Fraser Live: Sharing is a two-edged sword

I’ve previously suggested the strong possibility of a nil share value when garment supply companies with no brand credibility look for buyers. When it fails to find one, which is usually the case, the shareholders walk away with nothing.

We all agree that this is pretty tough, especially on the minor shareholders who are then apt to fly into a rage as they see what they thought was a valuable asset vanish.                                                  

Often, such shareholders were given the shares as a gesture of gratitude from the company owner.

While the owner probably saw it as an act of generosity, the employee saw it as an earned entitlement.
There is a case before the courts right now that is typical of this type of situation. The company, which concentrated on sourcing for retailers under the retailers’ house brands, was wound up at nil share value simply because no buyer could be found.

The company’s only value was in its service, and since the key employees had moved on when the wind-up news came through, it had neither brand nor service to offer a purchaser.

The minor shareholders cried foul and a court case is being mounted. It will be interesting to see if the court rules that nothing is worth something.

Another case had a different set of circumstances but the principle of not giving employees shares still held fast. This company was highly successful and the owner gave his most trusted employee four per cent of the action.     

Although the company had no brand to speak of, when it came time to sell, it fetched a high price because the management agreed to stay in place and work for the new owner. (Another example of this was the sale of S+R Fashions to Charles Parsons two years ago).

The four per cent shareholder had to be bought out before the sale of the whole company could go through.

Although this shareholder was quite amicable and negotiable about the deal, he had to be represented by an independent lawyer to satisfy the laws relating to the protection of minority shareholders.

The lawyer, wanting to earn, and perhaps augment his fee, tossed in a few spanners and created delays that threatened the bigger deal. It was sorted out in the end but caused great angst – all over a four per cent stake.

Again the lessons from these – and many other instances I could quote – is, don’t confer shares upon your employers, no matter how much you love them, admire them and can’t do without them.

It will come back to bite you in the bum. Buy them exotic cars, bestow staggering bonuses upon them, send them on first-class trips for holidays. But do not give them shares. Not even one per cent.
Beware the star performer

The most dangerous person in a private company is the star performer – that is if he (or more often she) is not one of the owners.

A couple of high-turnover, sourcing interface clothing companies I could name have suffered considerable pain when their star performer left, taking the connection between suppliers and customers with them.

One, which has now morphed into something quite different, had a star performer who had been in the habit of taking buyers overseas to research styling and coming home via China to place orders with trusted factories.

The margins were slim, certainly, but as near to safe as you can get in this business. The star performer was resentful that her talents were not, in her view, being sufficiently appreciated and left the company.

It was a mistake for both sides, as it turned out, but the lesson was that star performers should never be given so much power that they cannot be replaced. Whether they like it or not, an understudy should always be on hand.

Another company more recently lost its star performer who had built a powerful conduit between a major retail chain and Chinese factories. In her case, she simply saw the opportunity to have a business of her own.

While she was restrained from touting for business among her employer’s customers, there was nothing to prevent the customers wanting her as their design/production/delivery interface.

This is, in fact, what happened and now she has a successful small interface business while her former employer is licking its wounds. You will detect that I am taking the side of the employer here.

But if I was on the employee’s side I’d tell every middle manager to become a star performer, hug know-how to the chest and wait for the opportunity to strike out on their own. This business still depends upon the interplay between buyer and supplier, where confidence and trust still reign.