Is the Executive pay gap really ethical?

This week Financial Times reported on the shareholder resistance that came up against BP's Bob Dudley's 20% pay rise. Hardly surprising, seeing at this pay rise will have come out of money they invested, or at least money that could otherwise have go to them in dividends. 

Excessive pay within higher management has been the main obstacles that businesses have face in building and maintaining trust. Be that for shareholders, and more of a general perception of the business. Personally, when I hear that a CEO has given themselves a nice little pay rise, or bonus for that matter, I do become a bit more wary. Not necessarily for the business itself, but more in the sense of "is my money just going straight into their pocket?" I'd like to think that the money I'm paying is in some way going to help the company grow, towards sustainability or something similar. Not going towards paying for a nice holiday home in the Bahamas. 

The FT also states the excessive pay gap is so out of line that CEOs "risk being treated like aliens". I think that fits in quite nicely with the terms "out of touch with the real world" and "how the other half live".  I think it is true that many CEOs may almost appear to be in a world of their own and have no concept of working to get by. Yes, I agree that many will have worked hard to set up and grow a business and will have put in the hours to get to where they are now. But how do they decide on these pay rises and bonuses? Do they get into work one day and think "oh good job this week, you deserve an extra £1m!"? And why not give everyone a little extra?

It is argued that no single solution will fully bring the pay gap down, however FT suggests a few possible ideas that, when used together, might just work.

Firstly, reduce complexity. There are many different standard for accounting used around the world, meaning what is seen as unethical in one country may be acceptable in another. It is also argued that many remuneration committees often do not understand the value of what they are handing over. Not necessarily due to them being lazy or not caring, but because it is nearly impossible to calculate. I understand that calculating and keeping track of all the wages and salaries within a company can be difficult, but surely they will know if the company can afford excessive pay rises and how this may look to investors and the public?

Secondly, making transparency work in favour of restraint. If companies benchmarked their pay and targets against similar companies, they will be able to ensure that no unwanted attention to drawn to them over pay gaps. However, this can often lead to the Lake Wobegon effect where nobody would want to be paid below the average amount. If everyone is using each other as a benchmark, how do you set the initial pay level?

Thirdly, and most importantly in my opinion, link CEO pay to the performance of the company. This seems pretty straight forward to me. Everyone has their initial set base pay, then pay rises or bonuses can be given according to how well the company has done that year. This may help directors think a little bit more about where the money is coming from and how it is affected by performance.

I know I have spoken quite harshly about CEOs so far in this blog, so I believe it is also worth talking about Richard Pennycook, CEO of Co-operative. Earlier this month he insisted on taking a 60% cut in his base pay following the Co-op's turnaround. Whilst I do think that 60% may be a bit excessive, this is the kind of lead that CEOs should take in terms of pay. It is likely that CEOs will be on a hefty pay package, far higher than other workers, so if the company is facing financial troubles, is it really so wrong to suggest that they sacrifice just a small percentage of their pay?

My final note on this is that companies should consider how their values are reflected in their pay policies. If the company is promoting an ethical brand and equality, a large pay gap doesn't really reflect this. It should also be noted how a company's pay policy can  impact their license to operate and the perception this gives out to the public. 

The collapse of the Lehman Brothers

"You wanna call it a game? This is the game!"

Much like watching the film Margin Call, the Lehman Brothers gave me further insight into the breakdown of a large company, and what really goes on 'behind the scenes'. All the panicking, crisis talks and tough negotiations, it's easy to forget that all of this happened over the course of just a few days. Admittedly, I doubt anyone got any sleep that weekend.

What became very apparent to me throughout the course of the documentary was just have arrogant and almost clueless all the top bankers seemed to be on the situation. Or just how none of them really knew how to handle the situation. It seemed that they had created a very egotistical environment amongst themselves, which eventually became too big for any of them to handle, causing a huge downfall, of which effects were felt all around the world. During a phone call between Paulson and Fuld, Paulson remarks that "the laws for this weekend haven't even been written yet, nobody knows what to do". Yes, at that current moment they are discussing the inevitable demise of the largest Wall Street bank, but I can't help thinking that maybe this is meant more as a general comment. Nobody does know what to do in this situation, but maybe he is trying to suggest that none of them really seem to know what they are doing in their jobs. Arguably, if they did, maybe they wouldn't have ended up in this mess!

