Securicare - A New Approach to Shareholder Investment and Globalisation
by Julianna O'Bryan

The use of investment funds as a conduit for superannuation investment has changed the traditional valuation of the share portfolio. Investment funds are measured/valued on capital growth and this valuation base has replaced the traditional income benefit. In keeping with the desired growth of capital directors are pressed by their major fund shareholders to look at short-term growth to validate the increase in the value of shares.

The extent that fund managers rely on derivative products to maximise fund growth is difficult to judge. At the same time we have seen unprecedented criticism of the corporation's law, directors freed on technicalities, prospectuses effectively negate the liabilities of the promoters and businesses fail to live up to their market predictions.

Can the present system of superannuation, funds managers, corporation law and stockbroker/advisor driven markets be sustained?

Securicare offers a philosophy, culture and methodology which confronts inadequacies in the existing corporate system and introduces a new approach which seeks to:

o
expand upon principles of ethical/values-based investment,
o
see research and development as a natural extension of the investment mix,
o
separate understanding of countries with small market share from the traditional US venture capital model,
o
protect the valuation of the investment,
o
give an equal representation before the law to all those who seek justice under this system and posits,
o
create a more constructive development of the process of globalisation.

In the text the word service provider replaces director. Service providers will be eligible to be directors but not all directors will be eligible to be service providers. There is a self- assessment test for directors who would like to be service providers. Shares, equity, stock, shareholders, equity holders and stock holders are to be read as alternative words.

Securicare links

o A standardised Charter of Responsibilities which sets a higher standard of due diligence than was possible under the Australian corporations law and at the same time slashes the legal documentation to reflect what is intended. The result is that all signatories to the documentation are equal before the law. In the case of a dispute the outcome is no longer dependent on who has the biggest war chest of money for legal fees. The Securicare system protects registered businesses and service providers in dealings within the external business environment including joint ventures, licensing agreements, networks and other contractual agreements.
o A system of equity valuation that is as set by the business itself on a formula that relies on a present day value of the business. The Securicare valuation reflects the effective use of human resources and other assets, business risk and a formula for rewarding increased profitability and wealth creation. The method balances the risk of success or failure between the external equity holders and those responsible for the management of the business.
o Existing stock markets can run a Securicare market alongside their traditional market. Trades are capped at 10% above and below the valuation a business places on its own stock.

Securicare is based on a network structure, vertically rather than hierarchically integrated. A board of directors will protect the interests of the investing public.

Securicare can operate within the current corporations legislation and sets higher standard of due diligence than was possible under existing Australian corporations law. If it is needed to protect Securicare from market 'look a likes' Securicare can be legislated for as a preamble to the existing corporations law.

This paper is designed to introduce the concept of Securicare to all interested parties and to give an overview of the proposed changes.


In providing an environment for world trade we needed to look for a business model that recognises the human rights contained in the following.

1. Savings and superannuation funds invested in equity markets are in the main the product of human work/endeavour/ personal exertion. To protect the rights of the investor the investment environment must provide a stable environment of investment so that those people who put forward their savings and superannuation can expect to have their savings protected from manipulation. The level of risk in any investment must be clearly stated.
2.

A clearly articulated and simplified legal system. This legal system must have as the reason for its existence the understanding of the intra-relationship of all the following parties,

a. Business and its internally employed staff
b. Service providers who are external to the business but provide necessary skills
c. Equity providers
3.

And the expectation that the parties will provide an environment of:

a. Trust
b. Human values
c. Governance
4. In this model the legal work is standardised. Each document will be registered and contain terms and conditions that are special to that legal document. Such terms and conditions are to describe the spirit of what is intended rather than to spell out every possible contingency.
5. Intellectual property to be protected from within the country of origin. This protection is given regardless of whether it is part of the collective wisdom of the community (research institutions, universities, etc), businesses, or, in some cases, the individual. Those who are licensed to use the technology/ joint ventures etc in any country have a duty to the individual/ business or institution in the country from which the technology developed. The legal agreement entered into must be sufficiently simple and cost effective for the parties to the agreement to be able to enforce their legal rights.
6. Part of the development of any business and of their ability to trade relies on the people of their own country having collectively provided for the infrastructure of the society from which the business trades and the collective wisdom of the learning and research institutions. Business in this context is seen as being advantaged by using the facilities of their own country.
7. The development of wealth in the community comes from the growth of old businesses, research and development and subsequent commercialisation and from business agencies etc brought from overseas. This business investment mix sees each category of business as being a valuable. It is of practical benefit to the whole community if in developmental stages the individual business is part of a larger collective investment fund. Businesses that are suitable for this style of registration will be funded through all phases of developmental growth.
8.

