What exactly is NewCode?
Well, NewCode is an innovative way of organising the interaction
between capital markets and companies,
and between capital and employment.
It is a new and
more motivating approach for both for management and employees, i.e.
the company's human capital,
and it also ensures a satisfactory return on capital.
In some ways, NewCode is a formula that best
brings the interests of financial capital
in line with those of human capital
and, within human capital, aligns the interests of directors and employees.
NewCode is not a dream.
The NewCode model can function in a large number of companies
and a wide variety of situations.
For example, it is a useful instrument when founders transfer companies to their management and employees,
when there are turnaround situations or financial restructuring needed,
and when very simply put companies have to turn to financial markets
to finance their development.
NewCode is not a dream but it does embody a vision that involves
reversing the relationship between capital and companies.
With NewCode, we move from a situation in which financial capital
owns a company and operates it to its own advantage by controlling its governance
to an opposite relationship in which a company is entitled to source capital under the best conditions
available on the market
and then to employ this capital to its own advantage and to the advantage of its lifeblood.
So how does it work?
All NewCode transformations are based on consensual, shared enterprise project,
prepared by management and supported
by the company's workforce and by investors right from the start.
Everyone has to agree on all aspects of the enterprise plan:
activity forecasts, investments, all types of financing requirements,
matters concerning human resources like employment forecasts,
payroll expenditure, the possibility and cost of subcontracting
and lastly the return on capital.
NewCode's transformation and innovation lies in the nature of the financial instrument
that composes the "capital structure".
Generally speaking, the capital structure comprises two capital layers -
in simple terms, debt and equity.
Debt has a fixed remuneration, an interest rate and a repayment schedule.
The cost of debt is known in advance.
On the other hand, the remuneration of equity is uncertain,
potentially high and potentially non-existent. We don't know in advance -
it depends on the company's financial performance, on its profits.
Simply put, profit is what remains once all costs have been paid,
so quite naturally
equity will steer governance towards minimizing costs,
including staff costs.
And it is this constant pressure on staff costs that we believe goes against
the company's long-term interests.
These days,
it is essential that companies and advanced economies
have human resources who are motivated
rather than human resources who are disheartened because they feel
money is constantly being made at their expense.
It is quite simple - human resources want to be part of an enterprise
which aims to pay them more rather than less.
Therefore, with NewCode, equity is replaced by a new instrument
- the NewCode Instrument -
which enables companies to better control the cost of the equity layer.
Broadly speaking, it proposes fixed-rate, contractual basic payments
that are attractive compared with risk-free interest rates that are currently very low
but nevertheless a fixed-rate. This means that once the interest has been paid,
investors can no longer demand more money
just as suppliers cannot demand more money
once the raw materials bought from them have been paid.
In fact, NewCode recognises that investors are suppliers of capital.
They are important players admittedly but nevertheless company suppliers.
Obviously, a balance needs to be found so,
in return for limiting the cost of capital,
the company has to convince investors
that the risks they incur are lower than those incurred in a share holder status.
Therefore, right from the start, when the enterprise plan is being discussed,
it should include convincing protective mechanisms
that ensure NewCode protects capital and provides a minimum remuneration.
And this protection has to come from the company and from its human capital -
this is the quid pro quo for the reversal of the relationship between the capital and the company.
So when the enterprise plan is being drawn up,
employees have to agree in advance to make concessions
should the company perform significantly
below plan, in a way that threatens
the integrity of the NewCode Instrument.
Of course this contribution will have to be reasonable,
and should not exceed about say 10% of payroll expenditure.
It could also be structured fairly to ensure that the highest salaries are more exposed.
Reserves should also be built up during the first few years so that
if difficulties arise, these reserves can be used first.
Risk-sharing schemes associating several companies could also be envisaged,
like an insurance policy.
In fact, there are an infinite number of financial innovations
that can be envisaged to reduce the impact of this investor protection on employees.
Yet the principle behind NewCode remains the same and it is a very strong principle:
reversing the relationship between capital and companies,
between financial capital and human capital.
The company becomes the boss.
Those in charge are its governing bodies, its management and the people who run it on a daily basis.
And with NewCode, quite simply financial capital becomes the "emplyed" body.
The English term "Capital Employed"
is rather relevant in this context.
And as NewCode is civilised, it makes sure that the capital employed receives a decent and satisfactory remuneration.
To take the paradox a step further,
in some ways NewCode offers a kind of social security for capital,
but we'll discuss that later.
Now, let's summarise what we have done so far.
We have taken control of the remuneration of capital which was previously self-determined
and potentially limitless.
We have readjusted the weight of human capital and financial capital in the enterprise system.
And the value created by the company
can now be shared out in a more balanced way
between the human capital and the financial capital and within the human capital,
between the managers
responsible for executing the business plan
and the employees who run it on a daily basis.
