This is a quick note after reading the results of the latest Federated Farmers confidence survey.   

You can find it here.

I found the outcomes fascinating.

In summary:

• There was a 10.1% decline in farmers who considered current economic conditions good
• A net 64% of farmers believed general economic conditions would deteriorate in the next 12m – a 25% decline since the July-21 survey

These results are in an environment where milk futures for FY23 just topped $10, lamb and beef returns are strong and global wheat prices just increased 40% in a week!

Whilst it is important to recognise the impact of inflation on operating costs, the ongoing issues in the labor market and continued influence of regulatory requirements (not to mention the threat of escalating war in Eastern Europe), one could argue that from a profitability perspective we have rarely seen things so good.

Yes, history says that the usual fix for high prices is high prices, and that the higher the high the more precipitous the fall.

But what if prices don’t drop? What if this period of high commodity prices is sustained (and in fact we have been through a period over the last 3-4 years of minimal volatility and general upside)?

I think it’s an interesting thought process to go through to test what your business would do strategically (and maybe operationally) should high product prices be sustained.

That could well be nothing different – pay down debt, pay a dividend, reinvest on a as needed basis…..or could it mean that certain elements of your strategy are accelerated or reshaped?

Is this the time to bring forward infrastructure spending? Is this a great opportunity to investigate and invest in environmental management and mitigation? Could you bring forward elements of your succession process?

History says that not only do higher commodity prices lead to better profitability, they also get capitalised into land values. What would an improving balance sheet mean for your business and your decision making?

It seems to me that if we were staring down the barrel of lower product prices, we would be focusing pretty hard on business strategy in order to manage through that period.

So why not flip that and do the same sort of process, but through the lens of sustained higher price? The old saying says “hope for the best and plan for the worst”.

Let’s flip that and “plan for the best….and plan for the worst”! There will be nothing lost and everything to gain by making sure you position your business to take full advantage of the current tailwinds in profitability.

I would say the process would be great for improving your confidence levels too! 

We spent a few days in Cromwell with the kids at the end of the last school holidays. After a fairly long and dreary Timaru winter it was nice to escape to the open spaces of Central Otago.

Every few months another ‘most trusted” survey hits the media headlines, providing a bit of fodder for office and talkback conversations.

Most trusted brand, most trusted New Zealand celebrities (past winners including such luminaries as Suzanne Paul and Richie McCaw!), and most trusted professions (politicians not typically well represented!).

In a world of fake news, consumerism, brands and ideologies built around personalities, genuine trust is as valuable as ever.

Last week Andrew wrote a great article on succession, focusing on inter-generational businesses that have the quality, diversity and profitability to appeal to family and support positive succession outcomes. Without these dynamics, successful succession outcomes are hard to come by.

This week I would like to focus on a few other elements that will support succession, with a central focus around trust.

I read an article recently that described the three core elements of Trust.

The article was focused on what breeds trust in organisations, but the principles can be applied to any situation where trust is critical to a positive outcome or experience. The elements were:

1. A mindset built around genuine benevolence – that is, that you feel that the party you are dealing with has your best interests at heart. That doesn’t mean a fair and balanced commercial outcome can’t be achieved or is given away, but it means that you have confidence that the other party is genuinely interested in your success, your satisfaction or in meeting your key needs. And critically, that they will do it on a sustained basis, not just a one-off transaction.
   
   
2. Competence – this is pretty simple. At the core of any relationship that has a high degree of trust is the confidence that the other party is competent – that they can do the job, provide the service, run your organisation, provide great advice – with an appropriate level of skill or execution.
   
   
3. The ability and willingness to resolve disputes – any relationship will have times where tension is high, or parties aren’t seeing eye to eye. A relationship that is built on trust will have the ability to navigate these times and find a solution and outcome that allows all parties to move on with the relationship intact (and possibly strengthened).
   
   

So how does trust relate to positive succession outcomes

(and running a successful business)?

When you think about it, trust is at the core of succession in so many ways. To achieve a positive succession outcome, you need to trust:

• Each other – the base of everything else that goes into a succession process. Do you have trust in each other? Do you have confidence that those involved have your best interests at heart? Are you able to be open and honest with each other, knowing that sharing openly won’t be used against you? Do you exhibit trust when setting up the ongoing structure of the business? And have you earned trust?
  
  
• In advisors – invariably, a well-managed succession process will involve a group of advisors. In some cases, these advisors will have an execution role – legal framework, ownership structure, funding solutions etc. In other cases, an advisor will play a key leadership role in facilitating the succession process and being a part of the ongoing execution. Whatever the role they play, having the ability to trust your advisory team – the faith that they are working for you, that they are competent to do the job you are asking – is critical. Trust is also at the core of holding all these parties to account for their own performance and execution.
  
  
• To put the right people in the right roles – as Andrew pointed out in his article, a great business is key to succession. And a great business has the right people on the bus and puts the right people in the right roles. Whether that be operationally, or at advisory or governance level, being prepared to make the hard calls on key people and trust in their abilities is key.
  
  
• To be held genuinely accountable – again, another fundamental value of a great business. Having built a clear strategy, having plotted a deliberate pathway, having developed excellent systems for monitoring performance – are you prepared to be held accountable to all these elements?
  