There is also an underlying sense of arrogance running throughout the film. That the bank thinks that are too big to fail. Too powerful. The look of pure shock on their faces when the Fed tells them there is no public money to bail them out is a key example of this. The fact that they just assumed that the people would come to their defence and give them a bailout really shows how egotistical this bank was. Maybe they should have been more concerned about how this would affect their shareholders, rather than nursing their bruised egos. Maybe that is why the Fed let the Lehman Brothers collapse. To show that they aren't too big to fail, and to use this as an example to the others banks. It is clear that reckless behaviour, especially with this kind of money, and only being concerned about yourself, really isn't sustainable in the finance world.

Now, I want to discuss this whole idea of SpinCo, setting up a 'bad bank' in which to transfer all the toxic assets. Just how naive do they think the world is?! Basically, they would be moving the issue from Lehman's balance sheet, on that that of another. Whilst this may seem like a nice tactic at first, getting rid of the assets and being 'free' of them, surely this would be an indicator that something has, or is about to, go awfully wrong? This wouldn't be something that even the most confident investor couldn't just brush over. 

Unfortunately, the finance world seems to be very interdependent, however many banks fail to see or believe this. They are far too concerned with securing the lowest cost of capital for themselves and linking companies and investors, that the financial crisis was bound to happen. They are too busy looking after number 1 and unwilling to help each other out, however maybe if, for once, the banks had worked together, the crash may not have been so overwhelming for everyone.

The film ends with a quote from Bernie Madoff, or "the greatest con artist of all time" as he is commonly known. That "everyone wants something for nothing; you just give them nothing for something". I think this summarises the whole crisis pretty well. Everyone was out looking after themselves, and expecting people to come and help them, when really nobody was willing to do something that wouldn't benefit them. 

Could Burberry be the best dressed army?

"A business whose prospects remain strong should not sell itself cheaply"

Burberry is well known for its signature garment, the trench coat. Which just so happens to be considered as 'military wear'. Kind of ironic given that they may have to do battle to avoid being taken over by a mystery buyer!

A mystery buyer has built up a 5% stake in Burberry, causing the company to take action to defend against a potential takeover bid.  Under UK rule, once an investor's stake crosses over 5%, the company target company can ask for disclosure on the owner of that stake. However, the stake has since dropped to below the 5% threshold.

So, who could this mystery investor be? Reports seem to be conflicted on the exact nature of this investor. FT suspect it could be from a rival luxury brand, such as LVMH, or a private equity investor. In contrast, WSJ disagrees and believes it is unlikely that the bid would come from a European fashion brand, however does also suspect a private equity investor, or perhaps a sovereign fund. Personally, I agree with WSJ on this. I don't see why another luxury fashion brand would necessarily want or need to plan a takeover of Burberry. Yes, it is a very desirable brand, and maybe for a European company would be a good move into the UK. However, European companies, such as LVMH, are currently facing their own issues and do not have the funds available for an attempted takeover.

Burberry is highly focused on the Chinese market, making up 25% of its sales, as well as a further 10% in Hong Kong. However, spending on luxury items has dropped significantly in China recently, resulting in a drop in the Burberry share price. Could it be, then, that this mystery investor has seen their chance and taken it? With the share price taking a hit, why not invest in the company now at a lower cost? Seems like a logical plan to me. Maybe this investor thinks that they can improve the company and bring the share price back up. With this in mind, they invest in a large proportion of shares now, at a cheaper price, get the company back up to strength again and increase the share price, then you can sell the shares off at a higher price, making some good money on the investment. I know, easier said than done.

