GUIDANCE TO TUTORS ON ANSWERS TO STUDENT QUESTIONS

Below are eight suggested discussion questions and a list of points that you might choose to steer students towards in attempting to answer them. Where the Redland case is unable to provide a comprehensive or up-to-date picture on a given technical subject (e.g. the range of issues embraced by governance), please feel free to add to it from your own understanding of the subject. The aim is that the case should open the door to discussion and learning, not contain a rigid boundary around what may be learnt from it.

Question 1

Many organisations attempt to protect themselves from economic adversity by diversifying their operations. Others choose to focus on depth and market share, aiming to gain enough strength to avoid becoming a takeover victim. With this in mind, analyse the changes in Redland's market position over this period. In your analysis, address the following points:-

1. What were the main external factors affecting Redland's business? How were the various operations and territories affected differentially?

   SUGGESTED DISCUSSION POINTS

   • In the UK, compared with elsewhere, Redland was in close proximity to City institutions, especially investment bankers, resulting in considerable formal and informal contact with them. This almost inevitably led to a choice of 'transactional' means of growing the company and the use of financial 'devices'.
   • There was a strong tradition in the UK of investor primacy. One effect was to make Redland management very aware of the risks of losing investor support and being vulnerable to takeover. This led to a belief that the bigger the company became, the safer it would be.
   • Corporate management had to face the reality of half-yearly results presentations and numerous other interrogations from the financial markets.
   • National economies were at different stages in the economic cycle.
   • Germany was faced with problems and opportunities associated with reunification.
   • Legislation in Germany required formal consultation over change programmes with a company's supervisory board.
   • Different cultural traditions existed (e.g. German managers were more risk averse and more thorough than their British counterparts, and naturally less responsive to investor criticism and pressure).
   • The Braas partner wished to maintain as much independence from Redland as possible, exploiting Germany's more bureaucratic culture and complex legal environment.
2. How able was Redland to cope with regional and country market swings and global economic downturns?

   SUGGESTED DISCUSSION POINTS

   • Redland's international spread of businesses should have enabled it to insure itself against adverse national conditions (as analysts Smith New Court identified).
   • Its arm's length relationship with many of its smaller overseas partners meant that, in theory, it was able to move into and out of country markets at relatively short notice, and should therefore have been able to follow economic and market changes. In practice, the need to exit businesses quickly (sometimes for reasons not associated with economic and market downturns) meant that it frequently took a loss.
   • It failed to manage its businesses tightly enough and lost the ability to respond to changing circumstances, and was thereby severely impacted by the recession in the early 1990s.
   • It was too dependent on one area of business (the German roofing company Braas). When this market suffered a turn-down, Redland was exposed and had little room for manoeuvre or influence over Braas.

Question 2

Over a long period Redland developed an appetite for acquisitions, culminating in the biggest, Steetley, in 1992.

1. How was this acquisition different from all the others, in its nature (as well as in its scale)?

   SUGGESTED DISCUSSION POINTS

   • Steetley offered the potential for benefits that reached well beyond short-term cost savings.
   • Potential benefits depended on achieving genuine synergy (see list below).
   • This required substantial integration of the businesses. Without this degree of change, benefits would be limited, and competition between the erstwhile businesses would undermine each other, especially in the UK.
2. What scope existed for Redland to achieve greater post-acquisition synergies in 1992/93?

   SUGGESTED DISCUSSION POINTS

   • The Redland case makes clear that the main focus of synergy was on achieving promised short-term cost savings.
   • Deeper, long-term synergy benefits might be expected to include:
     • sharing of best practice
     • enhanced market shares and geographical presence
     • common sales force
     • better product ranges
     • combined R&D
     • shifting and concentrating production in low-cost locations
     • extension of existing businesses, such as aggregates, into new lines of business (e.g. lime and magnesia production)
     • know-how in bricks and aggregates
   • There would be other necessary post-merger integration activity (whether or not synergistically beneficial), including:
     • rationalising IT systems, products (e.g ranges of bricks) and HR policies, systems, practices, pay rates, etc.
     • transfer pricing between product divisions, geographical centres, etc.
     • rebranding
3. What factors were insufficiently thought through before the bid was made?

