BZT Dictionary®

More

Offshoring happens to the greatest extent from high-cost countries to low-cost countries. A prerequisite is the ever more globalized economy which makes it ever easier to move capital, products and services between countries. Globalization has also brought about increased cost and price pressure from low-cost countries, and the principal purpose of offshoring has been, and still is, to lower costs in order to meet increased price competition. But offshoring is driven more and more by the possibility of also establishing R&D and sales in the country to which the production is moved. Especially interesting countries are the rapidly growing markets in Asia, where China, India, Indonesia and Vietnam are some examples.

Clearly, the advantages of offshoring are not only financial ones. It also leads to increased contacts, collaboration and cultural exchanges between countries. The receiving countries get to share know-how, investments and opportunities for work, which in turns leads to growth and increased well-bring. But there are also of course disadvantages and risks with offshoring, for example:

• Increased logistical complexity.
• Increased costs for inventory maintenance, quality control, travel, etc.
• Cultural and language barriers.
• Risks of copying and "theft" of intellectual property, e.g., know-how, patents and trademarks.
• Export of employment opportunities.
• CSR risks - e.g., bribery and child labor.

In principle, all manufacturing of clothing today is done outside of industrialized countries. Here the global trademarks Nike (US) and H&M (Sweden) have been pioneers and have built up production using partners in a large number of developing countries. But offshoring of electronics and software is also of great importance and there China and India are large recipient countries.

More

A share (stock) call option gives the option holder the right, after an agreed time, to purchase a number of shares at a pre-determined price. Example: For a premium of €0.5 per option the option holder receives the right to acquire 100 shares in Company X in three years for €50 per share. If the market price of shares in the company in year three exceeds €50 the option holder will exercise the option and purchase 100 shares for €50 each. If the market price is less than €50 the option will not be exercised since it is cheaper to directly buy the share on the stock exchange. In this case, the option holder will have suffered a loss amounting to €0.5x100= €50. The granter of the option, by contrast, will have a corresponding profit and in addition will still have her or his 100 shares.

Options transactions between existing shareholders have no effect on the number of outstanding shares and do not result in dilution. But if a company issues subscription options (rights to subscribe for newly issued shares) the number of the company's outstanding shares will increase and that will result in a dilution for existing shareholders if the options are exercised. Subscription options are a common way of offering management and employees a chance to become owners in the business. Options with the rights to subscribe for new shares are also called warrants.

What, then, is an option good for? An option gives the option holder a chance to acquire the underlying asset with a more limited capital investment. Assume that the closing price in the example above is €60. If the option holder then exercises the option and purchases 100 shares for €50 per share, he or she will make a profit of €10 - €0.5 = €9.50 per option. For the grantor of the option the option provides both premium income which increases direct return and also protection in case the asset's value declines. If the grantor of the option in the example above had purchased the shares for €30 per share and the shares had declined to €29.50 the grantor of the option would have made neither a profit nor a loss (€29.50 + €0.5 for the premium).

The "Black-Scholes" model is a common model for valuing and calculating the premium for an option, and there are several other calculators on the net which you can use.

More

Initially businesses began to outsource activities non-critical to the business, e.g., wage administration, cleaning and reception of visitors. But today everything is delegated which someone else can do better or cheaper. Many production companies have all manufacturing of component parts outsourced and only do final assembly and quality control of the finished product in-house. Closely related expressions are "contract manufacturing" and "subcontractor" (the one who does the production).

The advantage for the company which outsources the production is in reducing its costs and in more easily being able to adapt its capacity to variations in demand. So-called buy/make calculations are done in order to determine what is to be done in-house and what is to be outsourced. The subcontractor to which the outsourcing is made gets larger volumes and must adapt costs, prices and its capacity to the requirements of the customer making the order. The risks for the company which outsources its production lies, among other things, in that it cannot control the production at the subcontractor and that it gives up know-how that may be critical to the business. What is particularly to be avoided is becoming dependent on one supplier (a so-called single source) for a critical component.

For the company which takes over the production, outsourcing means greater volume over which to spread fixed costs, which should in turn lead to increased profitability. But it can also lead to heavy pressure on prices and margins if it is necessary to compete for attractive customers and orders. The supplier, too, must ensure that it does not become unduly dependent on one large customer. If the customer chooses to change to another supplier, that can produce large adjustment problems under great time pressure.

More

Owner directives are particularly important in all companies with more than one owner. All owners will have different objectives and intentions with their ownership in the company. One owner may want to create and build a company to be taken over by the next generation. Another owner may value cash and want as quickly as possible to sell the company to realize created values.

Owner directives are even more important in companies where there are different types of owners, such as private individuals, venture capitalists, and state (public) owners.

In listed companies, there is usually no owner directive. The scattered ownership makes it difficult to establish one for all shareholders' common view of the ownership, and hence a joint directive to the Board.

In the process of producing the directive, the owners should agree on some important issues, e.g.:

• Is it a growth or a livelihood business the owners intend to build?
• Should the company invest the profits in developing the business, or should the profits be distributed to the owners?
• What financial structure and financial risk should the company have, for example, in the balance between equity and debt?
• Will the growth target require the owners from time to time to inject new capital in the company, e.g., in share issues or by shareholder loans? Share issues, for example, will have an impact on long-term ownership since owners who can't or do not want to participate will over time become diluted when their share of the company decreases.
• Do the owners aim to exit the ownership in the company within a foreseeable time span (3-5 years), i.e., cash-out? Or, should the company be taken over by the next generation?
• What is the perception of "value"? Is "value" equal to the price of the stock, or is it measured in more soft parameters such as jobs created and recognized (prized) entrepreneurship.
• How much time should each owner devote to the company – full-time or part-time?
• What management positions in the company should the owners have – if any?
• In case owners are involved in the operations, who supervises whom? Important positions to agree on are the CEO; CFO; and directors for sales, marketing, and R&D.

In addition to the direct business objectives, the owners should, in the process, also share intentions and agree on goals of a more personal matter. What drives an individual to be an active owner in the company? If there are several private owners, personal goals with ownership may essentially differ.

An updated owner directive is necessary if the Board of an owner-led company is expanded to also include external, independent Board members as well. Potential new Board members of owner-led companies should ask for an owner directive before deciding to join the company's Board of Directors.

The Board should be in no doubt about the owners' intentions with the company. The directive lays the foundation for the Board's and management's strategy work. The company's business plan should reflect the owners' intentions.

An owner directive should not be confused with a shareholder's agreement (SHA), which is a legally binding agreement between major owners. The SHA includes the essential corporate governance issues relating to the governance of the company. Examples are the articles of association, the company's field of activity, how the Board of Directors will be appointed, how shareholders may sell shares, and needed votes for major strategic decisions. Hence, there is an overlap in some issues, which means that adjustments may be needed if one of the documents is changed.

An owner directive may be developed in various ways, e.g., through an internal process between the owners. However, it is recommended for an external and independent adviser to be brought in to lead and structure the process. An external advisor, whom the owners trust, can usually facilitate discussions of more personal and sensitive matters of ownership. There are numerous professional advisers and consultants who specialize in the development of owner directives.