Alternatively, there could be a lesson in Portfolio Theory here, linking back to my first blog. Maybe if Burberry hadn't focused so much on the Chinese market and had ventured into other markets earlier on, they wouldn't have faced such a decline in share price based on the Chinese market. If the share price hadn't dropped significantly, maybe they wouldn't be facing a potential takeover bid now.

Another issue faced by Burberry is that Christopher Bailey acts as both CEO and Chief Designer of the company. This may leave Burberry looking vulnerable and as an easy target for a takeover. This may also raise suspicions as to whether the maximum value is being gained from the company. Again, maybe this investor believes there is more money to be extracted, thus increasing on their own investment. Data shows that since Mr Bailey took on his dual job role, the shares in Burberry have dropped 7.7%, compare this to LVMH which has increased 21% in the same time and you see the problem! It is believed that, should this be an activist investor, the first thing to be done would be cutting Mr Bailey's job in half. Hence his keen interest in stopping this takeover bid!

In my opinion, this mystery investor has taken some business initiative and bought a large volume of shares whilst they are at a low price. If this is a takeover attempt, they are more than likely to work to increase the share price, thus gaining on their investment.

Margin Call - What does it take to get a 7 figure bonus?

"Be first, be smarter, or cheat"

Margin Call is focussed around an investment bank and their impending financial meltdown. It is interesting to see how the different characters respond the news of the crisis, both those in senior positions and junior positions.


The film begins with the HR department conducting a mass layoff on their trading floor. Of those being laid off is Eric Dale, the head of risk management. Upon his departure he warns Peter Sullivan, a senior risk analyst, to "be careful" and to look at the project he is working on. This moment is referred back to numerous times throughout the film and is a pretty fundamental point of the film. What stood out for me about this moment was how Eric had tried to raise his point to his employer and senior members of staff; however they only seem concerned about getting him out of the building. In contrast, Peter immediately looked at Eric's project and realised what a dire situation the company is about to find itself in. That being that if the firm's assets decrease in value by 25%, the loss for the firm would be greater than its market capitalisation.

Was Peter's decision to look into Eric's project as a sign of loyalty to his manger and to see the project through? Or was it based more on the warning given, would that be to him or the firm as a whole? Either way, I'm pretty sure Peter just saved the firm! If the reason for his quick response was out of loyalty, this really highlights the importance of building good relationships between employees, especially managers and their subordinates. Without a strong relationship between the two, Peter may too have ignored Eric's request, then who knows what would have happened to the firm when it all fell apart!

Another point is would like to look into is the aspect of human nature in the decision making throughout the film. How big a role do emotions play in these? It is interesting again to see how each of the senior manager act under the immense pressure of the decision they are having to make. Ultimately, are they trying to do what is best for the company, looking after their own personal interest, or just wanting to get out of the situation as fast as possible? Personally, I do not think that the decisions made were anything to be made lightly. There would be no set right or wrong solution, you would end up upsetting someone, whichever choice was made. The best thing the firm could do was to limit their losses and try to save what they could of the company.

Something I found rather unrealistic was the speed and ease that the firm was able to sell of the toxic assets; then again this did have to fit into a 2 hour film. Looking at Fama (1970), in a semi-strong market, surely regulators would have spotted the flaw in the formula and stopped the assets being sold. Then again, this appears to be a reputable Wall Street firm, so who would suspect them of trying to pull a scam? Look at what Bernie Madoff pulled off!

Was the company wrong to sell of all their worthless assets? I would argue that from a business perspective not. They realised the flaw in the system and came up with a plan to save the company before it all went under. Sam Rogers is seen to be questioning this, stating that they are "selling something they know has no value". However, as John Tuld, arguably, correctly points out, they are still "selling to willing buyers at the current fair market price". Again, linking back to the Madoff scandal, if you have willing buyers, why not sell the assets? All the employees wanted to do was survive, be that the company survives and or they survive still with a job. This is human instinct, and relates largely back to the emotions at the foundations of these decisions.

Towards the end of the film, John Tuld is seen telling Sam Rogers that he plans to promote Peter Sullivan. Hardly surprising, given he just saved the entire company! However, I do have to question quite what position he is being promoted too. By the end of the film I wasn't too convinced how much longer the company would really be around!

