Chris Styles

I sat in a hotel room in Kuala Lumpur the night before a UNSW graduation ceremony and watched the lPO of Jack Ma’s Alibaba. Sitting in the shadow of the extraordinary Petronas Towers, it was strangely gripping TV.

Ma was interviewed on CNBC and was treated like a rock star. In his interview he repeated his mantra – customers are #1, employees are # 2 and shareholders are #3. But he still wants to make sure shareholders (or those soon to be shareholders) make money.

While at that point he didn’t have investors’ money, he said what he did have was trust. That seemed to be his key selling point for the company. One of the interviewers said he was feeling particularly uncynical about the whole thing. Ma has a vision to empower entrepreneurs through his e-commerce website and be the champion of small and medium-sized business in China.

“We want to be bigger than Walmart,” Ma says. He wants people to say that Alibaba is like Microsoft and Walmart – it changed the world.

Before the bell, the price was set at US$68. At that price this IPO should raise almost the total amount raised in IPOs so far this year. The scale – like all things in China – is immense. It will be the biggest IPO ever.

Masayoshi Son, CEO of SoftBank, biggest shareholder of Alibaba and now Japan’s richest man, followed Ma on TV and sang his praises. According to Son, money is not the goal, it’s about passion and vision. And Ma has both. Politics is not an issue. One is from China, the other from Japan.

When the stock went on the market, there was no indication of a selling price. There were hundreds of thousands of orders but no sellers. Indications were that the first sellers would come to market at around US$84-US$87.
Could this be the perfect IPO? Even with the uncertainties that come with the China market?

The stock finished the day at US$93, valuing the company at US$230 billion. More than Facebook.

In the heart of capitalism – the New York Stock Exchange – China could once again be changing the (economic) world order. Along with the Petronas Towers out my window, it is another reminder of the shifting centre of gravity to Asia.

The ticker for the company is BABA. “Ba” means 8 in Mandarin – a lucky number in Chinese culture. Ma and a bunch of investors got very lucky. Perhaps so too did global capitalism.

Let’s see if the luck holds.

Chris Styles is a professor of marketing and dean of UNSW Business School.

Jenny Buchan

The Australian government is moving to introduce a new Franchising Code of Conduct as part of wide-ranging reforms to how franchising arrangements are regulated, claiming it will be fairer for small operators and cut red tape. Whether that will happen is far from certain.

The proposed changes will only apply to franchise agreements signed from the start of 2015. The biggest changes are the introduction of a specific duty of “good faith”, and the requirement for franchisors to give prospective franchisees an “information statement”.

These changes are accompanied by legislation that will give the regulator, the Australian Competition and Consumer Commission, the ability to impose financial penalties on franchisors that breach the code, whereas it wasn’t able to before.

But the changes would leave some of the fundamental problems affecting the relationship between franchisors and franchisees – namely knowledge and power imbalances – unfixed.

Knowledge and power imbalances are the Achilles heel of franchise relationships. A franchisor builds a business, creates a blueprint of it, and licences franchisees to replicate it using the blueprint. With power over the content of the agreements comes scope for abuse. Franchisees sign the agreements with little ability to negotiate changes.

The first Franchising Code of Conduct in 1998 attempted to bring balance to franchise relationships. It mandated pre-contract disclosure, specific rights such as a cooling off period for franchisees and established a dispute-resolution system based on mediation.

However, eight more franchising reviews have been conducted since the code was introduced, suggesting it has not achieved its objective of raising standards of conduct in franchising.

The current proposals have come out of the 2013 Wein Review. It made recommendations in eight broad areas: disclosure, franchisor failure, transparency of financial information, good faith, the end of a franchise agreement, dispute resolution, enforcement and “other matters”.

Most recommendations weathered the subsequent change of government.

The most significant change, Wein’s recommendation for a “good faith” clause, has been adopted. But a party to a franchise agreement does not have to act in good faith if this would get in the way of their legitimate commercial interests.

