, and on the planet. And that also means to take “sustainability” as a core product message. Because it’s no longer just about ‘earnings per share,’ it’s about ‘impact per share,’ noted Bank of America CEO Brian Moynahand and Nestle CEO Mark Schneider. But, as to how they would be measured by the new statement… Crickets.

Nonetheless, this unprecedented acknowledgment by the CEO Roundtable may reflect times to come. And while it has yet to trickle down or across the business landscape, it’s too early to see how it will impact CEO tenure rates going forward.  Critics argue there was no mention of ESG.org (Environmental, Social & Governance) issues specifically, no targets, no measurements, and no time commitments specific to more contemporary concerns like the lack of diversity and the personal and ethical behavior of senior leaders these days. Nevertheless, the revised statement could make its way into the compensation calculus measures for CEOs in the years ahead. At the moment 60% of CEO comp is stock-driven or time-based option incentives. And adding a new layer of cost not tied to performance is a significant push-back. ESG is nice, but no one doubts that profits must still come first. Without those caring more about stakeholder concerns won’t hold much weight in the boardroom, or the corner office.

At the private company level, CEO tenure is even more of a bumpy ride, and turnover is less predictable. According to Mike Keeland a Vistage CEO Group Advisor, CEOs are under the gun more today than at any time in history. He sees causes for turnover to be widespread including personal accountability for nearly any business mishap, a focus on short term success & profits, high-performing CEOs being recruited away, and companies being sold or merged. What then is the future to behold?

The Future of CEO Tenure

Today there seems to be fewer places and ways to hide from the echoing voices that were in the past mere siloed distractions. And while CEO tenure is still all about earnings & stock PERFORMANCE ahead of all else, until that piece is secure little worry about stakeholders vs stockholders will likely come into play, as long as CEO’s are compensated by a narrow financial slice of the growing panoply of important numbers. However, as we move into the next decade large institutional investors, out of concerns that corporations need to start taking on a more uniquely accountable role in environmental, social and internal governance, are making their voices heard. Today, more pension funds and endowments are directly and indirectly pressuring stock performance by investing more and more in higher ESG-scoring companies. And as these headwinds add more layers of constituency concerns for Boards and CEOs the bottom line is that change is coming fast to how CEO performance will be measured. Out with the old and in with a new basket of equally important performance metrics tied to compensation over a longer horizon, perhaps overlapping CEO tenure-ships cumulatively for the benefit of all stakeholders. All the same as they say, adapt or die. CEOs today know all too well as did many of their forefathers in the great history of empire, the clock is always ticking.

Make sense?

CEO Tenure Questions to ponder

  • Is history my guide or my Achilles heel?
  • What are the right measures for my tenure, the true drivers of my success?
  • Who are my constituent groups, am I communicating the right message often enough to them?
  • How can I beat the odds?
  • How long do I have left, realistically?

About the author: Rick Andrade is an investment banker at Janas Associates in Pasadena, where he helps CEOs buy, sell and finance middle market companies. Rick earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a CA Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. Please note this article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC. 

The Latest CEO ‘Rule of Thumb:’ Slow Down

In 1990 in his new book Mind Sights, Stanford professor Roger Shepard first introduced this image and called it, Turning the Tables. Shepard was fascinated by why humans perceive the same objects differently simply based upon their physical orientation to us. He argued the reason the average human brain thinks they see different sized tables in these images is because as humans we tend to “generalize” our understanding of what’s in front of us from past experiences. It’s the way our evolutionary brains seem to work. And that was our advantage back in the day when we were being chased across the great savannas by large ravenous beasts looking for a meal. But in modern times, the same skill-set can have far less successful ramifications.

A faulty generalization for example is a conclusion based on limited sample size. For example, let’s say you go to Vegas and bet on lucky 7 at the roulette table, they spin and you win $10,000. Chances are good that given that single victory you will immediately generalize that your lucky streak has arrived and bet again. To Shepard over time these innate human behaviors “have become so deeply internalized, implicit, and automatic in their operation as to be largely inaccessible to our conscious awareness.” In other words, humans simply can’t walk away from the table, and as a result over time develop dozens of unhealthy biases to support our knack for creating generalizations.

Decision Biases in Business

In his widely popular 2011 book Thinking, Fast & Slow, author Daniel Kahneman (notable decision theory expert) linked our tendency to generalize with the concept of Heuristics in decision-making. Heuristics are like rules of thumb we humans learn and use over time as short-cuts to making quick decisions and moving on. Learning and teaching these heuristic (rules of thumb) especially from elders and leaders undoubtedly enabled humans to survive and thrive because they helped us identify a safer way to live such as which plants to use as medicine, or when and where to hunt for food, build temporary shelters, and anticipate weather patterns and seasons. But while many Heuristics can prevent calamity others, which accumulate in our psyche over time as these authors suggest, become biases, and it’s these deeply rooted biases that can cause great harm when making key business decisions.

Perhaps the most damaging of all biases is not what you might first think, it’s not race, religion, gender, or social status that tops the deadly list, it’s actually “Overconfidence,” aka executive hubris. And in business and life we see it everywhere because it’s synonymous to being a “risk-taker,” a person who takes a chance that the expected outcome they perceive will occur is greater than any other. But that’s not all. Coupled with that overconfidence bias is “speed.” Speed alone is not a bias, but when combined with overconfidence it’s like mixing drinking and driving making fast decisions particularly damaging or even deadly. And as humans no matter how many thousands of years have passed, we can’t seem to turn it off.