  
• To let others, have control or influence in your business – this can be one of the hardest things to achieve. Having built a business over decades, being in control of most aspects operationally and making all the decisions, are you prepared to let others in? What do you need in place to be able to trust that the people coming in to run the business, drive decision making or provide governance or strategic support are trustworthy? Or what is it about yourself that you need to get comfortable with, to allow yourself to trust these people?
  
  
• The process – there are rarely quick and easy solutions to succession. These are processes that take time and energy and patience and leadership. And at times you will be frustrated, or feel things aren’t moving quickly enough or in the right direction. But if you have laid out a clear process, with clearly defined roles and responsibilities, at times you will need to just sit back and trust the process.
  
  
• To let go! – possibly the last and the hardest step. Trusting your process, the people around you, the plan and the structure and being able to step back and let go.
  
  

We work with many businesses at various stages of the succession process.

Trust doesn’t get built overnight. It’s built on great communication, on openness, on transparency, on a willingness to let go and on the confidence that there is a level of competence from all involved that inspires trust.

When there is trust – and where succession is done well, what does that look like? And what has led to that point?

When I draw on personal experience, the businesses I see doing this well exhibit the following characteristics

• Starting early – and the earlier the better
  
  
• Communication – an environment where open and honest communication is encouraged, and where people feel like they can articulate their needs and be heard and understood
  
  
• Transparency – being open and transparent about what the business is, how it is performing, what its strategy is, what are its strengths and weaknesses. Being honest about what the exiting generation wants and needs. And having an environment where the next generation feels the same.
  
  
• Clear expectations – what do you want personally, and what do you expect of others?
  
  
• Leadership – who is going to drive this process. Who has the competence and mindset to see a truly great process from beginning to end?
  
  
• Independence – getting the right people around the business, people who genuinely want to see a great outcome and will go on the journey with you. Too often we see a “succession plan” – a document that lays out some needs and a structure, but no pathway to a successful endpoint. Great independent support will be there right through with you, playing a key role in successful execution.
  
  
• And of course, a great business – one that everyone wants to be a part of.
  
  

And the last element that often gets missed is to have some fun!

Being able to build and transition an inter-generational business is something to be immensely proud of. Yes, there will be bumps along the way, but you are achieving something that few businesses have the opportunity to do. That should be a satisfying and fun process, something to cherish and appreciate.

No successful and sustainable relationship exists without trust.

And successful and sustainable relationships are at the heart of succession and running strong businesses. At NZAB, trust is our highest priority. We exist to see our clients succeed, and every month we are measured on that. We employ the best in the market, with years of knowledge and experience and the know how to help you navigate the challenges of succession, the challenges of building a business that people want to be a part of.

So, trust the process!

My daughter turns six later in the month, so to celebrate we had a big gathering of friends and family over the weekend. Thankfully no injuries on the bouncy castle (this time!).

Naturally the conversation turned to the recent election, but also the potential impact on farming from the National Environmental Standards released earlier in the year, especially given the election result and a continued swing to the Left.

I won’t begin to go into the detail of the standards, nor the potential options to manage and mitigate the potential impacts (nor our respective political views!).

What I would like to do is talk more broadly about what we at NZAB are seeing as the key themes in this space, and the potential impact on farming businesses and their ability to access capital going forward.

What is ESG? (Environmental, Social, Governance)

You will have no doubt seen or heard this acronym in the last while. Environmental, Social and Corporate Governance refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. For investors, bankers, regulators and governors of businesses across all sectors, it is an increasingly important aspect in how they assess the future performance of companies (return and risk).

We’re seeing the impact of this already in loan pricing

In September 2019, Synlait Milk accessed a $50m loan from ANZ Bank that has its pricing linked to the ESG policies and performance of the company. This is a clear demonstration of how Bank’s are looking to incentivise good performance in this space, on the basis that it knows that key risks are being managed, but also that the business may reap economic benefits.

Similarly, the Auckland City Council has gone to the market recently, raising $500m via the issue of a “Green Bond” – essentially accessing funding on a long-term basis that is allocated to council projects with an environmental or sustainability focus.

The world is awash with so called “green money”. This pool of relatively cheap and long-term funding looks set to continue to grow.

Consumers are already valuing products that have great ESG fundamentals

You don’t have to go too far in the media at the moment to find examples of companies looking to leverage what they are doing environmentally to help appeal to consumers.

Recent examples include Fonterra’s Carbon Zero Milk; Anchor with plant based milk bottles; Southern Pastures purchasing Lewis Road Creamery outright as it looks to leverage its 10 Star Values Program; Bostock Chicken and its Bio-degradable Meat Packaging - the examples are endless and show the value consumers are starting to place on good practice in this space.

These are positive innovations and reflect a focus from NZ producers on meeting consumer needs, whilst hopefully driving higher returns within the farm gate. We are well placed as a sector to take advantage of these changes in consumer preference, the rewards represent the carrot rather than the stick.

So what about ESG in the Banking Sector?

As illustrated via the Synlait example, Bank’s are starting to put a much greater focus on both their clients, and their own, environmental and social policies.