This means, for instance, that if a franchisor’s duty to its own shareholders is best met by selling the franchisor’s business to a property developer who wants the franchisor’s sites (even though this would mean the franchisees lose their businesses), the franchisees’ rights become secondary. This will only create a false sense of security for franchisees.

Another major change, the proposed information statement, is intended to address knowledge imbalances by providing franchisees with more information. But the change will only require a generic information statement, which assumes all franchise networks are the same, and that franchisees can already conduct adequate due diligence.

This overlooks the fact that every franchise is structured differently. Even within the same network different franchisees can be exposed to different risks.

A prospective franchisee, attempting to conduct due diligence, will still meet numerous impediments. Neither a franchisor’s disclosure documents nor its franchise agreements are on a public data base. This means potential franchisees cannot compare the offering before them with what is usually offered for franchisees in the same network, or with the franchise agreements of comparable businesses.

This is even worse if a franchisor operates through a trust, because the franchisee cannot discover who is behind the trust. And because dispute resolution processes are confidential, it is difficult to identify problems in the network.

Franchising has changed since 1998. Franchisors used to establish a successful business before franchising it. Now, according to the Franchising Australia Survey 2012, one-third of franchisors have operated their business for less than 12 months when they start selling franchises.

How can a business operating for less than 12 months be described as successful? And franchisors now exist within networks of, say, 40 related entities. Any due diligence on the franchisor is not indicative of how sound the franchisor’s related entities are.

The franchisor may itself be a “$2” company. If it is not performing well it can be placed in administration and restructured by shedding franchisees. The code should require disclosure of a full organisation chart showing how the franchisor fits into the group.

Perhaps the worst of the overlooked opportunities for reform is that of franchise failure. The franchisor retains the right to terminate the franchise agreement if the franchisee enters administration, but no reciprocal right exists for the more vulnerable party – the franchisees.

The government has returned the complex challenges that franchisor failure presents to the “too hard” basket. This is a missed opportunity to alleviate the knowledge and power imbalances that make life for franchisees that much more difficult.

Jenny Buchan is an associate professor in the school of taxation and business law at the Australian School of Business. A version of this post appeared on The Conversation.

http://theconversation.com/new-franchising-law-no-code-for-fairness-25154

Anil Hargovan

Fortescue Metals Chairman Andrew Forrest can breathe a huge sigh of relief after winning his High Court appeal against a Federal Court finding that might have seen him banned as a company director.

The Australian Securities and Investments Commission (ASIC) suffered loss in more ways than one. Apart from the financial sting, where costs were awarded against ASIC, the regulator also suffered from reputation loss arising from the way in which it ran the case.

The unanimous judgement was highly critical of the manner in which ASIC framed its case and has sent a clear and sharp message to the corporate regulator for the need for greater transparency when formulating claims against defendants.

In 2011, the Full Federal Court overturned the decision of the trial judge and held that (then-CEO) Forrest had breached his duty of care and diligence by allowing Fortescue to make misleading statements that it had entered into “binding contracts” with several Chinese companies for the development of critical mining infrastructure.

When news broke in the media that such agreements struck in the framework agreement were not binding, the Full Federal Court also upheld ASIC’s claim that the company had breached the continuous disclosure laws by failing to disclose this to the market.

However, before the findings of the Full Court were remitted to the trial judge to assess civil penalties for breach of the Corporations Act (which included the prospect of being banned from being a director, as well as financial penalties), Forrest appealed to the High Court.

In rejecting ASIC’s claim that the public statement was misleading, the High Court emphasised the need for ASIC to identify the intended audience and to ask: what would they have understood?

Applying this test, the High Court found that the intended audience of investors and members of the business community would not have understood the agreement to be binding in a legal sense. According to the High Court, “it would be extreme or fanciful” for the target audience to have understood that the contracts were capable of being enforced by an Australian court if the parties later disagreed.

Of all the competing meanings of the phrase “a binding contract”, as used in the context of this case, the High Court took the view that it simply conveyed to the intended audience what the parties to the framework agreement had done and said they had done.

In preferring this narrow meaning, the High Court found that there was no evidence led at trial to show support for a broader meaning, for example, that a court will grant relief should the agreement be breached.