A business or research unit etc requiring registration in this proposed model will be responsible for setting it's own present day value of equity.

o The business itself and its service providers will calculate the businesses own present day value. (and where necessary its own stock market value) This valuation is arrived at in conjunction with the organisation's set guidelines. These guidelines will be set in conjunction with the service providers and are arrived at by a multiple of quantitative and qualitative factors deemed necessary in each particular case.
o Stock markets that require membership of the group can build a separate market alongside their existing markets. They will allow share trading to 10% above and 10% below the present day value.
o Contribute a proportion of their equity to a central international fund. Apart from administrative expenses the income from this fund is for designated research purposes on behalf of the world community. The equity is refundable if a business was to leave the Group.

I have called the system that understands and provides a suitable environment for the above - Securicare.

Securicare. What does it promise?

o Simplifies the legal work in businesses that adopt the Securicare method and makes all parties equal before the law. Businesses have increased opportunities for licensing and joint ventures as all Securicare businesses have adopted the same philosophy and principles.
o Is available to work cooperatively with any regulatory authority and or government with the necessary fiscal controls to use the Securicare system.
o Gives a focus to those businesses that have a dedication to values as a path of operational growth within their business.
o Advantages businesses and equity investors so that they are not affected by the market variances to their share prices. This provides them with the opportunity to engage in stable, longer term, investment relationships.
o Builds on the market cry for ethical investment by setting certain standards of probity, transparency and trust between investors and companies.
o Allows the present market mechanism, such as in Australia the ASX to run a Securicare market alongside its other markets.
o Advantages research and development by giving them a conduit to management and investment that by passes the inappropriate elements of the venture capital industry.
o Allows all businesses that adopt the Securicare philosophy and principles to be part of the Securicare Foundation. Beyond running expenses the monies collected by the Securicare Foundation is to fund projects for research into the natural elements, human endeavour and third world economies.

We will examine this in more detail (Other than matters that are available for international statutory authorities.)

Simplifies the legal work.

In 1992 I had stepped aside from consulting to understand and to reflect on:

o Consumer based cultures which had increasingly become orientated to the needs of self
o Legal systems inadequate to the demands of the arbitrating and the resolving of commercial disputes
o Unduly complicated legal documentation and linking of legal firms internationally
o Lack of a stated common and effective value system where businesses both nationally and internationally can work together
o Inadequacy of the culture of service providers who negated their own liabilities when giving investment advice
o Increasing problems of world equities market where stock brokers, derivatives traders, market hedgers and superannuation funds managers are effectively the same conglomerate groups

In trying to bring an understanding of this development work to the Australian Government I set out a Charter of Responsibilities (or Mission Statement) then the thought came.

Can such a Charter of Responsibilities be a central document to bind a business, its service providers and investment capital (equity)?

With terms and conditions that personalise what is intended can such a Charter of Responsibilities be the core document for joint ventures, licensing agreements, prospectuses, work contracts, contracts between directors, service provider? The original (SCR) shown here was specifically for SME's.

SECURICARE
Charter of Responsibilities

 

The responsibilities of the parties to equity investment in small and medium sized businesses (SME's) is to be as follows:

The management of the SME's to the management of the equity investors is to be parents to adult children/adult children to parents depending on their circumstances.

In the management of these SME's and of their equity investors we include banks, lawyers, accountants, research institutes and other consultants.

In this way, openness to what these categories of people do not know and to what these people need to know becomes a two-way responsibility.

This two-way responsibility is the only viable way to provide a starting point and develop a new commercial environment of mutual trust and human values.

 

Copyright May 1995 Julianna O'Bryan, East St Kilda, Vic, Australia

It is believed that this style of Securicare Charter of Responsibilities enables:

a. A clear understanding of the intentions of all parties involved in a transaction using the Securicare philosophy;
b. Uses language which is understood in all cultures;
c. Is simplistic in its approach, whilst embodying a philosophy that enhances the understanding of care and due diligence.
d. The wording parent and adult child is used to denote a standard of care and due diligence. This wording will not always be appropriate.

While Securicare was not an outcome of either the Australian Financial Services Inquiry (Wallis Inquiry) or of CLERP ( Commercial Law Reform ) we were given sufficient confidence by the administration of these bodies to proceed.

