15/04/2010 - 00:00

Z Scores and other tales from the dark side

15/04/2010 - 00:00

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A man who loves bancruptcies offers insight into how to make a business work.

I ADMIRE people who are honest enough to admit their predilection for the dark side of business.

As a journalist this is stock in trade, but we also get fed information by a lot of people who relish the prospect of anonymously watching the damage that is inflicted as we reporters do the dirty work. Very few are keen to be seen engaging in schadenfreude, taking pleasure in others’ misfortunes.

So it was refreshing to recently hear Ed Altman, a visiting scholar from the US who is attending the University of Western Australia’s Business School this month, reveal his ‘vulturistic’ tendencies.

“I love bankruptcies,” Professor Altman said at a function I attended before Easter.

Of course, such a comment deserves a bit of context.

Professor Altman is the creator of a financial analysis tool called Z Scores, which have a 40-year history of use as a predictor of companies going into bankruptcy, a US term which could generally be compared to ‘external administration’ here.

The Z Score system has five ratios based on common balance sheet and income statement items, each given a weighting.

Originally the scores simply divided the answers into three areas – a safe zone, a grey zone and a distressed zone. Obviously, to create these zones Professor Altman needed past data to determine the predictive powers of this system, hence his love of bankruptcies.

Company failures provided the evidence to create the system and continue to help refine it. These days, Z Scores are usefully given a rating, much like that of bonds, with AAA ratings and the like.

From what I can tell, having asked a couple of CEOs around town, the system is not well known here. Perhaps it ought to be.

A colourful and engaging speaker, I would encourage anyone who gets the chance to hear the good professor speak take up the opportunity.

At the function I was at he recounted the story of how a board member of a US company was asked to help turn around the business by becoming CEO in the late 1970s. He employed the Z Score system as his principal measure. Even the receptionist knew who Professor Altman was when he rang the company after hearing about its use of the system.

Ultimately the new CEO turned the business around, and it was later sold at a significant profit for shareholders.

He has also applied it to nations when looking at sovereign debt.

Of course, in corporate life there is plenty of focus on negative measures; it is not Professor Altman’s exclusive domain. The Australian Institute of Company Directors course, for instance, focuses significant attention on some of the financial ratios that directors ought to be watching to ascertain the financial health of the company and when they ought to be asking further questions.

However, a simple test that predicts the future likelihood of failure is such a simple idea, so I am surprised this is the first I have heard of it.

Indigenous issues

DESPITE having recently had a good hard look at Aboriginal business in regional Western Australia, I won’t claim to have a complete understanding of the issues around native title and indigenous heritage.

Few would be qualified to speak with any degree of confidence on this subject.

One who is more qualified than most is Kimberley Land Council CEO Wayne Bergmann.

I recently interviewed Mr Bergmann with regard to the indigenous business opportunities available from the state government’s proposed James Price Point gas hub north of Broome. I was also fortunate enough to hear him speak further on the subject at a recent event organised by the Centre for Social Impact.

Although the event was ostensibly about Perth-based business leader Michael Chaney, much of the roundtable discussion that was part of the occasion came to be dominated by Mr Bergmann, who was clearly frustrated by efforts to derail the hub.

Subsequent to that event we have seen one of the claimant groups, the Jabirr Jabirr people, move to back out of the KLC-negotiated deal.

I have no doubt that this partly due to the agitation of green groups – and a few blow-in celebrities – that have sought to divide the local Aboriginal people on this issue.

This is a pity for Mr Bergmann, who clearly sees the big picture and wants to Aboriginal people to participate in the economic development of the state, rather than just stand on the sidelines catching a few morsels or, worse, just stand still.

Mr Bergmann is emerging as WA’s version of Noel Pearson, the Cape York-based indigenous leader who is shaking up the status quo and has a voice on the national stage. Mr Pearson was one of the first to challenge the perception that the environmental fundamentalists and Aboriginal people were joined at the hip.

Good luck to Mr Bergmann as he negotiates his way past the most recent set back.

Taken for a ride

I FOUND the state government’s decision to promote Western Australia via The Extraordinary Taxi Ride as more than a little ironic.

I am not alone in noting the fact that getting a taxi in Perth is more than a little haphazard. While a tongue in cheek view might be that we can hardly afford to take one out of the system for a tourism promotion, the truth is that our taxi system is not a good advertisement for our state.

Readers may recall the absurd situation a couple of years ago when contestants in the reality TV series, The Amazing Race, couldn’t find a taxi in Perth to solve their transport woes.

They would not be alone.

Recently I was prompted to compare Perth’s taxi service with that of Singapore, which has a cheap and efficient service.

The numbers tell the story – at least in terms of availability. In a city of 5 million people, Singapore claims to have 24,000 taxis, or almost five taxis per 1,000 people. In our city of 1.5 million we have 1,850, or about 1.25 taxis per thousand people.

While Singapore does have onerous laws to restrict private car usage, I still find this discrepancy incredible, especially when you realise that the city-state to our north has more confined geography and a very efficient public transport system.

The big question in my mind is how well taxi drivers fare in terms of income in Singapore? The drivers’ don’t appear to be at the bottom of the socio-economic ladder, so perhaps there is a lesson we could learn from our neighbours.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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