   SUGGESTED DISCUSSION POINTS

   • The wisdom of being in the bricks business (in spite of the stated business strategy).
   • How business success would be measured post-integration.
   • How financial success would be measured post-integration, and what indicators of added value would be deemed relevant.
   • The importance of gaining the growth and business enhancement facets of the merger, as opposed to one-off cost savings.
   • How the promised £30m of cost savings could be delivered without damaging operational capacity, product quality, customer service, employee relations, etc.
   • Whether the high price would leave Redland short of cash to invest in efficiency enhancing opportunities and therefore unable to enhance margins and returns from the existing business base.
   • Whether Redland had the managerial capability and experience to manage comprehensive post-acquisition integration.
   • The need to watch out for the decision being driven by:
     • ego
     • one or two determined personalities
     • pressure from a competing buyer
     • the fashion for agglomeration and diversification
     • narrow financially orientated expertise
     • the vested interest of investment banks
4. What were the various motivations which lay behind the desire to make this and other acquisitions?

   SUGGESTED DISCUSSION POINTS

   • The belief by corporate management that a company had to keep growing, and that growth generally meant acquisitions.
   • The pressure on corporate management to be at one with their investment bankers' views of business/management success.
   • Strong rivalry with main business competitor Tarmac, who were also bidding for parts of Steetley
   • The need to move in haste because of Tarmac's advanced negotiations with Steetley.
   • Ambition, the wish to be seen as virile, and the need to satisfy other psychological states.
   • The strong desire to be the biggest in the construction materials industry.
5. How thorough was the measurement of the pre- and post-merger financial impact?

   SUGGESTED DISCUSSION POINTS

   • Despite the Steetley acquisition being judged ostensibly through financial (rather than operational) eyes, the financial case was under-considered, as was the question of Steetley's debt.
   • After the takeover, financial success could not be properly evaluated because at that time Redland lacked sound and agreed measures for assessing whether value was being added.

Question 3

Like all organisations, Redland had many stakeholders, each with different requirements and expectations.

1. Identify the key sets of stakeholders in Redland.

   SUGGESTED DISCUSSION POINTS

   • Institutional fund managers
   • Private shareholders
   • Investment bankers/analysts
   • Other City institutions and firms (lawyers, insurers, banks)
   • Managers in joint ventures
   • Minority shareholders in joint ventures
   • Non-Redland owned distributors and builders' merchants
   • House builders
   • Home-owners
   • Redland corporate HQ directors and managers
   • Other Redland managers and employees
   • Suppliers
   • Local neighbourhoods affected by quarrying (polluting noise, dust, heavy traffic, eyesores, etc.)
   • Regulators (government, construction industry sector such as National House Building Council, financial)
2. How well were their interests served by the actions and policies of Redland and its directors?

   SUGGESTED DISCUSSION POINTS

   • Companies prioritise stakeholders' interests, consciously or otherwise, and have to address the need to balance their interests, which are sometimes competing.
   • We can infer something from the case about how Redland went about this:
     • Shareholders did well initially.
     • City institutions did very well, both in Redland's good times and bad.
     • Corporate managers with financial expertise did well.
     • Employees were not regarded as a strategic determinant of top management actions.
     • Joint ventures were treated instrumentally.
     • Distributors, builders merchants, house builders and home owners received high-quality, technically advanced products.
     • Public/community - we don't know.
     • Suppliers - we don't know.
3. What were the key performance indicators (KPI's) that these different sets of stakeholders would look for?

   SUGGESTED DISCUSSION POINTS

   • We are only able to speculate since no data is provided by the Redland case. In practice, most KPIs remain implicit.
   • The developing practice of stakeholder engagement aims to make explicit the less obvious stakeholder interests (such as neighbourhood concerns over pollution) and helps both parties understand what success looks like and how their respective needs can be met.
   • Note the considerable variety below, and the management challenge of balancing the various interests:
     • City institutions - volume of fees earned
     • Fund managers - share price and dividend
     • Regulators - number of complaints
     • Suppliers - volume of business and margins earned
     • House builders - competitive prices and volume discounts
     • Community neighbourhoods - reduction in visual, air and noise pollution
     • Managers and employees - Job security, pay levels maintained, career opportunities and feeling proud of working for a good company.
4. Where would you expect to find relevant information on stakeholders reported?
   Was the information that Redland provided to stakeholders appropriate and transparent?