In the end,
NewCode aims to ensure that the initial commitment made by the human capital
to protect the NewCode financial instrument
provides investors with a clearer understanding of unfavourable scenarios
and that this increased understanding, in financial terms, represents added value.
NewCode is a financial technique
that allows human capital to benefit from this increased value
and this is exactly what will happen
in a favourable scenario
where business out-performs the enterprise plan.
The incremental value created, instead of all going straight into the pockets of investors,
as it used to,
will be shared out in proportions agreed upon in advance
which can be very favourable for human capital. As a rule of thumb,
it could be up to 50% for employees, 20-30% for managers and 20-30% for the NewCode instrument.
Of course percentages may vary, depending on the case,
but the key point is
that there is a good alignment of the interests of capital, management and employees.
With NewCode, none of the three parties can win at the expense of the others.
But NewCode's financial aspects are not the most important ones.
The greatest advantage of NewCode is the impact it will have on company performance.
Here we don't mean financial performance
but operational performance, i.e. the performance a company would achieve through providing the best possible service to its customers,
in other words the kind of performance the economy really needs.
Indeed,
NewCode aligns the interests of all parties, and this has a positive impact on operational efficiency.
With NewCode, everyone goes to work feeling certain that they and their colleagues
will automatically benefit from greater company efficiency.
Each euro earned in excess of the business plan, each additional customer, and any savings made on purchases
contribute directly and automatically to an increase in payroll expenditure, based on a pre-determined percentage,
such as the 50% mentioned earlier.
NewCode will thus open a vast array of opportunities to better motivate people,
which management teams can now explore as part of their mission,
and this will inevitably lead to improved performance.
In this way, NewCode's virtuous cycle is complete
because improved operational performance
means less risk for the capital invested,
and this consolidates NewCode's initial equation.
Now let's discuss governance, the last, but perhaps the most important component of NewCode.
Nowadays, governance is controlled solely by capital.
Therefore, capital obviously encourages management teams to maximise shareholders value at the expenses of human capital.
With NewCode, there is no more such pressure.
There are a management team, employees and one or more NewCode investors, whose interests are aligned.
NewCode is structured in a way that none of them can win at the expense of the others, as mentioned earlier.
With these three components, as well as outside skills,
it will be possible to implement a new type of governance for major decisions and company processes:
- appointing and if necessary replacing management
- implementing and creating a consensus on the enterprise project
- financing and refinancing NewCode instruments
- distributing added value
- introducing adjustment mechanisms in the event of difficulties
- building and using reserves, etc.
You may say that, compared to traditional governance, there is nothing new about this.
You're right, except for one essential aspect -
the governance is no longer guided solely by the short, medium and long-term aim
of maximising shareholder profits.
Therefore, governance can be fully and exclusively devoted to the company's interests.
Once again, this offers an endless scope of opportunities.
There is no point in establishing too many rules for NewCode in advance.
Users will adjust the formula on a case-by-case basis according to the contexts.
In some cases, employees will play a major role in governance,
as is the case with workers cooperatives.
There are other situations in which investors will become more involved
and may request independent directors to contribute more,
as is often the case with listed companies.
Lastly, there are situations in which a company's managing directors will weigh more heavily than in others.
However, given the potential offered by NewCode
and given the fact that there is no longer a shareholder bias,
it would be very surprising if the balance in governance is achieved in ways that are not favourable to the sustainable and controlled development of the company.
What's appealing about NewCode is there's no need for a financial revolution.
NewCode can be implemented immediately in modern economies.
What is capital today?
It is made up of funds from pension schemes, insurance companies, and also from monetary policies.
Generally speaking, it is made up of the savings and funds of individual people.
So, how do people expect their this capital to be remunerated?
On average, do they require a potentially high, extremely volatile remuneration?
Or a stable, satisfactory level of remuneration?
The second formula obviously.
And this is exactly what the NewCode Instrument offers.
So there is surely going to be plenty of capital available to finance NewCode structures.
Companies will be free to make the most of this supply of capital
by obtaining financing or refinancing under the best possible terms on each occasion.
Companies will no longer have to refrain from calling upon markets for fear of diluting its shareholders' interests
because the price of shares has fallen.
Companies will turn to the markets based on their strong operational performance,
not when there is a speculative bubble,
and this is much healthier.
Finally, these are the key aspects of NewCode:
- a Consensual Enterprise Plan,
- an alignment between management and employees based solely on operational efficiency,
resulting in a cure to the traditional fracture affecting human resources
- balanced sharing of added value between human capital and financial capital
- optimal use of capital markets for the benefit of the company
- but also a new asset class that will be well received by these markets.
- a well-balanced, unbiased governance for the benefit of one of the parties,
and entirely devoted to the company's interests.
I will let you explore the website to find out more.
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