The ultimate solution given in the film for the banks survival was to motivate everyone with a 7 figure bonus. It was simple, you get a 93% sale on your assets, you get a $1.4 million bonus. The question is, would you do something you knew was unethical to get a 7 figure bonus?

 

 

Dividend Policy or Dividend Puzzle?

In the words of Fischer Black (1976), "The harder we look at the dividend picture, the more it seems like a puzzle, with pieces that just don't fit together." Considering that it is still not decided whether dividends add to, or destroy, company value, I would say that this statement is completely true. 

The main question within dividend policy is does paying dividends maximise shareholder wealth? Surely, the very basic and simplistic answer would be yes, it does. Paying dividends out to shareholders will give the shareholder more money, thus maximising shareholder wealth. However, it is not as simple as that and, as every company is different, it would be virtually impossible to give a generic answer and solutions to dividend policy. 

The main issue that companies face with regard to dividends is do they pay out (or repurchase shares) to shareholders, or do they invest this money in positive NPV projects. Which would be more beneficial to shareholders?

A large amount of research has been carried out into the attitudes of companies towards the payment of dividends, or re-investing in the company. It was commonly found that the tendency to pay dividends was lower in smaller companies, who perhaps were not yet profitable and were looking to grow and expand. Due to being a smaller company, the investment opportunities and possibilities for growth would be fairly high. My opinion on this is that these managers would be looking at the dividend puzzle with a longer term perspective and would have the attitude that in order to maximise shareholder wealth, they would have to become more competitive and profitable. In order to do this they would have to invest in positive NPV projects and reduce, or eliminate, the payment of dividends to shareholders. 

Alternatively, larger companies have been found to be more likely to pay higher dividends, rather than reinvesting the money within the company. I think the reason for this is that they have less room for growth than new, younger companies and so the best way to keep their shareholders happy is to pay the dividends directly to them. If there is not necessarily a want or a need for investment and growth, this would evidently be the optimal use of the excess earning. 

I am of the opinion that smaller companies should adopt the Residual Dividend Policy, as in order to bring in the best returns for shareholders and increase shareholder value, they will need to develop a strong base. Investing in positive NPV value projects would still increase the market value of the company to reflect the increase in future returns, as detailed by Modigliani and Miller (1961).

For larger firms, I believe that a manged dividend approach would work best. Being a larger company, they would be more susceptible to variances in earnings each year. Sometimes they would exceed expectations by a large amount, other times they could fall short. A managed dividends policy would ensure shareholders would receive a decent dividend each year, giving them peace of mind that they chose a solid investment. However, it should be noted that any reasonable investor would expect to see slight fluctuations in their dividend, both positively and negatively, due to inevitable changes in the market or should the company's position change over a longer period of time.

I think it can be said that there is no set dividend policy that companies should adopt. Each company should determine their own policy based on what is most optimal for them and their shareholders. The policy is most likely to change and evolve alongside the company, and it is important for both the company and shareholders that the money is invested in the best way to increase value for both of them.

How much debt is too much?

 Finding the correct balance between debt and equity is a problem commonly faced by many companies. Choosing to finance mainly through debt is often seen as the safer option as a large amount can be borrowed, for relatively low returns. In comparison, equity is more expensive and viewed as being more risky. Due to the increased risk, investors want higher returns and as a result reduce the owner’s control of the company. Additionally, debt is tax deductible, whereas dividends are not. By taking on more debt, the gearing of the company will increase, which will in turn reduce the Weighted Average Cost of Capital, increasing the overall value of the company.

So, everything is pointing towards using debt rather than equity, right? Unfortunately, it is not always that simple. American Apparel took on so much debt, that it had to file for bankruptcy in October 2015. A plan has been agreed with creditors to swap $200 million of debt for equity, and extension of $90 million in debtor-in-possession financing and $70 million in new capital. It is believed that this plan will help reduced the level of debt by 70% to $135 million and cut interest payment by $20 million. I think these figures truly highlight how wrong American Apparel had going with their financing and level of debt, and also show how damaging high levels of debt can be for a company. Quite how long it will take American Apparel to sort this out, if they can, I really don’t know. 

