Would you buy shares in Great Britain Ltd?

Let’s imagine a friend or financial adviser called you up and suggested you invest your life savings in a company called Great Britain Ltd (GBL).

Your first question might be, “could you tell me a bit about GBL’s management?”

“Well”, your contact replies, “the CEO used to work in the PR department and has never run a major organisation or even department before. But he’s a really nice guy and very popular. The Financial Director is one of the CEO’s closest chums, but has no financial qualifications – in fact he’s a history graduate with no real work experience”.

“What about the management team? Surely they know what they’re doing?” could be your next question.

“Umm,” your contact hesitates for a moment, “actually most of them have been caught fiddling their expenses and using company money to pay partners, friends and children as supposedly working for them. And they’ve been pushing for more generous expenses and a 30% to 40% pay rise even though GBL’s results get worse every year and its share price has fallen by about 40% compared to similar companies”.

By now, you’re not feeling too excited about the prospect of investing your cash in GBL. But, just in case there’s something you’ve overlooked, you ask, “what’s GBL’s financial situation like?”

There’s a long silence, then finally your contact admits, “unfortunately GBL spends £720bn for every £600bn it earns, its debt is rising by £120bn a year and markets will soon lose confidence in GBL’s management. In just five years from 2010 to 2015, GBL’s debt will rise from £700bn to £1.4trn and soon the company will only be able to borrow money at almost extortionate rates of interest. Unless GBL’s management do something pretty drastic and do it quickly, GBL may go  bankrupt”.

Hearing this, you politely suggest that there’s no way you’d consider putting your hard-earned money into a seemingly obvious disaster like GBL.

“Ah,” your contact quickly replies, “it’s not as bad as it looks. There’s a very strong rumour that a new management team will be taking over GBL in May 2015”.

By this time, you’re pretty doubtful this will improve the situation. But nevertheless, out of politeness, you ask, “what’s the new management team like? Have they a better record than the current bunch?”

“The person likely to be the next CEO is quite young and was most people’s second or even third choice for the job. He was very close to the previous Financial Director who got booted out 3 years ago when GBL got into severe financial difficulties. He has little to no experience and isn’t really that impressive. In fact, most people think he’s a bit of a nerd,” your contact hesitatingly reveals. “And the next Financial Director was a key and influential member the last management team. During a time when business was booming, they unfortunately more than doubled spending while revenue only increased by about 60% and they doubled GBL’s debt from £350bn to over £700bn even though sales had never been so good. This meant that when business conditions worsened, as they always do after a period of unusually strong growth, GBL got into real financial trouble and the whole of the previous management team was replaced”.

“So,” you ask your contact, “you’re telling me that key members of the team responsible for wrecking GBL’s finances will soon be back in their management roles?”

“Yes,” you contact replies, “but although they won’t admit to making any major mistakes last time they were running GBL, they’ve promised to be a little more careful if they take over in 2015. So, it’s a great investment with a great future”.

Being a rather cynical person, you’re not convinced and decide to put your money elsewhere.

Now, I don’t know whether comparing a company with a country is valid. But what this little parable tells me is that I should be getting out of sterling, as neither of the two management teams likely to run Great Britain has a track record of success. And neither has either the ideas or the courage to solve Great Britain’s financial problems.

What are you going to do?