Gives focus to those businesses that have adopted Management by Values.

The early psychology and management academic Abraham Maslow was the pioneer behind the hierarchy of needs and the concepts of self-actualisation. A published work of the early 1960's ' Eupsychian Management ' was a series of notes written to himself from a summer posting to the Non Linear Production House. He was out of his university environment and into the real world. To quote from the editors of a reprint of the Maslow notes:

"Learning, creativity, fairness, responsibility and justice come naturally to people according to Maslow's theories. Why is it that we often design organisations as if people naturally shirk responsibilities, do only what is required, resist learning and cannot be trusted to do the right thing. Yet most of us would argue that we believe in the potential of people and that people are our most important organisational assets. If that is the case why then do we frequently design organisations to satisfy our need for control and not to maximise the contributions of people"?

Much has been written since Maslow and the names Drucker, Peters, Meister, Covey and Blanchard, as a development in thinking as well as the development of management practice through the quality cultures, re-engineering and leadership training until we reach the present day.

From the Australian Centre for Organisational Governance and one of it's founders David White I quote the following:

"My (his) work is related to how you develop the values or even more broadly intangible success factors including things like trust ,commitment and competitive advantage I have come to the conclusion that these success factors are not created by one process, task or activity or directive e.g. three weeks from now everyone will trust each other …………My view is that most of the current directions in governance impose more processes for scrutiny More plans, policies, procedures and traditional auditing does not mean more control as they do not create trust - in fact governance processes and disclosure requirements are typically imposed due to a lack of trust."

To this I add my own meaning of values.

Values - the basic understandings that we all have of what is good in our lives, that gives us pleasure, delights, gives satisfaction, makes life worthwhile. It is values that puts meaning into our lives and underpins how we relate to others. In the workplace if we cannot be our true selves, if we have to hide from the truth we feel used. To the positives and the negative experiences of life the individual's response will depend on their values system.

From this we can explore the aligning of company and individual values which enhance productivity, profitability, team work, congruency, future focus, commitment, passion, empowerment, learning, customer focus, loyalty, success consciousness, innovation, happiness, energy. We can start to realistically understand the aligning of our own values and the workplace, management by values and how through focus groups we can start on the management by values process. To align businesses that have not contemplated this procedure/ have management practices that are out of values alignment we allow two to three years for the process of adjustment.

For businesses that are committed to management by values all stakeholders are involved. Experience has shown that the alignment of values is 80% of the effort in stewardship, ethics, corporate governance, organisational governance and the most efficient way to achieve lasting change.

It may be that the aligning of Securicare with this management by values movement will decrease the amount of time to achieve effective change. Over the last twelve months the corporate governance international alliances have moved into the category of organisational governance, trust and values in business.

Advantages business so that they are not affected by market variations.

A business that seeks Securicare registration will be required to value their organisation at present day value. The team making the valuation will be the business itself and service providers who will also be registered as being responsible for ongoing development of the business. This method of valuation is designed to give a balanced view right across the enterprise. There is no incentive for a business to overvalue its chance of financial success.

This Securicare valuation will reflect the effective use of human resources and other assets, business risk and a formula for rewarding increased profitability and wealth creation. The method balances the risk of success or failure and the resultant stock ownership between the external equity holders and those responsible for the management of the business.

Businesses that are in the process of becoming profitable will be part of Securicare based collective fund and will not be available for flotation until they have a proven track record of profitability.

It is hoped that this will eliminate the following:

o Historical underperformance of stock as against their IPO documentation or prospectus,
o Market variations to stock valuations that have no rational basis in the marketplace,
o The past dot com wave of investment which left effective control loaded against the external investor,
o The underperformance of well-established blue-chip stocks who have lost direction to maximise their asset base and adjust to a modern business climate,
o The increasing awareness among a broadening shareholder demographic that the 'Cliquey' network controlling most public company listings is becoming unproductive and therefore redundant,
o Slash the present upfront fees of 10-15% traditionally paid to those who are the service providers whether in IPO's or in venture capital.

Securicare is well structured and conceptually attuned to provide the impetus for a re-assessment of investment and an opening up of the SME sector in keeping with investor demands.

Shareholders of publicly listed businesses may have to face a price adjustment if they decide to go the Securicare route. The long-term value of the stock will nevertheless be attainable if the original investment was prudent and did reasonably reflect the future value of the market.