For example, on January 27th 1986, the night before the Space Shuttle Challenger was scheduled to launch from the Kennedy Space Center in Florida, the temperature out at launchpad 39A was unusually cold that morning, below freezing for the first time in a long time. Still, under pressure from NASA to keep the program on schedule the contractor who built the solid rocket boosters, Morton Thiokol, proclaimed their rockets could handle the freeze as senior program managers gave NASA the green light. The hubris had come from the simple idea that no other rocket had failed to launch in the cold weather before. Consequential, neither would this one the executives told NASA. That overconfidence, which killed seven astronauts is “the mother of all biases” according to Max Bazerman & Don Moore authors of Judgement in Managerial Decision Making (2013) and is responsible for much of the world’s worst human-driven preventable disasters whose rival is only that of mother nature herself.

The same can happen in mergers & acquisitions, which are notorious for not working out as intended. And it was hubris and overconfidence that were center stage when in January 2000 CEOs Gerry Levin of Time Warner and Steve Case of then giant online access provider AOL decided to merge. AOL actually acquired TW using its overvalued stock at the time. The deal was estimated at $165 billion, still among the largest ever. But only a few short months later as the dot-com boom collapsed, so did the hubris and confidence at which time AOL was forced to write-off $99 billion of the deal value the following year which in turn helped to collapse AOL’s market valuation from $225 Billion to $20 billion, essentially laying off hundreds of workers and wiping out 90% of the company’s market value. It remains among the leading M&A disaster case studies of all time.

I use these two extreme examples to showcase that there is no size limit to how deadly the impact that overconfidence can have. Small companies are equally at risk as large ones whose CEOs jump to conclusions heuristically believing their own personal insights and successful tract records will never lead them astray on their road to Vegas. And they may be right most of the time, but when they are wrong, the fallout can put everything on the line. So how do we attack this problem?

How to Overcome your Biases

According to Kahneman, the best way to avoid making a bad decision that might be driven by one or more of your personal biases as a leader is to block your biases at the outset. The way to do that is to “recognize the signs that you are in a cognitive minefield, slow down, and ask for reinforcement,” which simply means to step back and give your biases a chance to reveal themselves and their prospective positions and impact on your decisions. This is the concept behind Kahneman’s thinking fast vs slow. Thinking fast is how we all got here, but thinking slow is how we make the most of it better, not the other way around.

It is believed by many in retrospect that had history’s most eventful decision-makers understood this deep human flaw and taken measures to step back from their heuristic biases and generalizations beforehand, dozens of history’s most bias-driven damaging decisions could have been avoided. And for most of us having that ability to step back and pre-judge our decisions objectively might help us avoid pulling the trigger at the wrong time, and in turn suffering the consequences we never expected.

Make sense?


About the author: Rick Andrade is a Food Industry investment banker at Janas Associates in Pasadena, where he helps Food CEOs buy, sell and finance middle market companies. Rick earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a CA Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. Please note this article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC. 


The Future of Employee Engagement in Food

As published by Rick Andrade: Food Industry Executive Magazine

It’s mid-year 2019 and the U.S. unemployment rate is at a record low of 3.7%, the lowest in 50 years. And the food industry, which employs more than 20 million workers, is struggling to keep them. While a tight labor market is great news for job seekers, it is tough finding and keeping food workers happy these days. To make matters worse, as wages rise, employees are increasingly tempted to jump ship to a competitor. But a higher wage isn’t always the number one reason staffers make the switch. Often the jump will stem from culture clashes and, more notoriously, a company’s management team’s failure to properly recognize the delicate balance between an employee’s perception of their individual contributions to the company and their weaknesses as perceived by their managers.

According to researchers, when an employee’s performance is out of step with their employer’s expectations, the misalignment at some point compels a change. Either the employee improves or is asked to find another job. And it doesn’t take much to create a ticking time bomb either. For example, in many cases, a quick review of a company’s mismatches can be found on the website GlassDoor.com, where former employees can rate their former employers and voice their experiences, good and bad, and their reasons for switching jobs. A common negative refrain emerges, wherein former staffers argue their case for why they were not appreciated as expected and why they were not promoted. “It’s management’s fault,” they say. True or false, in today’s labor market, business leaders can’t afford to second guess even the slightest of potential HR issues. Rather, they should be looking closely at how to prevent turnover and unhappy staffers and drilling down to the root causes of the problem.

Not surprisingly perhaps, the number one gripe in my experience over the last 10 years in the food industry from former employees is not low wages. It’s getting proper feedback. It sounds easy enough, but according to recent studies, trying to implement a robust and effective employee feedback system into an effective “employee engagement” program takes trial and error to perfect. Each company and culture is unique, and a one-size system does not fit all. Still, if your employee engagement program needs a tune-up, here’s the latest on what works and what doesn’t.