So, why would management at American Apparel allow such a highly geared capital structure? Modigliani and Miller argued in 1958 that the capital structure of a company has no impact on the WACC. Therefore the total market value of the company is not affected by the capital structure, whether this is financed through debt or equity. However, this theory was highly criticised, based on a number of assumption the M&M made. Notably, that there was no taxation and no costs of financial distress and liquidation. Following this, M&M revised their initial theory in 1963 and took a more real world approach, taking tax into account. Debt is a tax deductible expense, which is another added bonus to financing through debt, as opposed to equity. M&M (1963) suggested that if you increase the level of gearing within a company, WACC will be reduced, and as a result the total market value of the company will increase.

Taking this into account, I can understand the reasoning behind American Apparel’s financing. The after-tax cost of debt is cheaper than equity and ideally they just wanted to lower WACC and increase their market value. However, what was not taken into account was the cost of financial distress and potential for liquidation. American Apparel should have also looked into the market conditions and possibly how competitors were financing their companies, before taking on too much debt. 

Personally, I do not believe that financing a company solely using debt is a good idea. Yes, it may help reduce WACC and increase the market value in the long run, but how do you expect to attract potential investors when all you have backing you up is a whole lot of debt? Obviously, this is something that can vary drastically between industries and markets, but maybe in this case it should be more about fitting in with what others are doing, rather than trying to stand out.

Madoff Hustle: How do you make $64 billion just, disappear?

  "He was an equal opportunity thief..."

People often hear about money scams in the news and think "I would never be stupid enough to fall for that", however when a scam is so cleverly thought out and manipulated, and it appears to be a solid safe investment, do you really have 'stupid' to fall for it?

Bernie Madoff is regarded as the greatest conmen of all time and was the mastermind behind one of Wall Street's biggest Ponzi schemes. What is surprising, yet could have also contributed to his success, is that he was one of the people working on Wall Street that you would least expect to conduct a scam such as this. He was seen as the "gold standard" of Wall Street and was highly regarded, seen as a reputable family man. Due to this reputation, he was able to draw potential investors in, gain their trust and make them believe that their money would be safe with him. Little did they know, exactly the opposite was true!

This brings me on to the "3 key rules of the long con" highlighted throughout the programme:

1.  If something looks too good to be true, it probably is
2. Everyone wants something for nothing, you just give that nothing for something
3. You can't cheat an honest man (said to be the most important)

 

 

Firstly, the scam was shown to give steady returns of 1% each month, year after year. These were consistent, whether the market was going up or down. This is a modest return on an investment and would likely to be far lower than others around the same time, however what drew people in was the guarantee of consistent returns. It does not appear that this is a case of people being greedy and wanting to gain high returns for very little, just that naïve people put their trust in someone who appeared to be an expert in the area and what to gain a safe, steady return on their money. Indeed, the scheme almost seemed too good to be true and, unfortunately, in this case it was!

Secondly, Madoff convinced his clients that they would be getting steady returns for very little risk, when in reality they were not getting any returns at all. What was actually happening was Madoff was slowing giving them their own money back, rather than gaining the interest they had been guaranteed. Madoff grew this Ponzi scheme as more and more money came in, through new generations hearing about this desirable high returns. As with every Ponzi scheme, it would collapse when the inflow of cash stopped. This occurred for Madoff during the 2008 credit crunch, when all the marks, or victims as they may be referred, wanted their money back all at once, the scam almost became too big to keep going. As noted above, I don't think that those drawn into the scam were being particularly greedy, and therefore may deserve what they got, but rather they just wanted a safe and steady investment. However, Madoff was taking their money and giving them nothing in return. He was indeed giving them nothing for something.