Concerned that the decision might be seen as falling short of protecting the investing public, the High Court was at pains to point out that the result in this type of cases are determined by the particular facts and evidence.

As a result, the High Court cautioned that this case does not establish a broad proposition to the effect that any public statement that Company A has made a contract with Company B necessarily conveys to its audience a message only about what the contractual document contains. The effect of the message conveyed is, ultimately, dependent on a close and careful analysis of the facts.

There are at least two key messages highlighted in today’s judgement. First, the value of this judgement as a precedent for corporate management to navigate its way through the investor protection provisions of the Corporation Act is limited, due to its narrow focus.

Based on the High Court’s finding on the core issue of misleading or deceptive conduct in favour of the defendants, the court did not focus on other significant issues such as the use of the business judgement defence – that the decision was made in good faith and with the best interests of the company – as a defence for breaching directors’ duty of care and diligence.

Nor did the result in this case warrant an examination of the directors’ obligations under the continuous disclosure laws.

It is understandable, but regrettable, that the High Court did not offer guidance on such important issues of major concern to the corporate community.

Second is the clear and sharp message sent to ASIC that its litigation strategy was defective for two main reasons.

One, ASIC failed to clearly specify the basis of the alleged misrepresentation (for example, whether it was fraudulent or negligent), resulting in confusion and potential unfairness to the defendant.

Second, in piling one alternative claim on top of another, ASIC was found to have taken this strategy to litigation to new heights which was condemned.

Such an approach was considered by the High Court to be “planting a forest of forensic contingencies” and unacceptable to achieve a fair trial.

In so doing, the High Court upheld the notion and reminded ASIC that no person ought to be put to loss without having a proper opportunity of meeting the case alleged against them.

Such critical remarks offer comfort to potential defendants facing allegations of breach of law by regulatory agencies.

Anil Hargovan is an Associate Professor at the Australian School of Taxation & Business Law at the Australian School of Business. This opinion piece was previously published on The Conversation under Sharp message to ASIC as Forrest wins High Court appeal.

From the Knowledge@Wharton today blog.

When Burberry recently reported that sales at stores open a year or more were flat, and suggested that profits are likely to be on the disappointing side, some people began to wonder if Burberry might be the canary in the coal mine – a harbinger of lower sales in the luxury sector over the coming months.

A Wall Street Journal article today supports that theory, noting that diamond sales in China are expected to grow more slowly this year than last, while Daimler AG has announced that its Mercedes-Benz division would miss its profit target in China and expects lower sales for its Porsche division.

Is London-based Burberry indeed an example of what we will see in the luxury goods market? What are the implications for the global economy and, equally important, for the upcoming holiday season?  

Burberry suggests that its slowdown is “a sign of an upcoming trend in the luxury segment,” says Wharton marketing professor Barbara Kahn. “Although it is hard to know for sure, there is some indication that this might be a correct analysis.”

Much of the ability of the luxury segment to maintain steady growth has been due to strong performance in China, she adds, and “recently, this growth has slowed down for several reasons. First, as the Chinese luxury consumer gets more sophisticated, [his or her] need for purchasing high-end visible status symbols slows down. Many of Burberry’s products are high status — and visibly so, due to the famous ‘check’ [design].” Now that consumers are gaining more confidence “in their own positions of wealth, these types of purchases may decrease.”

In addition, Kahn says, China’s economy is slowing down, “and there are indications that the government will not provide substantial stimulus mechanisms, as they have in the past, to keep up the growth levels.”

Burberry, a luxury fashion house that sells accessories and clothing for men, women and children, has approximately 235 stores and outlets, and can be found in more than 200 upper-end department stores worldwide.

An article in The New York Times noted that Burberry’s main customers, “known in the industry as traveling luxury consumers, [include] just over a third in Asia, a quarter in the Americas and a little less than a third in Europe.”  The article, published shortly after the disappointing figures were announced by the company, quotes Burberry CEO Angela Ahrendts acknowledging that “the external environment is becoming more challenging,” and suggesting that Chinese consumers may be slowing down their luxury purchases only temporarily, waiting to see how the upcoming leadership changeover in China affects their purchasing power. 