The problem with negative feedback

In early August 1943, General George S. Patton, commander of the U.S. Army forces in Sicily, visited the 93rd Evacuation Hospital tent to check on his wounded soldiers. The fighting was tough and the injuries severe. There, he encountered Private Paul Bennet, age 21, shaking nervously. “It’s my nerves,” he told the general when asked. At that moment, history recorded perhaps the most notorious example of negative employee feedback. Sickened by his sense of cowardly injustice, Patton slapped the young private across his neck with his glove and screamed at him, “Your nerves, hell. You are just a Goddamned coward, you yellow son of a bitch.” And with that, the boy sobbed as doctors and nurses looked upon the scene in horror. Needless to say, this example of feedback was not an effective approach, and Patton was later severely reprimanded by Gen. Eisenhower and forced to make a public apology for his actions.

I cite this infamous example as the extreme case for using “negative feedback” to improve a subordinate’s performance because it’s easy to see why the approach does more damage than good. Today, with the exception of military-style training, negative feedback is the least attractive way to improve performance.

The positive approach

In a recent Harvard study, researchers Francesca Gino and Bradley Staats concluded that company culture also takes a hit from negative feedback reviews. Their study asked participants to write a short story, after which they partnered with a researcher who gave them feedback. “People who received negative feedback, we found, were far more likely to seek a new partner for their next task than those who received confirming feedback. People who received criticism from peers looked for new relationships.” It’s a kill-the-messenger response. It turns out that if an employee does not feel their employer values their work overall, negative feedback in any particular area will seem harsh and unjustified, and will cause them to seek other employment at first chance. To stem a negative tide, however, business leaders will have to walk a fine line to get the highest production from their troops.

In May 2019, I wrote an article: Want to Save Your Company? Just Say No – CEOWorld Magazine. In it, I focused on the downside of becoming a “yes-man” organization, wherein managers and staffers never hear “no” for an answer. I argue that a yes-man culture that eliminates critical feedback damages an organization’s ability to take on more risk, the kind that produces new products, new markets, new sources of revenue, and, yes, failure. In my view, corporate culture needs an effective balance of give-and-take to survive in the long run. Researchers, on the other hand, say that we can have it both ways: a softer, gentler, more positive-thinking peer-to-peer company culture that avoids the ill effects of negative feedback and succeeds.

In a Fortune Magazine interview earlier this year, CEO of Mondelez Dirk Van Der Put divulged his formula for the company’s recent success: “I need to take away any barriers so employees can move fast. I need to take away blaming or fear of failure or not accepting being different… then it’s up to the people.”

The reason negative feedback causes such a reaction, researchers argue, is notably because the recipient takes away a negative self-impression from the experience, resulting in a damaging blow to their developmental self-confidence going forward. In the military, this may be overlooked. But in business, the troops tend to quit as a result and look for a new commander with a softer touch. So, how do we fix this?

Linking feedback to culture

Many new hires will quickly recognize how peers get promoted. They will learn if their company has an “HP way” (or not). Coined by the founders of Hewlett Packard back in the 1970s, which was way ahead of its time, the “HP way” was fundamentally focused on a more holistic approach to their employees’ motivation to work, which included children’s scholarships, stock options, and profit-sharing incentives, to name a few. And it worked. But incentives today need to go even deeper and wider into employee engagement to be as effective. Employees need annalmost cult-like emotional buy-in to stay and thrive, and while not all companies are as adaptable, many are learning fast.

Food companies that made the top best places to work recently include Wegmans, Publix, and The Cheesecake Factory, according to Fortune’s top list for Millennials, and In-N-Out Burger on GlassDoor.com’s top list.

According to GlassDoor’s annual 2019 Best Places to Work as rated by employee surveys, linking culture and feedback works best when everyone sees the same goal as reachable and personal. And the results speak for themselves. Top employee engagement companies, according to the survey, had four pillars of success in common:

  1. A mission to believe in: A motivating mission that inspires quality work. Employees have a sense of purpose and understand the impact they make.
  2. A strong culture: A clearly defined and shared set of values that fosters community. Engaged leaders see positive culture as part of a good business strategy.
  3. People-focused: Employees are engaged and empowered to do their best work. Emphasis on employee growth and development.
  4. Transparency: Open and clear communication, from the top down. Honest feedback is valued and encouraged.


Look familiar? Still, the food business has a long way to go. A look at LinkedIn’s 2018 Best Places to Work shows only two of 50 that made the list, Starbucks and PepsiCo.

Developing an effective employee engagement program

In June 2019 at their annual HR conference, the Society for Human Resource Management (SHRM), the world’s largest HR membership organization, showcased a workshop by Brad Karsh, wherein he advocated for companies to create a culture of continuous feedback on an ongoing basis.

Normally, most companies provide for an annual performance review looking back over the year and measuring performance against targets achieved or missed. The trouble here, as Karsh points out, is the changing composition of a younger workforce, and, in particular, meeting the expectations of the 80 million-strong Millennial generation looking for a faster, more personalized way to gauge and engage their individual performance. And the best and fastest tool to get you there, especially if you’re starting over or need a serious makeover of your existing employee engagement program, is new software.

Among the list of leaders in the growing “employee engagement” arena is OfficeVibe.com. With the help of Deloitte Consulting, OfficeVibe developed a program that provides input from regular employee surveys, and then groups their responses into performance scores. This is essentially a modern digital version of a 360-degree review, whereby all worker performance is evaluated by other workers and management. Performance scores are developed and linked to agreed-upon targets, such as an increase in the number of happy customer comments or a reduction in the number of unit production errors, etc. This approach is like having a live GlassDoor or Twitter comments exchange for employees to reach out and help each other succeed and to vent anonymously about anything that bothers them, from boring meetings to helpful tips on improving a new production line. Managers can then anticipate a problem or shortfall beforehand, which is not a common benefit found in the old-school annual review feedback method.