Thirdly, I feel that the final rule may have been proven wrong in Madoff's case. Yes, there is arguably always an exception to the rule; however in this case there appears to be thousands of exceptions. Perfectly honest victims were cheated out of their money, through no direct fault of their own. However, what can also be said is that a common problem with Ponzi schemes, both back when they first became popular and also in modern day, is that people don't look beyond the promised rate of return. Could it then be said that the victims were maybe not as honest as first thought? Had they looked further than the initial face value of return, would they have spotted flaws within the system?

What stood out for me personally throughout the programme was how ruthless Madoff was with his scam, stopping at nothing to get what he wanted. Nobody was off limits when it came to him conning them out of hard earned money. The most shocking for me, and also notably for those interviewed, was the Elie Wiesel Foundation for Humanity, which was cleaned out of $15million worth of assets. It's one thing to scam the super-rich out of money, and the thousands of 'ordinary' people including friends and family, but to target charities and take money from those is just a whole new level of psychopathy. Did Bernie Madoff really have no morals? At least one thing can be said about him, he was an equal opportunities thief. He didn't care whose money he was taking.

Bernie Madoff has been sentenced to jail time and will spend the rest of his life behind bars. Unfortunately, he is still having the last laugh. In pleading guilty, he did not have to face trial and questioning as to how or why he did it and where in fact all the money has gone. I guess we never will find out his secrets and what possessed him to do what he did.

 

 

Leave a comment below letting me know what you think.

 

A Royal take on Portfolio Theory

"Diversifying risk means holding foreign assets too"

She became our Queen in 1952 and in this time has built a sizeable portfolio of assets and investments. Unfortunately, a number of these assets come with the job and cannot be bought and sold to obtain the best value of portfolio. Not that the Queen really needs to be watching the pennies! Her portfolio mainly includes diamonds, artwork, property, and of course the Crown Jewels. However, seeing at there's not much room for comparison on the jewels themselves, we may need to focus on the gold instead!


Markowitz developed the idea of Portfolio Theory in 1952 (anyone noticing a pattern in these dates?!), suggesting that investors should aim to reduce risk through diversification and holding a range of different investments. Investors should consider the potential returns, risks and standard deviation, and the correlation of a prospective portfolio. Markowitz says that a strong portfolio should contain investments that are not correlated with each other, therefore if one industry faces a fall, the other investments would not be affected by this and still bring in high returns. However, if you believe that an industry is going to continue doing well, why would you invest your money elsewhere?


The sterling price of gold has more than doubled in real terms, therefore excluding the effects of inflation, since the Queen came to the throne. Whilst this shows the benefits of a long term investment, the price of gold has been decreasing in the past five years, therefore suggesting this is not advisable for short term investors. At least not to invest in currently. In contrast, the diamonds have not fared as well and, if anything have suffered the effects of inflation over the same period of time. Personally, I find this surprising. Surely gold and diamonds would follow similar patterns to each other and would be highly correlated?


The key investment within the Royal Portfolio is the collection of artwork which has been gathered over the years. Over the past century this has been one of the best performing assets, bringing in 3% a year above inflation. I'm sure with the extensive collection held within the Royal family, and the extra 3% each year, this will amount to a pretty sizeable return! According to Christophe Spaejers, finance professor at HEC Paris, the price of artwork in London has risen more than 500 fold in nominal terms since 1952, or 20 fold after the affects of inflation.This could be due in part to various artists gaining higher profiles and interest, therefore increasing the value of their pieces of art. Alternatively, it could be argued that those with a keen interest in art are highly educated and subsequently have a high amount to spend on the desired artworks, thus pushing the prices up. The Telegraph also states that has a very low correlation to equity markets, therefore investing in art is an ideal way diversify and give a good overall investment porfolio.


Another crucial investment held is that of the various properties the Queen holds throughout Britain, which have also proven to be good investments over the years. Many of the properties and estates are older buildings and are likely to be graded, adding to their ever growing value. Needless to say, the added detail of them being owned at one point by Royalty will add the their pretty sizeable price tag! Over the years, the older properties, bought or inherited at the beginning of her reign, are estimated to have increased in value 127 fold. Quite whether this is solely due to the general trend of increased house prices, or whether the link to the Royals has something to do with this, I'm not convinced. However, the Queen doesn't show any signs of moving out of Buckingham Palace anytime soon, so her vast collection of properties are likely to bring in even higher returns.