Wharton marketing professor Z. John Zhang has a slightly different take. “I don’t believe that the overall consumption of luxury goods in China is going down, and even if it is, it will not last for long,” he says, adding that economic downturns typically do not affect many luxury goods consumers, “especially in a country where the income disparity is huge. If anything, in a downturn, you need to look even better to impress your peers.”

Burberry’s lower sales could be due to a number of reasons, according to Zhang. “First, more and more people in China are going abroad for shopping. The people who could afford to travel abroad are those who could afford to buy luxury goods, and there will be a substitution effect. Second, there may be more fake luxury goods in the Chinese market. After all, during a downturn, you do what you must to survive. The supply of fake goods may have increased considerably now that the economy is getting tougher.”

The worst outcome for Burberry in China, he adds, is that “it is no longer on the top of the Chinese customer’s list of luxury goods [to purchase]. These consumers are constantly looking for new ways to distinguish themselves and to stand out in a crowd. It is an arms race [among] luxury brands to find new ways to provide exclusivity to their customers.” The disappointing news from Burberry could reflect the fact that the company “is losing favor with exacting Chinese consumers.”

So what’s ahead for Burberry and other luxury goods retailers?

“The luxury retail sector was the first to recover after the recession, partly due to strong demand from China,” says marketing professor Stephen Hoch. “Maybe they are now at a pausing point.” Any weakness that is evident, he adds, “would be due to Europe and China rather than the U.S., where the rich seem to be doing just fine relative to everyone else.” In China, if the new stores — where you would expect the biggest increase in same store sales since they are new — showed any weakness, “then this could be a big contributor,” he points out. “It is hard to predict whether Burberry is a harbinger of anything else. I tend to doubt it, but we will see.”

Kahn notes that the continuing uncertainty in Europe is definitely a factor in lower luxury goods purchasing. In addition, she has read reports suggesting that the new Chinese leadership team – expected to begin transitioning as early as next month – “is not likely to provide as much stimulus to the economy as they have in the past.”  Finally, if Burberry’s slowdown is indeed a general trend, and not unique to Burberry, “I would expect to see similar slowdowns in other highly visible status luxury purchases, such as LVMH and Chanel.”

And the outlook for the luxury goods sector during the all important holidays? “As usual, it is hard to predict the upcoming holiday season,” Kahn says. “The back-to-school season was reasonably strong — relative to our new, more moderated expectations — so people are cautiously optimistic. I think the current thought is that we should see a holiday season fairly similar to last year – which is reflecting the slow but steady growth patterns.”

This post was previously posted in Knowledge@Wharton today blog: Is Burberry the Canary in the Luxury Coal Mine?

 Professor Chris Jackson

How you answer the phone may influence your chance of a pay rise, your promotion and even your overall career prospects. Here at UNSW we have recently conducted a study which has analysed the personality traits and biological and environmental factors that predict so-called “career maverickism”.

Workers who lift the receiver to their left ear are more likely to be mavericks that bend the rules and foster new ideas, impressing their bosses, and moving up the career ladder much faster. It is important to foster better ways of working in organisations; working smarter, not harder, by doing things in a more efficient way. Those who break the rules and ‘just get things done’ are much better people to have working for you, if you are interested in the bottom line.

The study, based on 458 workers, found that managers can spot “mavericks” simply by assessing how they answered the phone. It details how those who hold the receiver to their left ear denote a preference for using the right side of the brain, which is associated with creative, problem-solving activities.

I’ve noticed that the GFC means that businesses are increasingly reliant on the skills of internal rule-breakers. Australia may have sailed through the global downturn, but there are still firms out there doing it tough. Firms need to be aggressive and competitive in the global market place. They want workers who don’t do it the same way ‘because that’s the way we’ve always done it’. They don’t want people who are cautious, safe or conservative. Maverick employees have been popularly described as independent thinkers, creative problem solvers, quick decision makers, and goal-oriented individuals. It’s all about avoiding ‘group-think’, encouraging workers to be creative and giving them just an extra bit of room to take measured risks.