   SUGGESTED DISCUSSION POINTS

   • A company's annual report would nowadays be expected to make passing reference, at the very least, to all main stakeholder groups.
   • Statute requires certain matters to be reported, such as employee training and health and safety.
   • Growing interest in governance and the notion of corporate citizenship (see Redland's Vision statement) would create the expectation of the reporting on such matters as progress in reducing pollution, charitable giving, customer complaints, technological benefits to consumers, etc.
   • In Redland's case, information is primarily financial (a practice Redland shared with many large, established UK companies).
   • Redland's annual reports (which students do not have) show that reporting on governance was limited to compliance issues concerned with board composition and remuneration (again, not unusual).
   • The Redland case suggests that publicly available information did not enable investors to assess the risk to the company resulting from its financial and business strategy, owing to:
     • the choice of financial indicators
     • the use of clever devices for the management of financial exposure and cash shortage
     • the absence of a clear and consistent definition of what the company's real 'strategy-in-use' actually was.
5. What other sources of information might there be? What changes are taking place today to serve the information needs of investors?

   SUGGESTED DISCUSSION POINTS

   • A corporate website is now regarded as a shop window, providing improved access, more up-to-date information to a wider group of interested parties (going beyond those with a financial interest), including more information of governance and corporate social and environmental responsibility.
   • An environmental report for a company in this line of business (either within the annual report or appended to it) would be expected by environmental NGOs.
   • Companies listed on the London Stock Exchange must now report annually to their shareholders on their use of internal controls to manage a wide range of risks, including those to the company's reputation arising in the social, environmental and ethical domains.
   • The media are more persistent today in exposing shortcomings in companies.
   • An upsurge in 'shareholder activism' (often by institutional investors) is now challenging board misjudgements, excesses and weak governance by contesting resolutions at AGMs. (See Energis case in Financial Strategy.)
   • Whistleblowers are more vociferous as they are now protected by the Public Interest Disclosure Act 1999.
   • Large companies now attract alternative websites ('complaints' or 'sucks' sites) where aggrieved investors, pressure groups, and representatives of other stakeholders make their feelings and views explicit.

Question 4

Redland reached a position in which it wholly owned some businesses, and held either majority or minority stakes in others.

1. Outline the principal differences between these kinds of ownership, from both an operational and a financial reporting viewpoint.

   SUGGESTED DISCUSSION POINTS

   • The differences in management and control between these types of ownership (and the fact that the nature of such management and control can often be critical in determining the required accounting treatment).
   • Difficulty in imposing a Group strategy, performance management system or values on an entity in which head office does not have 100% voting rights (the Braas operations provide an excellent example of this).
   • Groups can allow investee companies to be run anywhere on the scale of corporate involvement from passive interest to close central scrutiny - this will depend as much on corporate management style as on the actual ownership interest (i.e. a wholly-owned subsidiary might be given total autonomy in some cases, while Group management might take a very hands-on role in a 25% associate).
   • Redland, by 1993, was neither 'fish nor fowl'. It was not a tightly controlled financial holding, or a well-managed industrial company. It was a rather loose-knit grouping of disparate cultures and arrangements.
   • From a financial reporting standpoint, wholly-owned and (usually) majority-held investments will be accounted for as subsidiaries; i.e. consolidated and subject to relevant disclosure requirements; minority investments will be accounted for on an equity basis (if they meet the criteria of FRS9), again with the relevant disclosure requirements, or (if they do not meet the requirements of FRS9) as trade investments, with no adjustments in the consolidated accounts.
   • Note that an investment that is on the face of it a majority holding might not be a subsidiary if the voting interest differs from the economic interest (see the Energis case under 'Financial Management' for an illustration of this); conversely, a minority holding could in some circumstances come to be treated as a subsidiary.
2. Trace the changes in the relationship with Braas management and the German minority shareholder during this period, and its impact on Redland's overall strategy.