If there’s one thing most common in business, it is that nothing stays the same for long. And that includes the nature and nurture of your workforce. What’s clear today is that, while nobody likes to hear bad news, most younger workers are not comfortable with negative review feedback that is not couched in a positive way that values and warmly appreciates each worker’s positive overall contribution to the mission of the company. Annual reviews that include negative feedback remarks are rapidly falling away as Millennials prefer affirmative guidance more from employers today. The consequences of failing to adapt to this culture shift are a higher employee turnover rate and a potential loss of key talent, which is harder to replace in a tight labor market.

So, if you find yourself somewhere behind the curve on creating a modern feedback and positive employee engagement work culture, I suggest you take a minute and ask your HR executive for a best practice review, and then act quickly. Giving no action on an old-school annual review feedback program that still includes negative feedback comments as the “stick” with no “carrot” component is a company killer. In other words, as Ric Alvarez, CEO of Richelieu Foods, puts it, “If you don’t have anything nice to say, keep it to yourself.”

Make sense?


About the author: Rick Andrade is a food industry investment banker at Janas Associates in Pasadena, where he helps food CEOs buy, sell, and finance middle-market companies. Rick earned his BA and MBA from UCLA, along with his Series 7, 63, & 79 FINRA securities licenses. He is also a CA Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle-market business owners. He can be reached at RJA@JanasCorp.com. Please note this article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC. 

Want to Save Your Company? Just Say “No”

It wasn’t always this way, was it?

In 1982 First Lady Nancy Reagan famously coined and branded the phrase ‘Just say No,’ which was meant for children tempted by drug use in their lives. It was notably simple, and it worked for a while.  But somewhere along the nearly 40-year path since, “Just Say No” became “Just Say Yes,” and from my standpoint it’s not been a perfect panacea for business owners personally or professionally either.

It’s undeniable, we have become a “Yes” culture in America. In fact, Amazon lists more than 50,000 books on the subject of saying “Yes”, or getting to yes, or convincing people that “No” really means “Yes.” There’s even a cable show called Yes to the Dress. But why the growing abundance of “Yessers,” and all the “Yessing?” Does saying “Yes” all the time make your life or business better? What actually does saying “Yes” all the time get you?

Pouring through the research it appears that saying “Yes” frees you from the emotional reaction of saying “No” to someone, and hurting their feelings, or disagreeing with them, and making it look like you’re not on-board with the team, or not being fair. According to a recent Frontiers in Human Neuroscience study too much agreement, however, creates a culture of “conflict avoidance,” which in abundance is diminishing our objective critical thinking, over-whelming our busy lives, and weakening the impact of our authority.

As a CEO advisor these days I see a lot of Yessers. Each, like me, wanting to be liked and responsively amicable. Sometimes it’s straight-forward, other times it’s implied. As if being positive at every chance will make it so. But while “Yes” makes employees happy, what about the rest? Think about your business, your daily life. How many times a day do you say “Yes” in some way or another? Have you noticed the cumulative effect?

In business it’s “Yes” to every employee, customer, supplier, visitor, yes to your lawyer, yes to your banker, yes to lunch, yes to anyone looking for it – yes, yes, yes. Now add your home-life where it’s yes to your Mom & Dad, yes to the kids, yes to the dog, yes to your in-laws, yes to your dentist, yes to your boss and your wife if they are not one in the same, yes to your barrister at Star Bucks, yes to buying groceries and gas every Saturday, yes to re-painting the garage, yes to fixing the backyard pergola, which has seen better days, yes to the birds screeching when you let the feeder run low, yes to paying the bills on time, yes to the dry cleaner who always says “Yes” after every word you say, yes to your neighbors who park where they don’t belong, yes to every holiday, every office party, every birthday and every social gathering, and of course it’s yes to helping every friend and stranger who asks day or night– Am I  right?

The Hidden Trouble with “Yes”

The trouble with saying “Yes” too much, which is to be excessively affirmative, is packed with hidden risk and exposure to other things which few likeable leaders seem to consider beforehand:

  • YES requires an allocation of resources, including time & money
  • YES is making an open commitment or obligation to someone or something
  • YES implies a certain level of risk you must bear personally & professionally
  • YES puts your reputation on the line, or in someone else’s hands
  • YES creates a company culture devoid of constructive critics

As a CEO, “Yes” should mean that you’ve already considered these, and all the other ramifications, risks & consequences, and agreed to them. But is that really true? Or are you saying “Yes” most of the time because it’s easy, and what you think everybody wants to hear from an approachable visionary leader?

In his article in Harvard Business Review: The Problem with Being Too Nice Michael Fertik offers a warning, “Nice is only good when it’s coupled with a rational perspective and the ability to make difficult choices.”

Too much “Yes”, and its hidden consequences, is therefore creating countless company cultures of affirmative risk-avoidance, and exposing you and your company to the negative effects of a fear-driven company culture that can’t say “No” to anything. And when that transformation is complete, precipitously bad and costly business decisions are not far behind.