The research also shows there is a drawback for people who can’t stop breaking the rules. They tend to be poor team players and are generally unpopular. They rub people up the wrong way. You need a manager with vision who can pick up on their insights, and not be put off by the way they do things. In some jobs what may be seen as dysfunctional behaviour, like risk-taking, is crucial.

Interestingly, men are more prone to “maverickism” than women – which I think suggests a further area for productive study.

There are several icons in the business world who don’t follow the rules – and who make great role models.

Just think of people like Richard Branson, Steve Jobs, or Michael Crouch, who has established a Chair in Innovation at the Australian School of Business. He started Zip Industries because he thought that instead of selling what everybody else sold – because it was much easier to sell – he came up with a new product that actually did what people wanted – give instant hot water. Mavericks are good at perseverance and overcoming hurdles.

They are good for businesses and good for Australia.

Chris Jackson is a Professor of Business Psychology in the School of Organisation and Management.

Centre for Innovation and Entrepreneurship | CIE Blog

My apologies on announcing the winners of last week’s Peter Farrell Cup. Official press release or announcement coming soon. In the meanwhile, I couldn’t help building on the earlier blog post about fear of failure vs failure to start. It was nagging me to create this bubble chart based on the same GEM data with a few changes:

• Fear of failure and entrepreneurial intentions in the same chart as different axes
• Bubble area according to additional population data (since the GEM data is based at the individual level, not firm level)
• Color coded by GEM’s classification (Factor-driven economy: RED, Efficiency-driven economy: BLUE, Innovation-driven economy: YELLOW)

So, if one were to draw a linear regression line through the whole data set, then Australia would probably be middle of the road for the overall data. If you look at only the yellow bubbles (innovation-driven economies), then Australia tends to be towards the upper right, i.e., greater intentions to start (not bad), but higher fear of failure (not good). Does that mean that relative to the other innovation-driven economies, Australia is a country of “intentrepreneurs” or “wantrepreneurs”?

– This blog post first appeared on the CIE Blog.

Centre for Innovation and Entrepreneurship (CIE) | CIE Blog

There have been recent critiques about What’s Killing Australian Innovation (see our commentary on a recent talk by ASB Dean Alec Cameron, and related ABC radio interview). At this week’s TiECon Australia, TiE Sydney chapter president Dilip Rao commented that Australia is ranked 18th globally for having a ‘fear of failure’ (first being worst). Based on the GEM Global Report 2010, Australia actually shows up worse, ranked 16th out of 59 countries.While that sounds quite bad, the spread of the scores shows that Australia is nonetheless close to the average, and not that much different to, say, Germany (see figure below). The classic benchmark is the US, which is ranked 47, and still not close to being statistically significantly away from average (assuming a normal distribution).

Fear of Failure: Percentage of 18–64 age group with positive perceived opportunities who indicate that fear of failure would prevent them from setting up a business

Wait a second, but what’s this other variable, called “Entrepreneurial Intention”? Well, it’s defined as the “percentage of 18–64 age group (individuals involved in any stage of entrepreneurial activity excluded) who intend to start a business within three years” (p. 63 in the 2010 GEM report). Australia ranks poorly on this one as well (39/59) if you take the rankings at face value. Interestingly, the US ranks even lower than Australia here (44/59).

What the heck is going on?

My best guess, is that in some countries, entrepreneurship is not a choice, but a way of life. Almost everyone there has to hustle and bustle to feed their family. Meanwhile in the “Innovation-Driven Economies” it’s an optional career choice. So, focusing on the latter, what do we see?

Well, Australia ranks 6/23 on the fear of failure measure, but still very close to average for the group (US ranks 20/23 in this group). Australia also ranks 7/23 on the entrepreneurial intention measure, again still very close to average for the group (US ranks 11 in this group, worse than Australia!).

=> Claims that Australia has a fear of failure are NOT supported by THIS data
Yours truly,
The Centre for Innovation & Entrepreneurship

This post first appeared on the CIE Blog.