   SUGGESTED DISCUSSION POINTS

   • For most of the time Braas remained at arm's length from Redland's corporate management, protected from interference by highly complex legal agreements (in the German tradition), and by its powerful stakeholders, which included a strong German Supervisory Board and a range of minority shareholders.
   • For a long while Brass could not identify with Redland's insistence on the need for urgent and drastic remedial action.
   • Braas management co-operated more(but rather slowly) when the writing was on the wall and once Redland's chief executive became more uncompromising in his requirements.

Question 5

The Group's later strategy involved expansion by acquisition of subsidiaries, both within and outside the UK. Problems were encountered when several of these subsidiaries became loss-making.

1. If Redland was still trading today, and assuming the UK tax regime as it exists in 2002, discuss the extent to which the corporation tax payable by profitable, UK-resident members of the group could be relieved by each of the following:-
   • the tax losses of loss-making UK group members;

     SUGGESTED DISCUSSION POINTS

     • The rules for UK group relief and how they would apply to Redland, given the different ownership arrangements for its various investments (see question 3) and allowing for time-apportionment in respect of entities bought and sold during the year.
     • How tax structuring might have been used to enable profits and losses to be transferred more effectively around the UK group.
     • Asset transfers.
     • Scope for 'managing' the tax charge, such as disclaimers of capital allowances by loss-making companies depending on capacity for group relief in a particular year - this would ideally require companies to look at their profit forecasts to see where profits and losses are expected to arise in future periods.
     • Availability of small companies or marginal rate depending on the number of companies in the group (unlikely to be applicable in a group of Redland's size).
   • the tax losses of loss-making overseas subsidiaries

     SUGGESTED DISCUSSION POINTS

     • On the face of it, the losses of overseas subsidiaries cannot be utilised against UK tax profits. However, methods such as the use of robust, properly documented, tax-efficient transfer pricing arrangements can help to ensure that group profits are (legally) transferred to territories with the lowest prevailing tax rates.
   • the foreign taxes paid by profitable overseas subsidiaries.

     SUGGESTED DISCUSSION POINTS

     • Students should consider the rules relating to the following (these are covered in detail in the taxation section of the Business Strategy technical digest):
       • double tax treaties
       • controlled foreign companies
       • dividend arrangements and profit repatriation
       • branch v. subsidiary structures
       • thin capitalisation issues (debt/equity ratios)
2. What planning could have been done to maximise such reliefs without impairing Group operational and financial performance?
   and
3. To what extent should the main corporate objectives of demergers - such as those that were being contemplated by Redland before it was acquired by Lafarge - be allowed to be overridden by their tax consequences?

   SUGGESTED DISCUSSION POINTS

   • Some of the key devices available have already been raised above; e.g.
     • transfer pricing arrangements
     • group structuring
     • financing arrangements
   • However, tax considerations, while important, should not be allowed to dictate suboptimal commercial decisions. For example:
     • it may be beneficial for tax reasons (e.g. to take advantage of losses) to increase a shareholding to bring a company into the UK tax group, but there may be overriding business reasons for leaving the shareholding as it is;
     • a transfer pricing structure might be introduced that reduces taxes around the world, but which does not motivate local management to operate their businesses in the most effective way (i.e. they might be forced to buy from another Group company when they have a better quality external supplier available; or they might not be concerned about margin if this is in effect largely imposed by central management.
   • Consider some of the specific issues mentioned at different stages of the Redland case, such as:
     • The company's exit in 1989 from its six -year involvement in fuel distribution, following an acquisition undertaken partly for tax reasons.
     • Redland's purchase of £30m of Advanced Corporation Tax (ACT) capacity in Steetley.
     • The Smith New Court comment that " ... the sensitivity of its earnings recovery to the tax charge and the difficulty of keeping the tax charge low against likely recovery in the UK and France will lead to periods of share price uncertainty."
     • The finance department 'enhanced scrip dividend' scheme, which while helping with the ACT problem for a period, was a 'short-term palliative, which would mask the true cash-generation picture for a while'.
     • 'Project Starburst', which meant finding ways through complex tax problems.