The Path to “Less Yes”

The path to less “Yes” is to Just Say “No.” And by that, I mean to skip the trigger-finger temptation to use ‘being agreeable’ as your default communication method. My advice is to cut back on your exposure to Yesses each week. Easiest way is to reduce the number of staffers that report directly to you. Less direct-reports means less fire-fighting the little things and more delegating them. For upper management exchanges, try to be more like a friendly skeptic, like a doctor or advisor: a quick decision-maker who also has a contemplative restraint.

Nonetheless, having less direct reports and fire-fighting distractions will help you regain the real meaning and true value of saying “Yes” and reserving it for customers, and bigger issues with higher impact outcomes, Killer Decisions I call them. And be sure to use a decision-making tool for those, such as a Decision Ring that can help separate and weigh the options widely and evenly, not compulsively or emotionally.

Finally, if an idea to implement a lesser Yesser program sounds super amazing to you, then I invite you to join my new Just Say No – Practice & Training Club, wherein members can rediscover the meanings of “Yes” and “No.“ Upon graduation, on the one hand I expect you’ll be just as likeable if a bit less agreeable, but on the other hand pleasantly more able to identify and dispatch with the little Yesses and focus on the bigger ones. And when you do that, your new army of ninja skeptics may one day save your company, and make you a happier, healthier, and even more successful leader.

Make sense?

Go ahead, just say it… 😊



About the author: Rick Andrade is an investment banker at Janas Associates in Pasadena, Ca and a finance writer in Los Angeles helping CEOs buy, sell and finance middle market companies. Rick earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a CA Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. Please note this article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC

Government Resources for Small Business CEOs

As a proud member of the Small Business Administration’s SCORE volunteer group and as a working financial industry professional, I can’t say enough about the collection of individual talent and commitment SCORE has grown to become over the last decades. SCORE has become the go-to resource for all business, not just start-ups, and small business, all business. No matter how big or how widespread a company becomes the fundamental rules and guidelines are still precedent in the minds of successful CEOs.

And as we look forward to the balance of 2019 the economic outlook seems to favor a moderate economic growth trajectory with a 3.7% unemployment rate and low inflation. On Main Street that translates all into “good for business.” And with that SCORE and other US.GOV and .Org group advice from thousands of contributors can help most. Below is a list of links I want to share. These run the expanse from A-Z in business, all FREE courtesy of your tax dollars and the contribution and lessons from thousands of former and current business executives.



Want to Learn the Best Way to Increase Sales this Year? Let’s ‘Chat…’

Over the last few decades CRM (Customer Relationship Mgmt) software has evolved from basic call-centers and contact trackers to a vastly more expansive suite of customer-engaging capabilities. Moreover, as the cost of acquiring new customers continues to rise, new lower-cost-to-implement technologies like online ‘Chat’ are leading the way to help turn your website ‘looky-loos’ into solid sales leads.

According to one lead- management vendor expert, Chatbots (short for Chat robots) are at the front lines in the battle for first contact messaging software dominance, and it’s just beginning.  Why? Everyone knows you have but one chance to make a good first impression. Today they say, “a gap still exists between a well-designed website and human connection” that’s needed to engage new customers when they first appear on your landing page online. Moreover, adds an analyst at Gartner research firm: “Conversational marketing will be a recognized channel of B2B and B2C customer engagement and revenue by 2020, displacing a combination of marketing, sales and service activities.” So, does your company need an online ‘first contact’ Chat feature?

What is on-line Chat and Why is it Important for business?

Ever go to a website using your desktop or mobile phone and notice a small (often oval shaped) CHAT- button suddenly appear on the right-hand side of your screen? That’s a “first contact.” And if you click on that button a message box will pop open and a smiling sales representative image with a headset on will ask you how your day is going. That’s Chat. The significance of that first customer touch point online can no longer be taken for granted.

“Mr. Watson, come here, I want to see you.” That was March 10, 1876, Alexander Graham Bell’s first words spoken into his new land-line invention he called the telegraph. He would later add: “the day is coming when telegraph [phone] wires will be laid on to houses just like water and gas — and friends will converse with each other without leaving home.” Without leaving home? Amazing! But what’s also amazing is how much his invention has so suddenly (in the last 5-10 years) become itself outdated, displaced not so much by technology, but rather because speaking to another human, especially those you don’t know is now a complete turn-off. And the reasons are simple.  It’s all about texting.

The once favored Bell telephone and all its comm-cousins including email, voicemail, online forms, and even the original face-to-face communications of old are each no longer the preferred first choice to make first contact with your business online anymore, mostly because all these methods are either painfully slow, or too invasive & solicitous for a first-time visitor simply browsing your website. Nothing worse than jumping through hoops just to get a straight answer to a simple question, right?

Enter the new frontier of CRM Lead Management: The Chat Wars?

As Lead Management tools grow more critical to increasing online sales each year, it’s the Chatbots that are fighting it out on the front lines. Battles between nascent newcomers and more established Chat software providers are heating up. Each sees the pot of gold waiting for the winner. At the heart of it are two competing Chat business models ‘duking it out’ for your marketing dollars. The first is A.I. (Artificial Intelligence,) like IBM’s Watson computer which recently used A.I. to beat a legendary Jeopardy champion hands-down on the famous tv gameshow for brainiacs. The real victory for Watson’s designers wasn’t just getting the right answer as fast as possible, it was understanding the question. Same goes for Chat. The key success factor is learning how to understand and communicate with humans online who use slang, broken sentences, mixed intonations, and many unique language idioms and fact patterns that matter most. So, is it hard to be a human and get good service online after all?

