Sense &'Sensibility

The Great Recession is the consequence of a culture of excessive risk-taking and short-term thinking. Tony Urwin argues for the importance of checks and balances and a sensible long-term view

The current global financial downturn could have been avoided had the management of banks operated with a long-term vision. There would have been no solvency crisis had bank directors dismissed the idea of extending loans to the patently unqualified as an unsustainable practice. There would have been no need for bailouts had the same directors thought of the consequences of selling on or buying dodgy loans. Sadly, the industry did not push long-term thinkers into the boardroom. No, the eight-digit salaries were reserved for those who thought up the most effective ways to realise quick gains, regardless of the consequences.

When I consider the mess caused by institutionalised myopia, I consider myself lucky to be working in the franchise industry. In a franchise network, franchisors and franchise owners act as a check and balance on each others' activities, and both have a strong incentive to run their business with a long term view.

As publicly listed companies, Western banks had shareholders as their masters. Shareholders want a good return on their investment, and the banks work hard to deliver it. When the banks deliver, shareholders think little of sharing the profits with the bankers in the form of lavish bonuses. The only effective check on the banks' behaviour is government. However, governments are not likely to put the brakes on highly profitable activity (no matter how dodgy) when it generates lots of tax revenues for pet projects and projects a neat image of national prosperity. So, with no incentive to curb dangerous, unsustainable behaviour, greater risks are taken in search of ever greater profits, until the downside of risk - loss (gasp!) - begins to mount, and the house of cards tumbles to the ground.

Unlike banking, franchising is a two-party business relationship. Franchisors and individual franchises have responsibilities to each other, which discourage reckless risk-taking by either party. If a franchisor wishes to force its network into dangerous, speculative activity, franchise owners are likely to rebel (with genuine consequences for the franchisor) out of a desire to protect their investments. Likewise, if franchise owners get greedy and start selling new and unauthorised products and services, or start selling outside of their territories without permission, the franchisor is likely to clamp down to maintain system-wide compliance.

Franchise owners have an interest in restraining imprudent franchisors, while franchisors have an interest in protecting brand and business integrity. Both act as check on each other's activities, promoting a healthy focus on moderated, sustainable business growth.

Banks, bankers and shareholders believe that they have 'won' if they finish the year - or even the quarter - with a handsome gain. After all, quarters and fiscal years are when the 'scores' are tallied for PLCs. Steady returns and incremental gains are like broccoli and peas: healthy, but dead boring. The short-term milestones of stock markets encourage nearsighted management decisions designed to deliver stunning windfalls and spectacular gains. Franchising is, financially speaking, a healthy vegetable. Franchisors and their franchise owners enter into binding agreements that last five years or longer, making the aim for both parties one of consistent long term growth, not sudden spectacular gain. All gains must be sustainable throughout the term of the agreement or both parties suffer. Hence, long-term planning is endemic in our industry.

Is our industry as flashy and news-worthy as that of finance? Certainly not, and I think we're the better for it. Now go and eat your vegetables.