Builds on the market cry for ethical investment by setting certain standards of probity, transparency and trust between companies.

An article published by O'Bryan last year in the Australian Financial Review shows how farcical the present situation is. Referring to the Corporations Law ---

"one High Court judge recently "it is indeed so complex that it falls under its own weight"

"The impractical nature of the current legislation stems from its gradual mutation into a largely irrelevant, convoluted document which, despite the best intentions, has been proven to not act in the interests of the general society, let alone the investing public……"

" As it currently operates, the corporation law has two broad agendas. The first is to set rules and regulations that have to do with the administration of the law, such as the filing of documents, listing officers of a company, or registering a business name. The second goal is to regulate the expectations of the rights and obligations of the persons who are part of the corporations themselves."

"It is this second area that presents the most problematic issue before legislators and the public. Those who have watched the operation of the courts over the last ten years know this to be so. The ------ case may be the latest example, but we have all watched as corporate giants have stalked forcefully away from the court hearings when the best that can be said that they were simply able to put insurmountable barriers before the proper enactment of the law."

"This is happening at a time when Australians are now leading the world in stock ownership through such developments as compulsory superannuation, employee share plans, and a diminishing welfare sector, and when the relationship between corporations and the public is closer than ever. Improving the channels of communication between corporations and investors via more adequate corporations legislation is, therefore, vital."

"I believe that ASIC has done whatever it can to be effective under the current system, but it can only give advice on the operation of the law through a properly constituted government inquiry ..."

The case in Australia is not isolated. In democratically elected governments there is an obligation that the government call upon the existing leaders in the business community and the professions as the delegates to any government inquiries.

I understand the current system, and I have:

o conceptualised and set up projects for new industries in Australia,
o been at the receiving end of professional indemnity claims that have not been paid,
o been in a business when the managing director failed to tell me when all the market on which they relied disappeared,
o been accused by a university of incompetence when I showed that the university had no ownership of the research which its investors were buying,
o since the early 1980's traded stocks in intelligent industries for investors looking for financial advancement.

In Australia we have had two Government Inquiries, and have numerous Centres of Excellence and Research Institutes that represent the face of the legal system, and business and professional associations. To date the serious issues of the current investment system as it relates to equity value and/or superannuation have not been addressed.

My own knowledge of the ethical business model is that the advice given to investors and industry has presupposed the dependability of the corporations law and the investment markets, and has ignored the following issues:

o Given its small domestic market, Australia has a need for a corporations law that provides businesses seeking to expand their markets the greatest possible protection against the multinationals with which they form alliances.
o Current equity markets may be subjected to manipulation.
o What is required worldwide is an expansion of the equity investment market for the money that will come into the system from the ageing Western Communities.
o An ageing Western population is likely to reduce the market for consumer goods and services.
o Research and development, developed as a segment of investment funds, will promote an increase in the commercial activity needed to provide for the economic growth of an ageing population.

For completeness the suggested total investment fund could have the following characteristics. Actuarial calculations for correct percentages for investment would need to be made.

o %Preserve the capital /buying for value. Shares valued at today's value have a prospect of developing it's market/ increasing market share and increasing wealth by valuation when this happens.
o % research and development / commercialisation equity investment through collective funds, say10-15%. This amount could be increased through government incentives. .
o % An annuity to protect against long life
o % Preserve capital without paying an interest based income. Designed to keep pace with CPI adjustment but not increase in buying value.

The exact % figures would need to be made by appropriate professional advisors.

Allows the present market mechanism, the ASX, to run a Securicare market.

A Securicare market can be formed using the existing market structure. It is not appropriate in this overview to discuss the existing legislation and it's application to Securicare other than to look at the following:

Given the interest in stakeholder value it could well be that the present ASX market does not fulfil the Business Judgment Rule. I put forward the following questions to evaluate the business' and the directors' responsibilities:

o What are the current and planned performance goals of the business? Is performance effective, efficient, appropriate, maintainable and socially responsible? Are tradeoffs between quantity, quality, time and cost appropriate?
o Is there a governance system established within the business cost effective to make informed judgments over performance, resources, assets and relationships? Does it align directing, managing and operating activities? Is the system 40 percent effective? 50 percent? 70 percent? (after allowance for what can be controlled, human error and cost);
o Are directors, managers, advisers and auditors exercising due diligence? In the event of performance failures, losses and injury, can stewardship be demonstrated and reputations protected? What due diligence principles have been adopted? Have they been effectively applied?