The big downside is when a prospective online customer senses a computer at the other end, gets frustrated and goes to your competitor. Older Chatbots were simple Q&A based pre-written scripts. Sometimes they worked well, and gathered good leads, other times they failed miserably and lost potential new customers. More recently, however, A.I. has really stepped up its game by quickly using machine learning algorithms to learn how to best communicate like a human, hence the Chat wars.

The second option, which is also an outsourced solution is also a Chabot, but the Chatbot uses real humans in a live Chat session. This is highly preferred but also expensive with industry hacks hired by call centers to engage new customers via Chat and phone.  Implementing live Chat in-house means someone has to be available 24/7 to respond immediately. It’s the old debate, human v. computer, which begs the question: Is a live Chat message response from India as good as a computer-generated A.I. response? Both can be devastating to your sales conversions if the customer gets frustrated either way. A few years ago, I would have said to go with a live Chat operator “hands down,” but not today.

Today A.I. is super-close to the real thing, and a lot cheaper 24/7, but it all depends on what you’re selling, and how much online traffic you generate. The key metric to track with either method is “response times,” aka how quickly you engage a potential new customer online.

Is that important?

According to the Kayako company (Chatbot software provider) who surveyed 400 anonymous consumers and 100 anonymous businesses found that:

  • 38% of consumers are more likely to buy from a company that offers Chat
  • 51% of consumers are more likely to stay with or buy again from a company that offers Chat

At the close of business for the 2018 Holiday season, online sales grew by more than 17%, topping $122 billion according to Digital Commerce.com an e-commerce data- tracking firm. Furthermore, Forbes predicts total “global e-commerce retail sales to increase to $4.1 trillion by 2020 from $2.8 trillion in 2018.” The growth is mostly due to increasing global use of the internet and mobile technology devices.

Why does this matter to your business?

As online sales continue to grow, your website is quickly becoming the first stop for new customers who haven’t made up their minds yet. And if your response times to each online prospect visitor is slower than your best competitor, guess who’s going to close the deal?

In a study of 433 software providers online conducted by Drift.com a Chatbot software developer, they filled out 433 online contact forms and/or clicked on the Chatbot (if available) hoping for an immediate response. What they found was only 7% responded inside 5 minutes, which is the wait-time threshold they argue for most customers before they move on, and 55% of the study took 5 days or more to respond. Yikes! This proves that online forms and email newsletter subscriptions are outdated, and don’t work well enough to compete for the new “need for speed” in the lead management world.

So, what does it cost to get this level of first-contact engagement you ask?

The Cost of Chatting

Depending on the size of your company and your Chat-specific needs these programs can be very affordable. For smaller more simple-product companies including professional services firms, like lawyers, dentists, and even financial advisors, the monthly fees range from Free (personal use) to $1500/month or more depending on which Chat features you include in your monthly package. Larger companies and those with more complex product configurations should look to pay more. The deeper you require a Chat operator to learn your business in order to become an effective first contact representative, the more expensive your Chat provider will cost you. But it may be well worth it if you’re selling big ticket items. Click over to CrazyEgg.com, a website optimization-tool vendor, for more specifics on the top 10 Chat software providers and their pricing.

Choice of Chatbots

While most of the leading Chatbot providers can also integrate with your back-end CRM systems, front end functionality may come first. I suggest you make a list of your first-contact business requirements and how Chat software and its tracking features can best work for your company. Then when you’re ready, click over to software industry reviewer  G2Crowd.com Chatbot reviews. They looked over several of the leaders in the Chatbot conversational software universe and ranked them by several functionality metrics. This list is a good first stop before jumping into a demo or free trial offer.

Putting it all together

As I wrote in a recent article: Winner; Best Product 2018 – is Speed, the rising customer demands for more speed & convenience from your company on the web is begging you to raise the bar to meet them. Each day you delay is another potential day of missed opportunities. Adding a Chatbot program to your website may be the fastest, cheapest, and easiest way to up your game and increase sales this year. This way, instead of losing out on new business opportunities, you engage every new online arrival with a friendly, “Hello, how is your day?”

And that can be like having your own doorman at the Fairmont.

Make sense?

About the author: Rick Andrade is an investment banker at Janas Associates in Pasadena, Ca and a finance writer in Los Angeles helping CEOs buy, sell and finance middle market companies. Rick earned his BA and MBA from UCLA along with his Series 7, 63 & 79 FINRA securities licenses. He is also a CA Real Estate Broker, a volunteer SBA/SCORE instructor, and blogs at www.RickAndrade.com on issues important to middle market business owners. He can be reached at RJA@JanasCorp.com. Please note this article is for informational purposes only and should not be considered in any way an offer to buy or sell a security. Securities are offered through JCC Advisors, Member FINRA/SIPC


Small Company M&A can be like an “Arranged Marriage”

While hundreds of small businesses changed hands this past year, few were lucky to be asked by one of the world’s largest CPG companies to join the family. And of those small mostly innovative start ups that make the cut, even fewer ever reveal the inside story about what it is like to wake up one morning rich beyond your dreams from an arranged corporate marriage the night before. But here it is. In this eye-opening  article by Tom Foster, Editor-at-large for Inc Magazine he lays out the pros and cons and big changes in this candid interview with owners selling their fledgling business to a mega-giant.  (click on the link above or here to read more about it}

Rick Andrade

M&A Advisor
Managing Director
JANAS Associates
Securities Licenses: Series 7, 63, 79

Investment Bankers &
Management Consultants
141 S. Lake Avenue, Suite 102
Pasadena, CA 91101
Phone: 626 432 7000

Goldilocks has Come for Dinner Is Your Business Ready?