Question 6

Think about the role of Redland's corporate headquarters over this period.

1. Redland spent heavily on acquisitions and had a tradition of paying high dividends. Its natural attitude was to rely heavily on corporate financial skill and its good relationships with investors, analysts and bankers. To what extent was this 'strategy' its strength or its undoing?

   SUGGESTED DISCUSSION POINTS

   • Paying high dividends gained investor support for borrowing capital to fund Redland's growth-by-acquisition strategy. Unfortunately, it paid too much for most of the acquisitions and destroyed value; i.e. the cash returns did not cover the cost of the capital invested.
   • The tradition of a high dividend rebounded when it starved Redland of badly needed cash to invest in its products, plant, processes and systems for long-term benefit.
   • Initially, Redland's core financial skill allowed it to manipulate its way out of financial problems. But the symbiotic relationship with City counterparts was at the expense of operational management expertise and managing Redland in the round.
2. How justified is the claim that corporate headquarters was largely responsible for destroying £1.9bn of value in Redland?

   SUGGESTED DISCUSSION POINTS

   • Redland corporate management was responsible for most of the value destruction by virtue of:
     • The nature of their business-growth strategy
     • lack of long-term strategic consistency
     • poor choices within that strategy (i.e. product sectors, evaluation of businesses to take over or buy into, price to paid)
     • core management values and expertise
     • financial measures used to assess success or failure
     • longer-term risk management
     • lack of attention to creating clear corporate norms, culture or management quality
3. Trace the stages in development of the influence of the new Finance Director and Human Resources Director within the organisation. What did they contribute during the crucial period?

   SUGGESTED DISCUSSION POINTS

   • The finance director, Paul Hewitt, injected badly needed, evidence-based financial reality about Redland's financial health, its success at strategic decision-making, and its business performance, and where it was headed if it did not change. Hewitt made value-based management (VBM) the prime basis for measuring the financial success of managerial decisions and performance, which provided crucial clarity about the extent and depth of Redland's performance problems. He helped to persuade the board to cut its traditional high dividend and thereby retain cash for reinvestment in the business.
   • The human resources director, Don Young, focused attention on the dysfunctional facets of the Redland organisation, assessed management competence, introduced Group-wide management standards, upgraded the management cadre by recruitment and terminations, contributed to the development of a new statement of 'Vision and Guiding Principles', promoted the sharing of best practice, supported the chief executive and the finance director through the latter-day change process, and shaped a new style for management conferences.
   • The two new directors needed each other and were ideally complementary in their in expertise. They often supported each other against colleagues' resistance to change, challenge, new ideas and bad news, and provided each other with valuable insights to their respect fields of interest. In particular, Hewitt provided Young with clarity of analysis about the financial performance problems; and Young supported Hewitt in developing an understanding of the politics and dynamics of change.

Question 7

Think about the metamorphosis that Redland sought to achieve in the 1990s, and the way it chose to go about it.

1. There were various sources of conflict over how the required change programme should be implemented. What lay behind these different perceptions, and how did these viewpoints affect employees?

   SUGGESTED DISCUSSION POINTS

   • Compared with their UK counterparts, Continental European managers were:
     • less experienced in managing in both good times and bad
     • more cautious
     • in possession of a broader range of technical, marketing and manmanagement skills
     • more concerned with the interests of their employees
     • under more pressure by local legislation to consult with supervisory boards (with employee representatives)
     • less in thrall to financial institutions and insulated from the City
     • less able to put themselves in the shoes of investors by virtue of their core operational managerial expertise
     • less short-term oriented
     • less disposed to take risks with the business
     • less aware of the extent of the crisis
2. Redland management possibly underestimated the extent of cultural differences within the Group. What steps could it have taken to avoid this problem?