Stock Market valuation of the business: Do the present mechanisms for prospectuses, stockbroker/ analyst driven markets, continuous disclosure and capital driven fund management reflect a valuation of the true worth of the business? If not, does this now impose a new liability on businesses to ask their national statutory authorities and the Securicare Foundation to assist them in the process of changing the procedures and valuations mechanism for those businesses that require equity funding?

Advantages research and development by giving them a conduit to management and investment which bypasses the 'vulture capital' industry.

As a student of the venture capital industry since 1982 and having followed the industry from the Espie Report onwards I have had the unpleasant task of seeing Australia and the 'vulture capital' industry of this country feast on the good that has come out of our great CSIRO, Universities and private development.

Until now the venture capital industry has used the overseas model that was specifically developed for the U.S. and it's large domestic market. To date investors in this industry segment have endeavoured to match the U.S. return on this investment by either selling the technology or by IPO's.

Promoters of IPO's and the accompanying professionals are paid as a percentage of the money raised usually 10-15% . The IPO's are valued on forward projections. This is in contrast to when venture capital makes it's own investments that are in line with the Securicare method. The vulnerable members of the investment community who are most at risk are those investors who do not understand that the marketing expertise is to stack the floats of businesses with people who swiftly sell their shares as the vulnerable scramble for stock.

To date there has been no concern expressed in Australia for the vulnerability of businesses involved in viable new industries when a business involved with connecting research fails. In the failed business the intellectual property can be sold overseas within days of a liquidator being appointed through a facilitating group of major consultants. This can harm the rest of the otherwise viable new industry.

The alternative Securicare structure is that the funding process for research and development is a continual process with all the development linked so that there can be a crossing of information and expertise where necessary to preserve the overall growth of the sector. Research and development that seeks the protection of Securicare will be valued on the first funding at present day value. As the entity reaches and/or exceeds its goals, as pre-set at the first level of funding, the ownership will be varied. Within the Securicare system overseas parties to licensing agreements, agencies, and connecting research institutions, will be tracked.

In Securicare service providers will be rewarded by a system of options for any proportion of their fees they elect to retain within the client business. Within the Securicare framework there will be a facility to work with existing venture capital managers who have the expertise and entrepreneurial skills needed to grow value in IT industries.

Allows businesses that adopt the Securicare philosophy and principles to be part of the Securicare Foundation.

On acceptance the Securicare existing practices of complicated legal documentation, lengthy prospectuses, upfront fees and stock market distortions will be on the wane. Businesses that decide to be Securicare registered will be protected by a simplification of the law used for the express purpose of protecting all the stakeholders.

Business will themselves seek a value to their businesses that they can sustain. Markets that trade Securicare investments will have individual stock set with a 20% trading range until the next revaluation.

Service providers to Securicare registered businesses will be registered. In addition to fees they will be rewarded with a system of options that will be tied to the expectations of the business as expressed in their valuation.

Businesses that are Securicare registered will on registration contribute a percentage of their capital to the Securicare Foundation. There will be a 'needs payment' to the founder family and running costs. Otherwise the capital value of the foundation will be used as a low cost bank for approved projects in underdeveloped countries. The income stream monies from Securicare registered businesses will be available for approved research projects into the natural elements.

Securicare will emerge because it is the correct business decision to protect business and the equity holders and the investment of their personal exertion savings and superannuation.


Author Julianna O'Bryan is a creative strategist and CMC. She has worked on the development of Securicare for a period of ten years. She came to the task with a rich experience of corporate life and share trading. In addition she has at various times been a family counsellor, internal and external auditor, principal of a management accounting practice, has conceptualised new industries for Australia, commercialised research and mentored and directed a range of SME's in 26 industry groups in Australia. She has contributed written papers to the Australian Financial Services Inquiry (Wallis Inquiry), CLERP (Commercial Law Reform) and the Innovation Summit (scoping paper). She has published opinion pieces in the Australian media and contributed articles to EJBO Publisher: Business and Organization Network (BON), University of Jyväskylä, School of Business and Economics, Finland.

Julianna welcomes further questions on the development and potential of the Securicare concept. The implementation process for the Securicare Foundation is proceeding steadily in Australia. She can be contacted by e-mail: jobryan@surfnetcity.com.au . For additional information visit www.securicarefoundation.com .

More on Corporate Governance in Corporate Boards in The CEO Refresher Archives

   


Copyright 2001 by Julianna O'Bryan. All rights reserved.

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