Consider this;  the US economy grew at an impressive 4.2% annualized growth rate in the second quarter of 2018. This figure was revised upward reflecting more business-spending on software, and the forward trend looks to sustain a robust 3% annual growth rate for all of 2018.

The last time that happened was 2005. And things continue to look good economically now and for the next six months. But as the economy starts to cool in 2019, will Goldilocks stick around after dinner?

As of mid-September, all three major stock index averages, Dow, S&P, and Nasdaq are at or near record highs. And with unemployment rates lingering below 4 percent consumers are not only busy working, but also busy spending. The evidence is all around us.

And I am confident you can feel the growing enthusiasm when you speak with customers and employees who will likely altogether contribute well to the bottom lines of American businesses this Christmas season.

As far as consumers go, despite all the media head-fakes and White House melodramas this year the typical consumer seems oblivious to all the noise, like a 3-year-old at Disneyland.

And given that our U.S. economy runs on 70% consumer-driven spending for fuel, it is probably a good idea to keep them in La-La Land for as long as we can.

But as the party continues outside, I am also hearing from the subtle concerned voices inside about what if anything a CEO or business owner can do to prepare for a potential downturn (aka future recession) and stay one step ahead of their competitors. Hence the question:

How long will Goldilocks have her way in this late stage Bull Market for business?

While recent changes to US tax laws have triggered part of the recent boom; The Tax Cuts & Jobs Act of 2017 as you know substantially reduced individual and corporate taxes, and also lowered the tax bite to repatriate billions trapped offshore in business accounts.

The key drivers behind this market’s bull run for business is the euphoria consumers feel from their 401k balances and job prospects. US workers are quitting at the fastest pace in 17 years according to the Labor Dept. report.

Workers tend to quit their jobs when new job prospects appear more abundant. The JOLTS (Job Openings & Labor Turnover Survey) recorded nearly 7 million job openings as of late, a new record. And when people have job security, they tend to spend more on discretionary fun stuff, like trips to Disneyland. It’s all great fun until somebody pulls away the party punch bowl.

So now what? Should you keep your head down and hope for the best?

A few key measures to keep your eyes on may help avoid falling into a deep recessionary trap in the months ahead.

Start with how the political winds blow this fall after the November 2018 mid-term elections. If the Republicans stay in control of Congress, we should expect to see more of the same pro-business policies. However, if the Democrats win, all bets are off because the Dems will most likely refocus their political agenda to impeach and undue all that President Trump has endeavored to repair after decades of Washington mismanagement and neglect to help preserve American business’ competitiveness in this country and across the globe.

But Washington policies and politics alone are not the only foreseeable risk: If you are a CEO, pay attention and take action at the first signs of trouble. Here are three crucial key trend indicators to watch:

  • Escalating Signs of Inflation: especially wage inflation lurking nearby, but also commodity input cost inflation, some which we will likely see if tariffs on Chinese imports increase. If you start seeing signs of rising costs, you need to immediately focus on margin gaps and inventory costs. Calculate how much you can absorb before increasing prices. You will need to absorb the difference and if that becomes a problem in your profit forecasts you should consider not carrying higher levels of inventory (on lower margin products) in 2019.
  • Escalating Cost of Borrowing: will trend up later this year as the Federal Reserve Board votes to raise benchmark interest rates (borrowing costs) again to incrementally try and slow growing signs of inflation from this 10-year-old economic bull run expansion. Ahead of this, be sure to re-secure any long-term debts at lower fixed-interest-rates now. And any short-term borrowings aka Lines of Credit with adjustable interest rates should be paid off or swapped into long-term fixed-rate loans. Don’t delay. Once interest rates go up it could take a long time before they come back down, meaning the cost of business in the future will go up. So, act now and call your lender to discuss this timely critical issue, and how they can help you plan for it.
  • Escalating Trade Wars: not knowing where, when, or how US Trade sanctions could affect your supply chain and customer accounts be prepared to absorb short-term cost increases internally, and try to make up for it by cross-selling more services like 1-day delivery (see my article CEO World Magazine.com; Winner Best Product 2018: Speed). But the best way to avoid the impact of a trade war in the meantime is to offer more products genuinely Made in the USA that Americans want to buy.

As we head into the final Quarter of 2018, America businesses will likely continue to see a robust demand market and a very Merry Christmas as cash registers ring up big sales this December.

The important thing to recognize here is to be ready to act quickly to the first signs of anything that could trip up those sales or profit margins. In 1999, Andy Grove, former CEO of Intel wrote the best seller: Only the Paranoid Survive… which can still save many CEOs from disaster. Read it, and you’ll learn how too. In the meanwhile, let the good times roll, but let’s also keep an eye on little Miss Goldilocks this winter. She could shake things up looking for a warmer spot elsewhere come January 2019.