One thing that does need to be noted about the Queen's investment portfolio, in particular the properties, is that it is far too concentrated in the UK. Therefore, should the Queen wish to strengthen her investment portfolio, my advice would be to look into foreign assets and holding more international investments.

Is Markowitz right with Portfolio Theory, is it better to diversify risk and hold a range of investments, or is it better to focus on one industry that is performing well?



Hawick Knitwear: Can Digby Jones take them global?

Sir Digby Jones is a champion of British business and believes that British manufacturing has "so much to be proud of". However, there is one key struggle which these manufacturers are constantly facing. Staying one step ahead of their global rivals. It is all about having the "right product, in the right market, at the right time". Probably easier said than done.

Hawick is located in the Scottish borders and knitwear has been manufactured here since the late 1700s. Digby Jones has been brought in as a consultant for one of the few original wool manufactures, Hawick Knitwear. Many of the employees here are long serving and have become highly skilled in their time at Hawick. Many of the roles within the company require high precision, which has been passed on through generations working within the business and Hawick knitwear has becomes highly important within the local community as it provides jobs for hundreds of locals and attracts school leavers into the business world.

"Do it professionally, do it competently. But do it"

The main problem highlighted throughout the programme is that Hawick Knitwear produces a large volume stock for other companies, therefore a high amount of the products do not bear the Hawick name and the brand is not recognisable. Digby believes that developing a strong brand is key to a company's long term survival, however the shareholders need to be willing to invest the money into the brand. It becomes apparent the Hawick Knitwear attracts a high amount of Chinese customers, so much so that the Edinburgh store, also the most profitable, has hired Chinese speaking sales assistants to aid sales. Digby wishes to pursue this lead and proposes the Hawick Knitwear should go international and open a store in Shanghai. He pushes this idea suggesting that within five years Hawick Knitwear could be an identifiable brand within departments stores in both Shanghai and Beijing. Personally, I believe this to be slightly optimistic, yes they do attract a high number of Chinese customers, however are they ready to branch out that far? Does it not comes with too higher risks for such a small company?

The problem with Hawick Knitwear is that they have developed a niche market for themselves and have become highly successful within this. Therefore, they are highly sceptical about pushing out of this comfort zone and the risks that may come with it. They ideally want to take a more steady pace, focusing on growing and developing the brand within Scotland and the UK, then Europe before setting up in Asia. This may seem the more logical method, and is evidently the one preferred, however Digby still believes that there is a successful market in China and that is order to get the rewards, you have to take the risks.

Paul Alger, Director of International Business Development for UK Fashion and Textile association, suggests that Japan would be a far more lucrative market than China and proposes this as an alternate route into Asia. The route of expanding into Japan has already been done by many British companies and is often easier to crack than China. It is advised the Hawick Knitwear pursue Japan with a slimmed down collection, focussing on the Heritage range, made 100% in Hawick and with a strong British story and brand. Digby is supportive of this plan, expressing that you have to "do it professionally, do it competently. But do it". A plan of action appears to be taking shape, with approval from both sides. 

A meeting with Ruia group, the majority shareholder in Hawick Knitwear, reveals further reservations about the proposed expansion into Japan, and plans revert back to focussing on the core markets within the UK and Europe. This is disappointing for Digby, who really believed in the Asian markets, and also for the viewer in a way as you could see the plans coming together for the expansion, only for them to go back on them at the last minute.

The programme ends with one last meeting with Digby, where it is revealed that plans have changed once again and Hawick Knitwear are willing to test the Japanese markets, however with minimal time and investment. The feedback is positive from Japanese buyers and there is potential for quick returns for limited investment. This may not be the plan the Digby initially set out with, however this is a compromise of both sides and a plan is put in places which everyone seems to be happy with.

Was Digby right to push the idea of going global, or would they be better focussing on their established niche markets? Let me know in the comments below.