   SUGGESTED DISCUSSION POINTS

   • German representation on the Redland board could have taken place earlier.
   • The board could have valued and opted for greater diversity of background, education, values and experience among directors to introduce more openmindedness, questioning, exploration, doubt and humility.
   • Attendance at senior management conferences could have been more broadbased and multi-national, and the style could have been more involving earlier than 1995.
3. How successful was Redland's concept and implementation of value-based management (VBM)?

   SUGGESTED DISCUSSION POINTS

   • Once it had overcome resistance, VBM was popular (especially in the UK and USA). German management were slow in accepting it. The usual approach is to cascade VBM down from the corporate HQ. Redland's decision to give local managers a lot of discretion in deciding on the use of capital in their businesses meant that managers were anxious to learn about VBM and that the corporate office did not need to 'push' them to adopt value as the main measure. The German top management were much more reluctant to relinquish control before they felt that they had fully developed a 'perfect' framework of controls. This slowed adoption of VBM to a snail's pace.
   • VBM provided a logical and unifying way of understanding and measuring performance.
   • Senior managers welcomed the power it gave them over local business priorities. Thus, it was possible to adopt very quickly the measures, and the changes of behaviour and priority they brought.
   • VBM achieved a good balance between local discretion and corporate involvement (advice and learning).
4. What alternatives exist to measure performance, and how do they compare?

   SUGGESTED DISCUSSION POINTS

   • Designing the key measures and ratios to suit the nature of the business. For example, Redland's core businesses tended to be quite capital-intensive and its product markets tended to be very cyclical. The top management also chose acquisitions as the favoured strategy for growth. Therefore, they needed to track the true cost of acquisitions and the cash returns that they were achieving from acquisitions related to the cost of the capital that they were raising and investing.
   • It would seem sensible for a company such as this to be able to track value creation over relatively long time periods; i.e. through cycles. Instead, they chose to measure profit related to sales volumes on a year-by-year basis.
   • They also tended to believe that holding assets such as land (aggregates reserves) was generally a good thing because the value of land appreciated more rapidly than inflation. What they did not compute was the cost of the capital tied up in non-revenue generating assets.

Question 8

The Redland case presents a number of interesting ethical issues, none of them unique to this company, but indicative of the dilemmas faced by many large organisations and their management teams on an almost daily basis.

1. How did Redland's stated commitment to its various stakeholders, including the community, corporate citizenship, etc., manifest itself in the Group's behaviour, as opposed to its rhetoric?

   SUGGESTED DISCUSSION POINTS

   • The statement of Redland's vision expresses its commitment to "add value to the public". This statement was probably ahead of its time, and would now be considered commonplace, especially for a company extracting natural materials from quarries, and engaged in roadworks, etc. But the case tells us nothing about the company's actual practice.
   • The statement speaks favourably about its commitment to employees, but its acquisition of Steetley and the consequent need to derive synergy benefits (i.e. cost savings through redundancies, and its chosen defence strategy of selling the Group in bits to appease a different stakeholder, the City - appears to contradict the stated value.
   • Redland's dominant focus on the financial community as prime stakeholder, and its core expertise being financial, suggests that customers, employees and the community was a lesser concern.
2. In its relationships with the City, how open, transparent and consistent was Redland's management?

   SUGGESTED DISCUSSION POINTS

   • Redland, like many other companies, was both open and occasionally manipulative in its communications with the financial markets. It must be said that Redland's corporate management had a long and honourable history of financial probity when it came to such matters as business ethics and compensation. But, the company sought constantly to present itself in the most favourable light to the City. Thus, when Paul Hewitt arrived and was anxious to expose and report the true nature of the problems, he was accused by some as being pessimistic.
3. What steps could it have taken to minimise the impact of the 1994 dividend cut on its share price?

   SUGGESTED DISCUSSION POINTS

   • Redland management might have been able to anticipate this problem. It could have moved away from the tradition of a high dividend earlier by trailing the benefit of switching capital to long-term investment instead of short-term shareholder rewards.
   • The only real answer is that the company could (and arguably should) have chosen to be different in its behaviour, skills, culture and chosen strategies from, say, 20 years before the dividend cut. Failing that, the die may be cast and a company's fate determined by patterns of behaviour years before evidence based on financial results becomes apparent.