Make sense?



Winner: Best Product 2018

Have you heard the news? According to NASA, planet Earth is slowing down thanks to the moon. And in a mere 180 million years or so our planet’s 24 hour-long day will slow, adding a full hour to each day. Wow. That’s welcomed news. Because while NASA is busy studying the impact of a slower future, these days if you’re in a business, being too slow is the kiss of death, because Speed is the new currency of convenience, thanks to the internet, and Amazon.

I know what you’re thinking, speed (aka being fast at something) is not a new concept to CEOs and business owners; rather it’s been around for a very long time especially as a customer-centric sales strategy. This time is different though. Because while companies struggle to identify more ways to stay ahead in the game, delivering high quality products is still #1, and being environmentally responsible is also still #1, and being socially sensitive is still #1, and being the top drawer most awesome customer friendly business ever is still #1. While all these compete for resources to drive new sales, Speed, which translates into convenience is the new #1, And by passing them all, ‘speed’ has recently become its own product category addition, racing past the rest to become the newest must-have competitive differentiator for nearly all businesses everywhere today.

The upside for the winners (aka younger new market entrants and early online adopters) is increasing sales, increasing marketshare, and a chance to shake up the old line status quo; All this by recognizing how adding “speed” as “convenience” in every conceivable customer-centric way to their core value proposition is genius! The downside for the laggards is a bumpy ride down the rapids; losing existing customers, new customers, and hard-earned profits – maybe forever.

So how is Speed related to convenience?

To a business speed is a simple thing defined as “removing the bottlenecks in any process.” To your customer though, it’s more like “a faster order-to-delivery cycle time experience that satisfies.”  In other words, in your customers’ mind they want everything faster. Do you know what that is worth to them? Turns out, increasingly it’s a lot! Convenience means that your customers have better things to do with their time than to wait for you. Waiting at a loading dock, or in line at a restaurant is no fun. Give them back some time and your customers will reward you – becoming more loyal and satisfied. This in particular explains why delivering speed, for example, created a dozen new delivery services in the food industry.

So how did we get here? And why is speed the best new product?

30 years ago in 1988 there was no internet as we know it today. And as large Consumer Packaged Goods manufacturers dominated consumer purchasing choices by controlling end-to-end how a customer perceived value and convenience, retailers let them do it — because it helped drive traffic. But even after the first “.coms” came on the scene in the mid-1990s many would have expected the internet to have completely dissolved the old-school formulas years ago. But of course given the intervening Financial Crisis aka The Great Recession slowed things down, a new catalyst was needed. I’m talking about Jeff Bezos, Amazon, and the instant addictive satisfaction we all get from convenience at the push of a button.

The result is a renewed feverish increase in the pace of business transactions that is today part of Web 3.0 – companies using Big Data, Robotic Automation, Artificial Intelligence, Amazon and Uber, are all together elevating the need for speed as convenience in favor of embracing a new utopian customer-centric “deliver to us everything now internet model.”

But as many business owners and CEOs are still slow to adopt, they are now consequently looking up at a fracturing water dam wall about to burst down on them. Yet these companies, reluctant laggards, are still building products the old way, still selling to customers the old way, still advertising to customers the old way, and still hoping business will go on the old way… But it won’t and companies caught behind will go under.

So what should you do now? And can you fix it?

Yes. You have already most likely given this some deeper thought as you sense the ground shaking. But all will not survive the deluge. Here’s why. Remember these two existential questions your strategy consultant once asked you to think about separately?

  • Why does my business matter?
  • How does my business matter?

Well they’re not separate any longer. Because while nearly all CEOs can answer ‘Why’ their business matters, many at the same time are learning it’s not enough. Because the ‘How’ your business matters is newly arrived at the top of Why your business matters today. And as it turns out (at least in my experience), nobody really cares about Why your business matters. Customers don’t. They only want to know How you can help them, right now. Because companies like Amazon and those that followed have finally and completely redefined the old internet shopping experience, and perhaps inadvertently created an entirely new categorical customer expectation not only for B2C companies but also for B2B companies as well. Take note! Today, the new perception of added product or service value is speed as convenience. And it’s like striking gold if you get it right, especially if your customers think it’s free.

There is however still the matter of How your business matters, because How it matters these days is quickly outpacing Why. In other words as more and more higher quality products all compete for the same, increasingly online sale, the new best product offering for How a business matters is SPEED. Not just slashing delivery times to the home, but in every aspect of your business, from supplier-to-manufacturer –to-retailer. The entire business value chain in cycle times is now on steroids, and will soon be poised ‘at the ready’ to please any customer, anywhere — instantly. And if you don’t prepare for that reality now – you’re going to feel it.

 So here’s the key takeaway

Once treated as an add-on feature at the bottom of your web page, speed as convenience is now at the top, winning over new customers and increasing sales from newer competitors. This makes SPEED; the hands down ‘winner of best product for 2018.’ Because regardless of your size or market share, big or small, as all businesses switch targeting from a “mass” market to a “me” market, from front office to rear dock (if you want to survive), adding speed and selling it as a differentiating competitive feature that delivers convenience is what is winning the day; Something that could help save a lot of slow-to-adopt laggards when the dam breaks from smashing up against the rocks.

Make sense?